India Back To Coalition Era: How The Government Will Respond To Challenges Of Fiscal Federalism?

GST Compensation Standoff: States vs. Centre :

The NDA government introduced the 101^st Constitutional amendment in 2016, which led to the implementation of the Good & Service Tax in India. This Idea of 'One Nation-One Tax', was a unitary idea to streamline the Tax collection and to curb the Cascading effect. But in reality, it escalated the problem of revenue sharing between the states. The GST is considered a Destination based tax, where the Consumer States collect the Tax instead of Manufacturing States. This could have impacted the revenue of the large manufacturing states like – Karnataka, Maharashtra, Gujarat, Tamil Nadu, etc. To mitigate such challenges the Central Government came up with the idea to award GST compensation to these States.

The Section 18 of the 101^st Constitutional Amendment Act, provides that - “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years”. Thus, the Centre has to pay for the loss incurred by the state in its revenue after implementing the GST in that respective state. The allotment of GST compensation has become a tug-of-warbetween the Centre and the State in the recent past, where the Central government applied delayed tactics in providing GST compensation to the States.

This conflict increased further during COVID-19, when the Central government was resisting to pay the compensation on the ground of a shortfall in the collection of revenue, caused by the lockdown. On the other hand, states were demanding this compensation as a form of legal and moral obligation over the Central government to compensate the States for their losses. There was also an instance where a sitting chief minister of Karnataka with his cabinet, registered his protest against the Centre government over the loss of revenue for the State. Similar concerns were raised by the respective state governments of Kerala, Tamil Nadu, and West Bengal.

Unresolved Conundrum of Nature of Power bestowed to GST Council :

The conflicts between the Centre and State also lie over the nature of the decision of the GST Council. The Central government holds the larger share in the decision-making power of the GST Council by keeping 1/3^rd voting rights in the council, as mentioned in Article 279-A of the Constitution. This ensures the supremacy of the Central government over the decision-making power of the council. The nature of power bestowed to the GST council came before the Supreme Court in Mohit Minerals v. Union of India in which the court interpreted the power of the GST council and held that the decision of the council is binding in nature. The Supreme Court in paragraph 59 of the judgment observed that :

“The recommendations of the GST Council are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system.”

This means that the power of the council, given in Article 279-A is binding in nature (subject to giving effect to the uniform taxation system) and the power conferred to state and central government in Article 246-A, to make laws on the GST related matter, has to be treated hormonally with the decision of the GST council under Article 279-A. This gives more authority to the GST council in making laws on GST-related matters, where already the Central government is in the position to super-ride the states over decisions in the council.

Demand for Special Status :

Based on the recommendations of the 5^th Finance Commission in 1969, the Special category status is classification of the States or areas for additional tax benefits and financial aid. The demand for special status has resurfaced in limelight as the formation of the new government took place in the Centre. The primary reason for this is the two important allies of the NDA government, namely Telugu Desham Party (TDP) and Janta Dal United (JDU), both comprising 16 and 12 seats respectively.

The demand for the special category status for Andhra Pradesh is not very new but it began since the separation of Andhra Pradesh and the inception of Telangana as a State in 2014. Since then, all the regional political parties based in Andhra Pradesh like YSRCP and TDP have constantly advocated for the special category status for the State. Chandra Babu Naidu, TDP chief, once left the NDA alliance in the name of special category status for his state (Andhra Pradesh) before the 2019 Lok Sabha elections.

There is a similar demand by one more crucial ally of the NDA government, Janta Dal United (JDU), under the leadership of Nitish Kumar for Bihar. Bihar is one of the most underdeveloped states in India, having a per-capita income of Rs. 31,280, lowest in the country. JDU is one of the contenders to push for the long-standing demand for special category status for Bihar.

Earlier with a strong Central government in power with a substantive majority, there was no considerable force in these demands as one single party was enjoying the power. But with the change in the dynamics of the power, it will be interesting to watch how the Central government will respond to these demands of its allies and how it accommodates its allies.

Building Consensus: The new way forward for the Central Government :

Narendra Modi-led government was dominated by the single-party majority in the last two terms, leading to a concentration of power in the hands of the few. This is not the case in the third term of the NDA government as no single political party enjoys the full majority and thus there is no concentration of power, leading to the emergence of several regional identities at the forefront. Now, the Central government cannot unanimously make any law or decision diluting the idea of Fiscal Federalism. Now, the regional political parties and the opposition-led State government will have more say in the decisions of the GST council as the Central government will always be on guard. It will become difficult for the Union government to make any unilateral decision on the council, curbing any rights of the state, as the government will be dependent on these state governments for the majority. This was a time when the State governments could also put forth the demand for special category status. The new approach that the new Central government should adopt is to make a consensus over every dispute. The Central government should now consider the demands of the respective State governments for the facilitation of better governance.

Road Ahead :

India is a quasi-Federal country with the elements of Unitary bias. But this bias for the Union government should not hamper the nature of the polity that the country has adopted. The fiscal relation between the Central and State governments is a constant constitutional tussle going on for decades on different issues. However, the Union government must play a fair role in the distribution of the resources in the presence of a strong Unitary-based Tax regime – GST. The era of the coalition could be a progressive time in the improvement of Centre-State relations, after the implantation GST Tax regime, as it will push for a more consensus-based political model. This is a time when issues like special category demand by the States could also come into the political limelight, thus promoting the cause of Fiscal Federalism.

Views are personal.