The Constitution (One hundred and First Amendment) Act, 2017 is against the federal set up of India and is therefore unconstitutional. The Goods and Services Tax (hereinafter, GST) has harmonized indirect taxes and has created a single-window tax. The GST transforms India’s ‘federal’ structure into a unitary one despite the fact that Art. 1[i] mandates India to be a union of states. It has been held by the constitutional courts of India in various cases[ii] that any conscious whittling down of the powers of the State will be deemed to be invalid and will be termed unconstitutional as it goes against the basic federal principle of the Constitution.[iii] This paper will show how the impugned GST act[iv] passed by the parliament of India is an intentional attempt on their part to encroach on the exclusive domain of the power of states to make and levy taxes.
Introduction
The federal principle signifies the method of dividing powers so that the Centre and the states are each within a sphere, co-ordinate and independent.[v] Federalism is one of the basic pillars of the Indian Constitution.6 The constitutional courts of India have interpreted that it has a Dual Polity.[vi] Moreover, the principles of federalism8 affirm that states are not appendages of the Centre.[vii] They are sovereign in their own sphere.[viii] The states are sovereign within the spheres allotted to them.[ix]
Fiscal federalism is concerned with the public finances of
the various orders of government in a federal system..[x]
Herein the sharing of fiscal powers of taxation between the Centre and states
stems from the idea of fiscal federalism.13 This entails that while
the Centre has powers of collection of revenue, the states are also autonomous
to a certain extent to ensure that they have a right of collection and spending
of revenue.[xi]
Moreover, the federal structure also ensures that the states do have to depend
upon the Centre for funds for state spending. It is best known to the
individual states as to decide who should be taxed and how much should be
taxed.[xii]
The basic structure doctrine is a creation of judicial
activism on the part of the Hon’ble SC to limit the power of the parliament of
India in amending the Constitution. The innovation of the doctrine of the basic
structure took place in the famous case of Keshavananda
Bharati[xiii].
It was held by Hon’ble Court in the same case of that there are certain
features of the Constitution that are beyond the limit of amending powers of
the parliament. The doctrine of the basic structure of the Indian Constitution
has evolved to incorporate federalism as one of its federal features.[xiv]
The states are absolutely sovereign in their respective domain to levy and
collect taxes. The power to levy tax has been universally acknowledged as an
essential attribute of sovereignty.[xv] The
power of taxation has been recognized as an inherent feature of a sovereign
state.[xvi]
The Hon’ble SC has held in the landmark case of S.R. Bommai
v. Union of India[xvii]
has observed that federalism has been designated as a basic value of the Indian
Constitution. The Hon’ble court in the very same case further held that so long
as the States are functioning within the discipline of the Constitution, they
are autonomous within their sphere having definite powers and independent
rights to govern. Central Government has no right to interfere in the
governance of the States. States have an independent constitutional existence,
and they have an important role to play in the political, social, cultural and
educational life of the people, just as the Union. They are neither satellites
nor agents of the Centre.
Furthermore, in the landmark case of Jindal Stainless
Limited v. State of Haryana[xviii],
a 9 judge bench of the Hon’ble Apex court has observed that Constitution
recognizes the sovereign powers of the State to make laws, and it also includes
the power to levy taxes on subjects enumerated in List II of Schedule VII.
Additionally, the court has also observed that the power to tax is a sovereign
power and is legislative in character. The State’s power, despite the limited
width of its field is plenary in nature. Except where the constitutional intent
is expressed clear, the State’s plenary power ought not to be whittled down by
the interpretations.
In addition to this, it has been held by the Apex court that
the view that insignificant and unimportant matters were assigned to the States
cannot be sustained in the face of the very important subjects assigned to the
States in List II[xix],
and the same applies to taxing powers of the States, which are made mutually
exclusive of the taxing powers of the Union so that ordinarily the States have an
independent source of revenue of their own.[xx] The
sources of revenue available to the states are substantial and would become
more substantial in the light of the taxing entries mentioned in List II. In
addition to the exclusive taxing powers of the States, the States become
entitled either to appropriate taxes collected by the Union or to a share in
the taxes collected by the Union.[xxi]
II.GST USURPS THE AUTONOMY AND INDEPENDENCE OF THE STATES.
