Recipe For Disaster
- Amendment Bill unclear on whether the GST Council's “recommendations” are binding.
- The Centre is given an effective veto over any decision of the GST Council.
- The GST Council will itself decide how its decisions will be challenged, and who will hear that challenge.
The Constitution(122nd Amendment) Bill, 2014 seeking to create a constitutionalframework for the Goods and Services Tax, asit stands, is a recipe for disaster, and if not corrected, will doom theGST in years to come.
To understand the constitutionalframework that is being put in place for the GST, it is necessary to understandhow India's federalism works. The Union Government and the states have eachbeen given exclusive powers to impose taxes on a wide variety ofsubjects in order to be able to run a government. While the Union has beengiven taxing power over more subjects than the states, this has been balancedin the Constitution by the needto share some of its revenue with the states in the manner determined bythe Finance Commission. Therefore, as it stands, the Union taxes income,manufacture, imports, and services, and states tax sale of goods, excise onalcohol, entertainments, et al.
Nonetheless, in the subjectsearmarked to them underthe “State List”, states are completely free to frame their ownlaws, and levy taxes, subject only to the limits under the Constitution.
Under the Constitution therefore,there is no subject over which both the Union and the state can impose a tax.Even though the Constitution provides for many subjects over which the Unionand the state may make laws (i.e., all the subjects mentioned in the ConcurrentList), none of these subjects relate to a tax. The Constitution framers clearlydid not want the Union and the state to be fighting over the same tax base orthe Union controlling the state in matters of taxation.
The GST is a radical departurefrom this Constitutional vision. By allowing both the state and UnionGovernments to tax both goods and services, in the interests of creating aneasier tax system, and creating a unified market, the proposed constitutionalamendment presents a dramatic change in the Constitutional scheme of the federalgovernment.
But does the GST address some ofthe concerns with having overlapping taxation powers that our Constitutionframers aimed to avoid?
GST Council: Toothless?
The mechanism envisaged is theGST Council. Composed of the Union Finance Minister and Minister of State forFinance, and State Finance Ministers from all states, it is a body thatperforms the crucial coordination role necessary for the smooth operation of GST. It is empowered to make “recommendations” on rates, exemptions,turnover limit for paying the tax, and all the important aspects essential to theoperation of GST.
It is, however, at present,designed for failure.
There are two major issues andone minor problem with the GST Council.
The minor problem is that theAmendment Bill itself has no clear idea of whether the GST Council's“recommendations” are binding. On the one hand, it uses the words“recommendations” four times, but suddenly uses the word “decision” whentalking about the voting manner. Likewise, the fact that there's a disputeresolution mechanism suggests that recommendations are necessarily binding onthe states and the Union, but the Bill insists on using the term“recommendation”. This is of course easily fixed by replacing the term“recommendation” with decision everywhere since all indications otherwisesuggest that the GST Council intends to make binding decisions.
The major problems however, liewith the manner in which the GST Council makes its decisions and how disputes, arising out of them, are resolved.
Centre Always Wins
The initial drafts of the GSTAmendment Bill had the GST Council taking its decisions on the basis ofconsensus. However, the present draft allows decisions to be taken on the basisof majority voting in the Council. What's worse, the votes in the GST Councilare weighted in such a manner that the Union is given an effective veto overany decision of the GST Council. This means that even if a given measure (sayto exclude a certain category of goods from GST) is supported by more than halfthe states, or indeed, every single state, the Centre can still say no to it,and the decision will not go through.
One would have thought that in afederal polity like ours, where states are these days ruled by parties otherthan the one in power at the Centre, serious objections would have been raised tothis proposed decision making structure of the GST Council, especially byregional parties ruling different states. Unfortunately, for reasons best knownto them, all regional parties, except the AIADMK, have not raised a word aboutthis serious flaw.
This is not just a turf battlebetween the Union and the states, but goes to the heart of a federal politysuch as India. The GST Council, as it stands, allows the Union power to vetofiscal policies of all states, forcing them to tailor their laws on GST to meetthe Union's demands. An arguable case can be made out that the GST AmendmentBill affects the “basic structure” of the Constitution and is therefore,unconstitutional.
Institutionalising Mistrust
The second major issue is theabsence of a clear dispute resolution framework outlined in the Constitution Amendment Bill. The GST Council itself is given the power to establish, at somelater date, a dispute resolution mechanism where a state can challenge thedecision of the GST Council. In other words, the very body which takes thedecision, will also decide how its decisions will be challenged, and who willhear the challenge. Read with the veto power that the Union Government has inthe GST Council, this means that there is absolutely no effective remedy in lawfor a state aggrieved by a decision of the GST Council.
The Constitutional frailties ofthe GST Council notwithstanding, the manner in which the GST Council willfunction suggests a body set up for failure. It is impossible for the Union toimplement GST without the cooperation and understanding of the states, but in asystem where the Union always has the final say, it will only breed mistrustbetween the Union and the states. Whether it is on the issue of rates orexemptions or any one of the crucial issues needed to make the GST a success,the Union and the states have to work together and arrive at a commonunderstanding to make it function. Unfortunately, the GST Council, as it hasbeen envisaged, only institutionalises mistrust between the Union and the states, pushing them to harden their stances on partisan lines.
It is a failure of imaginationand leadership that we've been saddled with the present GST Amendment Bill –one that is likely to hamper the proper implementation and functioning of GST in years to come. Hopefully, judicial intervention or the dawning of wisdomwill prompt the necessary changes.
AlokPrasanna Kumar is Senior Resident Fellow of the Vidhi Centre for Legal Policy,based in Delhi and has practised as an advocate in the Supreme Court of India.
The views expressed here are those of the author's and do not necessarily represent the views of Bloomberg Quint or its editorial team.
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