May 29, 2022

Supreme Court, Fiscal Federalism and GST

T M Thomas Isaac

THE experience of GST during the past five years has been disappointing, to say the least. For four years, the IT backbone for its full implementation was not in place. Tax buoyancy has been far below expectations and with Covid the shortfalls have ballooned. Compensation payments were delayed and in arrears. And now as the compensation guarantee period is ending, most of the states are drifting to the brink of the precipice of sudden fall in revenue and inevitable fiscal crisis. There is lack of dialogue on these issues – the GST Council failed to meet for more than six months at a stretch in 2020-21 and when it finally met, some of the veterans of the Council openly complained of the undemocratic manner that the business was transacted. The discussions have degenerated to party alignments. A former union finance minister, who has always been positive to GST, even feared that time might come to script an elegy for the Indian GST.

The review of GST from the perspective of federalism assumes importance particularly in the context of the growing fiscal imbalance in Indian federal structure. The dominant perspective being promoted by corporate houses and favoured by union government entirely neglects federal issues and argues for further rationalisation of rates. It is in this context that the judgement of Supreme Court of India last week assumes special importance for those who have been arguing for greater federal flexibility in GST.


It may be noted that the Supreme Court judgment was not directly concerned with federal fiscal relations. It was reviewing a judgement of the Gujarat High Court which had held the imposition of GST on freight charges of CIF imports as ultra vires. The union government had argued that it was a decision of the GST Council and binding on both centre and states. The SC while endorsing the Gujarat verdict also examined the nature and powers of GST Council. The key conclusions of the SC are the following:

I) According to Article 279 A of the Constitution, GST Council is only a recommendatory body. Though the Council is a constitutional body unless legislated by parliament or assemblies they cannot be enforced. GST does not abridge the supremacy of the legislative bodies.

II) Both the parliament and state assemblies have concurrent powers to legislate on GST. There is no repugnancy clause in the constitutional amendment and therefore, both centre and state have simultaneous legislative power.

III) Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.

The union government spokesperson has pooh-poohed the stand of the opposition states that have generally welcomed the judgement. The union government stand is what was so obvious has only been reiterated and reinforced by the SC. The judgment in no way is going to impair the present manner of functioning of the GST Council.



The judgment, whatever be the thinking of the union government, has opened a host of issues that have been considered buried deep. The constitutional amendment has only created the broad framework for the introduction of GST in the country. Within that constitutional framework it is still an open question whether we can have a GST which is more responsive to the concerns of the states and the people.

The most important issue to be considered is whether the states can have the right to modify state GST rates. GST can be viewed as extension of VAT principle to the national scale with most of the other indirect taxes of the states and service and excise tax of the centre subsumed in it. Though VAT had introduced uniform tax rates throughout India, in practice, there existed minor variations between states. It was the general understanding during the early discussions of GST at the Empowered Committee of State Finance Ministers that this flexibility would be carried into the GST.

In the GST law adopted by the parliament the only flexibility that was permitted was right of the states to impose a special cess for a definite period in extra ordinary circumstances like a natural calamity, and that too, with the approval of the Council. The states need to be given right to modify the SGST within the narrow band to introduce some level of federal flexibility into the GST. In the absence of the repugnancy clause there is nothing in the law to prevent a state government from exercising this right. There is already discussion going on in union government circles to amend the existing law to deny this freedom to the state governments.

Providing such flexibility to states would in no way adversely affect the functioning of National GST ie, Central GST and Integrated GST on inter-state trade. The tax would remain perfectly vatable, or, in other words, there would not be any hindrance to the input credit chain across the nation.

We have a concrete experience for this in Kerala. After the 2018 floods one per cent additional cess was permitted to be levied on SGST within the state. For two years the system of higher SGST in Kerala functioned smoothly. In the background of the judgment of the SC why not this limited autonomy be considered for the states?


The current corporate led clamour for merging the present multi-rate GST into a single rated one if attended to, would result in further deterioration of GST revenue collections. As we have seen, even with the present structure, there is a substantial rate fall for most of the commodities. If there is movement to a single rate, GST would lose even the semblance of progressivity in an otherwise regressive indirect tax. Tax rates on consumer durables and urban consumer products are the ones which have seen the sharpest decline. It is these same products which would further gain if the demand for a maximum ceiling rate of 18 per cent is accepted. Instead, the tax rates on luxuries should be raised.

The problem of multiplicity of rates is exaggerated. One only needs to think of the rate structure that existed before GST to realise the extent to which the tax structure has been simplified. Given the mass poverty and high level of income inequality in the country, it is preposterous to suggest a common rate of tax for grain flour and luxury vehicles. The ideal of equity should be considered at least as important as the ease of doing business. Excess simplification is the anathema of fairness.


Finally, the institution of the GST Council needs to be revisited. The Empowered Committee of Finance Ministers existed even under VAT regime. But there is a crucial difference with the GST regime: the distribution of voting rights in the Council is such that no decision can be made without the concurrence of the central government, not even if all the states take a united position. All decisions of the council require three fourths majority and the central government holds one third of the votes. The recent events underline the importance of re-evaluating the institutional framework and practices of the GST Council.

The SC judgement provides an appropriate occasion for dialogue on the above issues in the true spirit of cooperative federalism. The minimum conciliatory gesture that the union government can do is to extend the compensation period so that disruption of the state finances is averted. The compensation is not drawn from union budget but from a special fund collected by taxing sin goods and few super luxury items. So there is no loss whatsoever to the union government. It is important that the opposition governments and parties take up the challenge of transforming GST into a genuine federal tax.