It is submitted before the Hon’ble Court that the impugned amendment has taken away the fiscal autonomy of states as states generate their substantial revenue from Indirect taxes. The current system seeks to create uniformity at the cost of autonomy of the states.
The Constitution of India has a federal structure where
legislative and taxing powers have been distributed between the Union and the
states, respectively. The Union and the states have thirteen and seventeen
taxing entries in List I and List II, respectively, with no taxing entries
mentioned in the concurrent list.[xxii]
It is to be submitted that both Union and the states have plenary taxing powers
in their respective lists. However, with the oncoming of the impugned
amendment, the independent and executive powers will be reduced to nothing when
for every small and big expenditure, they have to be dependent upon the Union.
The ability to determine tax rates would be grossly curtailed by the imposition
of the ceiling determined by the GST council. In addition to this, the impugned
amendment will usurp the power of the states to levy and collect any additional
taxes. This would prevent the imposition of the new states either for the
purpose of revenue generation or for social welfare.
GST will confer a wide amount of discretion to the Centre to
allocate funds to the states. It cannot be disputed as the fact that the
decision of allotment of funds will be heavily influenced by ideological,
political and extraneous factors, which will make the states a slave in the
hands of the Centre for financial resources.
Further, it is to be submitted that such a centralized arrangement would have dire consequences on the fiscal and financial autonomy of the states as the states would be deprived of their important sources of revenue and their right to decide the tax structure. This will lead to more dependence of states on the Centre with reduced responsibility and accountability towards fiscal consolidation. The impugned act makes the states a mere spending unit and puts a question mark on their financial competence, sovereignty, credibility and accountability.
III. GST COUNCIL VIOLATES FEDERAL STRUCTURE
The One hundred and First Constitution Amendment Act, 2017 inserted Art.279A in the Constitution[xxiii] which provides for the creation of a GST Council. This Council comprises of members from the Union as well as members nominated by the State Governments. The Council makes recommendations to the Central Government as well as the State Governments in making any crucial decisions regarding GST.
Art. 279A (9)[xxiv] clearly lays down the decision-making process of the Council. While the Central Government has a weightage of 1/3rd of the votes in the Council, all the States together will have 2/3rd of the votes in the Council. Also, the State legislatures, voted to power by the people, won’t be able to meet the demands of the people since the tax rates will be set by the GST Council which will have to act according to the interests of the whole country and not for just are one State.
The GST council does not operate on a fair democratic
principle. Democracy is not just representation in numbers and figures.
Democracy is where the people participate and their common will and sentiment
is considered while making any decisions. The States are conferred with certain
duties and obligations in the form of directive principles that are enshrined
in the Constitution. The paramount functions of the States are towards the
citizens of those respective States. It is best known to the individual states
as to decide who should be taxed and how much should be taxed.[xxv]
It clearly violates the federal structure which is a basic feature29 of the Constitution. The Constitution of India respects the diversity of the States, and the States are sovereign within their own sphere[xxvi]. This has been enshrined in the Constitution itself. Under various entries in List II[xxvii] of Schedule VII, the States have been given the plenary taxing powers. However, with the latest amendment[xxviii], all these entries have been repealed and a new taxing entry i.e. GST has for the first time been entered into the Concurrent list. These powers cannot be considered plenary anymore since the States have to depend on the recommendations of the GST Council. How can a State be called autonomous when it has to depend on some other authority for its fiscal requirements? One who cannot decide his own spending cannot be called autonomous. The powers that the States enjoyed for decades and derived from the Constitution have been taken away from them in a sordid fashion.
The GST Council is directly against the autonomy of the
States. In the Pre GST era, the States had exclusive powers overtaxing on the
subjects in the State List. They could set their own tax rates that would be
levied on the taxpayers. Since every State has its own peculiar socio-economic
and geographic conditions, even the taxes imposed were based on the market
demands and hence the same good had different tax rates across the Country since
every State could levy its own tax. But with the GST Council deciding a uniform
tax rate which will be applicable to all the States, the autonomy to set tax
rates is no more with the States. This not only questions the autonomy of the
State but also hampers the working of the market forces since the rate set by
GST Council could be detrimental to certain sectors in some of the States. In
the Pre GST era, States could draw a substantial amount of revenue in the form
of indirect taxes levied by them. But now, all of them are replaced by the GST.
