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Should the FM get veto power in GST?
August, 12th 2010

The pulls and pressures for gaining powers of indirect tax administration among the constituents in any federal structure is not a new thing but it is the growing sense of unease and disquiet among the constituents which demands a review of the proposed formulation. This debate has been thrown into the forefront by the draft constitutional amendment circulated on July 21 and the Centres intent to introduce the Goods and Services Tax (GST) from April 2011.

In a federal democratic structure like India, it is important that states and the Union enjoy autonomy in discharging their duties enshrined in the Constitution. The powers and responsibilities of the Centre and the states have been clearly defined in the Constitution, wherein it is apparent that the states have been made responsible for all areas affecting delivery of public services and goods.

The proposed GST Council would decide on matters relating to the levy of indirect taxes, both of the Centre and the States. The state levies and related issues that have no implication on the Centre should, therefore, be decided by the states in the Council. The draft gives veto powers to the Union finance minister, which goes against the principles of federalism and the principles of collective decision- making.

Hence, the expression agreed by the Union finance minister should be deleted. By this, the Union finance minister will have more powers than all the elected representatives of the state legislatures and the central legislature. The proposal that the Union finance minister should agree to even such decisions is not justifiable. There should not be any veto power in respect of either Central or State GST. Even for the Central GST, if the Union Finance Minister retains veto power, the spirit of co-operative federalism is defeated.

The draft has overlooked the strong arguments put forward by all the states to have equal distribution of powers between the Centre and the states.

When states have relented to subsume all their indirect taxes and surrender some degree of fiscal autonomy in the interest of tax reforms, it is only in the fitness of things that the Centre should also change its approach and be magnanimous enough to the states. Gujarat has always stood for reforms, be it in the sectors of energy, water resources or taxes. We are ready for introduction of GST in the interest of the country.

But, at the same time, we want the transition to GST to be as smooth as possible. So, we have suggested an alternative model of GST implementation in which, states collect and retain SGST and CGST. Subsequently, CGST would be transferred to the Centre. In case states revenue collection through SGST does not equal projected revenue, then the balance would be met from the CGST collected by the state. This would be a means of upfront compensation.

To sum up, in addition to accepting upfront compensation model and ensure a decision-making structure that is democratic and retains flexibility and autonomy of the states; we must see to it that the IT infrastructure across the country is robust and up to the mark and any new tax, such as this, should not be a burden on the poor.

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