Fiscal federalism

The Supreme Court’s assertion that the Goods and Services Tax (GST) Council is not only an avenue for the exercise of cooperative federalism but also for contestation across Centre-state lines is a timely reiteration of the provisions in Articles 246A and 279A of the Constitution. According to Article 246A, Parliament and the state legislature possess equal powers to legislate on aspects of GST; Article 279A envisions that the Centre and the states can’t act independently of each other. The council’s voting system gives two-third weightage to the states’ collective votes and one-third to the Centre’s vote in a bid to provide a level playing field.

It’s unfortunate that despite such clear-cut provisions, the BJP-led Union Government and Opposition-ruled states have often been at loggerheads over the functioning of the council during the past five years. The one-nation-one-tax regime was rolled out in 2017 with the primary objectives of creating a unified national market and giving a boost to the ‘Make in India’ campaign; harmonisation of laws, procedures and rates of tax between the Centre and the states and among the states; and establishing an environment that would facilitate compliance and reduce corruption. The new regime has been partially successful, hampered at times by Centre-state disagreements. The all-time high monthly GST collection of Rs 1.68 lakh crore last month augurs well for the future, but most states may find it hard to fend for themselves once the five-year compensation plan for GST rollout ends next month. Punjab, for instance, stands to lose over Rs 15,000 crore annually if the Centre stops recompensing it.

The GST Council is the ideal forum for the states to voice their apprehensions and prepare an action plan depending on whether the Centre accepts their demand to extend compensation beyond June. Empowering the states to generate revenue on their own in the long run should form the basis of a workable fiscal model. With GST being a key driver of Indian economy, it is imperative to create a win-win situation for both the Centre and the states in the true spirit of federalism.