Goods and Services Tax and Vertical Fiscal Imbalance
What is Vertical Fiscal Imbalance (VFI) :
- The Union government is endowed with more tax powers than the States, while the States are assigned more expenditure responsibilities than the Union government.
- This gives rise to a vertical fiscal imbalance (VFI) between the Union and State governments.
More about the VFI and its calculation :
- The Union and State governments concurrently levy GST on commodities with 50% as Central GST (CGST) and 50% as State GST (SGST).
- There is an Integrated GST (IGST) on inter-State trade, so that 50% of it goes to the final destination State.
- The GST is a harmonised tax on commodities across the country.
- The simplest of the many empirical measures of VFI is ‘VFI equals one minus the ratio of the State’s own revenue to own expenditure’.
- If this VFI ratio is zero, the States have enough own revenue to meet their own expenditure and there is no need for financial transfers.
- The data for all the States over the periods of the last three Finance Commissions (200506 to 202021), the VFI ratio shows an increasing trend.
- For the latest period of 201516 to 202021, the ratio was 0.530, which means that only 47% of the States’ own expenditure was financed by their own revenue in that period.
Steps that should be taken to correct the VFI :
- Bring all commodities, including petroleum products, under GST.
- The Union government should continue to collect IGST only to settle revenue on destination basis.
- The veto power of the Union government should be removed in the GST council.
- Commodity taxation should be moved to State List II of the Seventh Schedule of the Constitution.
More about Goods and Services Tax :
- 101st Constitution Amendment Act, 2016 introduced the GST into the Indian Tax regime.
- The act added a new article 246-A to the Constitution which gives the federal and state governments equal and simultaneous authority to enact laws on goods and services taxation.
- Goods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the supply of goods and services.
- It is a comprehensive, multistage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except a few state taxes.
- Multi-staged as it is, the GST is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer.
- It is a destination-based tax, as it is collected from point of consumption and not point of origin like previous taxes.
- Goods and services are divided into five different tax slabs for collection of tax : 0%, 5%, 12%, 18% and 28%.
- However, petroleum products, alcoholic drinks, and electricity are not taxed under GST and instead are taxed separately by the individual state governments, as per the previous tax system.
GST council :
- Under Article 279 A of the Indian Constitution GST council is a constitutional body.
- GST Council is the governing body of GST having 33 members, out of which 2 members are of centre and 31 members are from 28 state and 3 Union territories with legislation.
- The council contains the following members (a) Union Finance Minister (as chairperson) (b) Union Minister of States in charge of revenue or finance (c) the ministers of states in charge of finance or taxation or other ministers as nominated by each states government.
- GST Council is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
Voting in the GST council :
- Every decision of the GST council shall be taken by not less than the three fourths of the weighted votes of all members.
- Meeting of the GST council requires a quorum of half of the members.
- In the meeting, the vote of the central government has a weightage of 1/3rd of total votes cast.
- Votes of the all state governments taken together have a weightage of 2/3rd of the total votes cast in the meeting.
Syllabus : Prelims + Mains; GS3 – Indian Economy