Even for implementing any welfare schemes, the State has to depend on the Union
for its grants, and this clearly makes the States subordinate to the Centre and
ultimately leads to a despotic situation.
The GST Council to a great extent is imbued with the domination of the Union. Art. 279 A of the Constitution specifically states that any decision of the Council requires 3/4th majority in support of that decision. This means that even if all the States are willing to make a decision and if the Central government is not in consonance with it, the Central Government can veto it and vice-versa. However, in order to create a win-win situation for both the sides, the law has been made in such a way that the Union alone cannot pass any law without the support of the majority of the total strength of the States. This does not mean that all the parties are happy. There can be a situation where one or more states oppose any decision of the GST Council since that is detrimental to the interests of those States, but since the majority of Council votes in favour of that motion, the needs of those states are to be compromised. One also cannot deny the fact that there is a possibility for the political and ideological clash between the Union and the States.
IV. Conclusion
Definitely, in a country like India, satisfying all the sections of the Country may not be feasible, but why to opt for such a mechanism when a better alternative is present. There is no denying the fact that GST is required. But why not set some upper or lower ceiling? Why not let the States decide the tax rates? Either GST Council is to be restructured, or any other effective alternative is to be resorted to overcome this glitch. This problem never arose earlier since there was no external body dictating the terms to any States. Statistics may make it look desirable, but the harsh reality will be encountered only in the moment of crisis. A pragmatic view of the overall impact of the GST Council would be nothing but the gamble done at the cost of the States losing their autonomy on the pretext of ‘greater good’ which again is uncertain.
*The Author is a student of LL.M., KIIT School of Law and Co-Author is a Legal Counsel.
Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the Authors and not to the Jurisedge Academy.
Readers may submit his/her blog for publication.Click Here or Scan the QR Code
[ii] Kuldip Nayar & Ors. v. Union of India & Ors, (2006) 7 SCC
1.
[iii] State of West Bengal v. Kesoram Industries Ltd. & Ors., (2004)
10 SCC 201.
[iv] The Central Goods and Services Tax Act, 2017, No. 12, Acts of
Parliament, 2017.
[v] K.C WHEARE, FEDERAL GOVERNMENT 10 (4th ed. 1963). 6
S.R Bommai v. Union of India, (1994) 3 SCC 1.
[vi] GRANVILLE AUSTIN, THE INDIAN CONSTITUTION
CORNERSTONE OF A NATION 188 (1st ed. 1972). 8
P.K Tripathi, Federalism: The Reality and The Myth, 258, 3 J.B.C.I. 251-277
(1974).
[vii] Jindal Stainless Limited and Another v. State of Haryana and
others, (2017) 12 SCC 1.
[viii] BIDYUT CHAKRABARTY, RAJENDRA KUMAR PANDEY, INDIAN GOVERNMENT AND
POLITICS 43
(1st ed. 2008)
[ix] A.V DICEY, AN INTRODUCTION TO
THE LAW
OF THE CONSTITUTION 151 (10th ed. 1959)
[x] THE PRACTICE OF FISCAL FEDERALISM : COMPARATIVE PERSPECTIVES, 370 (Anwar Shah ed., 1st ed. 2007). 13 Milivoje Trklja,
Fiscal Federalism, 80, 23 Zbornik Radova 72 (1989).
Saurabh Kumar
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Authors: Shashwata Sahu & Subham Bhut*
Abstract
The Constitution (One hundred and First Amendment) Act, 2017 is against the federal set up of India and is therefore unconstitutional. The Goods and Services Tax (hereinafter, GST) has harmonized indirect taxes and has created a single-window tax. The GST transforms India’s ‘federal’ structure into a unitary one despite the fact that Art. 1[i] mandates India to be a union of states. It has been held by the constitutional courts of India in various cases[ii] that any conscious whittling down of the powers of the State will be deemed to be invalid and will be termed unconstitutional as it goes against the basic federal principle of the Constitution.[iii] This paper will show how the impugned GST act[iv] passed by the parliament of India is an intentional attempt on their part to encroach on the exclusive domain of the power of states to make and levy taxes.
