Indian Economic Service
Indian Statistical Service Examination, 2023
“GST has curtailed the financial powers of the States under fiscal federalism.”
There have been concerns about the impact of the Goods and Services Tax (GST) on the financial powers of the States under fiscal federalism, as it has been a significant reform to India’s indirect tax system. A detailed explanation of this statement will require us to examine the concept of fiscal federalism, the GST system, and how it has affected the powers of the States.
1. Fiscal Federalism:
The central government and the state governments share financial responsibilities and powers in fiscal federalism. Through the distribution of taxing powers between the Union (central government) and the States (state government), fiscal federalism is enshrined in the Indian Constitution.
States and the Union are allowed to levy taxes on certain items, such as land revenue, sales tax, and stamp duty, while the Union has exclusive rights to levy taxes on items like income, custom duties, and interest on securities. The Indian economy operates more smoothly as a result of this system, since the central government and the state government both receive their fair share of resources.
The central government has the authority to levy and collect taxes on certain subjects listed on the State List, while the states have the authority to levy and collect taxes on subjects listed on the Union List.
2. The Introduction of GST:
India introduced the GST on July 1, 2017 to replace multiple indirect taxes like VAT, excise duty, service tax, etc., with a single, comprehensive tax. Both the central government and the state governments can levy the GST on goods and services under the GST.
GST rates, exemptions, and other aspects are decided by the GST Council, which includes representatives from both the central and state governments. It has been credited with simplifying and streamlining the taxation process in India, increasing the tax base and reducing tax avoidance through the elimination of overlapping jurisdictions.
3. Impact on State Financial Powers:
a. Loss of Autonomy in Taxation:
GST has curtailed the autonomy of some States in taxation, which is one of their primary concerns. Prior to GST, states had considerable control over tax rates and policies. As a result of the introduction of GST, the Central Government is now in control of adjusting taxes and policies. This has caused some States to worry that their taxation autonomy has been compromised.
The introduction of GST has led to some States opposing its implementation. With the introduction of GST, the central government and state governments have shared the responsibility for levying and collecting taxes on goods and services. Consequently, States have fewer options in setting tax rates based on their fiscal needs.
b. Reduced Revenue from Local Taxes:
In the past, states collected revenue from local taxes like entry taxes, attribution taxes, and state-level VATs. GST has consolidated these sources of revenue. A central government compensation program for revenue losses due to the introduction of GST has been in place for some time, but there are concerns about its predictability and sustainability, especially over time.
As a result, there has been a call for better compensation mechanisms, greater state autonomy in setting tax rates and thresholds, and improved forecasting tools to ensure timely GST compensation payments.
c. Limited Control Over Tax Policies:
When decisions are made by consensus at the GST Council, States often have to compromise on their preferences for tax rates and policies. As a result, the States may not be able to respond to local economic conditions and fiscal needs.
Inefficient resource allocation and an uneven playing field can result from this. In addition, it may lead to lower tax revenues and a lack of incentives for the States to grow economically.
d. Loss of Revenue Due to Compensation Cess:
GST compensation cess was introduced to compensate States for revenue losses during the first years of GST implementation. Nevertheless, compensation cess has been viewed as a temporary solution, and it may not be a sustainable revenue source for states.
This can cause a huge financial burden on the States and lead to a loss of revenue. Due to this, basic services and amenities cannot be provided to citizens. The increase in taxes can also lead to an increase in living costs.
4. Conclusion:
The GST has brought several benefits, including the creation of a single national market and the simplification of tax structures, but it has also raised concerns about how it might affect the state’s financial authority. As a result, states have lost tax autonomy, received less revenue from local taxes, had limited control over tax policies, and were uncertain about compensation.
As India’s fiscal federalism landscape continues to evolve, the success of GST in balancing these concerns with the need for a unified tax system will continue to be a discussion point.
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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