Contextual: The 101st Constitutional Amendment Act of India plays a pivotal role in reshaping the country’s taxation landscape, empowering state governments to impose the Goods and Services Tax (GST). This transformative legislation aims to simplify and unify the previously complex system of indirect taxation.
Definition-based: The 101st Constitutional Amendment Act, which introduced the Goods and Services Tax, has replaced the convoluted array of previous indirect taxes on goods and services, marking a significant shift in India’s tax structure.
Significance of the 101st Constitutional Amendment Act:
Harmonization of Taxes:
- Simplification of complex indirect tax structures under GST, eliminating cascading effects, and making the taxation system more transparent and straightforward.
- For instance, the GST replaced various state and central taxes, such as Value Added Tax (VAT) and Central Excise, leading to a more uniform tax regime across the country.
Reduced Tax Evasion:
- Introduction of the GST Network (GSTN) to facilitate seamless tax collection and compliance.
- The GSTN reduces tax evasion by providing real-time data sharing and monitoring, enhancing the government’s ability to track tax payments.
Establishment of a Common Market:
- GST ensures the free flow of goods and services across state borders, promoting economic integration.
- In June 2023, India recorded a substantial year-on-year increase in gross GST revenue collection, amounting to Rs 1,61,497 crore.
- The revenue-sharing mechanism between the central and state governments promotes fiscal autonomy.
- State governments receive a share of the GST revenue, providing them with a stable source of income.
Ease of Compliance:
- Online payment gateways and simplified forms make it convenient for businesses and individuals to submit their taxes.
- This eases the burden of tax compliance and promotes a more efficient tax system.
Reflecting Federalism in the 101st Constitutional Amendment Act:
Dual Taxation System:
- GST incorporates both Central GST (CGST) and State GST (SGST), allowing each government to independently levy and collect taxes.
- This reflects the cooperative federalism model, where states have the power to tax within their jurisdiction.
- The formation of the GST Council under Article 279A comprises representatives from both the central and state governments.
- Decision-making within the council is based on a 3/4th majority, demonstrating a cooperative approach to taxation policy.
Elimination of Barriers:
- The removal of interstate trade barriers like octroi and entry taxes streamlines the movement of goods and services across state borders.
- Input Tax Credit (ITC) ensures that taxes paid in one state can be set off against taxes payable in another state, facilitating inter-state commerce.
Decision on Revenue Sharing:
- The GST Council also plays a vital role in determining the distribution of revenue among states, ensuring equitable sharing and reducing fiscal disparities.
Harmonization of Tax Rates:
- Uniform tax rates across states reduce interstate tax competition and create a level playing field for businesses.
- This promotes economic growth and development across all regions of the country.
While the 101st Constitutional Amendment Act has achieved significant milestones in fostering federalism and transforming India’s taxation system, there is room for further improvement. Measures such as enhancing dispute resolution mechanisms, simplifying implementation procedures, providing training and capacity building, and establishing improved feedback mechanisms can enhance the effectiveness of GST.
Alternatively, the concept of “GST 2.0” is gaining momentum, with recommendations like making the CGST pool fungible across states to free accumulated ITC and allowing the conversion of ITC into tradable scrips. These innovations could further strengthen the positive impact of the GST on India’s federalism and economic landscape.