GST Council recommendations not binding, says SC, would ‘disrupt fiscal federalism’ if so treated

A bench of justices D.Y. Chandrachud, Surya Kant & Vikram Nath upheld 2020 Gujarat HC judgment in favour of importers challenging levying of GST on grounds that they had paid customs duty.

The Supreme Court of India | Manisha Mondal | ThePrint

New Delhi: A federal system is a means to accommodate the needs of a pluralistic society to function in a democratic manner and Indian federalism is a “dialogue in which states and the Centre constantly engage in conversations,” the Supreme Court said Thursday.

A bench of justices D.Y. Chandrachud, Surya Kant and Vikram Nath made these observations while ruling that all the recommendations of the Goods and Services Tax (GST) council are not binding, but have a persuasive value and that both the Centre and states are free to legislate on the GST.

The GST council, notified with effect from 12 September, 2016, has representatives from both the central and state governments and makes recommendations on the GST rate, exemption and thresholds, taxes to be subsumed and other matters related to the GST.

The 153-page SC judgment underlined the powers of the federal units in the context of imposition of taxes and commented on the “unequal voting pattern” in the GST council.

It said though the Constitution, which is “necessarily federal”, confers “the Union with a higher share of power in certain situations to prevent chaos and provide security”, states having lesser power can “still resist the mandates of the Union by using different forms of political contestation.”

This, the court added, was permitted by constitutional design and such “contestation” furthers both “federalism and democracy”.

On the GST council’s recommendation, the court categorically remarked that to treat them as binding “edicts” would “disrupt fiscal federalism”, where both the Union and states enjoy equal power to legislate on GST.

Further, it would “dislodge the fine balance on which Indian federalism rests”.

The court gave its opinion on the nature of the GST council’s recommendations while delivering its verdict on an appeal filed by the Union government challenging a Gujarat High Court judgment of 23 January, 2020, that upheld the plea of certain importers claiming they cannot be subjected to levying of GST.

The petitioners — M/s Mohit Minerals Pvt. Ltd and others — had challenged the levying of GST on the ground that they have already paid customs duty, which is levied on the component of ocean freight and the levying of IGST on the freight element in the course of transportation would amount to double taxation.

While arguing its appeal, the Centre contended that GST was levied on the recommendations of the GST council, which is binding. It had argued that if the recommendations are not binding then the entire structure of GST will collapse, as each state would levy a conflicting tax and collection scheme.

The court however, disagreed and rejected the Centre’s appeal to uphold the Gujarat HC verdict. It said : “The argument that if the recommendations of the GST Council are not binding, then the entire structure of GST would crumble does not hold water. Such a reading of the provisions of the Constitution diminishes the role of the GST Council as a constitutional body formed to arrive at decisions by collaboration and contestation of ideas”.

In response to the SC order, revenue secretary Tarun Bajaj told ThePrint that the GST law nowhere says it will be mandatory. “It is a constitutional body, executive body created by the Constitution, which consists of Centre and states. On the basis of its recommendation, we have created laws related to the GST,” he said.

The GST council has always decided issues keeping cooperative federalism in mind. “GST will complete five years and barring one decision, all have been unanimous. It is written in the GST Act “on the recommendation of the council”, so we presume that council recommendation is the mandate by which the legislatures of the state or Centre will perform,” Bajaj said.

‘Fiscal federalism important feature of Indian federalism’

Writing for the bench, Justice Chandrachud explained that “fiscal federalism” is one of the important features of “Indian federalism”. Therefore, the GST Council, is an important “focal point to foster federalism and democracy,” and not “merely a constitutional body restricted to the indirect tax system in India”.

Article 246A, which was inserted in the Constitution in 2016 to introduce the GST regime, entrusts both Parliament and state legislatures the power to legislate on GST. Therefore, the recommendations of the GST Council “are the product of a collaborative dialogue” between the Centre and states, the court elaborated.

Though the Council was introduced with the objective to enhance cooperative federalism and harmony between states and Centre, it does not have an equal voting pattern structure, with states collectively having a two-third voting share and Centre having one-third, the court noted.

Rejecting the Centre’s contention that the GST council’s recommendation is binding, the court talked about the multi-party-political system prevalent in the country, under which a party in power at the Centre may or may not be in power in states. Therefore, the court reasoned the GST Council is not only an avenue for exercise of cooperative federalism but also causes political contestation across party lines. Hence, deliberations in the Council would impact both federalism and democracy, it added.

“When the federal units are vested with unequal power, the collaboration between them is not necessarily cooperative. Harmonised decision thrives not just on cooperation but also on contestation. Indian federalism is a dialogue in which the states and the Centre constantly engage in conversations. Such dialogues can be placed on two ends of the spectrum — collaborative discussions that cooperative federalism fosters at one end of the spectrum and interstitial contestation at the other end”, the judgement opined.

The court said that “democracy and federalism are interdependent on each other for their survival such that federalism would only be stable in well-functioning democracies. Additionally, the constituent units in a federal polity check the exercise of power of one another to prevent one group from exercising dominant power”.

With regard to the GST council’s recommendations, the top court said the fact that the legislature chose to delete Article 279B of the Constitution — that proposed to set up an adjudicatory mechanism in the form of a GST Dispute Settlement Authority in case a dispute arose between the state and Centre out of a deviation from the GST Council’s recommendation, indicates that Parliament intended that GST council’s recommendation to only have persuasive value.

Moreover, it added, the Parliament went ahead with the inclusion of Article 279(11) of the Constitution that speaks of the GST Council devising its own mechanism to redress disputes. This, the court added, was done with the objective that the GST regime will foster cooperative federalism and harmony between the constituent units.

Further, the amended Constitution, following which GST was introduced, does not carry a repugnancy clause to resolve disputes between Centre and state laws on GST. This, the court added, means the GST Council must ideally function in a harmonised manner to reach a “workable fiscal model through cooperation and collaboration”.

(Edited by Poulomi Banerjee)