Daily News Analysis 14th November 2018

Daily News Analysis (Prelims + Mains) – 14th November 2018

General Study – II

Topic: co-operative federalism

A reality check on cooperative federalism

• Taxation powers are contentious issue and the Central government has won most of the disputes purely due to express provisions in the Constitution.
• In the Goods and Services Tax (GST) scenario, States have foregone some taxation powers (octroi, entry tax, luxury and entertainment taxes, etc.) but have powers to levy taxes through panchayats and municipalities.
• After the GST amendments to the Constitution, States have power to levy tax on sale of petrol, diesel, etc. and these would be revenues of the respective States. However, the GST Council is yet to recommend inclusion of these items under GST.
• This brings us to another key dynamic that defines the Centre-State relationship — sharing of taxes.
• The southern States have been vocal about the false positives and negatives from tax sharing and this mechanism is largely subject to the recommendations of the Finance Commission (FC) and action by Parliament.
• State levies and State GST form part of a State’s revenue. Under Article 269A(1) the GST Council and not the FC has the powers to make recommendations in relation to sharing of taxes from inter-State trade.
• This is important since States have a vote in the GST Council. However, Articles 270(1A) and 270(2) provide that taxes levied under the GST laws will be shared in the manner ‘prescribed’ in Article 270(2) — which takes us to the FC, and not the GST Council.
• The possible anomaly between roles and powers of the FC and the GST Council has not been tested but it may make sharing of these revenues subject matter of the FC and Parliament rather than the GST Council, where States have more power.
• States don’t merely seek parity with each other, historically States have also sought parity with the Centre (Sarkaria and Punchhi Commissions).
• There is no provision for an aggrieved State to challenge the FC report or seek its enforcement.
• If the Centre refuses to make allocations as per the GST Council, or if a State is aggrieved by the recommendations itself, an aggrieved State would have to litigate in the Supreme Court as it appears that the GST Council is yet to establish a mechanism for resolving differences in terms of Article 279A(11).
• In 68 years of the Constitution, there is limited precedent for such extreme actions. In an era of coalition politics, this would be a true test of cooperative federalism.