GOODS AND SERVICES TAX AND FEDERALISM

Abstract

The Indian state being federal in nature, through its Constitution lays down distinct responsibilities to be performed by the Centre and the State, according to the division of powers, for which they need to raise resources. For this purpose 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. 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). GST is India’s most ambitious tax reform initiative that is targeted at bringing simplicity, transparency and efficiency to the system of indirect taxation in the country and is being considered imperative in the emerging economic environment. 1 In operational terms a well established and functioning federalism is a dire necessity for effective governance of the country. A fundamental requirement for effective governance is the establishment of a relationship of trust between all principal stakeholders in India’s federal set-up: the central government, states, regions and even villages and Panchayats. This involves inter alia that all stakeholders be clear about their responsibilities and rights and that financial flows between these stakeholders are predictable and easily understood.