Introduction

• Since at least 1974, when the Supreme Court commented on the Constitution envisaging a cooperative federal structure, federalism has come a long way in India.
• Despite federalism being the basic feature of Indian Constitution, central government continues to wield superior legislative powers including residuary powers over states.
• Among many other, the taxing provisions are also contentious terrain as the Centre is more empowered under the newly enacted Goods and Services Tax law.

An example: President’s Rule

• In relation to the imposition of President’s rule under Article 356 of the Constitution, federalism is far more mature.
• Between 1947 and 1977, there were 44 instances when the power to impose President’s rule was exercised.
• Between 1977 and 1996, the power was exercised almost 59 times. 15 instances between 1980 and 1984 after the Supreme Court held federalism a basic feature of the Constitution is quite telling.
• From 1991 till 2016, there have been 32 instances of the exercise of this power — compared to 92 instances in the preceding period.

Supreme Court rulings

• In S.R. Bommai v. Union of India (1994), the limitation laid down by the Supreme Court might have placed gentle breaks on exercise of this power (Article 356), but the Centre continues to wield superior legislative powers, including residuary powers and legislative precedence.
• Recently, in Govt. of NCT of Delhi v. Union of India , the Supreme Court gently tilted the balance of executive power in favour of the Government of the National Capital Territory vis-à-vis the Lieutenant Governor (and by extension, the Centre).
• However, the court’s observations on cooperative federalism were stating the obvious considering members of both cabinets take an oath to uphold the Constitution.

Taxation powers

• Taxation powers are another contentious issue and the Central government has won most of the disputes purely due to express provisions in the Constitution.
• In the Goods and Services Tax (GST) scenario, States have foregone some taxation powers (octroi, entry tax, luxury and entertainment taxes, etc.) but have powers to levy taxes through panchayats and municipalities.
• Such powers can result in an anomalous situation of a transaction being taxed under GST laws and a local law, and this is yet to be tested in court.
• After the GST amendments to the Constitution, States have power to levy tax on sale of petrol, diesel, etc. and these would be revenues of the respective States. However, the GST Council is yet to recommend inclusion of these items under GST.

The Anomaly created by GST Amendment

• As per Article 269A(1) of the Constitution, the powers to make recommendations in relation to sharing of taxes from inter-State trade has been given to GST Council and not the Finance Commission.
• However, Article 270(1A) and Article 270(2) provide that taxes levied under the GST laws will be shared in the manner ‘prescribed’ by Finance Commission.
• Thus, there is an anomaly with respect to roles and powers of GST Council and Finance Commission regarding sharing of tax proceeds.

Finance Commission and role of states

• Involvement of Finance Commission also means making of laws through the Parliament under Article 275 (statutory grant – grants in aid) where states have lesser role to play.
• Recommendations of the Finance Commission are placed before Parliament and States have no role in the debate.
• There is also no provision for an aggrieved State to challenge the report of Finance Commission on certain grounds or seek mandatory enforcement of its recommendations.

On GST Council

• As per Article 279A (11) – The Goods and Services Tax Council may decide about the modalities to resolve disputes arising out of its recommendations.
• If the Centre refuses to make allocations as per the GST Council, or if a State is aggrieved by the recommendations itself, then as of now moving to the Supreme Court for an aggrieved State is the only option.
• This is because till now, no modality to resolve disputes under Article 279A (11) has yet been finalised.

Conclusion

• States don’t merely seek parity with each other, historically States have also sought parity with the Centre (Sarkaria and Punchhi Commissions).
• In an era of coalition politics, GST will be a true test of cooperative federalism.