Updated: March 16, 2021 1:04:04 pm
Taxation is an economic tool that helps the government raise revenue — a scarce resource — for allocation among competing uses. Contrary to popular belief, taxation powers do not come with great responsibility. The Supreme Court of India has described taxation as a “sovereign” power and, consequently, shown a lot of latitude towards taxation powers, particularly of the central government. For instance, in 2016, the Centre levied the equalisation levy on certain e-commerce activities. The levy was neither an income tax nor a service tax. It was levied using provisions of the Income Tax Act and service tax law, offering neither direct tax credits nor input credit under service tax. The equalisation levy didn’t fill the coffers but made a statement about India’s willingness to tax non-resident e-commerce service providers.
The subject matters over which the Centre can tax and raise revenue are limited only by the imagination of its bureaucrats. The subject matters over which states can raise revenue are expressly limited. In ITC Ltd. V. State of Karnataka 1985 Supp SCC 476, Justice Sabyasachi Mukharji made an important observation in his dissenting opinion: “States must have power to raise and mobilise resources in their exclusive fields.” Nearly 17 years later, his dissent became the law of the land in ITC Ltd. v. APMC & Ors, (2002) 9 SCC 232. However, after GST, states do not have this autonomy in raising finances. The Constitution (One Hundred and First Amendment) Act, 2016 (GST Amendment), substantially deleted provisions empowering states to independently levy taxes, leaving only “Taxes on the sale of… motor spirit (commonly known as petrol),…alcoholic liquor for human consumption, and, “Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council”. The Centre was always empowered to levy excise duty. What is significant is the retention of the tax on the sale of fuel with states.
Justice Mukharji’s dissenting opinion that “…one should be chary to denude the State of its powers to legislate and mobilise resources — because that would be destructive of the spirit and purpose of India being a Union of States”, is, therefore, crucial for a state’s fiscal independence.
State governments are unlikely to relinquish means of raising revenue and allow fuel to be subsumed by GST. After 2022, states are not required to be compensated for the loss of revenue on account of state taxes being subsumed under GST. Unlike GST, state revenue doesn’t form part of the Consolidated Fund of India and hence is not subject to central government debates. If states resorted to raising revenue through “taxes on entertainments” it would lead to double taxation of services under GST and a separate state tax. Curtailing the fiscal independence of states will inevitably result in irreconcilable anomalies.
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Independent of the fact that the wisdom of taxation powers is beyond judicial scrutiny, the Centre’s high excise duties must be seen against the larger backdrop of the compelling need to bolster revenue. Recovery measures after the pandemic have virtually eliminated the possibilities of a reduction in expenditure. The fiscal deficits at the Centre and states show that neither is going to forego raising finances.
The real problem for the Centre would be to keep inflation in check considering rising fuel prices will translate to higher cost of goods. While this has already been observed by the RBI Governor in the Bulletin for February 2021, it also optimistically notes that inflation rates have been revised and risks — “balanced”!
A population that is keen to travel coupled with the absence of a robust public transport system would effectively render the demand for fuel inelastic. The unprecedented collections in GST for December 2020 and January 2021 are encouraging in this context. The central government’s need for fiscal responsibility under the Fiscal Responsibility Budget Management Act has ensured that it maintains high taxes on fuel since neither revenue nor capital expenditure is going to be reduced in the aftermath of the pandemic. Raising fuel prices may temporarily be on hold in states scheduled for elections, but it will not change the economic compulsion of raising finances. The tax on fuel would also be required to finance various promises made before the elections. As regards the central government, in the words of Sir Humphrey Appleby, high fuel prices are neither “controversial” nor “courageous” considering parliamentary elections are not in the foreseeable future.
This column first appeared in the print edition on March 16, 2021 under the title ‘Fuel for thought’. The writer is a Delhi-based lawyer
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