Introduction
The federal principle signifies the method of dividing powers so that the Centre and the states are each within a sphere, co-ordinate and independent.[v] Federalism is one of the basic pillars of the Indian Constitution.6 The constitutional courts of India have interpreted that it has a Dual Polity.[vi] Moreover, the principles of federalism8 affirm that states are not appendages of the Centre.[vii] They are sovereign in their own sphere.[viii] The states are sovereign within the spheres allotted to them.[ix]
Fiscal federalism is concerned with the public finances of the various orders of government in a federal system..[x] Herein the sharing of fiscal powers of taxation between the Centre and states stems from the idea of fiscal federalism.13 This entails that while the Centre has powers of collection of revenue, the states are also autonomous to a certain extent to ensure that they have a right of collection and spending of revenue.[xi] Moreover, the federal structure also ensures that the states do have to depend upon the Centre for funds for state spending. It is best known to the individual states as to decide who should be taxed and how much should be taxed.[xii]
The basic structure doctrine is a creation of judicial activism on the part of the Hon’ble SC to limit the power of the parliament of India in amending the Constitution. The innovation of the doctrine of the basic structure took place in the famous case of Keshavananda Bharati[xiii]. It was held by Hon’ble Court in the same case of that there are certain features of the Constitution that are beyond the limit of amending powers of the parliament. The doctrine of the basic structure of the Indian Constitution has evolved to incorporate federalism as one of its federal features.[xiv] The states are absolutely sovereign in their respective domain to levy and collect taxes. The power to levy tax has been universally acknowledged as an essential attribute of sovereignty.[xv] The power of taxation has been recognized as an inherent feature of a sovereign state.[xvi]
The Hon’ble SC has held in the landmark case of S.R. Bommai v. Union of India[xvii] has observed that federalism has been designated as a basic value of the Indian Constitution. The Hon’ble court in the very same case further held that so long as the States are functioning within the discipline of the Constitution, they are autonomous within their sphere having definite powers and independent rights to govern. Central Government has no right to interfere in the governance of the States. States have an independent constitutional existence, and they have an important role to play in the political, social, cultural and educational life of the people, just as the Union. They are neither satellites nor agents of the Centre.
Furthermore, in the landmark case of Jindal Stainless Limited v. State of Haryana[xviii], a 9 judge bench of the Hon’ble Apex court has observed that Constitution recognizes the sovereign powers of the State to make laws, and it also includes the power to levy taxes on subjects enumerated in List II of Schedule VII. Additionally, the court has also observed that the power to tax is a sovereign power and is legislative in character. The State’s power, despite the limited width of its field is plenary in nature. Except where the constitutional intent is expressed clear, the State’s plenary power ought not to be whittled down by the interpretations.
In addition to this, it has been held by the Apex court that the view that insignificant and unimportant matters were assigned to the States cannot be sustained in the face of the very important subjects assigned to the States in List II[xix], and the same applies to taxing powers of the States, which are made mutually exclusive of the taxing powers of the Union so that ordinarily the States have an independent source of revenue of their own.[xx] The sources of revenue available to the states are substantial and would become more substantial in the light of the taxing entries mentioned in List II. In addition to the exclusive taxing powers of the States, the States become entitled either to appropriate taxes collected by the Union or to a share in the taxes collected by the Union.[xxi]
II. GST USURPS THE AUTONOMY AND INDEPENDENCE OF THE STATES.
It is submitted before the Hon’ble Court that the impugned amendment has taken away the fiscal autonomy of states as states generate their substantial revenue from Indirect taxes. The current system seeks to create uniformity at the cost of autonomy of the states.
The Constitution of India has a federal structure where legislative and taxing powers have been distributed between the Union and the states, respectively. The Union and the states have thirteen and seventeen taxing entries in List I and List II, respectively, with no taxing entries mentioned in the concurrent list.[xxii] It is to be submitted that both Union and the states have plenary taxing powers in their respective lists. However, with the oncoming of the impugned amendment, the independent and executive powers will be reduced to nothing when for every small and big expenditure, they have to be dependent upon the Union. The ability to determine tax rates would be grossly curtailed by the imposition of the ceiling determined by the GST council. In addition to this, the impugned amendment will usurp the power of the states to levy and collect any additional taxes. This would prevent the imposition of the new states either for the purpose of revenue generation or for social welfare.
