The Goods and Services Tax (GST) Council, envisioned as a landmark in India’s fiscal federalism and a testament to shared sovereignty between the Union and states, is facing increasing scrutiny over its effectiveness and the potential for a subtle shift towards centralisation. While the institution has facilitated significant tax reforms and revenue growth, concerns are mounting regarding the proliferation of non-shareable cesses and surcharges by the Union government, alongside the underutilisation of its collaborative potential by the states.
GST Council’s Genesis and Functioning
Information was available with The Chenab Times detailing the GST Council’s establishment under Article 279A of the Constitution as a pivotal institutional experiment in post-independence India. It represented a fundamental restructuring of fiscal federalism, moving beyond mere tax simplification to a shared legislative authority over indirect taxation. This structure arose from the economic and political pressures of the 1990s, which saw the rise of regional capital and the need for a unified national market to overcome the barriers of a fragmented, origin-based tax regime.
The Council’s operational phase was initially characterised by a strong commitment to consensus-building, where decisions were reached without formal voting. This approach, coupled with a voting structure that ensured even smaller states had a voice, fostered negotiation and cooperation. The principle of ‘one state, one vote’ and the requirement for a 75% weighted majority incentivised collaboration among all members.
Fiscal Achievements and Structural Weaknesses
In terms of fiscal outcomes, GST has demonstrated notable success. Tax collections have nearly doubled, compliance has seen improvements, and the taxpayer base has expanded considerably. The creation of a national common market has also led to reduced logistics costs and the elimination of cascading taxes, thereby contributing to enhanced economic integration across the country.
However, underlying these achievements are structural weaknesses that pose challenges to the system’s long-term sustainability. A significant concern is the concentration of the tax base, with a small proportion of taxpayers contributing to a disproportionately large share of revenues, indicating that the goal of broad-based formalisation remains incomplete. The informal sector, especially in business-to-consumer transactions, continues to operate largely outside the purview of the GST framework.
Furthermore, the fiscal outcomes have been uneven across states. While GST aimed for progressivity by transitioning from origin-based to destination-based taxation, its real-world impact has varied. States with robust industrial and service sectors have seen higher collections, while others have struggled to achieve revenue neutrality. The compensation mechanism, initially intended to mitigate these disparities, has seen diminishing momentum, exposing the underlying fiscal tensions.
Challenges to Federal Balance
The most significant challenge to the GST Council’s federal character stems from the Union government’s increasing reliance on cesses and surcharges. These levies, which are outside the divisible tax pool shared with states, have seen a substantial increase over the past decade. This practice effectively allows the Union to bypass the shared sovereignty principle institutionalised by the GST Council, leading to a de facto fiscal centralisation that operates discreetly through tax instrument choices rather than overt institutional changes.
The states have also been criticised for underutilising the institutional platform provided by the Council. Despite possessing both voice and voting rights, many states have adopted a reactive stance rather than proactively shaping policy. The lack of coordinated strategies among states has weakened their collective bargaining power within the Council.
An additional critical gap exists in the coordination between the GST Council and the Finance Commission. While the former determines the tax pool’s structure and size, the latter is responsible for its distribution. The absence of a formal institutional link between these two bodies can lead to inconsistencies in fiscal policy, particularly in a consumption-based tax regime.
The future trajectory of the GST Council will largely depend on its evolution into a comprehensive institution of federal governance, addressing issues such as the integration of small businesses and the informal sector, and consumer impact. Crucially, it requires a political consensus on the limits of centralisation, ensuring that the delicate balance between national unity and sub-national autonomy is maintained. The Council’s ultimate success as a federal institution hinges on its ability to foster genuine shared governance rather than becoming an instrument of central authority.
The Chenab Times News Desk