Primarily, I would like to make the readers aware of the term ‘Co-operative federalism’. It is a concept in which national, state and local Governments although divided in a federal form of structure work with cooperation and unity so as to solve common problems. As it turns out The Goods and Services Tax (GST), which came into effect from July1, 2017, is an excellent example of cooperative federalism. Let’s not just believe it because Prime Minister Narendra Modi or Union Commerce Minister, or the RBI report says so. Let’s see how.

The spirit of cooperative federalism requires both the Union and the State governments to sacrifice their fiscal autonomy in favor of collective decision-making.

Clearly, Centre gave up its fiscal autonomy to levy tax on interstate sale of goods, Provision of services and manufacture of goods. Similarly, State gave up its fiscal autonomy to levy tax on intrastate sale of goods and to fix their own tax rates (as tax rates will now be decided by 3/4th of the total majority present and voting). Also, in the previous tax regime, if goods produced in state X had to be sold in state Y then a trader had to pay tax in both the production and the consumption state. Such tax provisions restricted inter-State movement of goods within the country. GST being a destination-based tax is levied only in the state of consumption of goods/services by the ultimate consumer. The manufacturing states gave up their fiscal autonomy to levy tax on the interstate sale of goods only to help the traders increase their Inter State sale by lowering the tax burden. This shows how both the Centre and the States in the spirit of cooperative federalism agreed to share their powers to achieve uniformity and remove compartmentalization in indirect taxation.PM Modi aptly compares GST to the railways with state and Centre playing an equal role in its operations. While railways receive regional support at the state level, yet it is representative of the “Indian Railways”. The Central Service officers are deputed both at the centre and in the states yet they work in unison for India. Under GST both the central and the state governments shall be putting consolidated efforts in the same direction. This is an example of – ‘Ek Bharat Sreshtha Bharat’.

Further Cooperative federalism envisages the setting up of interstate councils. The GST council is an interstate one, having representatives from all the states i.e. Finance Minister of all the States and the Union Minister of State for Finance under the leadership of Union Finance Minister. Cooperative federalism requires Consensus in decision making. Guided by broader national concerns under the principles of cooperative federalism, the states gave up the right to fix their own tax rates. Now both states and centre decide for the taxes. Decisions are taken by 3/4th of the total majority present and voting (Central government – 1/3rd of the total and states 2/3^rd). Thus, to reach any decision Consensus and cooperation Is imperative. In case of any dispute between Centre and state or among states GST council takes the final decision.  However, as the Centre enjoys 75% of the total votes, it can veto any proposal, even the collective decision of all the states. Centre must use this privilege wisely and prudently to augment co-operative federalism. Else, it will be a disaster.  Remarkably, the very fact that there has been no need to resort to voting to take any decision in the18 meetings of the GST Council held so far reflects the spirit of “One Nation, One Aspiration, One Determination”.

Participation of all the States together with the Centre, including West Bengal and Tamil Nadu, irrespective of their differences is in itself a good signal. Centre also denied the Central Board of Excise and Customs’ proposal to create dual control over the assessment of businesses with an annual turnover of up to Rs.1.5 crore and rather gave States that power. This was one of the contentious issues and Centre adhering to States demand is a positive sign. Co-operation has also been displayed by the Centre and the State Government Officials in organizing Joint Trade Awareness & Outreach programs wherein for the first time the Officers came together to create GST awareness amongst Trade and other stakeholders.

Thus the idea of cooperative federalism is clearly reflected in the GST council and such cooperation will establish vibrant interstate trade and commerce and will improve the overall economy of the nation. Moreover, due to different tax regimes in various states a product used to have different prices in say Delhi, Gurugram and Noida which are hardly 25-30 kilometers apart. This was because Haryana, Delhi, and Uttar Pradesh had different tax regimes. This created confusion in citizen’s mind. The foreign investors used to be confused about different systems in different states. GST has helped in removing this confusion and the compartmentalization of powers to tax. The Constitution of India has also been amended accordingly.  

GST, with the aim of ‘One Nation, One Tax, One Market’ intends to transform India into a true economic union. This economic integration will not only boost economic growth but also bind the nation better. It is an idea which could not have been materialized but for the spirit of co-operation displayed by the Centre and the States.Indeed, GST in India in its inception, enactment, and execution is an example of real ‘co-operative federalism’, in tune with the unique character of India – ‘Unity in Diversity’.

Disclaimer: 

The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of any other agency, organization, employer or company.

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