Introduction
With the vision to introduce “Reform” rather than a mere amendment in the existing Indian taxation system the Indian government in 2017 through Constitutional Amendment 101st ,2016 introduced Goods and Services Tax (GST). It simultaneously enlarged and curtailed the fiscal sovereignty of Indian states. The GST envisaged to subsume[1] over 17 central and state taxes and seized 23 types of central and state surcharges and cess into a single, unified, multi tired indirect tax regime. The back story about the advent of GST is a story about tension between economic rationality and political sovereignty between the imperatives of a liberalising market economy and to constitutional imperatives of a federal polity in which states fiercely guard their taxing powers as an attribute of sovereignty. Reform of this magnitude required the alignment of interest across Political parties, ideological notions and regional economic configurations.
Tax policies plays a pivotal role in a country’s growth and have a direct impact on its economy in terms of efficiency and equity. A good taxation system is that which ensures the equitable income distribution and also generates revenues in such a manner V, M. M. (2020). A Comprehensive Analysis Of Goods And Services Tax (GST). In India. https://doi.org/10.56902/IRBE.2020.4.2.58 for central and state governments which can lead to overall benefit of nation’s infrastructure, defence, public amenities, public health and security. Central and state governments derives their powers to levy taxes and collect indirect taxes from the constitutional provisions mentioned under Article 246[2] 7th schedule.
Before the advent of GST indirect tax regime, India had a very complex and economically inefficient taxation system. As specified in the Government of India Act 1935, the constitutional power to collect taxes given to both union and state government culminated in a cascading effect[3] of taxation that is “tax on tax” as it imposed massive compliance burdens upon businesses almost giving way to Red tapism , created perverse incentives for tax induced economic distortions and fragmented the Indian market into 29 distinct economic jurisdictions. Multitude of taxes such as central exercise , service tax etc. was imposed by both central and state governments on the Indian population, this created a ripple effect wherein tax imposed on one destination was also taxed on another destination. So to alleviate this dilemma, GST was seen as a panacea wherein Union and states would together levy a dual GST the central GST(CGST) and the state GST (SGST) on every transaction of supply of goods and services with the special integrated GST (IGST) on Inter-state supplies this setup highlighted the cooperative federal structure.
Part- II
A Decade in the Making : The Legislative And Political Journey – A Reform driven by 101st Amendment
The seeds of GST in India were first sown in the year 2000 by Atal Bihari Vajpayee, who was the then Prime Minister of the nation and under the of tenure Vajpayee led National Democratic alliance government gave the task to Empowered Committee of State Finance Ministers[4], under the chairmanship of Asim Dasgupta with specific focus on creating aim to design a uniform Value Added Tax (VAT) structure while doing the harmonisation of sales tax across states. But with the realisation of structural inadequacies of existent multi-layered indirect tax regime fraught with cascading tax effects, inter-state trade distortions and red tapism , so to counter all these problems the Vajpayee government empowered the [5]Kelkar Task Force on Indirect Taxes (2003), which recommended the consolidation of the existing CENVAT (Central Value Added Tax) and the state-level VATs into a comprehensive goods and services tax indicating towards the need of GST model. It was Vajpayee’s political will that paved the way for GST.
The critical watershed moment came in February 2006, when Finance Minister P. Chidambaram under the UPA government , in his [6]Union Budget (2006-2007), announced the ambitious target of introducing GST by April 1, 2010.
The First Constitutional Amendment Bill and Subsequent Bills.
In the budget session of the year 2011, Finance Minister P. Mukherjee during the UPA-II government through 115th constitutional amendment bill in the Lok Sabha made the first formal attempt to introduce GST in India by advocating to insert a new Article 279A to constitute a Goods and Services Tax Council and to amend Articles 246, 268, 269, and 270 of the Constitution to enable the levy of CGST and SGST. However the bill remained stalled due to the sparse political consensus, tussle between state and centre over revenue autonomy, treatment of petroleum products and compensation arrangements due to which the bill lapsed with the dissolution of the 15th Lok Sabha in 2014.
