When the new Goods and Services tax was introduced, its backers called it a new model of “cooperative federalism”. Much praise was lavished along the same lines on the GST Council, a body of finance ministers of the states and Union government that would now decide indirect taxes for Indians, instead of their elected lawmakers doing so.

From “India’s first truly federal institution” to an “embodiment of pooled sovereignty”, the creation of the GST Council was lauded as a breakthrough in how the Indian Union organises itself.

So convincing were these arguments for some that suggestions to create new institutions using the template of the GST council started to circulate almost immediately after the new tax was introduced.

In 2018, Union finance minister Arun Jaitley mooted the idea of bodies along the lines of the GST council to manage healthcare, rural development and agriculture.

In 2019, the Chairman of the Economic Advisory Council to the Prime Minister, Bibek Debroy called for one on public expenditure. In 2020, the Reserve Bank of India suggested GST Council-like bodies to manage land, labour and power.

Did the actual functioning of the GST council match up to these lofty projections?

Rocky road

GST, introduced in July 2017, was intended to simplify India’s complex tax regime by putting a range of Union and state taxes into one silo. To persuade states to move to the new regime, the Centre promised to cover the shortfall in their tax revenues for five years through a new GST compensation cess.

Much of the functioning of the GST Council was smooth for the first three years. But remember, this was also a time when states were being paid a handsome compensation and did not have to worry about tax revenue. Of course, the real test of any such deliberative body only comes in the case of conflict and its role in managing it.

This is where any objective appraisal of the GST Council produces poor results. The entire GST apparatus has been severely tested the past year as GST revenues started to slow down given India’s poor economic performance. By the end of 2019, GST compensation had started to get delayed, with states not receiving their bimonthly payout on time. By March, it was clear that there would not be enough money to pay compensation and plans for borrowing were discussed at the GST Council.

As the Covid-19 pandemic hit the globe, India’s botched response resulted it in becoming one of the worst impacted countries economically. As the Indian gross domestic product contracted 24% in the first quarter, the Modi government for the first time started to talk of the states not getting their legally mandated share of compensation.

This was a federal crisis like no other. Now was the time for the GST Council to live up to its billing as a breakthrough in federalism. Unfortunately, the council did no such thing.

Finance Minister Nirmala Sitharaman. Credit: PTI

Missing in action

The GST Council would have been expected to provide a forum to discuss and debate solutions to the compensation crisis. Instead what was seen was that the Union tried to bypass the council. For example, to get past the compensation morass, the Union government unveiled two options – both involving states borrowing funds to meet the compensation shortfall.

Despite it being clear that there were sharp divisions on the matter, however, at no time was the issue ever put to a vote in the council. In fact, the Union government tried its best to avoid a vote. In the 40th GST Council meeting on October 5, for example, the Union revenue secretary tried to abruptly call an end to proceedings in order to prevent voting on the options, reported The Telegraph.

When the next meeting was held on October 12, states again pushed for solutions, including a dispute resolution mechanism. However, Congress leader P Chidambaram claimed that Union finance minister Nirmala Sitharaman abruptly ended this meeting as well.

With the crisis looming, the Union government then put out anonymous leaks in the media arguing that voting on the compensation options was out of the “jurisdiction” of the GST council. This directly contradicted Union Finance Minister Arun Jaitley, who in his role as the chairperson of the GST Council had assured the body in its 8th meeting that in case of a shortfall in GST Compensation, “the GST Council shall decide the mode of raising additional resources, including borrowing from the market”.

With the GST Council rendered useless, Opposition states threatened to go to the Supreme Court to contest the case for their pending compensation legally.

Threats like these possibly forced the Union government to bend somewhat. On Thursday, it agreed to borrow a part of the compensation and pass it on to the states. Notably, even on this point of compromise, the GST Council was missing in action: the Centre made its announcement unilaterally via a press release.

As a reaction, some opposition states again asked for the entire compensation amount to be borrowed. This time too, the demand was made publicly. More federal negotiation it seems was being conducted on Twitter than in the GST council.

A rally to support the introduction of GST in Mumbai in June 2017. Credit: Shailesh Andrade/Reuters

Skewed to the Centre

Criticism of the GST Council is not new. Analysts had pointed out that the council, while marketing itself under the rubric of “cooperative federalism” was actually designed to give vast powers to New Delhi. The GST Council awards the Union government a weightage of one-third (33.33%) of the total votes cast. On the other hand, the other states and Union territories combined have two-thirds (66.66%). Every decision of the council meanwhile requires three-fourths (75%) of the total vote to be passed.

This means it is, firstly, very easy for the Union to get its policies passed by the council. It requires only the votes of 21 other states. Secondly, it is impossible for the council to pass a vote that the Union opposes since it alone controles 33.33% of the vote. This is true even if every state and Union territory votes against New Delhi. The Centre thus has a veto in the council.

To make this skew worse, the GST Council is managed by the government of India’s Revenue Department, which reports to the Union Minister of Finance, who in turn represents the Union government in the GST Council. This conflict of interest, former bureaucrats and public finance experts V Bhaskar and Vijay Kelkar have argued, means “its recommendations have limited credibility” and have resulted in “inconsistency of allocation of Compensation Funds with the GST law as well as the absence of credible and objective advice at the time of deciding on the guaranteed rate for compensation”.

Most fundamentally, the GST Council took taxation out of public legislatures – the standard in every democracy – and uniquely made it part of a closed chamber. As this compensation fracas shows, major chunks of information on a matter as critical as indirect tax were kept away from the Indian people.

Unlikely future

Why then was the GST Council’s architecture pushed as a silver bullet to India’s administrative problems? Since the council provides such vast powers to New Delhi, it is likely that politicians at the Centre saw in it a way to manage subjects that, till now, are totally or partially in the domain of the states without going through the normal democratic process – that is actually winning a state election.

However, given the poor performance of the GST council in managing the GST and the federal disputes that have arisen as a result, it is unlikely that states would agree to more such bodies in the near future.