In a significant judgment, the Supreme Court today ruled that GST Council’s recommendations were not binding on union and state governments while a bench headed by Justice DY Chandrachud said GST Council’s recommendations only have a persuasive value as India runs on cooperative federalism and the union and state governments had simultaneous powers to legislate on Goods and Service Tax (GST).
The bench emphasised that the GST Council must work in a harmonious manner to achieve a workable solution between the union and state governments. The apex court said that state governments and the union could equally legislate on matters of GST, and all recommendations of the GST council are not binding on the state legislature, but only have persuasive value.
The highest court of the country said that in accordance with Article 279, the state and the union could not act in exclusion of each other and also pointed at competitive federalism.
The judgment, which came on an appeal against a Gujarat High Court order, said, “Indian federalism is a dialogue between cooperative and non-cooperative federalism”, one in which “states and the centre always engage in a dialogue”.
The Supreme Court upheld the high court order that had quashed the central notification levying Integrated GST on importers on ocean freight.
Interestingly, reacting to the Supreme Court ruling, the Ministry of Finance said it did not entail changes “in any way” in the functioning of the GST regime and the institutional mechanism for its operation while some states welcomed the decision for clearly enunciating and safeguarding their rights.
Terming the GST Council “the finest example of collaborative and cooperative federalism”, the finance ministry said that the apex court had “only elaborated” on its functional mechanism in its observations. “This judgment does not in any way lay down anything new in so far 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,” it noted, seeking to quell anxiety about the future of the indirect tax system introduced on 1 July 2017.
The GST Council is a collaborative institutional mechanism and the union and states follow its recommendations that are arrived at with consensus, the union ministry said, stressing that there has been only “a solitary instance” where a decision required voting. “Even in this case, the dissenting States implemented the decision of GST Council,” the ministry said in a statement, adding that it would review the 153-page judgement in detail. “In all other instances, which run into more than a thousand, the decisions have been taken with consensus,” it said.
Emphasising that the Supreme Court had only explained the constitutional scheme for GST, it said the court had observed that the council’s recommendations had persuasive value for primary legislation, but its recommendations were binding for subordinate legislation such as the issue of notification, framing of rules, prescribing rates and taxes, etc.
Kerala Finance Minister KN Balagopal hailed the ruling for a different reason — upholding the relevance of cooperative federalism and said it would have a far-reaching impact on the country’s tax structure and Centre-State relations. “Ever since the GST regime came into being, the Centre had been arbitrarily imposing its decisions on the States, affecting their revenue and forcing them to impose treasury restrictions,” he said in Thiruvananthapuram, expressing the hope that this would pave the way for States to be able to protect their rights and ensure financial stability.
Tamil Nadu Finance Minister Palanivel Thiaga Rajan said in Madurai that the verdict safeguarded States’ rights by stating that the recommendations of the GST Council were not binding on the union and the state. “The council was only a recommendatory body and cannot supersede the State’s rights and power for enacting the laws with regard to GST,” he pointed out. The State too had powers to enact laws. The council could only make recommendations and the decision was not binding on the union and the state.
Tax experts were tentative about the implications of the verdict. “This would have far-reaching implications on various other matters where the States are not in agreement with the decisions of the GST Council, especially in light of the compensation period coming to an end in June,” said Mahesh Jaising, partner at Deloitte India.
While the verdict lays down that GST Council decisions are not binding on the State legislature, an absence of a legal basis should not hamper the Council’s functioning since most decisions of the Council have been taken by consensus, observed Bipin Sapra, a tax partner at EY India.