Author: Trisha Kashyap, DY Patil College of Law
Abstract
Taxes are, in many ways, the foundation structure upon which a nation builds its other economic edifices. Taxes provide the revenue for such governance and public welfare systems. In India, the evolution of tax reforms has drastically transformed the federal structure in general and the relationship between the central and state governments in particular. The article assesses the historical path on which taxation in India has travelled, the constitutional structure for tax allocation, and the recent tax reform and its fallout, with special reference to the Goods and Services Act (GST). Cases of a few landmark developments and present-day problems highlighted in this paper show, in general, the form fiscal federalism is taking in today’s India.
Introduction
India’s taxation history dated back to the Mughal era, when taxation included Jizya on non-Muslim citizens, reducing its functionality as chiefly a revenue-generating and social control tool. During the British colonial rule, the taxation formulation system was put in place to cover governance costs. Under diversified economic reforms post-independence, India had set into the taxation model a combination of direct and indirect taxation in response to the economy’s demands in a developing phase. The installation process of GST in 2017 is regarded as a watershed moment, crystallising a fragmented latter-day tax system into one cohesive system. However, the constant increase in tax burden, along with constitutional limits and a tussle with other players in politics, is in opposition to equity and the very existence of federal separation.
To The Point
India’s present-day tax regime is inherently marked, to a large extent, by indirect taxes, particularly GST realization, forming a large chunk of the government’s revenue. Though GST simplifies the tax structure by clubbing many levies, public sentiments are in uproar mode, given the high rates of tax on daily used goods and frequent rate fluctuations. Citizens and businesses had strong objections to the accentuated tax load impacting activities following the economic disruptions due to the COVID-19 pandemic.
Seemingly operating under the central government’s dominant aegis, the GST Council has come under scrutiny, given that States consistently blame the Union of India for lack of compensation. This hurt federal relations in struggling States for carrying out their economic responsibilities. The compliance has been exceedingly complicated for businesses, considering the small scale, which further justifies the demand for a fairer and clearer taxation policy with regard to the population at large. A series of public protests and litigation regarding GST continue to draw mainstream attention to the dissatisfaction with a given community necessitating urgent reform for a fair balance between tax generation and public welfare.
Legal Jargon
The Mughal Period:
Taxation during the Mughal Empire was used for socio-political administration. The imposition of Jizya, tax on capitation charge laid exclusively on non-Muslims, highlighted how unfairly taxes were imposed in those times, while, on the other hand, Muslims had to pay Zakat, tax on wealth prescribed by religion.
Land revenue collected through the Zamindari system emerged as the chief source of income to the empire that supported expenditures on both administration and military.
The Colonial Period:
In the wake of British rule, a well-structured taxation system was put in place, with income tax introduced in 1860 specifically to fund colonial expeditions appealing to the exigencies of colonial administrators, especially after the rebellion of 1857.
Various other indirect taxes that became normal such as excise duties and customs duties framed a centralized system of revenue widely dependent on trade and manufacturing.
Post-Independence:
After 1947, the Constitution of India, through the seventh schedule, defined taxation powers under three separate lists: Union List, State List, and Concurrent List. Articles like Article 246 gave legislative authority to this distribution.
The explosion of taxes has, therefore, resulted in a spider-web complex of taxes covering sales tax, excise duty, service tax, and VAT making compliance and enforcement very difficult indeed.
Rise of GST:
The implementation of the Goods and Services Tax (GST) in 2017 has marked a radical departure toward fiscal integrity. Enacted under the aegis of the 101st constitutional amendment, it incorporated Articles 246A, 269A, and 279A, altering the orientation of taxation.
While GST has unified numerous indirect taxes into a more user-friendly manner, it yet comes under a lot of criticism on account of higher tax ratio, complex hats and dilution of the authority of state financial sovereignty.
Constitutional Perspective
Article 246: The nature limits the ability of the Union and State Governments to legislate on certain subjects. There are three lists of subjects: Union List, State List, and Concurrent List. The distribution of powers in taxation has been clearly made. Union possesses customs duties, excise on manufactured goods, and income tax, while States operate taxes on land revenue, alcohol excise, etc.
Article 265: It enshrines the rule of law, wherein no tax shall be levied or collected except by the authority of law. This provision fundamentally protects individuals from arbitrary taxation while providing room for legislative sanction for any tax imposition.
Article 270: This Article of the Constitution provides for the distribution of certain taxes between the Union and the States. Taxes such as income tax and duties of excise by the Union are shared with States on the recommendation of the Finance Commission for equitable fiscal federalism.
Articles 280 & 281: Establish the Finance Commission as a constitutional body given the task of making recommendations regarding the distribution of tax revenues between the Union and the States. While Article 280 deals with the constitution and powers of the Commission, Article 281 prescribes the procedure for the laying of such recommendations before Parliament by the President.
Provisions of GST:
Article 246A: Introduced by the 101st Constitutional Amendment, this article gives powers to both the union and the states to make laws on GST, thus exercising concurrent nature of the legislative power regarding the taxation of goods and services.
Article 269A: Provides for the mechanism of collecting and distributing the GST on inter-State trade. The tax is to be collected by the Union, with the revenue divided between the Union and the States based on the recommendations of the GSTC.
