A new threat to the GST regime


In a judgment that may have well overreached, a three-judge bench of the Supreme Court (SC) ruled on May 19 that the recommendations of the Goods and Services Tax (GST) Council should be seen as having persuasive value rather than be considered binding on the Centre and the states. HT reported that the order appears to have been interpreted differently by the Centre and some non-Bharatiya Janata Party (BJP)-ruled states such as Tamil Nadu (TN) and Kerala. While the former maintains that it does not drastically change the status quo, the latter believes that it will allow for greater autonomy in GST matters. The picture may become clearer once the detailed order is analysed. If it doesn’t, the court might be asked to weigh in again.

Uncertainty about GST (and the authority of the GST Council) is something India can ill-afford. The ruling comes at an interesting time. GST is the single biggest tax reform in post-Independent India. Its fundamental premise is that both the states and Centre merge their tax sovereignty (except in the case of fuel and liquor) to make doing business easier, reduce the cascading impact of taxes, and boost growth. GST’s adoption proved difficult because states believed it tilted the scales against them in what was already a skewed fiscal federalism framework. The agreement was clinched by promising guaranteed revenue to states for the first five years after the implementation of GST. This period is coming to an end in 2022. With some non-BJP-ruled states demanding an extension of the guaranteed compensation period, tensions are expected to rise in the GST Council. Guaranteed or timely payment of revenue is not the only bone of contention. States have alleged that the functioning of the GST Council is often dominated by the Union government (with the help of states ruled by the BJP) and is often dismissive of the spirit of cooperative federalism. TN’s finance minister raised some of these issues in an interview with HT on May 13.

These issues are not related to the SC’s order, but they do underline the fact that there are good reasons why the GST regime needs to follow a consensus-building approach while allowing for state-wise disagreements where it does not undermine the first principles of the overall framework. Any attempts to remove this safety valve will only trigger political discontent against the tax reform, which continues (as it should) to evolve. The ruling may well be the biggest threat the GST regime has faced in its existence – one best addressed by the Centre and the states working together.


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