Supreme Court rules on GST Council recommendations

Supreme Court rules on GST Council recommendations

The bench was deciding on a bunch of appeals filed by the Government of India against a judgment of the Gujarat High Court

The Supreme Court, in a significant verdict, has held that the recommendations of the Goods and Services Tax (GST) Council are not binding on the Union and the state governments.

The bench comprising Justice DY Chandrachud, Justice Surya Kant, and Justice Vikram Nath ruled that the Parliament of India intended that the recommendations of the GST Council would have persuasive value. It stated that both the Parliament of India and the State Legislatures could equally legislate on GST matters.

The judgment stated, "The recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the states. They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the states are conferred equal powers to legislate on GST."

"It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make the decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation", the court added.

The bench further said, "Article 246A, which was introduced by the Constitution Amendment Act, 2016 vests the Parliament and the state legislatures with the concurrent power to make laws with respect to GST."

"If the GST Council was intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A. Neither does Article 279A begin with a non-obstante clause nor does Article 246A provide that the legislative power is subject to Article 279A," it observed.

The court explained that there would have been a provision in the Constitution of India if the GST Council recommendations were meant to be binding. Only the secondary legislation, based on the recommendations of the Council under the provisions of the Central Goods and Services Tax (CGST) Act and the Integrated Goods and Services Tax (IGST) Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase 'recommendations to the Union or the states' indicates that the GST Council is a recommendatory body aiding the government in enacting the legislation on GST. Its recommendations are binding on the government's rule-making power; but not on the legislative powers.

Therefore, the government, while exercising its rule-making power under the provisions of the CGST Act and IGST Act, is bound by the recommendations of the GST Council. However, that does not mean that all recommendations of the GST Council made by virtue of the power of Article 279A (4) are binding on the legislature's power to enact the primary legislation.

The apex court was deciding on a bunch of appeals filed by the Union of India against the judgment of the Gujarat High Court. The matter was whether an Indian importer could be subject to the levy of IGST2 on the component of the ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge mechanism.

Prior to the GST regime, the service tax on ocean freight was exempted. However, the exemption was lifted by the 2017 notification to levy service tax on the importer.

A division bench of the high court quashed the notifications as unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act.

While defending the impugned notifications, the Central government raised the arguments relating to the binding nature of the recommendations of the GST Council.

The Supreme Court also noted that the recommendations of the GST Council were not based on a unanimous decision but on a three-fourth majority of the members present and the voting held. Therein, of the total votes cast, the Union's votes were one-third and the states' votes were two-thirds.

The court briefed on the two significant attributions of the voting system in the GST Council. First, it has an unequal voting structure, where the states collectively have a two-third voting share and the Union has a one-third voting share. Second, since India has a multi-party system, it is possible that the party in power at the Centre may or may not be in power in various states. Therefore, the GST Council is not only an avenue for the exercise of cooperative federalism but also for 'political contestation' across party lines.

The judgment also discussed the concept of 'uncooperative federalism', whereby the states could use various forms of contestations within the Constitutional framework.

While quoting the leading experts in federalism, administrative law, and constitutional law, Jessica Bulman and Heather K, Justice Chandrachud said, "The uncooperative federalism is valuable since it is desirable to have some level of friction, some amount of state contestation, and some deliberation-generating froth in our democratic system."

He concurred, "When the federal units are vested with unequal power, the collaboration between them is not necessarily cooperative. Harmonized decision thrives not just on cooperation but also on contestation. Indian federalism is a dialogue in which the states and the Centre constantly engage in conversations. The states can use various forms of contestation if they disagree with the decision of the Centre. Such forms of contestation are also within the framework of Indian federalism."

While Additional Solicitor General of India N Venkataraman, appeared for the Union, Senior Advocates V Sridharan, Harish Salve, Arvind Datar, Uchit Sheth, Rajesh Kumar Gautham, Dr. C Manickam, Rajat Mittal, and Abhishek Rasthoi appeared for the respondents.