Re–Examining the Domestic Tax Scenario in a Pandemic (Part 2)

[By Mohit Gupta]

The author is a PhD Researcher at Centre for the Study of Law and Governance, Jawaharlal Nehru University, New Delhi.

To read Part 1 of the article, please click here.

Now, if one talks about the indirect taxes in the country then there are various types of indirect taxes that were levied by Central Government and various State governments before the introduction of The Goods and Service Tax (GST), which are referred at the beginning of the discussion. However, the GST which came into effect on 1 July 2017, following the passing of The (Constitution 122nd Amendment) Bill, 2014 by the parliament of India, and an amendment to the constitution of India which changed the arrangement of powers of taxation between central and state government, and also subsumed a majority of then-existing centre and state-level taxes[1]. The need to re-examine the GST also stems from the fact that recently it completed three years of its implementation and the voices of unrest related to this tax reform are getting louder[2]. The key rationale for the introduction of GST was that it would broaden the tax base and remove the cascading effects of taxation. However, the realisation of these objectives was constrained by various facts which included; that the GST on a few important products like diesel, petrol, air turbine fuel, natural gas etc. were immediately not included in the scope of the GST at the time of its introduction while goods like alcohol for human consumption was kept out of the purview of the GST. The obvious reason was that GST took away the power to levy taxes like sales tax which are the single largest source of tax revenue for the states and the states were not ready to compromise on their autonomy to levy and collect the taxes on these goods immediately. This then takes to the debate between the apologists and critics of the GST around the issue of Efficiency Considerations with GST vs. Fiscal autonomy of the states. There were various reasons provided to support the efficiency rationale emanating from the implementation of the GST which included its ability to improve the competitiveness of the domestic industry in the international market, creation of a common national market for India, broadening of the tax base by expanding the coverage of economic activities and prevention of leakages from the system (Rao and Mukherjee, 2019).

However, what has received less attention is the question that whether or not introducing GST was a desirable choice for a country like India where there are a federal structure and a lot of heterogeneity among states in their tax base. A few studies, at the time of introduction of GST, made a case against the introduction of this tax by pointing out the likely pitfalls of introducing this tax form – that it will significantly undermine the fiscal autonomy of the states in India, efficiency considerations were not the basis of its introduction in various jurisdictions around the world thereby cautioning against any attempt to transplant this form of tax from other jurisdictions and most importantly that it has not been adopted by the largest economy of the world with a federal structure- the United States of America (USA).[3] However, despite these cautions against the efficacy of GST in a country like India, it was adopted with haste in 2017.

These concerns around the fiscal autonomy of the states getting compromised with GST have visibly surfaced over time and more cogently in the times of a pandemic. This is in so far as the central government and the state governments have now realised that with the introduction of GST – they are left with very limited or no space to manoeuvre around indirect taxation structure in emergencies like a pandemic; especially the resource-constrained state governments. Hence, when the revenues began to dry up because of the halt in economy induced by pandemic, both central and state governments levied hefty taxes on products which currently don’t attract GST – an increase in excise duty by the central government on petrol and diesel, increase in value-added tax and special cesses by state governments on petrol, diesel and alcohol for human consumption etc.[4] Following this surge in taxes, while one can always debate the case for an excess tax on alcohol because it is a sin good but an increase in taxes on fuel is surely not the desired way of filling the government coffers because the very nature of a regressive tax is to hurt the poor more and likely to push up food inflation as well.

Further, the finance ministers of various states have now begun to echo the demand to overhaul the GST regime and finding out ways of increasing the revenue share of states in the GST[5]. Adding to the concerns of the state is also the fact that The Goods and Services Tax (Compensation to States) Act, 2017 that has assured states to protect revenue during the first five years of GST introduction (also known as transition period) is approaching its deadline in June 2022 and given the shortfall in GST collection and uncertainty associated with revenue on account of State Goods and Services Tax (SGST) collection, many states have approached the Fifteenth Finance Commission (FFC) for a possible extension of the GST compensation period by another three years, i.e., up to 2024-25 (Mukherjee 2020) and this was demanded even before the onslaught of the pandemic. The real conundrum here is that the centre may not have the fiscal space to provide the compensation beyond the transition period while states may suffer a major fiscal blow with the withdrawal of the GST compensation after the transition period. At the heart of all these developments lies a twofold  problem; one is that from the beginning GST debate abstracted away from the issues of intra-state disparity in its assumption of a uniform tax spread within the state in the projection of its potential gains, ignoring the structural constraints of intra-state disparities with a concentration of taxable transactions in commercial hubs and secondly but the larger issue being that political economy of fiscal federalism in India of the last two decades rests on the contradictions generated by the infirmities of the sound finance paradigm along with a concerted undermining of federal provisions (Das Gupta and Mazumdar, 2017)

Way Forward

The pandemic has and will continue to cause a severe negative impact on income and employment levels of a significant proportion of the population. It is therefore undesirable to impose a brunt of excessive taxation on them during these constrained times. Furthermore, there is little justification in the argument that the rise in the taxation of products like petrol, diesel etc is because of the fact that these are the only available sources of revenue mobilisation. This is erroneous on at least two counts; first is that as pointed out above, imposing indirect taxation is far more regressive compared to direct taxation, which will further exacerbate inequality and hurt the poorer section of the society relatively more compared to those up the income ladder. Secondly, there are other avenues of tax mobilisation other than indirect taxation. For instance, there is no strong economic basis or compulsion at the moment to not reverse the corporate tax cuts announced last year in September which lead to a substantial fall of tax revenues forcing the government to resort to indirect taxes for raising revenue. The only thing that refrains any government from doing this is the lack of a political will. Currently, a situation of status quo with respect to the taxation scenario in the country is completely uncalled for especially when the country is in dire need of a greater fiscal stimulus and the incomes of a large section of the population are plummeting. A re-examination of the tax scenario in the country can ensure that the resources for a greater fiscal stimulus can be raised by adopting a more egalitarian solution which would entail roll back the corporate tax cuts, levying other forms of progressive direct taxes (like wealth tax on super-rich) and reducing the reliance on indirect taxation for tax revenues like GST which are not only regressive but also undermine the federal structure.








Bandyopadhyay,  S.(2012).  “Tax Exemptions in India.” , Budget Track, 8(3), 20–23. Centre for Budget and Governance Accountability. Retrieved July 15, 2018 (

Chandrasekhar, C. P., & Ghosh J. (2020). Economic Contraction and the Fiscal Stance of the Indian Government. MacroScan, BusinessLine 16 June.

Das Gupta, C., & Gupta, M. (2017). The Hindu Undivided Family in Independent India’s Corporate Governance And Tax Regime. South Asia Multidisciplinary Academic Journal, (15).

Das Gupta, C., & Mazumdar, S. (2017). ‘Fiscal Federalism’ in India since 1991. Economic & Political Weekly, 52(2), 55.

Ghosh, J (2020). A critique of the Indian government’s response to the COVID-19 pandemic. Journal of Industrial and Business Economics.  Retrieved from:

Rao, K. (2015). “Corporate Taxes and Exemptions: What Does the Proposed Agenda Mean?, Economic and Political Weekly, 50(12), 27–29

Rao, K. And Sachidananda M. (2019). Evolution of Goods and Services Tax in India, Cambridge University Press, Cambridge, United Kingdom

Mukherjee, S. (2020), “Possible Impact of Withdrawal of GST Compensation Post-GST Compensation Period on Indian State Finances”, NIPFP Working Paper No. 291


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