Mains Marathon 2024

Approach Briefly introduce the 101st Constitutional Amendment Act. Discuss the key provisions of the 101st Constitutional Amendment Act Highlight achievements and challenges of the Act. Suggest further reforms to strengthen the GST Framework. Conclude Suitably.

Introduction

Fiscal federalism, which involves the distribution of financial powers and responsibilities between different levels of government, is essential for ensuring balanced economic development and efficient governance. The 101st Constitutional Amendment Act, enacted in 2016, represents a significant milestone in India's fiscal federalism.

Body

Key Provisions of the 101st Constitutional Amendment Act

• Introduction of GST:
  • The 101st Amendment Act made significant provisions for the implementation of the Goods and Services Tax, which replaced a complex array of indirect taxes previously levied by both the Centre and the States.
  • GST aimed to create a single, unified tax system, reducing the multiplicity of taxes and mitigating the cascading effect of tax on tax.
• Revenue Sharing and Compensation Mechanism:
  • The Act established a framework for the distribution of GST revenue between the Centre and States, including provisions for compensation to States for any loss of revenue due to the transition to GST.
  • It provided for the creation of the GST Compensation Fund to ensure States were compensated for shortfalls in revenue.
• Empowerment of the GST Council:
  • The Act granted constitutional status to the GST Council, a body comprising representatives of the Centre and States, tasked with making recommendations on GST-related issues, including tax rates, exemptions, and other policy matters.

Accomplishments and Positive Impacts

• Unified Tax System:
  • The implementation of GST has simplified the tax structure by consolidating various indirect taxes into a single tax, thereby reducing tax-related disputes between the Centre and States.
  • It has created a common national market, facilitating easier movement of goods and services across state boundaries.
• Revenue Efficiency:
  • GST has led to improvements in revenue collection efficiency, minimizing tax evasion and increasing transparency through a more streamlined and digitalized tax system.
  • The Gross Goods and Services Tax (GST) collections hit a record high in April 2024 at Rs 2.10 lakh crore.
• Economic Integration:
  • The GST regime has promoted economic integration and uniformity in tax policies, enhancing competitiveness and encouraging investment across India.
• Enhanced Fiscal Federalism:
  • The amendment has clarified the roles and responsibilities of the Centre and States in tax administration, thereby strengthening the fiscal relationship between the two levels of government.

Challenges and Criticisms

• Implementation Issues: The rollout of GST faced several challenges, including technical glitches in the GST Network, compliance burdens on businesses, and administrative hurdles at the state level.
• Revenue Compensation: India’s GST is precariously held together by the loose thread of "compensation guarantee", under which states surrendered their fiscal powers in return for guaranteed revenues.
  • However, during the COVID-19 pandemic, the Union government repeatedly violated the compensation guarantees to the States under the GST regime.
• State Autonomy: The GST has taken away much of the autonomy available to states and has made the country’s indirect tax regime unitary in nature.
• Administrative Complexity: The complexity of GST compliance and the need for businesses to adapt to a new system created administrative challenges, particularly for smaller enterprises and those in the informal sector.

Suggested Reforms to Strengthen and Empower the GST Framework

• A Reformed Approach toward States: The Centre could strive to be more conciliatory towards States’ concerns and fiscal dilemmas.
  • Implement more effective mechanisms for adjusting revenue-sharing arrangements to address concerns of States facing revenue shortfalls. This could include periodic reviews and adjustments to ensure equitable distribution
• Horizontal and Vertical Level Cooperation: Cooperation between the Centre and states is required at both vertical (between Centre and states) and horizontal (among states) levels and on various fronts.
  • This includes fine-tuning of developmental measures for desired outcomes, development-related policy decisions, welfare measures, administrative reforms, strategic decisions, etc.
• Reforms in GST Council: It may be time already for reform of the GST. What is needed is statesmanship at the GST Council even if the Court has said that the Council is a place as much for political contestation as for co-operative federalism.
  • The Council should transcend political rivalries of the day.
  • The States should have the right to dissent in the Council and their voice should not be drowned in the pursuit of unanimity in decision-making.
• Simplification of Procedures:
  • Streamline GST compliance procedures to reduce the burden on businesses, particularly small and medium enterprises (SMEs). Simplified filing processes and clearer guidelines can help improve adherence.
• Technical Support and Upgradation:
  • Invest in upgrading the GST Network and providing robust technical support to resolve glitches and improve the user experience for both businesses and tax authorities.

Conclusion

For GST to realize its full potential, ongoing cooperation and dialogue between the Union and the States are essential. Addressing the concerns of states regarding compensation and maintaining a stable and predictable tax policy will be crucial. Ultimately, the success of GST in strengthening fiscal federalism will depend on the ability of all stakeholders to work collaboratively towards a more integrated and equitable economic framework.