Goods and Services Tax (GST)

Implications of GST Council ruling

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST council

Mains level : Paper 2- GST council's role in federal structure of India

Context

The Supreme Court of India recently ruled that “The recommendations of the GST Council are not binding on either the Union or the States…”.

About GST Council

  • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
  • Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
  • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
  • 1] The Union Finance Minister will be the Chairperson.
  • 2] As a member, the Union Minister of State will be in charge of Revenue of Finance.
  • 3] The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.
  • The Council has to function as a platform to bring the Union and State governments together.
  • As a mark of cooperative federalism, the Council shall, unanimously or through a majority of 75% of weighted votes, decide on all matters pertaining to GST and recommend such decisions to the Union and State governments.
  • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
  • Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST.
  • This article is in sharp contrast to the constitutional scheme that prevailed till 2017.

Background of the case

  • In Union of India Anr. vs Mohit Minerals Pvt. Ltd., the Supreme Court of India on May 19, 2022 ruled on a petition relating to the levy of Integrated Goods and Services Tax (IGST) on ocean freight paid by the foreign seller to a foreign shipping company.
  • 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 double taxation.
  • GST is paid by the supplier, but if the shipping line is located in a non-taxable territory, then GST is payable by the importer, the recipient of service.
  • Ocean freight is a method of transport by which goods and cargo is transported by ships through shipping lines.

Important aspects of the judgement

  • Power to legislate simultaneously: Article 246A gives powers to the Union and State governments simultaneously to legislate on the GST.
  • In other words, the two tiers of the Indian Union can simultaneously legislate on matters of the GST (except the IGST, which is in the legislative domain of the Union government).
  • In this case, the Government of India had argued that “Neither can Article 279A override Article 246A nor can Article 246A be made subject to Article 279A.
  • However, cooperative federalism is to operate through the GST Council to bring in harmony and alignment in matters pertaining to the GST from both governments.
  • Given this background, the Union government had almost delegated the powers to create laws under the GST Act Section 5(1) to the GST Council.
  • Persuasive value only: The Supreme Court of India adjudicated that the GST Council’s recommendations are non-qualified and the simultaneous legislating powers of the Union and State governments give only persuasive value to the Council’s recommendations.
  • The power of the recommendations rests on the practice of cooperative federalism and collaborative decision-making in the Council.

Issues with voting rights in GST council

  • Inbalance in voting rights: The Union government holds one-third weight for its votes and all States have two-thirds of the weight for their votes.
  • This gives automatic veto power to the Union government because a resolution can be passed with at least three-fourths of the weighted votes.
  • This imbalance in the voting rights between the Union and State governments, makes democratic decision-making difficult.
  • Equal weight to all states creates political problems: Though all the States are not equal in terms of tax capacity, everyone has equal weight for their votes.
  • This creates another political problem as the smaller States with lesser economic stakes can be easily influenced by interest groups.
  • Debate on political lines: The debates in the GST Council will be on political lines rather than on the economics of taxation.
  •  When the States governed by Opposition parties are vocal on counter-points, the States governed by the same party at the Union government are mute spectators.

Way forward

  • Work in a harmonised manner: The Supreme Court has recorded, “Since the Constitution does not envisage a repugnance provision to resolve inconsistencies between the Central and State laws on GST, the GST Council must ideally function, as provided by Article 279A(6) in a harmonised manner to reach a workable fiscal model through cooperation and collaboration.”
  • Cooperative federalism: The nuanced understanding of cooperative federalism shows that there is no space for one-upmanship in either of the two tiers of the Indian federal government and particularly for the Union government under a quasi-federal Constitution.

Conclusion

Given the lopsided power structure favouring the Union government in the GST Council, it is against the spirit of democracy and federalism that the finances of governments can be left to such bodies.

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