Explained: The SC ruling that GST Council decisions are not binding on Centre or states

The Supreme Court ruled on Thursday (May 19) that recommendations of the Goods and Services Tax (GST) Council only have persuasive value, and cannot be binding on the Centre and states.

While the Centre has said that the decision does not bring any change to the already existing framework, some Opposition-ruled states have stated that it would give them greater space to take decisions in the federal structure.

What was the case before the Supreme Court?

A Bench led by Justice D Y Chandrachud and also comprising Justices Surya Kant and Vikram Nath, upheld an order by the Gujarat High Court that had quashed the levy of Integrated GST (IGST) on the component of ocean freight paid by a foreign seller to a foreign shipping line, on a reverse charge basis.

The SC dismissed the Revenue Department’s special leave petition challenging the Gujarat HC order that had gone in favour of taxpayers. (Union of India and Anr versus M/s Mohit Minerals Through Director)

Mohit Minerals had filed a writ petition before the Gujarat High Court challenging notifications levying IGST on the ground that customs duty is levied on the component of ocean freight and the levy of IGST on the freight element in the course of transportation would amount to double taxation.

The Union of India argued before the High Court that although tax is being paid twice on the value of ocean freight, it is not unconstitutional as the tax is on two different aspects of the transaction, namely, the supply of service and import of goods.

In its order passed on January 23, 2020, Gujarat High Court had quashed the Central notification levying IGST on importers for ocean freight.

GST is paid by the supplier, but if the shipping line is located in a non-taxable territory, then GST is payable by the importer, the recipient of service. Ocean freight is a method of transport by which goods and cargo is transported by ships through shipping lines.

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What observations did the SC make on the country’s federal structure?

Federalism in India is “a dialogue in which the states and the Centre constantly engage in conversations”, the court said — and although the Constitution confers “the Union with a higher share of power in certain situations to prevent chaos and provide security”, states “can still resist the mandates of the Union by using different forms of political contestation”.

“It is not imperative that one of the federal units (Centre or states) must always possess a higher share of power over the other units,” the Bench said.

The court pointed out that Article 246A of the Constitution stipulates that both Parliament and state legislatures have “simultaneous” power to legislate on GST — and recommendations of the Council “are the product of a collaborative dialogue involving the Union and States”. (Article 246A (“Special provision with respect to goods and services tax”) says: “(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.”)

Also, the court said, “the GST Council has an “unequal voting structure where the states collectively have a two-third voting share and the Union has a one-third voting share”.

How have the Centre and states reacted?

Reacting to the court’s order, Union Revenue Secretary Tarun Bajaj said on Thursday that the GST law provides for recommendation, and not a mandate. “It is a constitutional body, an executive body created by the Constitution which consists of Centre and states which will recommend and based on its recommendations we have created our laws on GST,” he said.

Adding that Section 9 of the CGST Act clearly states that the tax rate decision should be based on the recommendation of the Council, Bajaj said problems could get compounded if any state decides not to accept the recommendation of the Council.

“An administrative body created by the Constitution cannot have an overriding right on the legislature…it (GST) is a very good experiment…we are coming together in a pooled sovereignty which is good,” he said.

A Finance Ministry official said: “This judgment does not in any way lay down anything new insofar as the GST institutional mechanism is concerned, does not have any bearing on the way GST has been functioning in India, nor lays down anything fundamentally different to the existing framework of GST.”

Opposition-ruled states, however, said the judgment provides space for greater flexibility for states in the GST structure.

Tamil Nadu Finance Minister Palanivel Thiaga Rajan said that he had highlighted the issue of the Council being a rubber-stamp authority in his first remarks at the GST council meeting in May 2021.

“Taken together, we have arrived at a constitutional and historical oddity — a GST system and Council that function with an omnipotent and all-encompassing mandate not envisioned in the Constitution of India, yet deeply limited by a structural design and technology platform that are far from adequate to the important task. What makes this oddity truly alarming is that the actual Council is becoming in some ways a mere ceremonial seal, a rubber-stamp authority, with the real power to create policy abrogated to (constitutionally) ad hoc agencies such as the TRU of the CBIC, a feeble GST Secretariat, and the quasi-Governmental GST Network,” he had said at the time.

Kerala’s former Finance Minister Thomas Isaac said, “Supreme Court judgment on GST sets the stage for a fundamental revision of GST implementation and functioning of GST Council from the perspective of cooperative federalism.The court’s remarks open up the issues of federal flexibility in determining SGST rates and procedures.”

Abhishek A Rastogi, partner at Khaitan and Co, who argued for the petitioners before the Gujarat High Court, Supreme Court, and various other courts said: “This opens up the question whether different states could have different rate structures for a similar supply and such a deviated position would fundamentally affect the concept of one nation, one tax. It is optimistically expected that the states will not have different GST rates for the similar supply as the entire purpose of implementation of GST gets defeated in such a situation.”