Storm in a GST cup

News: The Supreme Court has given a ruling on a commercial dispute, the Union of India versus Mohit Minerals, over the levy of the integrated goods and services tax (GST) on ocean freight charges paid by importers. It has triggered a nationwide debate.

About the Judgment

The judgment is virtually a recitation from the Article 279A (4) of the Constitution of India. The article states that the GST Council shall “make recommendations” to the Centre and the states on all matters relating to the GST.

In legal terms, the recommendations are not binding on either the Centre or the states. Had the recommendations been binding, it would have been in violation of the legislative supremacy (Tax Sovereignty) of both Parliament and state legislatures.

The SC ruling also endorses the broader Constitutional position of fiscal federalism. It explicitly placed Centre and individual states on a par with each other in respect of GST. The Article 246(A) provides for concurrent taxation powers of the Centre and the states in relation to the levy of GST.

The bench has articulated that the GST’s Council’s deliberations have “persuasive value”.

Implications of the judgement

The “landmark” ruling has unintentionally “stirred and shaken federalism”. It has the potential to alter the nature of fiscal federalism in India.

The GST compensation will end from July 1, 2022. This will trigger dissent in the GST Council. This can lead to disruption and confrontation within the Council.

The judgment can be used by the GST Council members to pursue their agendas, the Centre to renege its committed obligations, or states to get some elbow room on indirect taxation policy.

The council will be driven more by political consideration than policy persuasions, and performance of the GST regime. The political view that state governments compromised their tax sovereignty in the GST regime is gaining currency.

Way Forward

All decisions of the GST Council have been based on consensus, rather than on voting.

The GST Council should start and strengthen the dispute resolution mechanism. Article 279A (11) requires the GST Council to establish a mechanism to adjudicate on any disputes arising out of its recommendations and its implementation. This should be in the form of the GTS Tribunal.

The GST Council must use its status as a constitutional body and skills as an institution to draw up guidelines for adjudication mechanisms to address disputes amongst GST Council members.

All the stakeholders should be made aware that more than loss of tax sovereignty of states, the GST was premised on pooling of tax sovereignty by both the centre and states.

The next Finance Commission can recognise the changes in the institutional landscape of the fiscal federalism post-GST Council. A new set of principles will be developed that will empower the states without disempowering the Centre must be worked on.

The GST Council could work out a state-specific GST outside the existing GST framework. This would transition from a co-operative federalism mindset to a collaborative federal system.

Source: The post is based on an article “Storm in a GST cup” published in the Business Standard on 28^th May 2022.