Restoring fiscal space for the States, Pg12

Key Highlights:

• The GST compensation cess has been abolished, merging with the regular tax, potentially benefiting consumers by over ₹2 lakh crore.
• Some States are concerned about potential revenue loss due to the abolition of the GST compensation cess.
• GST has shifted taxation power from States to the GST Council, where the Centre dominates decision-making.
• Central transfers account for 44% of States’ revenue receipts, indicating a compromise in their fiscal autonomy.

Detailed Insights:

• Article 246 of the Constitution demarcates taxation powers between the Centre and the States, with residuary power reserved for the Centre.
• The Finance Commission (FC), constituted under Article 280, determines transfers to all States, but there are grievances regarding its tax-sharing criteria.
• The actual devolution to the States as a percentage of Gross Tax Revenue (GTR) has consistently fallen short due to increasing cesses and surcharges.
• States are responsible for law and order, health, education, agriculture, and local self-government, leading them to seek power to collect higher tax revenues.
• Sharing the tax base on personal income tax (IT) between the Centre and the States, similar to GST, is suggested to enhance States’ fiscal autonomy.
• Empowering the States to top up IT, without major changes to the current system of levy and collection, is another alternative to reduce their fiscal dependence on the Centre.

Key Concepts Involved:

• Fiscal Autonomy: The ability of a government to manage its own finances and make independent financial decisions.
• Cooperative Federalism: A system where the Centre and States cooperate and collaborate to achieve common goals.
• GST Council: A body responsible for making decisions related to the Goods and Services Tax in India.