The Supreme Court, while deciding the correctness of the levy of IGST on ocean freight in the case of Union of India vs Mohit Minerals, had the opportunity to deliberate on one of the most fundamental issue about the role Goods and Services Tax (GST) Council plays for the implementation of GST laws. GST was introduced as a pan-India indirect tax law, replacing multiple laws like central excise, service tax, VAT, etc. The objective was to have a common law and procedures, and uniform rates that enable ease of doing business and do away with complexities of the earlier system.
The enabling power to levy taxes under the erstwhile laws were divided amongst the Centre and the states. With the dissolution of those laws, GST was intended to be governed and legislated both by the Centre and the states in the spirit of co-operative federalism.
With this objective, Article 279A, which provided for the formation of the GST Council with representations from both the Centre and State, was inserted in the Constitution. Every issue relating to the implementation, like legislation, rates, and procedures, were deliberated and implemented as per the decision of the GST Council. There is a provision of differential voting rights and, in case of any difference in opinion, the issue was to be decided by a three-fourth majority. This way of functioning ensured uniformity of GST laws across India.
But the question remained whether the decision of the GST Council is only persuasive in nature or binding on the Centre and each State. This question has huge ramifications as the concept of uniform laws would suffer a serious drawback, if the decision of the GST Council loses its enforceable character.
The question on whether the decisions of the GST Council is binding or persuasive is a vexed one. It would be important to trace the evolution of the GST Council for this purpose. It has undergone several trials and tribulations before being incorporated into the Constitution. The objective of the GST law was to subsume various laws that were being empowered separately by the Centre and the states. A fine balance was sought to be struck to ensure that there is amalgamation of purpose and intent without compromising on the autonomy to legislate. Hence, the important question of dealing with difference in opinion was addressed initially by having a dispute settlement authority.
The idea of a separate dispute settlement authority was not acceptable to the states as they feared losing their autonomy, and, hence, a formula was struck to enable dispute resolution within the framework of GST Council that consisted of representatives of the Centre and the states themselves. This necessitated enabling voting powers, to come to a decision by majority instead of chasing full consensus. Hence, the delicate question of autonomy versus uniformity was sought to be addressed by enabling the GST Council to take decisions.
Not only the aspects of decision-making, the distribution of taxes collected also is subjected to the same principles of uniformity. This uniformity also provides a huge advantage to the most important stakeholder, i.e., the tax payer. Therefore, the decision on enforceability of GST Council decisions has ramifications beyond the issue of rule-making authority.
The Supreme Court has held that the decision of the GST Council is not binding and carries only a persuasive value. Hence, both the Centre and the states retain their independence to legislate on GST laws.
The fall out of the above judgment on non-binding nature of GST Council decisions could be as follows.
– Will this open a Pandora’s Box, of allowing the states to have amendments specific to their legislation? This could lead to a loss in uniformity and wreck the very foundation of the GST regime.
– Could this lead to different rates being charged by the Centre and states? Now that the guaranteed compensation by the Centre to the states for loss of expected revenue is set for an expiry in June, can a state decide to have a different rate on supply of any goods or services to augment its tax collections?
– What impact will it have on IGST rates, which is the sum of the Centre and state GST rates? While the power to legislate on inter-state transactions is with the Centre, the rate is a function of both the Centre and state GST rates. How will the distribution of IGST happen among the states if there are different rates?
– Will there be a different IGST rate for import of goods at ports in different states?
– What impact would it have on the GSTN framework? Currently, filing of returns, availment of input tax credits, issuance of notices, refund claims, etc, are all being undertaken through the common GSTN platform. It could be a Herculean or near-impossible task to operate in an environment where there are different laws and rates.
Would the states find it worth their while to participate in the discussions of the GST Council? Also, having voting rights loses relevance if the decision cannot be enforced.
What could be the fate of past decisions made by the GST Council? One could argue that since the same were taken unanimously, the interpretation by the Supreme Court should not have any impact on these.
These are only some of the leading questions, and there will be several more which would be raised in the days to come. It would be important not to lose sight of the fact that the design of the GST laws is such that both the Centre and the states are conjoined twins, having a common nervous system. The day GST got introduced, the fates of the Centre and the states got interwoven. The evolution over the last five years has only further strengthened this basic character of GST levy. Whether it is a question of rates, filing of returns, administration of GST law, everything has been brought under a common umbrella. Any attempt to separate them could lead to disintegration of the uniform character and unravelling of the framework which has been designed to perpetuate the uniformity.
The author is Partner (indirect tax), Dhruva Advisors LLP. Views are personal.