The Supreme Court ruled that the recommendations of the Goods and Services Tax (GST) Council are not binding on the Union and the States and only have a persuasive value.

Observing that one of the important features of Indian federalism is fiscal federalism, the Supreme Court also held that the Parliament and the state legislatures possess simultaneous power to legislate on GST, and the recommendations of the Council are the product of a collaborative dialogue involving the Union and states.

The SC bench said the GST Council is not merely a constitutional body restricted to the indirect tax system in India but is also an important focal point to foster federalism and democracy.

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. To regard recommendations as binding edicts would disrupt fiscal federalism, where both the Union and the states are conferred equal power to legislate on GST, the court noted.

GST Council

• The introduction of the Goods and Services Tax (GST) regime in the country in 2017 was a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of central and state taxes into a single tax, the aim was to mitigate cascading or double taxation in a major way and pave the way for a common national market.

• Goods and Services Tax Council is a constitutional body for making recommendations to the Union and state governments on issues related to GST. 

• The GST Council is chaired by the Union finance minister.

• As per Article 279A of the amended Constitution, the GST Council, which will be a joint forum of the Centre and the states, shall consist of the following members:

a) The Union finance minister (chairperson).

b) The Union minister of state in charge of revenue or finance.

c) The minister in charge of finance or taxation or any other minister nominated by each state government.

Every decision of the GST 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:

i) The vote of the central government shall have a weightage of one-third of the total votes cast, and

ii) The votes of all the state governments taken together shall have a weightage of two-thirds of the total votes cast.

The Council is empowered to make recommendations to the Union and the States on:

1) The taxes, cesses and surcharges levied by the Union, the states and the local bodies which may be subsumed in the goods and services tax.

2) The goods and services that may be subjected to, or exempted from the goods and services tax.

3) Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply.

4) The threshold limit of turnover below which goods and services may be exempted from goods and services tax.

5) The rates including floor rates with bands of goods and services tax.

6) Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.

7) Special provision with respect to the states of Arunachal Pradesh, Assam, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

8) The date on which GST shall be levied on petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel.

9) Any other matter relating to the goods and services tax, as the Council may decide.

The mechanism of GST Council would ensure harmonisation on different aspects of GST between the Centre and the states as well as amongst the states.

How did the issue reach SC?

The Supreme Court’s ruling came on a batch of appeals, including that of the Centre, as it upheld a Gujarat High Court verdict to quash the levy of Integrated GST (IGST) on the importers on ocean freight under reverse charge.

The High Court had held that no tax can be levied under the IGST on the ocean freight for the services provided by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station in this country.

It had quashed the 2017 notification of the Centre by which IGST of 5 per cent would be levied on the services of transport of goods in a vessel.

Key points of SC ruling:

The recommendations of the GST Council are not binding on the Union and states for the following reasons:

a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units.

b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the state legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the central and the state laws on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and states. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and states are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.

c) The government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A(4) are binding on the legislature’s power to enact primary legislations.

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