Indian federalism is considered by some as myth, others as a substantial, if not full reality. The preamble to the Constitution does not contain the word, 'federalism', but it is now recognised as a part of the basic structure of our Constitution. With the Centre having overriding powers, including the takeover of State administration on the basis of the report of the Governor or otherwise, it has been argued that our Constitution has dominant unitary features. The ever expanding Concurrent List, discretionary grants, power to change boundaries of States and carve out new ones without the consent of State assemblies and the power to give directions to States comprise a few of the unitary features of our Constitution.
The most dominant federal feature pointed out by analysts is that taxation powers of the Centre and States are distinct and there is a formula-based devolution of a part of Central taxes to States by virtue of the constitutional provision and not parliamentary discretion. But in the political domain, we saw extreme centralising tendencies in the 1970s. The dominant party, the Congress, was electorally dependent on the charisma of Indira Gandhi and Chief Ministers owed their position to loyalty to the leader than their mass base. This trend saw a reversal during 1989-2014, with coalition politics at the national level. Since 2014, there has been a reversal. Centralising tendencies are again becoming dominant.
It is paradoxical that when political centralism waned and State-based parties, which championed the cause for restructuring Centre-State relations shared power at the Centre, fiscal centralism waxed. In the post-economic reform period, States competed for investment and gave big tax giveaways and holidays and this competition was described as a race to the bottom, as far as revenue collection is concerned.
It was at this time that the suggestion for uniformity of tax rates gained currency and a monitoring agency in the form of Empowered Committee of State Finance Ministers was constituted under Central guidance. Value Added Tax was introduced in 2005-06, with almost uniform tax rates introduced in States. GST is the second step reform when this uniformity of rate structure has been given constitutional sanction through GST Council. Now rates can be varied only by a collective decision of the Council and not independently by States or the Centre.
The balance tilts heavily in favour of the Centre though States, especially the consumer ones do gain. Central excise and service tax get subsumed. But the Centre still has buoyant taxes like income tax, corporate tax and customs duty. It can still collect excise duty from petroleum and tobacco products. It still levies surcharges and cesses, which are not shareable with States. On the contrary, States have surrendered rate varying power in 40 percent of their revenue, that is, from commodity taxes. They levy taxes on petroleum and liquor and do get a share of service taxes, which is of course, a gain.
With GST coming, traders above a turnover limit of Rs 20 lakh will come in the tax net. The Centre gets powers to tax the chain up to retail trade, while States get services within their tax net. Inter-state tax barriers are subsumed and there is full input tax credit. Exports are zero-rated, meaning all input taxes are refunded. Initially, there can be operational glitches, but compliance is expected to improve as input credit is invoice-based and there would be peer pressure for compliance. But if someone in the chain is powerful enough not to remit taxes, others too suffer as they cannot get input tax credit.
Heralding of GST has been much advertised as moving towards 'One Country-One Nation'. But the reality is quite far from it. It is another matter that it may neither be possible nor desirable to achieve the stated goal. Tastes, preferences and needs are diverse and need differential treatment. GST has five rates (Exempted, 3, 5, 12, 18 &28) and cess on the highest rate. GST is expected to curb tax evasion, make compliance more harassment free, remove trade barriers across States and make products cheaper for consumers. All these perceived gains will be put to test in the immediate future. But the shift in focus of the discourse is a challenge to public memory too.
The anti-evasion impact of the demonetisation is no longer discussed. How much undisclosed cash got extinguished is no longer a strident question in the public domain. Be that as it may, from a political economy perspective, GST has acted as a fiscal catalyst to the centralising tendencies in Indian polity, which is rather a bitter pill for States, and hence offered with the sugar coating co-operative federalism.
If States gain some revenue and get some extra space for social sector spending, it would be welcome. But voices for preserving federal spirit have to be heard and given due consideration, while we prepare to implement GST, as it touches more realms than mere revenue gains.
