TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................... 2

INDIAN STATE: FEDERAL, UNITARY OR QUASI- FEDERAL STRUCTURE .................... 2

FISCAL FEDERALISM ................................................................................................................. 3

POWER OF CENTRE AND STATE GOVERNMENT REGARDING IMPOSITION OF TAX ......................... 4

IMPACT OF GST ON CENTRE-STATE FISCAL FINANCIAL RELATION ........................... 6

CONCLUSION ............................................................................................................................... 7
INTRODUCTION
Goods and Services Tax Amendment bill, which is also popularly known as 122 Constitution
Amendment Bill 2014 has been passed and has taken effect from the date 1 July 2017. This is
called the Constitutional Amendment because the introduction of the bill will change the power
of the centre and state to devise law for tax purposes and these powers have been mentioned in
the Schedule 7 of the constitution and that is integral part of the constitution. This article belong
to a time when the Bill just cleared the upper house and send for the approval from the state
legislature before coming into effect and the present Article has been authored by Shreya jain.
This paper seeks to examine the proposed reform from the standpoint of fiscal relations
prevailing in India owing to a federalist. And for that purpose the author went to a great length
and highlighted the powers of the central and state government regarding taxation mentioned in
the 3 lists in Seventh Schedule with that also pointed out the changes which are going to take
place when the Bill becomes the Act.

INDIAN STATE: FEDERAL, UNITARY OR QUASI- FEDERAL STRUCTURE

The author, before discussing the effect of the GST on the present federal structure, thought it
reasonable to discuss at first the structure which is prevailing in the Indian State. It is apparent
that a state could have either federal or unitary structure and this may depend upon the various
factors; i.e. for the development of the country and to avoid conflicts and to have a uniform law
throughout the country etc. But Article 246 of the Indian Constitution with clarity implies that
the founding fathers of the constitution intended to have the federal structure in the country.
Article 246 mentions the list enumerated in the seventh schedule and makes it clear that the state
and the centre both have the power to legislate on the matters which falls within their ambit. But
with that some Articles; i.e. Article 249, 250 and 252 questions the purity of the federal structure
which prevails in India. Because these Articles clearly say that the centre can legislate on the
state subject in national interest, in emergency situation and etc. And here power gets centralized
which is the characteristics of the unitary structure. But it can’t be said that the provisions, which
were made for the temporary purposes and which might be required because of the
circumstances will prevail over the provisions, which were intended to stay and that too as a
general rule and not as an exception just to bend the system of a country in another category.
Federal character is a general situation in the Indian state and the unitary character can have
application in exceptional circumstances. But it also can’t be argued that Indian state has pure
federal structure but it can be categorized as quasi-federal state. The Federalism in India tries to
strike a harmonious balance between the centripetal idea of unity and cultural diversity of
regions. Further author also tested the federalism in the era of globalization and rightly pointed
out that in this situation more power in the hand of the centre will be beneficial because in such
scenario a country deals as a country (means as single unit) and not as union of state because
laws and regulations are required and a uniform law will be more beneficial for the overall
development of the country. If states are given power to make laws for their respective regions
then there might be and will be different law and the state which will have more favorable law to
business entrepreneur will get investment and this will lead to unequal development.

FISCAL FEDERALISM
The purpose of any legislation is to promote development in the country and if the legislation is
by the state then the object will be to develop the state which will, in consequence, will develop
the nation because India is union of states. For the purpose of the development a country or state,
as the case may be, need resources and the primary source for these resources are finance which
is the result of the tax-policy. The concept of fiscal federation is that the concept of federalism is
applicable to fiscal policy. And this means state and centre both will have power to legislate with
regard to finance related matters but on some matter state will have exclusive jurisdiction and on
some centre will have and on some subject both state and centre will have the power to legislate.
The Constitution empowers both the Centre and the State to levy and collect taxes through their
respective legislations as enshrined in the seventh schedule to the Constitution of India. Revenue
generation through the taxation of goods and services is a prominent source of financing the
governmental operations.

