GST – Magical Federalism

Shanmugham D Jayan

Magical Realism is a concept associated with art wherein fantasy or mythical elements are brought into an otherwise realistic situation. In the literary world, Latin American writers are associated with this movement and Gabriel García Márquez is considered as a front runner.

The fictional world depicted by the Gabriel García Márquez was termed as magical realism. However, Márquez was of the opinion that there was no magical element when viewed from the Latin American perspective and what he depicts is, in fact, reality. The identification of magical realism in his narration is thus only a perception of the Western world, he argued.

The introduction of GST regime (The Constitution (One Hundred and First Amendment) Act, 2016) in India is considered as a major step in revamping the tax structure. From the general perspective of law itself, the introduction of GST was a major effort. The impact is furthered by the changes that have been incorporated in the Constitution of India.

Article 246 of the Constitution brings in the federalist principles into the realm of legislative power by distributing the same between Union and States. Powers within the context of indirect taxation were also divided between the Union and the States by ensuring the presence of different entries in the corresponding lists in the Seventh Schedule.

However, vide the Constitution (One Hundred and First Amendment) Act, 2016, changes were made to the Constitution so as to facilitate the introduction of GST. By the said Amendment, the majority of enabling entries with respect to indirect taxes were taken out from State List as well as the Union List, leaving Article 246 bereft of competent entries in those Lists for legislating taxing statutes.

Article 246A reads as follows:

“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have the power to make laws with respect to goods and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”

This meant that the power for levying GST was given to both the Union and the States. Earlier, the same was distributed between Union and States based on the nature of transactions. However, with the introduction of Article 246A, the classification based on the nature of the transaction is no more, and both the Union and the States are more or less sharing the revenue on all transactions.

Any law school which renders a subject on Comparative Constitutional Law will definitely opine that the division of taxing powers under the Indian Constitution is evenly placed. This is a very realistic position from the perspective of a federal structure.

However, on scrolling down to the Constitution (One Hundred and First Amendment) Act, 2016 one will come across another inclusion into the Constitution by the same Amendment Act – Article 279A. The relevant portion of the same reads as follows:

‘279A. (1) The President shall, within sixty days from the date of commencement of the Constitution (One Hundred First Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council.

… … …

(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on—

(a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;

… … …

(h)any other matter relating to the goods and services tax, as the Council may decide.”

Article 279A provides for the creation, powers and functions of a body – GST Council. The said Council is represented by the Union as well as all the States. The Union, however, has higher voting power in the Council. As evident from Clause 4, the GST Council has the power to make recommendations and one may argue that this is evidence of cooperative federalism.

One who is studying Comparative Constitutional Law, on a reading of Article 246A, can positively state that there is a proper division of taxing powers between Union and the States in the Indian Constitution. It is to be noted that whether a given system is federal in nature or not is determined by the division of legislative power.

Tax being an element which empowers the government in materialistic terms has a greater say in deciding the power of the government. This being the position, equal taxing powers between the Union and the States have a big impact on the identification of whether the given structure is federalist in character or not.

As mentioned earlier, Article 246A definitely indicates that there is a proper division of taxing powers. Down the line, even if one comes across Article 279A, the wording of the same conveys a meaning that it is an inlet for cooperation between the Union and the States.

However, on a deeper verification of the impact of the functioning of GST Council, one can identify that the powers under Article 246A are practically for namesake and the Union as well as the States are only implementing ideas/policy evolved by the GST Council by exercising the legislative powers granted by Article 246A.

Consequently, the division of taxing powers present in Article 246A is only a myth.  The reality is that there is total subjugation of taxing powers granted under Article 246A to the majority decision of the GST Council under Article 279A.

Readers of Marquez identified the world created by him as a world of Magical Realism. However, as pointed out by Marquez, in the Latin American context there was nothing magical about it, and it was reality. The feel of a federalist structure one experiences on reading Article 246A is not a reality and the so-called division of taxing powers is only a myth. The reality is that there is no independence either to the Union or the States with respect to taxing powers and this situation is nothing but Magical Federalism.

Shanmugham D Jayan is a visiting faculty at Cochin University. He teaches Constitutional Law, Jurisprudence, IT Law and Law of Taxation. He is also a lawyer specialising in taxation and frequents courts and authorities of first instance.

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