Question

Implementation of the Goods and Services Tax has increased the revenue of the states but has reduced the autonomy of the states. Examine

Answer 1

Approach:

1. Explain the provisions of the Goods and Services Tax.
2. Discuss about the revenue variation to states after the GST reforms.
3. Mention your view on the financial autonomy of the states with reference to the GST.
4. Justify your view.
5. Provide befitting conclusion.

Goods and Services Tax:
Goods and Services Tax is the biggest tax reform in India founded on the notion of one nation, one market, one tax. The GST implementation aims to reduction of the cascading of the tax structure and simplification of doing business in India. It consists of three sets of tax as Central GST, State GST and Integrated GST with different slabs of tax rates.

Impact on revenue after GST:
GST is a destination based tax system and it is thought that the manufacturing states will get less revenue. On the contrary the revenue of the manufacturing states like Tamilnadu, Maharashtra and Gujarat had not seen drastic reduction in revenues. This was mainly due to the consumption level of these states are high. Some states like Punjab, Uttarakhand, Chhattisgarh and Odisha had seen some shortfalls in revenue.
The Northeastern states had seen an increase in the revenue as they are mostly depend on the neighbouring states for their material needs. The Union Government had also guaranteed 14% annual growth in GST for five years from the date of implementation (1 June, 2017). The shortfall in the revenue of the states for these five years will be compensated by the centre. Within five years the states should take measures to increase their revenue collection.

GST and state’s Financial Autonomy:
On the implementation of the GST, the states autonomy in deciding the tax rates have been reduced. The tax rates will be decided by the GST Council and it is the cooperative action of the Union and state. Though the states form part of the GST Council, its autonomy in deciding taxes and cesses is curtailed.

Justification:
In the total revenue of the states have effective autonomy on only 35% and the remaining 65% will be from the centre’s devolution to states and the GST Council decisions. Some of the factors that prove the loss of states autonomy are

• Plan to include petroleum into GST structure.
• Implication of the 7th finance commission recommendations.
• Loss of revenue flexibility dies to GST.
• Farm loan waivers and UDAY scheme.

Conclusion:
In spite of the reduction of the autonomy of the state’s in the short run, GST helps to build cooperative federalism that promotes unity of the nation. In real terms the GST has increased the registered taxpayers by 50% which will increase the revenue collection in the near future. Thus in the era of competitive and cooperative federalism, cooperation is inevitable for economic progress of the nation.