GST Council: The Pillar of India's Fiscal Federalism

Exploring the Constitutional Body Shaping India's Indirect Tax Regime Through Cooperative Governance

Introduction & Overview

The Goods and Services Tax (GST) Council is a constitutional body established under Article 279A of the Indian Constitution, inserted by the 101st Constitutional Amendment Act, 2016. It serves as a joint forum of the Centre and States, embodying the spirit of cooperative federalism in India's indirect tax regime. The Council is responsible for making recommendations to the Union and State Governments on all matters relating to GST, including rates, laws, and administration, aiming to create a harmonized indirect tax structure across the nation. Its unique decision-making mechanism, involving weighted voting, underscores its role in fostering consensus and collective action in fiscal policy.

101st Constitutional Amendment Act, 2016

The GST Council is a constitutional body under Article 279A, inserted by the landmark 101st Constitutional Amendment Act, 2016. This act reformed India's indirect tax system, formalizing the Council on September 15, 2016.

Cooperative Federalism in Action

The GST Council serves as a joint forum, a prime example of cooperative federalism in fiscal policy. It facilitates consensus between Centre and States on tax matters, harmonizing laws and rates for a unified national market.

Council Composition

  • Chairperson: Union Finance Minister
  • Vice-Chairperson: Chosen by members (typically a State FM)
  • Members: Union MoS (Revenue/Finance) & State Finance/Taxation Ministers.

Key Functions & Recommendations

The Council makes crucial recommendations on:

  • Taxes, cesses, and surcharges to be subsumed.
  • Goods and services to be subjected to or exempted.
  • Model GST Laws, IGST apportionment.
  • Threshold limit for exemption.
  • GST rates (floor, bands, special rates).
  • Special provisions for certain states.
  • Date for levying GST on petroleum products.
  • Any other GST-related matter.

Decision-Making Mechanism

Majority Required: 3/4th Weighted Votes of members present and voting.
Central Government
(1/3rd Weightage)
State Governments (Together)
(2/3rd Weightage)
Decision Taken (Binding recommendations)
Quorum: 50% of total members.

SC Observation: GST Council Recommendations (Mohit Minerals Case, May 2022)

The Supreme Court observed that the recommendations of the GST Council are not binding on the Union and State Legislatures. They have only persuasive value.

This ruling reaffirms the legislative sovereignty of both the Union and States, reinforcing cooperative federalism by emphasizing deliberation over compulsion. While it opens the door for deviation, the practical need for a uniform GST structure ensures the Council's persuasive power remains very high.

Prelims-Ready Notes: Quick Glance

Feature Details
Constitutional Article Article 279A
Added By 101st Constitutional Amendment Act, 2016
Nature Joint forum of Centre and States; Cooperative Federalism
Composition Union FM (Chairperson), Union MoS (Revenue/Finance), State Finance/Taxation Ministers
Decision Majority Not less than 3/4th of weighted votes present & voting
Voting Weightage Centre: 1/3rd; States (together): 2/3rd
Quorum 50% of total members
Nature of Recommendations Advisory; not legally binding (as per SC, Mohit Minerals case)
Key Functions Tax subsumption, scope of G&S, model laws, rates, thresholds, special provisions, petroleum date.

Mains-Ready: Analytical Insights

Major Debates & Discussions

  • Cooperative vs. Coercive Federalism: Debates on central influence despite weighted voting.
  • GST Compensation to States: Extension of compensation beyond initial 5 years, particularly during economic downturns.
  • Rate Rationalization: Complexity of multi-tier rate structure and demands for simplification.
  • Inclusion of Petroleum Products: Persistent exclusion of petroleum, alcohol, and electricity, affecting revenue and input tax credit.
  • Complexity and Compliance: Challenges for small businesses and issues of fake invoicing/fraud.
  • Impact of SC Ruling: Questions on long-term uniformity if states deviate from recommendations.

Historical & Long-term Trends

The GST regime represents a monumental shift in India's fiscal landscape:

  • Shift from Dual Taxation

    Historic move from fragmented indirect taxes to a unified 'One Nation, One Tax' system.

  • Institutionalization of Fiscal Federalism

    The Council created a unique mechanism for continuous Centre-State dialogue on indirect tax policy.

  • Digitalization & Data Revolution

    Massive digitalization of tax administration, yielding vast transactional data for policy and fraud detection.

  • Towards Revenue Self-Sufficiency

    Initial compensation focus shifted to helping states achieve revenue buoyancy under GST.

Contemporary Relevance & Impact

  • Economic Integration: Created a common national market, facilitating seamless movement of goods and services, improving ease of doing business.
  • Revenue Growth: Steady increase in GST collections, contributing significantly to both Union and State exchequers.
  • Formalization of Economy: Encouraged formalization by bringing more businesses into the tax net and promoting digital transactions.
  • Increased Tax Base: Expanded the tax base and reduced cascading effect of taxes.
  • Dispute Resolution Mechanism: The Council provides a built-in mechanism for resolving indirect tax disputes.
  • Policy Responsiveness: The Council has shown responsiveness to industry demands by adjusting rates, clarifying rules, and simplifying procedures.