The subsequent NDA government under the leadership of Prime Minster Narendra Modi reintroduce the revised version as the constitution (122nd Amendment) Bill, 2014 in the Lok Sabha . But here also this resolution was not devoid of impasse as NDA government lacked majority in Rajya Sabha which demanded a prolonged political negotiations, for over a year, the Bill remained stuck in a Select Committee of the Rajya Sabha, the primary disagreements centring on three issues:
- The Congress party’s demand for a constitutional cap on the GST rate (initially proposing 18 percent), which the government resisted defending themselves with the argument that such rigidity would impair the flexibility of the GST Council.
- The elimination of the one per cent additional tax on inter-state supplies proposed in the original Bill, which critics argued would perpetuate the cascading effects that GST was meant to eliminate.
- The quantum and mechanism of compensation to states for revenue losses was also a bone of contention.
After series of political compromises in 2016 the government agreed to drop the contentious one per cent additional tax on inter-state supplies, committed to a five-year compensation guarantee to states for revenue losses arising from GST implementation. The Constitution (One Hundred and Twenty-Second Amendment) Bill was passed by the Rajya Sabha on August 3, 2016, and was ratified by more than the required one-half of state legislatures . After receiving the President’s assent on September 8, 2016, the Constitution (One Hundred and First Amendment) Act, 2016 paved the way for GST. After the constitutional amendment, it was followed by a period of intensive subordinate legislation. The GST Council, constituted under the newly inserted Article 279A, underwent multiple arduous sessions to finalise the rate structure, [7]the four-tier slab system (5%, 12%, 18%, and 28%), the Compensation Cess, the rules on input tax credit, composition schemes, and the transitional provisions.
Four key Acts enacted by Parliament
- Central Goods and Services Tax Act, 2017
- Integrated Goods and Services Tax Act, 2017
- Union Territory Goods and Services Tax Act, 2017
- Goods and Services Tax (Compensation to States) Act, 2017
The Goods and Services Tax was launched at midnight on 1 July 2017 by the former President of India, Pranab Mukherjee, and the Prime Minister of India Narendra Modi.
Reforms brought by the 101st Amendment
The Amendment inserted a new [8]Article 246A which grants concurrent power to Parliament and the state legislatures to make laws on goods and services tax which signifies a fundamental departure from the pre-GST Constitution’s scheme in which the Seventh Schedule’s Lists I and II had laid out the exclusive taxing domains of the Centre and the states, respectively, with List III dealing with matters of concurrent legislative that excluded taxes from its subjects .Article 246A can be seen as a constitutional innovation as it effectively creates a new category of concurrent taxing power that exists outside the List framework. The Amendment also substituted Article 269A to provide for the levy and collection of IGST, the proceeds of which are apportioned between the Union and the states in the manner provided by Parliament on the recommendation of the GST Council. Article 270 was amended to include IGST in the divisible pool of taxes distributed between the Union and the states. The Amendment deleted Article 268A (service tax), Article 269’s application to certain taxes was modified, and consequential amendments were made to various entries in the Seventh Schedule.
PART- III
Article 279A and the GST Council: Composition, Powers and Federal Role
The 101st Constitutional Amendment also created a critical federal decision making body- GST Council (Article 279A), which is empowered to make recommendations on GST to the Union and the states on extensive matters, exercising quasi-legislative functions including the taxes to be subsumed under the GST, the goods and services exempt from GST, the model GST laws, the principles of levy, the apportionment of IGST, the principles governing the place of supply, the threshold limits of turnover, the GST rates, and any special provisions for particular states. The composition of GST council was such to avoid unilateralism and to maintain a strong central leadership, it consists of Union Finance Minister as Chairperson, the Union Minister of State for Finance as a member, and the Finance Ministers of all states and Union Territories with legislatures as members. However councils’ voting mechanism[9] consists of a Achilles heel as it is substantially asymmetrical in nature- Union has one-third of the total votes cast, and the states together have two-third of the votes cast, with decisions requiring a three-fourths majority, which means that even if all the states vote in favour, the Centre’s “No” vote means three- fourth threshold cannot be achieved that is the mandate for decision making, often stated by many analysts that this gives a upper hand to Centre as the Centre has de facto veto power which gives it a unfair political advantage. This unfair advantage to Centre percolates in the form of tensions between State and Union, incidents where wealthy states such as, Tamil Nadu, Maharashtra and Karnataka demand more room to increase or levy surcharges, which the Council has not considered. States also claim for frequent alteration through GST rates, which the centre pulls a lot of for its own liking, failing to ensure revenue predictability.
