GST Implementation and Fiscal Challenges
Introduction of GST and Its Implications
- The restructuring of GST tax slabs is projected to offer over ₹2 lakh crore in tax benefits to consumers.
- The abolition of the GST compensation cess marks a significant transition, potentially boosting local demand and revenue growth.
- States express concerns over insufficient estimations of revenue loss and feel neglected in compensation demands.
Impact on Fiscal Autonomy and Cooperative Federalism
The introduction of GST has shifted taxation powers to the GST Council, reducing States' fiscal autonomy. This has raised calls to revisit the fiscal policy on tax sharing to align with the principle of ‘cooperative federalism.’
Constitutional Framework and Fiscal Policies
- Article 246: Defines the tax power distribution between Centre and States.
- Service Tax: Introduced via the 92nd Amendment and further evolved with the 101st Amendment launching GST in 2017 as a destination-based tax.
Centre-State Financial Relations
- Articles 268 to 293: Outline Centre-State financial interactions.
- The Finance Commission is tasked with determining state transfers, but inconsistencies and perceived biases in its criteria are points of contention.
- Despite higher recommendations, actual devolution of funds remains below expectations due to non-shareable cess and surcharge increases.
Central Transfers and Fiscal Dependence
- Central transfers contribute to 44% of States' revenue, with significant variation across States, indicating fiscal dependency.
- Pre-GST and post-GST periods show centralisation of tax collection and increasing State expenditure responsibilities.
Challenges and Proposed Solutions
States face rising expenditure commitments on key sectors leading to demands for greater fiscal autonomy. Suggestions include adopting models like Canada’s for balance in tax collection and expenditure. Additionally, States are advocating for sharing the personal income tax base or allowing States to top up income tax to reduce fiscal dependence on the Centre.
Conclusion
GST has substantially altered the fiscal landscape, centralising tax power, and creating friction between States and the Centre. Enhanced fiscal autonomy is essential to meet public aspirations and bridge service gaps.
