Goods and Services Tax (GST)

Supreme Court’s ruling on GST deepens the churn in the tax regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Implications of Supreme Court's ruling for GST regime

Context

Last week, the Supreme Court ruled that the decisions taken by the GST Council are merely recommendations with “persuasive value” and are not binding.

GST as a advisory body

  • The court has rejected the Centre’s contention that the entire structure of GST would crumble if the Council’s decisions were not treated as enforceable.
  • In some ways, the verdict states the obvious.
  • Article 246-A inserted after the 122nd constitutional amendment states, “Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every state, have the power to make laws with respect to the GST imposed by the Union or by such state.”
  • Thus, the power to levy the central GST (CGST) vests with Parliament, the power to levy state GST (SGST) vests with state legislatures and Parliament has exclusive power to make laws with respect to the GST on items that are part of inter-state trade or commerce.
  •  Thus, the GST Council is only an advisory body and the actual decisions regarding model GST levies, principles of levy, apportionment of GST levied on inter-state supplies, principles relating to place of supply, exemptions and rate structure and any special provisions will have to be taken by either Parliament in the case of CGST and IGST or the states in the case of SGST.
  • In effect, decisions on the structure and operation of the tax can be made by the Centre and individual states without discussion and deliberation in the Council and both can ignore any recommendation made by the Council.
  • The judgment reiterates that the sovereign right to levy the tax still exists with the Union and state governments and it is for them to consider the recommendations of the Council.
  • The chance of having a harmonised GST and reforms in the tax regime will crucially depend upon continued negotiation and bargaining between the Union and states.
  • Intergovernmental cooperation has been kept alive to ensure a harmonised GST and unless both the Centre and the states see the gains, reforms will be hard to come by and if the Centre desires the reforms more than the states, it will have to ensure a “buy in” from the states to agree for the reform.

Implications of the judgement

  • Given that the GST Council has been declared as only an advisory body with a persuasive value, what happens to the dream of having a harmonised one nation, one tax, if a state or a group of states decides to deviate?
  • But the judgment paves the way for more intensive bargaining and negotiations, placing states on an equal footing with the Centre in taking decisions on the structure and operations of the tax.
  • At present, decisions get approved in the GST Council when passed by a majority of three-fourths of the weighted votes of the members present and voting, with the Centre having one-third weight and individual states (and UTs) having an equal share of the remaining two-thirds weight.
  • However, in the past, all decisions in the Council have been taken by consensus (except in the case of determining the rate on lotteries), and the Supreme Court decision reinforces this convention.
  • The immediate impact of this will be bargaining by states for extending the period of compensation for the loss of revenue.
  •  As the five-year period of compensation gets over at the end of June, this decision will now help the states to bargain hard for the extension.

Way forward

  •  Though the period of collecting compensation cess has been extended till March 2026 to meet the interest and repayment requirements of the funds borrowed from the RBI to meet the compensation requirements, the lasting solution lies in increasing the revenue productivity of the tax by pruning the list of exempted items, rationalising the rates and taking administrative measures.
  • These reforms will require strengthening the cooperative spirit.

Conclusion

This has come at a time when reforms have to be set in motion and hopefully, the Court’s decision will strengthen the cooperative spirit in reforming the domestic consumption tax system in the country.

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