GST— A Classic Example of Cooperative Federalism

Although, in a federation, there is a division of functions and responsibilities between the centre and the units and the respective areas of competence of each government is clearly earmarked, yet it would not be correct to assume that the various governments act in water tight compartments. Indeed, all these governments act side by side in the same country, yet inevitably many types of relations arise amongst them and many instrumentalities seeking to promote intergovernmental cooperation come into existence.
In fact, the very concept of cooperative federalism helps the federal system with its divided jurisdiction, to act in unison. It thus seeks to minimize friction and promotes cooperation amongst the various constituent governments of the federal union so that they pool their resources to achieve certain desired national goals, as rightly observed by a noted Constitutional expert who ventured out to define cooperative federalism as:

“In cooperative federalism, the states and national governments are regarded as mutually complementary parts of a single governmental mechanism all the whose powers are intended to realize the current purposes of the government according to their applicability to the problems in hand…”

In this sense, the essence of cooperative federalism promotes the idea that the various governments in a federation are interdependent and that they should act, not at cross purposes, but in coordination, in symphony so as to promote and maximize the public welfare and above all, the country’s unity and prosperity. It was in this background that GST saw the light of the day following over a decade and half of wrangling between the centre and the states on this issue.

Following the ingrained spirit of cooperative federalism, the states ultimately realized and rather convinced of the fact that a unified tax system in the form of GST by subsuming a host of disparate indirect taxes levied by the states hitherto was not only good for the nation but beneficial to them insofar as ensuring a conducive atmosphere of doing business and attracting investment to their states also.

The enactment of GST as a constitutional amendment with the due support of the states has reinforced the idea which our Constitution makers so zealously wanted to promote through cooperative federalism in India that in actual practice, the governments in a federation are arranged not hierarchically or vertically, but horizontally, that no line of command runs from the center to the states and that common policies among the various governments can be promoted not by dictation but by a process of discussion, agreement and compromise.

This sums up the roll out of the GST in the country with the active participation of the states in the ratification of the 101 Constitutional Amendment. In this entire process, the centre constantly remained engaged with the states through many rounds of discussions and deliberations so as to address and accommodate states concerns either on GST rates or revenue loss. GST Council has been created as an excellent forum for such debates and discussions between the two governments. In addition to this, The GST council has also been tasked on bringing about any change in the tax rates through mutual negotiations from time to time and that too in a fully democratic mechanism of voting with sates enjoying 2/3rd voting weight age in the Council. The recent instance of this has been, 18 January 2018, where a panel of federal and state finance ministers decided to revise GST rates on 29 goods and 53 services.

As such, the tax rates, rules and regulations are governed by this GST Council which comprises of as stated above, the Union finance minister and Finance Ministers of all the states. GST council as such acts as an instrumentality of fiscal cooperative federalism.

Let’s now revert to some of the main highlights of GST.

1. The GST with its coming into force from JULY 1, 2017 seeks to replace existing multiple cascading taxes levied by the Central and State governments. In this sense, it is an indirect tax reform ever undertaken in independent India. GST simplified a slew of indirect taxes with a unified tax and is therefore expected to dramatically reshape the country's 2 trillion dollar plus economy. Need to be mentioned that GST system followed by India is based on the GST model of France.
2. Being an indirect tax on the sale of goods and services, it divides the goods and services for taxation purposes into five tax slabs. These are 0%, 5%, 12%, 18% and 28%.
3. Petroleum products and Alcoholic drinks have been excluded from its purview. As such, these are taxed separately by the individual State Governments.
4. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In addition, a cess of 22% or other rates on top of 28% GST applies on a few items like aerated drinks, luxury cars and tobacco products.
5. The GST has subsumed all the indirect taxes levied by the centre and the states hitherto. #The single GST replaces several former taxes and levies which included: central excise duty, service tax, additional customs duty, state-level VAT and Octroi etc.
6. Other levies which were applicable on inter-state transportation of goods have also been done away with in GST regime. GST is levied on all transactions such as sale, transfer, purchase, barter, lease, or import of goods and/or services.
7. GST in India follows, what is called as dual GST model, meaning that taxation is administered by both the Union and State Governments. Transactions made within a single state are levied with Central GST (CGST) by the Central Government and State GST (SGST) by the State governments respectively.
8. For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central Government.
   

Some apprehensions with regards to GST:

GST is a consumption-based tax or what is also referred to as the destination-based tax; therefore, taxes are paid to the state where the goods or services are consumed and not to the state in which they were produced. Hence, the consuming states such as J&K stand to benefit under this regime. Such a tax regime might prove to be a disincentive for the producing States. Secondly, IGST complicates tax collection for State Governments by disabling them from collecting the tax owed to them directly from the Central Government. Under the previous system, a state would only have to deal with a single government in order to collect tax revenue.
However, in spite of certain apprehensions, the central government has assured states of compensation for any revenue loss incurred by them from the date of GST for a period of five years. So far GST is largely turning out to be a success with few gaps but even these gaps are being plugged so as to make GST as best as possible.
It must be noted here that a brilliant sync between the centre and the states witnessed in the GST Council is primarily responsible for making GST a success and dealing with the challenges as they appear. In this sense GST indeed is a classic case of Cooperative Federalism.

By: Pritam Sharma