TOPIC: SUPREME COURT RULING ON GST COUNCIL

THE CONTEXT: The Supreme Court ruled on 19 May 2022, that recommendations of the Goods and Services Tax (GST) Council only have persuasive value, and cannot be binding on the Centre and states. Supreme Court also held that Union and State legislatures have equal, simultaneous and unique powers to make laws on Goods and Services Tax (GST) and the recommendations of the GST Council are not binding on either the Union government or the states.

BACKGROUND

• The ongoing discords between the Centre and states over issues ranging from the allocation of financial resources to fixing of Goods and Services Tax (GST) rates has once again brought to the fore issues pertaining to our federal structure, the resolution of which is essential for the country’s growth. The traditional approach to federalism that sees competition and cooperation at loggerheads is no longer relevant in the post-1990s scenario. A combination of cooperative and competitive spirit ensures the economic prosperity and welfare of the nation in an equal and equitable manner.
• The apex court’s decision came while confirming a Gujarat High Court ruling that the Centre cannot levy Integrated Goods and Services Tax (IGST) on ocean freight from Indian importers. The Supreme Court has held that GST on ocean freight paid in case of import of goods is unconstitutional.

THE CASE

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 the 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. The Gujarat High Court 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)

SUPREME COURT RULING

COOPERATIVE FEDERALISM: The Supreme Court in a judgment championing the importance of “cooperative federalism” for the well-being of democracy, held that Union and State legislatures have “equal, simultaneous and unique powers” to make laws on Goods and Services Tax (GST).

COLLABORATIVE DIALOGUE: The recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the states.

RECOMMENDATIONS ONLY RECOMMENDATORY IN NATURE:

• They are recommendatory in nature.
• The recommendations only have a persuasive value and the recommendations of the GST Council are not binding on them.
• To regard them as binding would disrupt fiscal federalism when both the Union and the states are conferred equal power to legislate on GST.

ARTICLE 246A

• The court emphasized that Article 246A of the Constitution (122nd constitutional amendment) treats the Union and the States as “equal units”.
• Article 246A of the Indian Constitution gives the States the power to make laws with respect to GST.

ARTICLE 279A: Article 279A (constituting the GST Council) envisions that neither the Centre nor the states are actually dependent on each other.

SIGNIFICANCE OF THE SUPREME COURT RULING

• The order has reminded the States that they can reject decisions made by the GST Council and set different rates for goods and services in their jurisdiction. The point to note is that the Court has only highlighted what was already in the Constitution.

 THE ORDER AND DISRUPTION TO THE FUNCTIONING OF THE GST REGIME

1. If a State remains in the GST system but sets higher tax rates on a few goods and services: This will mean that taxpayers will be unable to claim the input tax credit on the goods outside GST, increasing their tax incidence. Taxpayers’ compliance burden for return filing will get very troublesome. Besides, higher tax rates will make the State less preferred by domestic and foreign companies.
2. If the State moves out of the GST system completely: there will be complete chaos. Other States will not want to share their GST revenue with the breakaway State, thus bringing down their revenue share from the Centre. Inter-State business with the breakaway State will collapse and FDI will move away from the State.

 IMPACT OF THE SUPREME COURT RULINGS

1. Increase in bargaining strength of the states: It paves the way for more intensive bargaining and negotiations, placing states on an equal footing with the Centre in taking decisions on the structure and operations of the tax regime.
2. The immediate impact of this will be on bargaining by states for extending the period of compensation for the loss of revenue. The five-year period of compensation gets over at the end of June 2022. States have therefore been demanding the extension of the compensation period by another two-three years and this decision will now help the states to bargain hard for the extension.
3. This judgement may change the landscape of those provisions under GST which are subject to judicial review. This is because the constitutionality of such provisions can be challenged based on GST Council recommendations.
4. The judgment also resolved a prolonged battle the government has been raging against companies to implement its IGST on ocean freight on a reverse charge basis. The decision will foster the spirit of cooperative federalism by emphasizing the importance of cooperative federalism as a vital component of democracy’s well-being.
5. Currently, filing of returns, availing of input tax credits, issuance of notices, refund claims, etc, are all being undertaken through the common GSTN platform. It could be a Herculean or near-impossible task to operate in an environment where there are different laws and rates.
6. This might open a Pandora’s Box, allowing the states to have amendments specific to their legislation. This could lead to a loss in uniformity and wreck the very foundation of the GST regime.

OTHER CHALLENGES WITH GST

TAX UNILATERALISM

• Cess revenue is not shared with states.
• Close to 18 per cent of central government revenue is being raised from
• Cess and not distributed (among states). Total control of finances is with
• The central government.
• It needs to be discussed and reviewed.

IMPLEMENTATION DELAYS

• The late implementation of E-invoicing, QR code and E-way Bill blemished the original idea behind this which was contemplated as a revolutionary change in the tax system to curb tax evasion.

CONSTITUTIONAL

• States’ fiscal autonomy is undermined as the GST Council instead of being just a recommendatory body was trying to influence the decisions of the state.

ADMINISTRATIVE

• GST Implementation Committee ( civil servants/bureaucrats) monitor the implementation of the GST Council decisions and recommendations, but the states have declined to adhere to such orders which have not been made by the council and are given by the committee.

