Objection milords: SC’s GST Council ruling is an overreach and can be hugely disruptive. GoI should file review petition

News: A Supreme Court Bench in a judgment has said that the recommendations of the Goods and Services Tax (GST) Council were not binding on the Central and state governments.

In the five years since GST has been rolled out, the GST Council has been the decision-making body on all key matters such as tax rates. Decisions of the Council are put to vote and seen to be binding on both GoI and states.

Details about the case

The origin of this verdict goes back to a decision handed by a division bench of the Gujarat high court in January 2020.

Companies that import coal for domestic industries challenged a tax levied by GoI under two statutory laws that are a part of the GST architecture.

Gujarat HC ruled against GoI, which subsequently brought the matter to the apex court.

In the apex court, GoI did categorically state that GST Council’s decisions are binding on both legislature and the executive. This argument was rejected by the apex court, thereby overturning the well-established hierarchy of decision-making in GST.

What has the Supreme Court said in its judgement?

Apart from stating that the Council’s decision is merely recommendatory, the court further noted Parliament and the state legislatures had the powers to legislate on issues related to GST.

What is the significance of SC’s judgement?

It marks a tectonic shift, unsettling India’s indirect tax architecture.

To now regard the GST Council’s decisions as just recommendatory in nature will undermine the current fiscal order which was painstakingly created across governments.

For economic agents, including firms and individuals, it introduces a level of uncertainty which is bound to undermine confidence. This, in turn, will act as a drag on economic activity.

If the GST Council’s decisions are not binding it opens the door to states cherry picking. That will defeat the whole purpose of transitioning to GST that aimed to create a common market in India by dismantling fiscal barriers between states.

– States voluntarily subsumed their unilateral powers over indirect taxation to usher in GST. For sure, there have been disagreements within the GST Council but the binding nature of its decisions have never been in question.

How the verdict does not raise any uncertainty?

It is worth noting here that what the court has done is to reiterate the constitutional position.

– Article 279A says the GST Council “shall make recommendations to the Union and the States …” regarding various aspects of the tax. But it also says that the Council will be “guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services”.

Moreover, Article 246A empowers the legislature of every state to make laws in the context of goods and services.

Notably, the Constitution also gives powers to the Council to determine the procedure in the performance of its functions. If gaps emerge in the functioning of GST, the Council is in a position to plug them.

Therefore, the judgment per se has not increased uncertainty in the GST system

Way forward

Alternative 1

This verdict is clearly one of judicial overreach and intrudes into the domain of the legislature. GoI should file a review petition right away.

Alternative 2

Perhaps the biggest challenge the Council needs to address now is the augmentation of revenue. With the completion of five years of implementation, the states from July 1 will not be eligible for compensation against revenue shortfall. 

Also, once the system stabilises, the need for making changes and, thus, the scope for differences in the Council will automatically decline.

The judgment nonetheless underlines the need for increased cooperation. The Centre must make sure that the concerns of all states are addressed.

It also shows that levies and provisions can be successfully challenged. The Union government and the Council must make sure that taxes are imposed strictly in accordance with the law.

Source: This post is based on the article “Objection milords: SC’s GST Council ruling is an overreach and can be hugely disruptive. GoI should file review petition” published in The Times of India on 19th May 22, and