Current Affairs & Recent Developments

  • Online Gaming, Casinos, Horse Racing Taxation (51st & 52nd GST Council Meeting, 2023): Decision to impose 28% GST on the full value of bets, highlighting Council's role in taxing emerging sectors.
  • Establishment of GST Appellate Tribunals (GSTAT): Significant progress in setting up benches across states for expedited dispute resolution.
  • Continuation of Compensation Cess (Legal View): Cess continues to be levied to repay pandemic-related loans, clarified by 50th GST Council Meeting (July 2023).
  • Focus on Compliance and Anti-Evasion Measures: Intensified efforts against fake invoicing and fraudulent ITC claims using data analytics.
  • Review of GST Rates and Rationalization: Periodic review and adjustments of rates for various goods and services, aiming for simplification.

UPSC Previous Year Questions (PYQs)

Prelims MCQs

UPSC CSE 2017: Which of the following statements about the Goods and Services Tax (GST) Council is correct?

  • (a) The Goods and Services Tax Council is a statutory body.
  • (b) The Union Finance Minister is the Vice-Chairperson of the GST Council.
  • (c) The vote of the Central Government has a weightage of one-third of the total votes cast in the GST Council.
  • (d) The recommendations of the GST Council are binding on the Union and State Governments.

Answer: (c)

Hint/Explanation: (a) is incorrect; it's a constitutional body (Art 279A). (b) is incorrect; Union FM is the Chairperson. (d) is incorrect; SC (Mohit Minerals) ruled they are advisory/persuasive. (c) is correct (Art 279A(7)).

UPSC CSE 2016: The GST is regarded as a significant step for Goods and Services Tax reforms in India. What are the main advantages of GST?

  1. It is a uniform tax across states.
  2. It removes the cascading effect of taxes.
  3. It promotes 'Make in India' initiative.
  4. It widens the tax base.

Select the correct answer using the code given below:

  • (a) 1, 2 and 3 only
  • (b) 1, 2 and 4 only
  • (c) 3 and 4 only
  • (d) 1, 2, 3 and 4

Answer: (d)

Hint/Explanation: All listed statements are advantages of GST. The GST Council is the mechanism through which these advantages are sought to be achieved.

UPSC CSE 2020: In India, which one of the following reviews the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

  • (a) Parliament
  • (b) Parliamentary Department Related Standing Committees
  • (c) Finance Commission
  • (d) Financial Sector Legislative Reforms Commission (FSLRC)
  • (e) NITI Aayog

Answer: (b)

Hint/Explanation: This question is related to governance and oversight bodies but not directly to the GST Council. However, it tests understanding of how oversight is exercised in economic sectors.

Mains PYQs

UPSC CSE 2017, GS Paper III: "Explain the salient features of the Constitution (One Hundred and First Amendment) Act, 2016. Do you think it is effective in ushering in goods and services tax (GST)? Discuss." (250 words)

Direction/Value Points:

  • Salient Features: Introduction of Article 279A (GST Council), concurrent powers for Centre/States, definition of GST, subsuming of taxes, compensation provisions.
  • Effectiveness in ushering in GST:
    • Successes: Single national market, removed cascading effects, improved ease of doing business, increased tax base, digitalization, revenue buoyancy.
    • Challenges: Initial complexities, compliance issues, multiple tax rates, exclusion of key sectors (petroleum, alcohol), IT glitches, compensation cess debates.
  • Conclusion: Largely effective, but ongoing reforms needed.

UPSC CSE 2019, GS Paper II: "The GST Council is a unique example of cooperative federalism. However, some aspects of its functioning have been criticized for undermining the fiscal autonomy of states. Analyze." (250 words)

Direction/Value Points:

  • Cooperative Federalism Aspect: Joint decision-making, weighted voting, forum for dialogue, harmonized regime.
  • Undermining Fiscal Autonomy (Criticisms): Dependence on Council decisions, reliance on compensation cess, limited flexibility for states, disputed revenue sharing, central influence (counter with SC ruling).
  • Conclusion: Designed for cooperation, but continuous dialogue and adherence to SC ruling spirit crucial for balance.

UPSC CSE 2021, GS Paper III: "The Goods and Services Tax (GST) has been lauded for improving the ease of doing business in India. Discuss the challenges in its implementation and the role of the GST Council in addressing these." (250 words)

Direction/Value Points:

  • Ease of Doing Business (Positive): Simplified indirect tax, reduced cascading, unified market, streamlined logistics, promoted formalization.
  • Challenges in Implementation: Multiple tax slabs, compliance burden (MSMEs), IT system glitches, exclusion of key sectors, fake invoicing/fraud, dispute resolution delays.
  • Role of GST Council in Addressing Challenges: Rate rationalization, simplification of rules, IT infrastructure upgrades, anti-evasion measures, overseeing GSTAT establishment, policy responsiveness.
  • Conclusion: Significant improvements, but challenges remain; Council's consensus-building role critical for continuous reform.