Further, any government, in order to attain success in achieving its goals needs to carefully work
out its fiscal equation. The disbursement of funds has to be matched and mapped to the revenue
generation and should ideally either result it a surplus or breakeven and a deficit situation should
be circumvented. Also the allocation of finances between the national and sub national units
should be worked out in a manner that it doesn’t result in a fiscal imbalance. A situation of fiscal
imbalance arises when the expenditure of a unit exceeds the revenue generation of that unit. Due
to a strong unitary control the Centre is able to command greater share in the public funds and
hence it leads to a vertical fiscal imbalance Usually the states lack funds in proportion to the
responsibilities entrusted to them to discharge the same.

POWER OF CENTRE AND STATE GOVERNMENT REGARDING IMPOSITION OF TAX

Seventh schedule of the Constitution lists the matters on which centre and state can legislate. List
I also known as Union list gives the matters on which centre has exclusive power to legislate and
List II known as Sate list lists subjects on which state can legislate but in certain circumstances
the parliament can also legislate on that and List III, concurrent list, lists matter on which both
centre and state can legislate. In List I entry 82 to 92C and 97 mentions the power of centre
government to legislate on tax and it is clear from these entries that the central government has
the power to levy a wide range of taxes and some of the very essential taxes such as the income
tax, excise duty, duty of customs, inter-state sale tax known as CST (central sales tax), corporate
tax and even the recent addition of service tax to the list evidently indicate that the Centre
intends to control the levy of the primary revenue generating taxes by itself. Even though the
Centre retains the exclusive power to levy the above mentioned taxes, it does not reserve the
entire proceeds for its own use and disburses defined percentages to the state units as well. On
the other hand in state list entry 45 to 63 mentions the subjects on which state can legislate
regarding taxation. And important entry in that is entry 54 which talks about sales tax/ value
added tax (VAT). But inter-state sales tax is levied by centre not by the state. State only collects
intra-state tax.

It is obvious that centre has the power to levy taxes on major subjects and this leaves the states in
a situation, which was compared by the Amiyo Kumar Ghosh in the Constituent Assembly as
“orphans with a begging bowl in hand approaching the Union Government for money and help”.
In order to achieve an equitable solution, the Constitution has envisaged a scheme for revenue
sharing. All the taxes which are levied and collected by the state are appropriated by the states
themselves. But certain taxes which are collected by the Centre have to be compulsorily shared
with the states. This provision for revenue sharing is enshrined in various articles of the
Constitution of India. Article 268 of the Indian constitution provides that stamp duties and duty
of excise on medicinal and toilet preparation as given under list I shall be collected and
appropriated by the state within which such duties are leviable, even though the power to levy
has been granted to the Centre. Article 269 talks of the taxes which are although levied and
collected by the Centre, shall be made available to the state units for appropriation. These
include duties in respect of succession to property other than agricultural land; estate duty in
respect of property other than agricultural land; terminal taxes on goods or passengers carried by
railway, sea or air; taxes on railway fares and freights; taxes other than stamp duties on
transactions in stock exchanges and futures markets; taxes on the sale or purchase of newspapers
and on advertisements published therein; taxes on the sale or purchase of goods other than
newspapers, where such sale or purchase takes place in the course of inter-state trade or
commerce ; taxes on the consignment of goods (whether the consignment is to the person
making it or to any other person), where such consignment takes place in the course of inter-
state trade or commerce. Article 270 makes a provision regarding Income Tax on nonagricultural
income. This tax is levied and collected by the union but shall be shared between the union and
the state units. Further article 272 makes a provision that though certain taxes are levied and
collected by the Centre, the Centre may share the proceeds of the same with the state units,
optionally.