Article 279A: Establishes the GST Council which is an inter-State forum for cooperative federalism. The GST Council decides on issues such as GST rates, exemptions, and systems for resolving disputes and plays an important role in the new tax regime.
Proof
1) An argument advocating high taxation burden and high compliance costs.
Evidence:
GST rates in India now rank amongst the highest in the world, with essential goods taxed between 12% and 28%.
According to the World Bank’s 2022 report, the indirect tax structure in India disproportionately affects low-income groups because these groups tend to spend a higher proportion of their incomes on consumables.
The National MSME Survey 2021 reports that over 70% of small businesses have difficulty complying with GST requirements due to technical and financial deficiencies.
2) An argument of the erosion of fiscal federalism.
Evidence:
Several states, such as Punjab and West Bengal, have expressed concern over delays with respect to GST compensation from the Union government, as highlighted in the CAG Report on GST Compensation, 2021.
The Supreme Court’s recent judgment in Union of India v. VKC Footsteps India Pvt. Ltd. states that, while such a cooperative mechanism to address disputes of a federal kind is indeed a necessity, the way GST Council functions now is very opaque.
3) An argument to establish non-equitable taxation.
Evidence:
Articles in the Economic and Political Weekly (2023) underline the regressive nature of indirect taxes that bear a heavier burden on the poorest while allowing corporate tax holidays.
The allocation disparity in GST revenue between industrial versus agricultural states breeds economic inequality; according to the data from the 14th Finance Commission.
4) An argument on unconstitutional scenarios.
Evidence:
States allege that the concurrent taxing powers under Article 246A have been undermined due to imperialistic tendencies of Union dominance in the GST Council (Article 279A);.
The unilateral fixation of GST rates has been noted by the Kerala High Court in Mohammed Siraj v. Union of India (2020) and has posed serious questions against the federal spirit envisaged in the Constitution.
Balanced View
These criticisms certainly ring true; however, one hardly thinks of them in the light of the rationalizing act of GST:
The unification of 17 taxes represents a huge step towards minimal cascading effects on tax transactions within the economy, thereby aiding in ease of doing business.
Tax collections in 2023, as revealed by the Ministry of Finance, indicate that GST could avail possibilities for further revenue mobilization for public welfare.
Case Laws
1. Union of India v. VKC Footsteps India Pvt. Ltd. (2021)
Facts: The case revolved around the refund mechanism under GST. Petitioners claimed that the formula prescribed for the refund of unutilized Input Tax Credit (ITC) on account of inverted duty structure was inequitable.
Issues: Whether the refund formula under GST rules violated the principles of equality under Article 14 of the Constitution.
Judgment: The Supreme Court upheld the GST Council’s recommendations but emphasized the need for equitable mechanisms in taxation policies to uphold the federal spirit.
2. Mohammed Siraj v. Union of India (2020)
Facts: This case questioned the unilateral imposition of GST rates on specific commodities by the Union Government.
Issues: Whether unilateral GST rate decisions undermine the federal structure envisaged by the Constitution.
Judgment: The Kerala High Court underscored the need for collaborative decision-making within the GST Council to align with the federal character of the Constitution.
3. Jindal Stainless Ltd. v. State of Haryana (2016)
Facts: The case challenged the imposition of entry tax by certain states, arguing it created barriers to trade and commerce.
Issues: Whether state-imposed entry taxes violated the constitutional principle of free trade under Article 301.
Judgment: The Supreme Court upheld the validity of entry taxes but stressed that such taxes must not impede free trade across India.
4. Gannon Dunkerley & Co. v. State of Rajasthan (1993)
Facts: This case dealt with the taxation of works contracts and whether states could levy sales tax on such contracts.
Issues: Whether taxing the goods component of a works contract infringed on the Union’s exclusive power under the Constitution.
Judgment: The Supreme Court ruled in favor of bifurcating the goods and service components of works contracts, paving the way for reforms in indirect taxation.
5. State of West Bengal v. Kesoram Industries Ltd. (2004)
Facts: The dispute pertained to the state’s authority to impose cess on coal mining.
Issues: Whether the cess constituted a tax or a fee and if it was within the legislative competence of the state.
Judgment: The Supreme Court held that the cess was a tax, and states had the authority to levy it, reinforcing the principles of fiscal federalism.
Conclusion
In conclusion, India’s taxation system has come a long way from its traditional conceptions, through its constitutional provisions, to the amalgamation of active reforms today. While measures such as the GST have streamlined tax structures, the larger fiscal burden on citizens, issues arising from the aspect of federalism, and inequities in revenue sharing call for remedial actions. These include providing a perfect balance between promoting economic growth and equitable governance.
FAQS
1.What is the role of the GST Council in India’s taxation framework?
GST Council is a constitutional authority mentioned under Article 279A, which is a federal body that sets the rates of GST and allows the exemption and tackles the dispute thereof. It ensures taxation with cooperative federalism.
2. What checks does the Constitution of India provision within its framework assuring an equitable distribution of taxes between the Union and that of the States?
Articles, in two aspects, namely the 270 and the 280, form a system of sharing yields through the Finance Commission aimed at giving the States a fair representation in terms of taxes collected by the Union.
3. What is the major criticism against the present tax regime in India?
The undue high GST rates, backwardness in terms of indirect taxes, erosion of fiscal federalism, and late compensation being rendered to States bordering on dominance by the Union in decision-making.
