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The Goods and Services Tax is widely acknowledged as one of the most important reforms implemented in India in the past decade. However, almost five years since it was first introduced, the dream of a simple and reliable tax structure still seems far away.
What’s added to the muddle now is the Supreme Court ruling on a case which among other things made the point that the recommendations of the GST Council are not binding on the states and the central government.
Now, that might seem to be just a reiteration of what’s already there in the law. Revenue Secretary Tarun Bajaj said as much after the apex court judgment.
On the other hand, critics of the tax (or the way the tax has been implemented) say the order restores the power of the states. Finance ministers of states ruled by non-BJP parties have also welcomed the judgment and said it will boost cooperative federalism.
Where the Supreme Court judgment acquires significance is in the way the recommendations of the GST Council are implemented. So far, even if the states have had differences, they have stuck to the recommendations of the Council.
Now, some states may well be emboldened to step out of line since the recommendations are not binding. This threatens the concept of ‘one nation, one tax’, the most attractive selling point of GST that replaced a complicated indirect tax structure with multiple levies.
The ruling also comes at a particularly delicate time. The compensation cess arrangement — wherein states are compensated by the Centre for revenue shortfall —is coming to an end this year. This increases the scope for further friction between the Centre and states.
To be sure, in a huge federal democracy like India, there will always be teething troubles for complex laws, especially those involving revenue sharing.
But the apex court ruling should act as a trigger for the Centre and states to come together and work as one, not only to increase revenues, but also stop a potential flood of litigation that can act as a drag on the nascent economic recovery. A recovery in GST revenues in recent months is a welcome trend and the two can work together to build it up further.Investing insights from our research team
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