Thus, it can be deduced that the sources of revenue generation from taxes for the states as : the
ones as mentioned in the state list, the ones categorized in the union list which are levied by the
Centre but which are collected by the states as mentioned in article 268, the ones listed in the
union list which are levied and collected by the Centre but the proceeds are made available
exclusively to the state for disbursement as mentioned in article 269, the ones which are under
list I and are levied and collected by the Centre but are compulsorily shared with the states as
mentioned in article 270 and lastly the ones which are under the union list and are levied and
collected by the center and may voluntarily be shared with the states as mentioned under article
272. But it was realized that there can’t be any hard and fast rule for percentage, which has to be
distributed, and it always has to be changed according to the economic condition of the society.
Hence it was left completely to the finance commission to devise percentage according to the
need. The functions of the Finance Commission are to make recommendation to the President in
respect of the distribution of the net proceeds of the taxes to be shared between the Centre and
states and the allocation of the shares of such proceeds among states; the principles which should
govern the payment by the union of grants-in-aid to the revenue of the states and other matters
concerning financial relations between the Centre and states. Apart from Finance Commission,
the NITI Ayog also plays an important role making allocation to the states for development. The
distribution of funds is made as per the formula devised by the National Development Council
(NDC).

With the time it has been seen that centre is trying to take away the fiscal federalism by
absorbing more and more power to legislate on subjects related to the taxes. And this approach
of centre shows a shift from the fiscal federalism to unitary structure.

IMPACT OF GST ON CENTRE-STATE FISCAL FINANCIAL RELATION

This question has always been asked as to why there is a need for GST and what impact it is
going to have and how it is different from the present policy? The need arises because the
existing system of taxation of goods and services suffers from various problems mainly the
multiplicity of Centre and state taxes on goods leading to cascading effect of taxes. Moreover
there is a blurring of the distinction between goods and services which makes the separate
taxation of goods and services untenable. Thus there is a need for a comprehensive taxation
regime which is proposed under the title of the Goods and Services Tax (GST). The proposed
GST system is targeted to be a simple, transparent and efficient system of indirect taxation which
involves taxation of goods and services in an integrated manner. The merits of the system lies in
eliminating the multiplicity of Centre and State levy of taxes on goods and doing away with
separate taxation of goods and services as the same is untenable in the view of blurring of
distinction between the two. The Constitution is proposed to be amended to introduce the goods
and services tax for conferring concurrent taxing powers on the Union as well as the States
including Union territory with Legislature to make laws for levying goods and services tax on
every transaction of supply of goods or services or both, as mentioned in Article 246A of the
constitution. The goods and services tax shall replace a number of indirect taxes being levied by
the Union and the State Governments and is intended to remove cascading effect of taxes and
provide for a common national market for goods and services. The proposed Central and State
goods and services tax will be levied on all transactions involving supply of goods and services,
except those which are kept out of the purview of the goods and services tax.
Under the new taxation policy (GST) the duty of excise which is a tax on manufacture of goods
is bifurcated on the basis of the nature of goods between the Centre and the state (entry 84 list I
and entry 51 list II). Thus there is a clear demarcation of the taxing powers with the Centre
retaining entire power to tax services and a bifurcation being made with respect to tax on
manufacture and sale of goods. It is important to point out here that India has adopted dual GST
regime as opposed to single GST regime which has been adopted by many countries. And it can
be deduced that this is because of the fiscal federalism which has been provided in our
constitution. Dual GST regime means the state as well centre both will have power to make law
and not just centre.

CONCLUSION
GST was introduced to avoid the cascading effect, which is tax on tax. But while doing that the
country has adopted the dual GST regime (CGST and SGST) and other countries haven’t
adopted the same. This is impact of the fiscal federalism that the state has also been given power
to legislate on the subjects. But with that there are different views: Some economists believe that
there is an increasing tendency towards centralisation of economic and financial powers in India
which may get exacerbated due to GST. With that it also has been argued that proposed GST
which is high as 26-28% creates apprehension in the mind of the paying consumer that it is too
much and this might invite tax evasion. And an essential feature of Indian federalism is that the
Union and the states can levy different types of indirect taxes to suit their special requirements.
Indeed, the needs of states like Maharashtra and Gujarat are completely different from states like
Jharkhand and Assam. The GST is bound to lead to serious difficulties, and could possibly fail,
because it seeks to treat unequal states equally. It will be practically impossible for the Centre to
compensate states that are likely to lose tax revenue for the next several years. On the other hand,
some says that states also now has power to legislate which is going to increase their revenue
which was not the case earlier and with that the price of goods are going to be reduced because
of elimination of cascading effect make the export oriented industries internationally more
competitive and improve the efficiency of tax collection and administration in the country.