Recommendations of GST Council not binding on Centre, States: SC

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Recommendations of GST Council not binding on Centre, States: Supreme Court

The Supreme Court on Thursday, 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) and the recommendations of the GST Council are not binding on them.

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 recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the states. They are recommendatory in nature… The recommendations only have a persuasive value. To regard them as binding would disrupt fiscal federalism when both the Union and the states are conferred equal power to legislate on GST,” a Bench led by Justice D.Y. Chandrachud held.

The court emphasised that Article 246A (which gives the States power to make laws with respect to GST) of the Constitution treat the Union and the States as “equal units”.

“It confers a simultaneous power (on Union and States) for enacting laws on GST… Article 279A, in constituting the GST Council, envisions that neither the Centre nor the states are actually dependent on the other,” Justice Chandrachud interpreted.

He said the Centre and the States were “autonomous, independent and even competing units” while making GST laws. “Cooperative federalism is treated like a marble cake federalism due to the integrated approach of the federal units,” he compared. The judgment said that though the Centre may have a larger share of power in certain instances to prevent chaos and provide security, the States still wielded power.

“India is a multi-party system. It is possible that the party in power in the Centre may or may not be in power in other States… Even if the States have been given lesser power [in certain situations], they can still resist the mandates of the Union by using different forms of political contestations permitted by the Constitution… It is not imperative that one of the federal units [Centre or the States] must always possess a higher share of power over the other units,” the court stated.

“The federal system is a means to accommodate the needs of a frugalistic society... Democracy and federalism are interdependent to each other. Federalism would only be stable in a well functioning democracy. Additionally, the constituent units of a federal polity checks the exercise of powers of one another to prevent one group from exercising dominant power,” the court stated.

In the GST Council, the States and the Centre have to function in a “harmonious” manner. The discussions in the GST Council cut across party lines and impacted federalism and democracy as a whole. But harmony, necessary for the well-being of the nation, and its fiscal security could be achieved not just by collaboration but also “contestations” between the Centre and the States. Contesting discussions between the Centre and the States could also further the cause of federalism and democracy, the Bench reasoned.

After all, the court said, “Indian federalism is a dialogue between cooperative and un-cooperative federalism where the federal units are at liberty to use different means of persuasion, ranging from collaboration to contestation”.

The judgment also resolved a prolonged battle the government has been raging against companies to implement its IGST on ocean freight on reverse charge basis. The issue had gained significance following news reports of fresh tax queries raised on ocean freight even as the dispute was pending in the top court.

Ending the controversy in favour of the importers and providing them great relief, Justice Chandrachud held that since “the Indian importer is liable to pay IGST on composite supply comprising of the supply of goods and supply of services of transportation, insurance, etc, in a Cost Insurance Freight [CIF] contract, a separate levy on Indian importers for the supply of services by the shipping line would be in violation of the Central GST Act”.

At the centre of the controversy were two notifications issued on June 28, 2017, levying the IGST on ocean freight. The Gujarat High Court declared the levy ultra vires to the IGST Act in January 2020. It said they lacked “legislative competency”. It had concluded that the IGST on ocean freight under the provisions of the notifications was “not permissible in law”.

‘Ocean freight’ is the cost of moving goods internationally to India. An agreement is entered into between two foreign parties in this regard. The agreement is usually between an exporter, a foreign entity, and a shipping line to transport goods to India.

The importers had complained that the IGST was being levied on them twice on the very same transaction by segregating portions of it.

“This judgment may change the landscape of those provisions under GST which are subject to judicial review,” said Abhishek A. Rastogi, partner at Khaitan & Co, who argued for the petitioners before Gujarat High Court and the Supreme Court.

“As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be 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” he noted.

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