279A (11)

• There is a constitutional provision for creating an Appellate Tribunal, which has not yet been made.

THE WAY FORWARD:

1. The spirit of cooperative federalism is already entrenched in GST. The Court has not brought about any change to the law. The States and the Centre need to keep the spirit going to ensure that the GST system functions. Despite having a brute majority, the Centre should pay heed to the problems faced by States and suggest corrective measures, whenever possible.
2. The Council should transcend the political rivalries of the day. The States should have the right to dissent in the Council and their voice should not be drowned in the pursuit of unanimity in decision-making.
3. A Reformed Approach toward States: The Centre could strive to be more conciliatory toward States’ concerns and fiscal dilemmas. The Council should also meet more often to nurture the critical fiscal federalism dialogue in the right direction and minimize trust deficits.
4. There are many pending reforms that require the Centre to work more cohesively with States to take India’s economy forward and lift those left behind – land, labour markets as well as the agrarian sector.
5. Horizontal and Vertical Level Cooperation: Cooperation between the Centre and states is required at both vertical (between Centre and states) and horizontal (among states) levels and on various fronts. This includes fine-tuning developmental measures for desired outcomes, development-related policy decisions, welfare measures, administrative reforms, strategic decisions, etc.
6. Reforms in GST Council: It may be time already for reform of the GST. What is needed is statesmanship at the GST Council even if the Court has said that the Council is a place as much for political contestation as for cooperative federalism.
7. The centre shall promote decisions in the GST Council to be made on consensus building, adhering to the ideals of cooperative federalism; constitutional crises shall be avoided by respecting the fiscal autonomy of the state legislatures.

THE CONCLUSION: As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations.

Adoption of best practices and implementation of reforms at the ground level would positively impact the ease of doing business for MSMEs. This would raise India’s manufacturing capacity to the next level and radically transform India’s growth story. The rise in economic activities would result in higher GST collection and thereby boost the government’s welfare measures. Competition among states along with hand-holding by the Centre has the potential to enable the realization of the goal of a five-trillion economy by 2024.

Mains Practice Questions:

1. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?
2. Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India in July 2017.
3. Explain the salient features of the Constitution (One Hundred and First Amendment) Act, 2016. Do you think it is efficacious enough ‘to remove cascading effect of taxes and provide for the common national market for goods and services?
4. India can only achieve its ambitious growth targets by enhancing competitiveness at all levels of government. Critically analyse.

Sources https://www.thehindu.com/opinion/editorial/a-timely-reminder-the-hindu-editorial-on-supreme-courts-gst-verdict/article65439674.ece https://www.thehindu.com/news/national/gst-council-an-avenue-for-political-contestation-across-party-lines-sc/article65431729.ece https://www.financialexpress.com/opinion/sc-judgement-on-gst-council-the-unravelling-of-gsts-uniformity-promise/2531472/ https://indianexpress.com/article/explained/supreme-court-ruling-gst-council-decision-centre-states-7927786/#:~:text=The%20Supreme%20Court%20ruled%20on,on%20the%20Centre%20and%20states https://www.thehindubusinessline.com/blexplainer/will-sc-order-disrupt-the-functioning-of-the-gst-regime/article65453284.ece

BACK TO BASICS

ABOUT GOODS AND SERVICES ACT

• It is a constitutional body under Article 279A.
• Article 279A empowered the President to constitute a GST Council by order.
• It makes recommendations to the Union and State Government on issues related to Goods and Service Tax and was introduced by the Constitution (101^st Amendment) Act, 2016.
• The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in charge of Finance or Taxation of all the States.
• The Union Revenue Secretary acts as the ex-officio Secretary to the council.
• It is considered as a federal body where both the centre and the states get due representation.
• Every decision of the Goods and Services Tax Council shall be taken at a meeting by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles:
• the vote of the Central Government shall have a weightage of one third of the total votes cast, and
• the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting.
• The GST Council is hailed for its cooperative federalism which brings together the Centre and States on key policy decisions.

GST COMPENSATION TO STATES

 How is it funded?

In order to mobilise resources for compensation, a cess is being levied on such goods, as recommended by the Goods and Services Tax Council, over and above the GST on that item. It is called compensation cess. To date, compensation cess is levied on products such as pan masala, tobacco, aerated waters and motor cars apart from coal.

 Who pays compensation to whom? When?

The consumer is required to pay for compensation. It is collected by the Centre which releases it to States. The proceeds of the compensation cess will be credited to a non-lapsable fund known as the Goods and Services Tax Compensation Fund in the public account. All amounts payable to the States as compensation will be released bi-monthly, provisionally, from said fund against figures given by the Central accounting authorities. Final adjustments will be done after receiving audited accounts of the year from the Comptroller and Auditor General of India.

Why are States demanding an extension of the compensation?

States say their revenue situation is yet to improve on two counts — due to the introduction of the GST and because the pandemic has affected revenue collection. At the same time, their expenses have gone up and they expect higher deficit as revenue growth is low. Considering all these, States are seeking an extension of compensation for five more years. Any decision, in this regard, has to be taken by GST Council.

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