Cooperative or Coercive Federalism: Lopsided Federalism in Some States
India has never been a symmetrical federation. The Constitution itself embedded asymmetry as a deliberate design choice recognizing that uniform treatment of unequal units produce unequal outcomes which will be counterproductive for a country like India. However GST’S novelty was designed for a symmetrical federation that India has never been as India’s GST represents a clash between two legitimate constitutional values – Value of a unified national market (which requires uniformity) and the value of asymmetric federalism (which requires differentiation. Constitutional asymmetry[10] created with certain Special provisions under Articles 371, 371A, 371J, Fifth & Sixth Schedules for tribal areas, Article 370 (now abrogated) for J&K , Special Category Sate Status. However, by imposing GST as a tool of structural uniformity on this deliberately asymmetric architecture, created a fundamental tension that has never been adequately resolved. Many such states like Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand, and Jammu & Kashmir (prior to 2019) that are accorded with Special Category Status (SCS)[11] lost their fiscal privileges after coming under the umbrella of GST. The concept of Special Category States (SCS) originated from the Fifth Finance Commission (1969) which provided certain fiscal-administrative privileges to them on basis of criteria set by Gadgil Formula – Hilly and difficult terrain, Low population density or large tribal population, Strategic location along international borders, Economic and infrastructural backwardness, Non-viable state finances. Many administrative accompanied with fiscal privileges like Tax concessions (Excise duty exemptions) to attract industries, Plan assistance priority Preferential allocation under Planning Commission, (Industrial incentive packages) Special packages under industrial policy etc.So there was a differentiated tax structure for such states and the GST coerced them to conform to uniform rate-based framework perpetuating fiscal homogenization overlooking the constitutional asymmetry enshrined in the Indian Constitution. States like Himachal Pradesh, Uttarakhand, and Sikkim had attracted pharmaceutical, FMCG, and electronics manufacturing through excise duty exemptions which was a pre-GST tool that allowed them to offer price competitiveness despite higher logistics costs but [12]after the implementation of GST, Excise duty (a central levy) was subsumed into GST which means now states cannot unilaterally offer GST exemptions without the mandate of GST council although State government restructured their Industrial packages as budgetary refund mechanisms rather than tax exemptions but they were far less lucrative for investors which eventually lead to several manufacturing units relocatingor refusing to expand in these states. Himachal Pradesh and Uttarakhand explicitly protested that GST had wiped out their industrialization gains that they built over a decade of incentive-based policy.
Similar ordeal exists for North eastern states and regions too as prior to the advent of GST many northeastern states used entry taxes and local body levies as revenue instruments suited to their small, border-trade-dependent economies but GST subsumed or restricted these, reducing fiscal space without equivalent compensation. The Centre offered area-based exemptions (ABEs)[13] for northeastern states and hilly regions, entire geographic zones were exempt from central excise but post -GST the Council replaced ABEs with budgetary support schemes which were discretionary, annually funded, and not embedded in the tax structure itself. Due to Northeast’s Unique Economic Geography northeastern states face challenges that are fundamentally different from mainland the India like being a Landlocked or near-landlocked geography with limited market access it is highly dependent on [14]central transfers (in some states, 80–90% of revenue), Sparse population spread across difficult terrain making GST compliance infrastructure expensive and difficult to build. As northeastern states are predominantly consuming states, they import most goods and generate little manufacturing output so under GST’s destination principle, they should theoretically gain (tax accrues to the state of consumption), but as most of the tribal economies are under large informal sectors the GST’s invoice-based system struggles to capture it. The patch work done by central government in the name of compensation mechanism which promised to compensate states for any revenue loss for a period of 5 years that expired in 2022 created a significant fiscal stress for such vulnerable states.