GST will confer a wide amount of discretion to the Centre to allocate funds to the states. It cannot be disputed as the fact that the decision of allotment of funds will be heavily influenced by ideological, political and extraneous factors, which will make the states a slave in the hands of the Centre for financial resources.
Further, it is to be submitted that such a centralized arrangement would have dire consequences on the fiscal and financial autonomy of the states as the states would be deprived of their important sources of revenue and their right to decide the tax structure. This will lead to more dependence of states on the Centre with reduced responsibility and accountability towards fiscal consolidation. The impugned act makes the states a mere spending unit and puts a question mark on their financial competence, sovereignty, credibility and accountability.
III. GST COUNCIL VIOLATES FEDERAL STRUCTURE
The One hundred and First Constitution Amendment Act, 2017 inserted Art.279A in the Constitution[xxiii] which provides for the creation of a GST Council. This Council comprises of members from the Union as well as members nominated by the State Governments. The Council makes recommendations to the Central Government as well as the State Governments in making any crucial decisions regarding GST.
Art. 279A (9)[xxiv] clearly lays down the decision-making process of the Council. While the Central Government has a weightage of 1/3rd of the votes in the Council, all the States together will have 2/3rd of the votes in the Council. Also, the State legislatures, voted to power by the people, won’t be able to meet the demands of the people since the tax rates will be set by the GST Council which will have to act according to the interests of the whole country and not for just are one State.
The GST council does not operate on a fair democratic principle. Democracy is not just representation in numbers and figures. Democracy is where the people participate and their common will and sentiment is considered while making any decisions. The States are conferred with certain duties and obligations in the form of directive principles that are enshrined in the Constitution. The paramount functions of the States are towards the citizens of those respective States. It is best known to the individual states as to decide who should be taxed and how much should be taxed.[xxv]
It clearly violates the federal structure which is a basic feature29 of the Constitution. The Constitution of India respects the diversity of the States, and the States are sovereign within their own sphere[xxvi]. This has been enshrined in the Constitution itself. Under various entries in List II[xxvii] of Schedule VII, the States have been given the plenary taxing powers. However, with the latest amendment[xxviii], all these entries have been repealed and a new taxing entry i.e. GST has for the first time been entered into the Concurrent list. These powers cannot be considered plenary anymore since the States have to depend on the recommendations of the GST Council. How can a State be called autonomous when it has to depend on some other authority for its fiscal requirements? One who cannot decide his own spending cannot be called autonomous. The powers that the States enjoyed for decades and derived from the Constitution have been taken away from them in a sordid fashion.
The GST Council is directly against the autonomy of the States. In the Pre GST era, the States had exclusive powers overtaxing on the subjects in the State List. They could set their own tax rates that would be levied on the taxpayers. Since every State has its own peculiar socio-economic and geographic conditions, even the taxes imposed were based on the market demands and hence the same good had different tax rates across the Country since every State could levy its own tax. But with the GST Council deciding a uniform tax rate which will be applicable to all the States, the autonomy to set tax rates is no more with the States. This not only questions the autonomy of the State but also hampers the working of the market forces since the rate set by GST Council could be detrimental to certain sectors in some of the States. In the Pre GST era, States could draw a substantial amount of revenue in the form of indirect taxes levied by them. But now, all of them are replaced by the GST. Even for implementing any welfare schemes, the State has to depend on the Union for its grants, and this clearly makes the States subordinate to the Centre and ultimately leads to a despotic situation.
The GST Council to a great extent is imbued with the domination of the Union. Art. 279 A of the Constitution specifically states that any decision of the Council requires 3/4th majority in support of that decision. This means that even if all the States are willing to make a decision and if the Central government is not in consonance with it, the Central Government can veto it and vice-versa. However, in order to create a win-win situation for both the sides, the law has been made in such a way that the Union alone cannot pass any law without the support of the majority of the total strength of the States. This does not mean that all the parties are happy. There can be a situation where one or more states oppose any decision of the GST Council since that is detrimental to the interests of those States, but since the majority of Council votes in favour of that motion, the needs of those states are to be compromised. One also cannot deny the fact that there is a possibility for the political and ideological clash between the Union and the States.
