Fuelling Federal Fights

Context: The Supreme Court in a recent verdict in the Mohit minerals case stated that GST Council decisions are not binding on states.

At one level, this can be seen as a reiteration of the constitutional provision that there is nothing in constitutional amendments relating to GST to force compliance with GST Council decisions. It’s just a healthy convention that has developed that the Centre and states have decided to fall in line with the Council’s collective decisions.

All governments still go back to their respective legislatures to give statutory sanction to GST Council decisions, which means the ultimate power continues to reside with legislatures.

What can be the potential impact of the SC verdict?

States now can defy the council, which can jeopardize the one nation, one tax principle. That will potentially set off a race to the bottom and re-balkanise the common market that India sought to create with a nationwide GST.

The SC decision is bound to ignite tensions around fiscal federalism, which has come under repeated assault of late. For instance the PM’s conference with CMs recently where he is reported to have rebuked non-BJP governed states for not cutting VAT on petrol and diesel. He urged they should follow the tax-cutting example of BJP CMs. Predictably, non-BJP CMs hit back. Another round of accusations and counters followed after recent fuel tax cuts by the Centre.

What is the way forward?

At central level

– The Centre must realise that structural and governance reforms necessary to get to a $5 trillion economy require not just states’ consent, but also their active involvement.

– Estimates suggest that the Centre collects about 60% of the combined revenue but gets to spend only about 40% of the total. States collect 40% of the combined revenue, but have the pleasure of spending 60% of it.

This implies at a big picture level is that our macroeconomic stability, and hence our ability to generate investment and growth, will depend on collective fiscal responsibility by the Centre and states.

At States’ level

– States on their part must acknowledge that the arrangements of fiscal federalism are not necessarily skewed against them as is commonly believed.

• First, as indicated above, fiscal aggregates have shifted in their favour and are likely to continue to do so.
• Second, not only do states get to spend a higher share of the combined expenditure but, with the abolition of the Planning Commission, they also enjoy greater autonomy on how to spend that money.
• Finally, States should stop seeing GST as a central initiative that required forced compromises on their part. Sure, states have surrendered some of their autonomy in raising taxes, but so has the Centre. Some give and take is inevitable in a national project like this. Eventually, though, as GST expands the tax base and arrests tax leakage, all parties stand to benefit.

Cooperative federalism is the way forward.

Source: This post is based on the article “Fuelling Federal Fights” published in The Times of India on 31st May 22.