29 March 2017 must be recorded as one of the most significant days in the history of federalism in India. By passing the four bills relating to different aspects of the Goods and Services Tax (GST), the Lok Sabha has, perhaps for the first time put limitations on its own powers, in the interest of federalism, and signed off on a pooling of sovereignty in taxation matters with 32 state and Union territory legislatures.
In turn, over the next couple of months all the state legislatures will share their powers of taxation. In the process of sharing and jointly exercising the powers to tax, the GST Council will be born as India’s first truly federal institution.
Neither the Parliament on its own nor the state legislatures individually or jointly can override the collective recommendations of the GST Council. In other words, the GST regime has created an institutional and Constitutional framework for cooperative federalism in the arena of indirect taxation.
In the GST regime, the Union and the states will be vested with concurrent powers to levy GST on intra-state supply of goods and services and the union will be vested with the exclusive power to levy GST on the supply of goods and services in the course of inter-state trade or commerce which includes supply in the course of imports into the territory of India.
There will be a State GST (SGST) and a Central GST (CGST) for intra-state supplies and an Integrated GST (IGST) for inter-state supplies. There will be separate laws for imposing these levies. SGST Act has to be enacted by each state and CGST Act and IGST Act has to be enacted by the Parliament.
Since CGST and SGST will be levied on the same tax base it is essential that the provisions of these laws should be similar so as to have harmony in the working of the system. Moreover, the IGST will have forward and backward linkage with CGST and SGST for Input Tax Credit (ITC), the laws dealing with these taxes will have provisions that will ensure a seamless and effective ITC mechanism.
Although GST is perceived as a levy formed by subsuming all taxes and duties on goods and services, in the proposed regime, taxes on petroleum products and alcohol have been kept out of the GST net.
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As passed by the Parliament, the law doesn’t extend to Jammu & Kashmir. The division of powers between the Union of India and the state of Jammu and Kashmir are governed by Article 370 of the Constitution of India as amended by various Constitution (Application to Jammu and Kashmir) Orders promulgated by the President of India from time to time. Articles 246 and 248 of the Constitution which govern the division of legislative powers between the centre and the state apply in a modified from to J&K. The Parliament is vested with the power to with respect to matters enumerated in the entries 1 to 96 of list 1 schedule VII; the residuary power is retained with the state.
Whereas sales tax laws of all the other states draw their sanction from entry 54 of the state list, the tax laws of the state are legislated by virtue of powers derived from Section 5 of the Constitution of J&K, which provides that all the legislative powers extend to all matters except those in respect of which Parliament alone has the powers to make laws for the state under the provisions of the Constitution of India (Article 246).
In the above backdrop it follows that the implementation of the GST regime for Jammu and Kashmir would be different. The state legislature will consider the enactment of legislation on the subject in which the state would make provisions in sync with the GST regime, applicable to all the other states. The components of GST would be levied by the state itself under the proposed legislation, which would be analogous to the statutory framework proposed by the Union of India.
To conclude, having created an institutional and constitutional framework for cooperative federalism, the task ahead is to create and extend a similar framework in other arenas of fiscal federalism. This could be started by rejuvenating the Inter State Council, which is a Constitutional body set up on the basis of provisions in Article 263 of the Constitution. The body was formed by a Presidential Order on recommendation of the Sarkaria Commission. It is the Council’s mandate to discuss all manner of policies, and subjects of common interest.
Haseeb A. Drabu is the finance minister of Jammu and Kashmir.