IV. Conclusion
Definitely, in a country like India, satisfying all the sections of the Country may not be feasible, but why to opt for such a mechanism when a better alternative is present. There is no denying the fact that GST is required. But why not set some upper or lower ceiling? Why not let the States decide the tax rates? Either GST Council is to be restructured, or any other effective alternative is to be resorted to overcome this glitch. This problem never arose earlier since there was no external body dictating the terms to any States. Statistics may make it look desirable, but the harsh reality will be encountered only in the moment of crisis. A pragmatic view of the overall impact of the GST Council would be nothing but the gamble done at the cost of the States losing their autonomy on the pretext of ‘greater good’ which again is uncertain.
*The Author is a student of LL.M., KIIT School of Law and Co-Author is a Legal Counsel.
Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the Authors and not to the Jurisedge Academy.
Readers may submit his/her blog for publication. Click Here or Scan the QR Code
[i] INDIA CONST. art. 1.
[ii] Kuldip Nayar & Ors. v. Union of India & Ors, (2006) 7 SCC 1.
[iii] State of West Bengal v. Kesoram Industries Ltd. & Ors., (2004) 10 SCC 201.
[iv] The Central Goods and Services Tax Act, 2017, No. 12, Acts of Parliament, 2017.
[v] K.C WHEARE, FEDERAL GOVERNMENT 10 (4th ed. 1963). 6 S.R Bommai v. Union of India, (1994) 3 SCC 1.
[vi] GRANVILLE AUSTIN, THE INDIAN CONSTITUTION CORNERSTONE OF A NATION 188 (1st ed. 1972). 8 P.K Tripathi, Federalism: The Reality and The Myth, 258, 3 J.B.C.I. 251-277 (1974).
[vii] Jindal Stainless Limited and Another v. State of Haryana and others, (2017) 12 SCC 1.
[viii] BIDYUT CHAKRABARTY, RAJENDRA KUMAR PANDEY, INDIAN GOVERNMENT AND POLITICS 43 (1st ed. 2008)
[ix] A.V DICEY, AN INTRODUCTION TO THE LAW OF THE CONSTITUTION 151 (10th ed. 1959)
[x] THE PRACTICE OF FISCAL FEDERALISM : COMPARATIVE PERSPECTIVES, 370 (Anwar Shah ed., 1st ed. 2007). 13 Milivoje Trklja, Fiscal Federalism, 80, 23 Zbornik Radova 72 (1989).
[xi] M.P. JAIN, INIAN CONSTITUTIONAL LAW, 597-599 (7th ed., 2016).
[xii] Id.
[xiii] Kesavananda Bharti v. State of Kerala, (1973) 4 SCC 225.
[xiv] Id.
[xv] Jindal Stainless Ltd. & Anr. v. State of Haryana & Ors, (2017) 12 SCC 1.
[xvi] Thomas M. Cooley: A treaties on the constitutional Limitations 986 (8th ed. 1927).
[xvii] AIR 1994 SC 1918.
[xviii] (2017) 12 SCC 1.
[xix] INDIA CONST. Sch. VII, List II.
[xx] M.P. JAIN, INDIAN CONSTITUTIONAL LAW, 607-608 (7th Ed., 2016).
[xxi] Id.
[xxii] INDIA CONST. Sch. VII.
[xxiii] INDIA CONST. 1950.
[xxiv] INDIA CONST. art. 279A.
[xxv] M.P.JAIN, INDIAN CONSTITUTIONAL LAW, 607-608 (7th ed., 2016). 29Kesavananda Bharti v. State of Kerela, (1973) 4 SCC 225.
[xxvi] BIDYUT CHAKRABARTY & RAJENDRA KUMAR PANDEY, INDIAN GOVERNMENT AND POLITICS 43 (1st ed. 2008).
[xxvii] India Const. sch VII, List II.
[xxviii] The Constitution (One Hundred and First Amendment) Act, 2017.
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