Overcoming GST implementation challenges in Indian federation

GST being a destination-based tax, many of the industrialized states were concerned that its introduction would lead to loss of revenues

The idea of goods and services tax (GST) was first mooted in India in the year 2000. It took nearly 17 years of herculean effort on the part of a number of political leaders, senior officers, tax experts and other stakeholders before GST was launched on 1 July 2017.

Implementation of GST has been full of challenges due to the federal structure enshrined in our Constitution. The Seventh Schedule of the Constitution delineates division of powers between the centre and the states through three lists —the Union list, the state list and the concurrent list. In the pre-GST era, the states were empowered to levy tax on sale of goods, which was one of their major sources of revenue. Introduction of GST meant that this tax along with many other central and state taxes would get subsumed into GST. Making GST a unitary tax was not acceptable to the states and it would have also meant compromising on the country’s federal structure. This challenge has been overcome by having dual GST as it enables the centre and the states to concurrently levy GST.

GST has been conceived as a destination-based tax and the tax accrues to the state where final consumption takes place. It required taxes to move along with the goods and services even during inter-state movement. This has led to a unique integrated GST (IGST) mechanism in India. IGST is levied and collected on supplies in the course of inter-state trade by the centre and is apportioned between the Union and the states based on final consumption and other prescribed principles.

Introduction of GST required a uniform set of laws, rules and rates on goods and services throughout the country. There were considerable differences in the VAT (value-added tax) laws, rules, practices and tax rates among the states. The Union government had its own experience in administering indirect taxes since independence. Each state also had its own set of politically sensitive industries and desired low tax rates on items of local importance. In order to forge consensus, the law committee and the fitment committee played a very crucial role. Both the committees consisted of equal number of senior officers from the state governments and the central government. The committees worked without a chairperson but had two co-conveners —one representing the states and the other the centre. In the absence of a chairperson, there was free exchange of ideas but the deliberations were lengthy. The recommendations of these committees were deliberated upon in the Council for building consensus.

GST being a destination-based tax, many of the industrialized states were concerned that its introduction would lead to loss of revenues. There was also an element of uncertainty about how the new GST regime would play out. The states wanted an assurance from the central government that their revenues would be protected. The centre agreed not only to protect their revenues but also provide for 14% nominal growth every year for a period of five years. In case of revenue shortfall, the states are being compensated through the compensation cess levied on select demerit and luxury goods.

As GST was to be levied concurrently by the centre and the states, it was feared that taxpayers might be required to have interface with both the central and the state tax authorities. However, the Council was very clear right from the beginning that the taxpayer should have minimal interaction with the tax authorities and interface, if any, should only be with a single tax authority. It was decided to divide the taxpayers with turnover of more than Rs1.5 crore equally between the centre and the states and to divide taxpayers with turnover of less than Rs1.5 crore in the ratio of 90:10 between the states and the centre. It was also agreed to cross-empower tax officers both under central and state laws.

Implementation of the game-changing economic reform impinging on a large number of stakeholders required an agile political body with strong mandate to take quick decisions. The newly created constitutional body, the GST Council, has emerged as a unique institution, where the centre and the states are willing to pool their sovereignty and give fiscal space to each other. The Council, since its formation in September 2016, has worked at a fast pace to take a large number of tax-related and fiscal decisions. It also realised that it would not be possible to take urgent operational matters to the Council and convene full-fledged Council meetings at a short notice. Therefore, it constituted a GST implementation committee (GIC), the decisions of which are implemented with the approval of the Union finance minister and are later placed before the council for information. Also, group of ministers and committee of officers addressed specific issues.

The GST Council has been responsive to the needs and feedback of the trade, industry and other stakeholders and made a number of mid-course corrections after the roll-out of GST. The Council’s structure and working are being seen as an example to be replicated in other crucial areas like water resources, road transport etc. so that the centre and the states could work together in the true spirit of cooperative federalism and in the overall interest of the nation.


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