Jammu &Kashmir has a more constitutionally intricate and unexplored issue that needs a fundamental rethinking of how Union Territories created from former states fit into a federal tax architecture designed exclusively around the Centre-state binary. Before the abrogation of Article 370 , constitutional amendments did not automatically apply to J&K as per Article 368 which means any amendment to the Indian Constitution that would alter the relationship between J&K and the Centre requires the concurrence of the J&K state government before it could be extended to J&K through a Presidential Order. This was not merely a formality but a genuine veto right that J&K exercised . J&K had its own Constitution (adopted in 1956), its own consolidated fund, and its own rules governing taxation. So when 101st Amendment came into existence it fundamentally altered the taxation entries in the Union and State Lists but in J & K it was implemented with certain modifications culminating to the issuance of (Application to Jammu and Kashmir) Amendment Order, 2017 under Article 370(1). When every other state simply adopted the Central Goods and Services Tax Act, 2017, J&K legislature passed its own statute – the Jammu and Kashmir Good and Services Tax Act, 2017. J&K participated in the GST Council as a full state, with full voting weight. Under Article 279A, the Council consists of the Centre and the states and J&K was counted as a state for this purpose, sending its Finance Minister as its representative. However there is a subtle constitutional tension as J&K’s Finance Minister, when sitting at the GST Council, was representing a state whose very participation in the GST framework was contingent on a Presidential Order that could theoretically be revoked or modified which undermines the representative’s independence making their constitutional power conditional .
The Unprecedented Decision – Abrogation of Article 370
Following the abrogation of Article 370[15] of the Constitution of India, which had conferred special constitutional privileges upon the State of Jammu and Kashmir, the region ceased to enjoy its earlier autonomous status. Consequently, all provisions of the Constitution of India became applicable to Jammu and Kashmir thereby leading to application of Central Goods and Services Tax Act, 2017 on the bifurcated Union Territories if Jammu & Kashmir( with legislature) and Ladakh ( without legislature). which raised an important constitutional question Can a Union Territory Sit in the GST Council? as according to Article 279A(1) states the GST Council shall consist of a Union Finance Minister as the Chairperson, Union Minister of State for Finance, Minister in charge of Finance or Taxation of each State so this constitutional provision lucidly used the word “State” not “State or Union Territory”. So a immediate practical solution was adopted that allowed J&K’s Finance Minister to continue participating in the Council, but this participation now lacks a clear constitutional basis. It is based on an assumption of continuity that is not backed by Article 279A which makes J&K’s representation in the council constitutionally questionable that could lead to future contentions regarding the validity of J&K’s vote in the council. Moreover there is a issue of double representation considering J&K’s Finance Minister participates in the Council, but J&K’s Finance Minister operates under a government that is ultimately controlled by the Lieutenant Governor, who is the Centre’s representative in the Union Territory indicating that the Finance Minister is not fully independent of Central direction.
Is “one nation one tax” slogan trying to conceal the anomaly of Ladakh ?
The problem is aggravated by the constitutional neglect of other Union territory carved out of former state of Jammu& Kashmir – Ladakh that has no legislature and therefore no council of ministers at all leaving its administration to be entirely governed by the Lieutenant Governor, who is a Central appointee with no accountability to any local elected body. The GST architecture where the Centre levies CGST and each state levies SGST on the same transaction, with both governments having independent administrative and fiscal claims, this mechanism envisaged to ensure a automatic predilection of states to surrender their independent sales tax powers, and in exchange they got a guaranteed share of a broader tax base. Although Ladakh participates in GST regime but has no representative at the GST Council, even the UTGST revenues collected in Ladakh go to the Union Territory’s consolidated fund which is a Central fund. So the Centre both administers GST in Ladakh and receives the UTGST revenues from it leading to the big question does Union Territory of Ladakh really have fiscal autonomy?
Part IV
The GST Council was devised as a forum for cooperative federalism, that took a paradoxical turn emerging as a potential tool of constitutional subordination. The GST Council, which was conceived as India’s most sophisticated experiment in horizontal federalism, has instead endorsed what many critiques like to call a “federalism of abandonment.” While the constitutional architecture of Article 246A ostensibly guarantees concurrent and co-equal taxing power to the Union and States, the judicial record reveals a more disconcerting reality As States began implementing the regime, questions arose: Did the Council’s consensus-based structure genuinely uphold federal autonomy, or had it strategically shifted the balance of fiscal power toward the Union? The Indian judiciary’s activism pertaining with GST has been precisely an effort to answer this question, an constitutional attempt to demarcate the boundaries between cooperation and coercion, between shared governance and masked centralisation.
