Let’s keep GST good and simple

Context: The Supreme Court ruled on May 19th that the recommendations of the Goods and Services Tax (GST) Council only have persuasive value, and cannot be binding on the Centre and states.

It should be noted that the case – Union of India vs Mohit Minerals Pvt Ltd – was dealing with the levy of Integrated Goods and Services Tax (IGST) on ocean freight and not per se on central and state legislative powers.

What are the concerns with the SC verdict?

There are concerns that after the SC decision, various states will now begin pulling in different directions, taking indirect taxes back to the VAT era.

The SC decision comes at a time when states have been very concerned about their ability to manage their fiscal situation once the compensation cess provided to counter revenue losses on account of GST comes to an end in June 2022. Suggestions by states to increase the period of the cess by two or three years, have not yet elicited any positive response from the Centre. In this situation, and given the SC ruling, there is concern on whether the level of uniformity in GST legislation across states, presently in force, will continue in future.

How have the stakeholders reacted?

Opposition-ruled States have hailed the verdict as upholding their rights vis-à-vis what a few termed as the ‘arbitrary imposition’ of Centre’s decisions in the Council.

The Finance Ministry has sought to disperse the anxiety by indicating that the Court has only elaborated on the Council’s existing arrangement and the status quo would continue. States can already reject the Council’s decisions, but none has chosen to so far, it said.

How has the GST Council performed so far?

The GST Council has met 46 times till now and its decisions have largely been unanimous, indicating a high level of fiscal maturity and understanding between the Centre and states.

While some states have had divergent viewpoints on some issues, the Council however has been effective in balancing the interests of the Centre and the states.

It has also dealt with various implementation issues during the past five years and ensured that the overall aim – a common indirect tax across the country – is not diluted.

Way forward

There does not appear to be any reason for immediate alarm, as the outcomes of GST Council meetings have largely been implemented by all states till now.

– Also, both the Centre and states have worked on GST in a spirit of cooperative federalism and the uniformity in GST laws across states has benefited both consumers and manufacturers.

At worst, the SC verdict can trigger more contestations in Council meetings, and at best, infuse a fresh sense of responsibility among members.

The Centre can strive to be more conciliatory towards States’ concerns and fiscal dilemmas.

The Council should also meet more often to nurture the critical fiscal federalism dialogue in the right direction and minimise trust deficits.

There are many pending reforms that require the Centre to work more cohesively with States to take India’s economy forward and lift those left behind. For instance: An overhaul of land and labour markets as well as the agrarian sector.

What we need right now is a restatement of the principle of ‘One Nation, One Tax’, that it won’t become a ‘One Nation, Many Taxes’ situation all over again.

GST should now move further along the path of procedural simplification, improving the ease of doing business. It is in essence a tax collected from consumers by businesses and paid to both central and state governments. Therefore, collective views of both consumers and businesses should be duly considered before considering any changes in the GST decision-making framework.

Source: This post is based on the following articles:

– “A timely reminder” published in The Hindu on 21st May 22.

– “Let’s keep GST good and simple” published in Times of India on 20th May 22.

– “Explained: The SC ruling that GST Council decisions are not binding on Centre or states” published in Indian Express on 21st May 22.