With the announcement of the composition of the 15th Finance Commission all eyes are on the members and the Chairman. The report will definitely generate a lot of interest, given that the Commission is mandated to recommend the vertical allocation (between Union and State governments) and horizontal distribution (amongst different State governments) of Union tax revenues against the backdrop of the impact of the GST. This gives an impression that all matters relating to GST revenue distribution will be dealt with by the Finance Commission.
However, this is far from true. A closer look reveals that distribution of two important matters will not be dealt with by the Finance Commission. Vertical distribution of Integrated GST (levied on inter-state supplies of goods and services) has been entrusted to the GST Council as per the provisions of the Constitution. Moreover, sharing of proceeds of the GST Compensation Cess (‘Cess’) is determined by formulae stipulated in the GST (Compensation to States) Act, 2017 (‘Act’). The presence of these formulae preclude the role of the Finance Commission.
Traditionally, the distribution of all tax revenues barring a few exceptions have been recommended by the Finance Commission, as can be seen from Article 270 of the Constitution.
The exceptions relate to proceeds from surcharges and Union cesses. A surcharge is meant to be for the purposes of the Union while a cess is for an earmarked purpose. The proceeds from a cess and a surcharge, though maintained within the Consolidated Fund of India, are to be retained with the Union Government alone. Another exception is with respect to proceeds of taxes under Articles 268 and 269 relating to certain stamp duties, excise duties on medicinal and toilet preparations and taxes on inter-state sale and purchase of goods, and the proceeds from such taxes are anyway assigned to the State Governments.
Now, pursuant to the 101st Constitution Amendment Act which introduced the GST, a new exception has been carved out under Article 270. Proceeds from the Integrated GST levied by the Union Government on inter-state supplies of goods and services will be shared between the Union and State governments based on recommendations from the GST Council as per Article 269A.
On the other hand, allocation of the Central GST (levied by the Union Government on intra-state supplies of goods and services) between the Union Government and the State Governments will be recommended by the 15th Finance Commission, as provided in Article 270(1A).
The Finance Commission is appointed by the President and is envisaged to be an independent body to oversee and recommend the distribution of tax proceeds. The Finance Commission is to consist of a Chairman who must be an individual of public eminence. Other four members must be qualified to be judges of the High Court or have special knowledge of finances and accounts or have wide experience in financial administrative or economic affairs. The President checks for any potential conflict of interest that may prejudice the role of a member.
On the other hand, the GST Council also appointed by the President, consists of the Union Finance Minister, Union Minister of State for Finance and Ministers of Finance or any other minister nominated by each State Government. The Council, as we have been witnessing, has been making recommendations with respect to a number of crucial matters such as the GST floor rates and bands, goods and services to be subjected to and exempt from GST, etc.
The Finance Commission and GST Council are very different in composition. This could potentially lead to adoption of varied parameters given the different dynamics at play. Will the two bodies work in close co-ordination on this matter? Is there a valid reason for such distinction being made out? Also, the public has access to the detailed reasons and recommendations of the Finance Commission through its reports. Such recommendations, once considered by the President, are tabled in Parliament by way of an explanatory memorandum. No such process is envisaged in the case of the GST Council. Once the recommendations of the GST Council are given out with the prescribed three-fourths majority, the same are implemented.
Another significant exception relates to the distribution of the Cess funds. The Cess was introduced through the Act to compensate State Governments for any losses for the first five years of GST implementation. The proceeds are to be credited to the GST Compensation Fund. The Act not only prescribes the formula for computing the compensation during the five year period but also stipulates how the left over amounts are to be distributed.
This is rather anomalous. If the Cess is indeed a cess, as per Article 270 it should not be shared with the State governments in the first place. If it is a tax on the other hand, the monies should be distributed as per the Finance Commission’s recommendations. The Act devises its own scheme and no plausible reasons for the departure have been cited.
In light of the aforementioned, on both these crucial aspects, the power to recommend does not belong to the Finance Commission. It looks like the Finance Commission will be required to find a way to work with these inherent limitations. Further, it would also need to find a way to work alongside the GST Council. Interesting times ahead, for sure.
The writer is Assistant Professor at Jindal Global Law School. She would like to thank Pradnya Talekar (Advocate, Bombay High Court) for her invaluable inputs