A combative federalism

News: There has been friction between center and state over the lack of compensation cess.

What is GST?

It is a “consumption-based destination tax”, which means that the revenue will go to the state in which the goods/services are consumed.

What are the steps that can be initiated by the state to cover the financial loss?

The state governments are short of funds, so the industry may face financial issues as the state may aggressively use its power to augment its finances. Attachment of bank account, blocking of the input tax credit, arrests are likely to rise to increase tax collections. Information under RTI revealed that ITC of about Rs 210 crore of businesses assessed by Central tax officers in Punjab, Haryana, Himachal Pradesh, and Jammu and Kashmir has been blocked.

The GST regime has over four tax slabs and offers many exemptions.  Industries that enjoy exemptions will first come under increased tax scrutiny. Since service tax was administered only by the Center, state officers are not experienced in tax services. So, issues that have been settled for the service industry could be reopened to increase revenue.

Why did the issue between the center-state arise over GST?

It is because of the lack of trust of states on center over administering GST fairly.

Also, there is a lack of consensus over the decision-making. Even the proposals are not best suited to the interest of each state. The delay in the release of compensation- cess, further increases friction between center-state relations.

How the distorted center-state relations can affect federalism?

Fiscal desperation could lead to the emergence of various issues. Under the GST, States could refuse to adopt the administrative orders issued by the central government, leading to different interpretations and implementation. As the state can make changes in the GST law applicable in the state (including change in tax rate) to suit its finances.

This would lead to a constitutional crisis, where the Supreme Court will be forced to address the question of; whether a state legislature, comprising democratically-elected members, is sovereign or is it submissive to an executive body with recommendatory powers — the GST Council.

Source: This post is based on the article “A combative federalism” published in Indian Express on 24th January 2022.