A new road for India’s fiscal federalism

News: Recently, the Supreme Court of India delivered its verdict in the Union of India vs Mohit Minerals case, where it also made several observations on the GST Council recommendations

About GST Regime

The GST regime was introduced through the 101st constitutional Amendment in July 2017 which aimed for unification of tax administration in India – ‘One Nation, One Tax’.

GST Council: The Amendment Act introduced Article 279A which mandated creation of a GST Council.

GST Council Composition: This body comprises the Union Finance Minister, the Union Minister of State for Finance, and Ministers of Finance from every State government.

Functions: The act led to deletion and amendment of many entries in the State list of Schedule VII of the Constitution. It enabled the state government to legislate on GST through a newly introduced Article 246A. The State governments could not legislate on sale or purchase of goods (barring a few exceptions, such as petroleum and liquor).

The Council was empowered to make recommendations to the Union and States on various matter. The matters included goods and services that may be subjected to or exempted from GST and the rates at which tax is to be levied.

Voting share: The Union government was granted a virtual veto in the GST Council’s voting structure and system

Confusions between advisory and binding nature of GST Council’s recommendations

The use of the word “recommendations” suggested that the GST decisions would be advisory, at best.

The mandate of establishment of a mechanism under Article 279A to adjudicate disputes between governments on decisions taken by the Council suggested that advice rendered were binding in nature.

Impact of making recommendations binding in nature

It could lead to dissolution and destruction of the well-laid plans of the Constituent Assembly, which carefully divided Fiscal responsibilities between the Union and the States.

What are the Supreme Court’s observations in the Union of India vs Mohit Minerals?

The Court proceeded on a technical reading of the provisions of the Central Goods and Services Tax Act.

The Article 246A provides concomitant power both to the Union and to the State governments to legislate on GST. It does not discriminate between the two in terms of its allocation of authority.

The concomitant powers allocated in Article 246A cannot be limited by Article 279A, which establishes a GST Council, and which treats the Council’s decisions as “recommendations”.

Both Parliament and the State legislatures enjoy equal power to legislate on Goods and Services Tax (GST). The Goods and Services Tax Council’s recommendations are just advisory that could never be binding on a legislative body.

According to the Court, the State legislatures can deviate from any advice rendered by the GST Council and to make their own laws by asserting, in the process, their role as equal partners in India’s federal architecture.

If the GST Council was intended to be a decision-making authority having binding recommendation. Such a qualification would have been included in Articles 246A or 279A.

Way Forward

The legislatures can give binding effect to the Council’s recommendation through statutory law. But, according the SC, a constitutional power can never be limited through statute.

Indian federalism is a dialogue between cooperative and uncooperative federalism. The federal units are at liberty to use different means of persuasion ranging from collaboration to contestation.

GST was conceived as a product of what some described as “pooled sovereignty” where our nation can take a genuine turn towards a more “cooperative federalism”.

Source: The post is based on an article “A new road for India’s fiscal federalism” published in the “The Hindu” on 25^th May 2022.