Equitable Distribution: PAC Report On GST

Fiscal Federalism Undermined: PAC Report on GST and the Looming Faultlines

The 19th report of the Public Accounts Committee (PAC) calling for a GST overhaul reveals deeper systemic flaws in India's fiscal federalism. The current GST framework, despite its promise of "One Nation, One Tax," has centralized control, ignored regional economic disparities, and exacerbated states' dependency on the Centre. This skewing of revenue distribution damages the foundational principles of cooperative federalism that India's tax system is ostensibly built upon.

Looking at the Institutional Landscape

The GST regime, touted as India’s most ambitious tax reform, operates under the 101st Constitutional Amendment Act, managed by the GST Council—a constitutionally mandated body chaired by the Union Finance Minister, with voting power split between the Centre and the states. While GST subsumes multiple indirect taxes, the very nature of its destination-based design has disproportionately impacted large manufacturing states like Maharashtra, Tamil Nadu, and Gujarat, which have seen a decline in indirect revenue collections. The States’ Compensation Fund, which aimed to offset revenue losses during the GST transition, has remained non-audited and delayed for over six years—a glaring operational failure.

The Argument and Evidence: Cracks in the GST System

Declining Revenues: PAC data indicates a nearly 2% drop in indirect tax revenue between FY18 and FY20, preceding the pandemic. This issue signals inefficiencies in revenue collection but also highlights how GST has failed as an equitable tool of fiscal redistribution. High-revenue states disproportionately shoulder indirect tax contributions yet receive lesser compensation, while fiscal relief for weaker states has been inadequate.

Skewed Tax Autonomy: The GST Council holds overwhelming power over rate slabs, exemptions, and compliance rules, leaving states with diminished autonomy. Section 144 of the CrPC, invoked during GST protests, has often suppressed federal dissent rather than addressing the substantive policy issues.

Procedural Complexities: Biometric Aadhaar authentication for GST registration has added compliance hurdles. The PAC noted that small businesses and MSMEs—key stakeholders—find the GST portal unwieldy, with 47% reporting technical difficulties during filing cycles.

Fraudulent Practices: Fraudulent claims for Input Tax Credit (ITC) and fake invoicing have led to revenue leakages. According to recent estimates from the GST Intelligence Directorate, India faced tax evasion worth ₹78,000 crore in FY23 alone.

Lack of Audits and Compensation Finality: The non-finalization of the States’ Compensation Fund continues to undermine states' confidence in the GST framework. This non-audited fund raises serious questions about transparency and accountability in implementation.

Counter-Narrative: Defending GST’s Structural Rationale

Proponents of the current GST structure argue that centralizing the tax system has reduced cascading taxes and increased compliance. Over the last six years, GST collections have shown an upward trend—gross revenue collections crossed ₹1.8 lakh crore in March 2023. Further, uniformity in tax rates has led to a smoother interstate trade regime, eliminating barriers like entry taxes.

It is also argued that the GST Council, given its composition, balances competing interests between states and the Centre. However, critics rightly counter that this balance is more theoretical than operational, as states often fail to secure meaningful concessions against the Centre's veto power in Council meetings.

International Perspective: A Lesson from Germany

Germany’s tax-sharing mechanism offers a stark contrast. Under the German constitutional model, states (Länder) retain significant autonomy, sharing federal taxes like VAT through fixed proportional formulas. Länder also negotiate their share based on economic disparities, ensuring a degree of equity while protecting manufacturing-heavy states like Baden-Württemberg and Bavaria. What India calls fiscal federalism, Germany operationalizes through entrenched decentralization. India’s GST, in comparison, centralizes power and redistributes inequitably, leaving economically robust states powerless and weaker states with insufficient revenue buffers.

Assessment: Repair or Replace?

GST 2.0, as suggested by the PAC, must address lingering inequities. This includes a transparent revenue devolution formula that considers regional economic capacities, real-time audits to cap revenue leakages, and compensation extensions up to FY2030 for less-developed states. Simplifying compliance for MSMEs, particularly through AI and blockchain-driven portals, remains crucial. However, these proposals should be viewed alongside broader goals of fiscal decentralization and accountability reforms across tax institutions.

The realistic next steps involve empowering states within the GST Council—moving away from a veto-dominated mechanism to consensus-based decision-making—reinforced by constitutional amendments that give states greater operational autonomy.

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