The tussle between GST council and Indian Federalism

Paper 2 : Union State Relations

Even if all the States combine, they cannot have their way of decision-making in the GST Council, unless the Union agrees to it. Analyze this from the perspective of federalism in India. (2020 PYQ)

GST Council is a Constitutional body under Art 279A and an embodiment of cooperative fiscal federalism. It’s a joint forum for the Union and the States to discuss and deliberate on issues related to GST.

Federalism in GST Council:

• The GST Regime was formed based on the sacrifices of taxation powers of the States in return for the GST Compensation Fund, which denotes the cooperative fiscal federalism of the country.

• As per the GST Act,  states are guaranteed compensation for any revenue shortfall below 14% growth for the first 5 years ending 2022.

• Decisions of the GST Council are taken by a 3/4th majority, wherein the Central Government has the total weightage of 1/3rd of the total votes cast and the states have 2/3rd of the total votes cast.

Factors affecting Federalism:

• the decision-making process of the GST Council is seen by Opposition-ruled states to be dominated by the Centre, with the  BJP-led National Democratic Alliance ruling in most states.

• The Centre also holds the veto power as it holds one-third of the vote share.

• Limits to State’s Fiscal Autonomy: delayed transfer of Compensation Cess due to the economic impacts of the pandemic.

• The 15th Finance Commission observed that the continuing dependence of states on compensation from the central government (21 states out of 29 states in 2018-19) for making up for the shortfall in revenue is a concern

• GST council’s “majority rule” way of the decision-making process, sometimes doesn’t take into consideration the interests of every state.

• Recently, the Supreme Court in a judgment invoking the spirit of "Cooperative Federalism" for the well-being of democracy, held that Union and State legislatures have “equal, simultaneous and unique powers” to make laws on Goods and Services Tax (GST) and the recommendations of the GST Council are not binding on them.

Currently, many states are urging the Centre to extend the deadline for the compensation fund which is ending this year. This would help the states with their capital spending.
The GST Council is founded on the bedrock of collaborative federalism. If the GST Council meets periodically as mandated and there is the active participation of the states with due consideration for their recommendations (Integrational Conflict Resolution by M.P.Follet), no state will oppose an initiative that has been carefully deliberated, and if it is in the national interest.