India’s Goods and Services Tax: A Unique Experiment in Cooperative Federalism and a Constitutional Crisis in Waiting

Canadian Tax Journal / Revue Fiscale Canadienne (2021) 69:2, 391 - 445

56 Pages Posted: 14 Jul 2021 Last revised: 21 Dec 2021

See all articles by Ajitesh Kir

Ajitesh Kir

University of Michigan at Ann Arbor - Law School - SJD Candidate

Date Written: July 12, 2021

Abstract

It has long been argued that federal countries, especially those with strong subnational taxing powers, might face difficulty in implementing a federal value-added tax (VAT) because of coordination issues involved, and therefore might be reluctant to adopt one. This article provides insights on how VAT structures are evolving in federal systems, where different tiers of government have separate (and sometimes overlapping) taxation powers. While the author focuses mainly on India’s recently enacted goods and services tax (GST), he also offers a comparative perspective, with reference to the GST/VAT systems in Canada, Brazil, and the European Union, thus adding to the hitherto limited body of scholarly work on VAT coordination in federal jurisdictions.

The GST is arguably India’s biggest tax reform in several decades. Introduced primarily to create a unified national market and bring an end to tax wars and economic distortions, the tax reform’s chief slogan was “GST—one-nation-one-tax-one-market.” This article takes a closer look at a unique institutional design feature of the Indian GST—a centre-state body called the GST council. What makes this body unique is that it is envisaged as functioning on the principles of cooperative federalism. But can a concurrent tax system, whose very survival is based on cooperative federalism, guarantee a unified national market? If yes, for how long? The author highlights the role of the GST council in market integration and explains why the council has succeeded on several fronts while failing on others. He also addresses an unresolved constitutional issue that could affect the GST council’s ability to function as the fulcrum for cooperative federalism—namely, the question of whether its decisions are binding. The uncertainty surrounding this issue could lead to a constitutional crisis if one or more states decide to opt out. The author discusses four possible ways to deal with this impending crisis.

Keywords: Fiscal Federalism, Goods and Services Tax, Vat, Comparative Analysis, Constitution, India

JEL Classification: H20, H70, H87, K34,

Suggested Citation

Kir, Ajitesh, India’s Goods and Services Tax: A Unique Experiment in Cooperative Federalism and a Constitutional Crisis in Waiting (July 12, 2021). Canadian Tax Journal / Revue Fiscale Canadienne (2021) 69:2, 391 - 445, Available at SSRN: https://ssrn.com/abstract=3885063

Ajitesh Kir (Contact Author)

University of Michigan at Ann Arbor - Law School - SJD Candidate

Ann Arbor, MI
United States

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