The much awaited GST intended to transform India into a single marketplace has also turned India’s constitution from being described as ‘Federal with a Unitary Bias’ to a ‘Constitution for the Union with a Federal Bias’. The process of unifying India’s taxation started with VAT in the beginning of this century.
Present situation of states taxation
With VAT states remained staunchly independent in their taxation policy, led by their own fiscal imperatives and VAT was often supplemented by a variety of taxes, leading to India being described as one of the biggest taxed nations. The ability of raising higher taxes gave states the ability to raise larger resources to address problems unique to them. Many states had implemented wide ranging social sector reforms on the back of cash generated from its taxation program. Even more than states, it would be municipal bodies which could levy many taxes independently.
Changing scenario with GST
For states with manufacturing industries, sharing the unified indirect tax base with the union government via the destination-based GST, will mean an outflow of tax revenue along with goods and services produced there, to states that consume the goods and services. In this sense, GST provides no incentive for manufacturing states. The Mumbai Corporations huge income from Octroi duty will be financially challenged and their power to tax would be virtually decimated with the roll out of GST. Urban local bodies will have to deal with a huge fiscal gap once local Octroi and other entry taxes are scrapped. GST effectively transfers the power of taxation to an unelected body. GST Council takes the power of deciding tax rates from both the union parliament and state legislatures and will be the supreme body in determining tax rates. State executive and legislature will have little say over what taxes can be raised in their respective states.
The world has not yet totally embraced GST as a panacea for its fiscal ills. United States has not yet agreed to usher in any form of GST. Possibly because of the federal nature of its constitution. In Canada the provinces have the power over direct taxes, while the federal government has the power to tax indirect taxes, which is why the GST did not entail any impact on the state powers. It is yet to be seen how the Indian polity will respond to the challenge to the implementation of GST.