This Part argues about the dual crises that has been reflected through judiciary’s engagement with GST disputes First can be seen at the formal constitutional level where GST Council’s decision-making architecture has inverted the federal bargain by collapsing State legislative discretion into a majoritarian body where the Centre holds effective veto power. Second, supporting the formalist rigidity of GST’s compliance regime that has inadvertently triggered a colossal retreat into informality defeating the envisaged target of curating a tax system which will broaden the tax base. The judicial interventions we examine below are meticulous attempts to correct these anomalies simultaneously revealing , something more fundamental: that the GST’s promise of “one nation, one tax” cannot be accomplished without addressing the structural inequalities that GST itself has rendered .
Conclusion
GST represents India’s most ambitious fiscal reform perceived an achievement that demanded over a decade of political negotiation and constitutional innovation. Yet the promise of cooperative federalism embedded in Article 279A remains only partially fulfilled. The Centre’s structural veto in the GST Council, the erasure of Special Category State privileges, the fiscal marginalisation of north-eastern economies, and the unresolved constitutional status of Jammu & Kashmir and Ladakh within the GST framework collectively reveal that uniformity imposed on an asymmetric federation produces its own inequities. The “one nation, one tax” vision, however sound economically compelling but it cannot be considered constitutionally complete until it addresses the structural anomalies it has created and that too not through discretionary administrative measures, but through principled federal accommodation. GST’s first decade is a success story with an unfinished constitutional chapter.
[1] Ministry of Finance, Government of India, The Constitution (One Hundred and First Amendment) Act 2016 (Government of India 2016); Empowered Committee of State Finance Ministers, A Model and Road Map for Goods and Services Tax in India (Government of India 2009) 3–5.
[2] Constitution of India, art 246 read with the Seventh Schedule, Lists I and II.
[3] Government of India Act 1935, s 100 read with Sch 7; Vijay Kelkar and others, Report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 (Ministry of Finance 2004) 14–16.
[4] Empowered Committee of State Finance Ministers, A Model and Road Map for Goods and Services Tax in India(Government of India 2009); Parthasarathi Shome, ‘GST in India: A Political Economy Perspective’ (2012) 47(19) Economic and Political Weekly 14, 15.
[5] Vijay Kelkar and others, Report of the Task Force on Indirect Taxes (Ministry of Finance 2002) ch 3.
[6] Union Budget Speech 2006–07 (Ministry of Finance, Government of India, February 2006) para 153.
[7] GST Council, Minutes of the 14th GST Council Meeting (18–19 May 2017) Annexure II (Rate Schedule).
[8] Constitution of India, art 246A (inserted by the Constitution (One Hundred and First Amendment) Act 2016, s 2); Arvind P Datar, ‘Constitutional Validity of GST: An Analysis of Article 246A’ (2017) 1 GST Law Reporter 3, 5–6.
[9] Constitution of India, art 279A(9); M Govinda Rao and RK Singh, ‘GST and Indian Federalism’ (2017) 52(45) Economic and Political Weekly 10, 12–13.
[10] Constitution of India, arts 371, 371A, 371J, Fifth Schedule and Sixth Schedule.
[11] Fifth Finance Commission, Report of the Fifth Finance Commission 1969 (Government of India 1969) ch 4; Planning Commission, Gadgil Formula for Central Assistance to State Plans (Government of India 1969).
[12] Department for Promotion of Industry and Internal Trade, Industrial Policy for Hill States: Review Post-GST Implementation (Ministry of Commerce 2018); Himachal Pradesh Government, Economic Survey of Himachal Pradesh 2018–19 (Directorate of Economics and Statistics 2019) 62–64.
[13] Ministry of Finance, Budgetary Support Scheme under GST for Units Located in States of Jammu & Kashmir, Uttarakhand, Himachal Pradesh and North-East (Government of India, Office Memorandum No 01/03/2017-ME, 5 October 2017)
[14] Fourteenth Finance Commission, Report of the Fourteenth Finance Commission (Government of India 2015) vol 1, paras 7.20–7.25; North Eastern Council Secretariat, Basic Statistics of North Eastern Region 2019 (Ministry of Development of North Eastern Region 2019) 48–50.
[15] The Jammu and Kashmir Reorganisation Act 2019 (Act 34 of 2019); Constitution (Application to Jammu and Kashmir) Order 2019 (CO 272 of 2019); Dr Farooq Abdullah v Union of India Writ Petition (Civil) No 1099 of 2019 (Supreme Court of India, pending reference).
