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

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.