Collaborative federalism will be under threat, once a constitutional institution like the GST Council is rendered teethless.
What does the working of the GST Council till now tell us about the institution?
The Goods and Services Tax (‘GST’) Council has been in existence for more than five years now, and has met as many as 45 times at different locations in the country to deliberate, decide and recommend on a myriad of GST issues.
No one can doubt that it is a representative and consultative constitutional body which has both locus and status. The members of the Council are the most concerned with GST issues, being an aggregation of Finance/Revenue ministers of the Union and state governments. As a part of a democratic set up, like the legislatures, the functioning has to be democratic to keep the constitutional institution relevant.
Being a highly diverse and a political country, it would be naive to assume that the constitutional bodies which work on democratic principles would be totally free from political affiliations, at least on contentious matters.
Why is the Supreme Court’s judgment in Union of India versus M/s Mohit Minerals Pvt. Ltd. significant?
The Supreme Court’s recent judgment in the case of Union of India versus M/s Mohit Minerals Pvt. Ltd., passed by a three-judge division bench comprising Justices D.Y. Chandrachud, Surya Kant and Vikram Nath, held that the GST Council’s decisions are not binding on the Centre or the states.
The judgment comes at a time when the country has settled with an impression that as almost five years have elapsed since GST was introduced on July 1, 2017, the rampant anxieties and discussions surrounding it are things of the past, and that GST has become a fait accompli, which has been accepted by all the stakeholders.
THE GIST OF THE JUDGMENT: The five basics
The GST regime has subsumed all the indirect taxes. 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.
Article 246A entrusts the Parliament and state legislatures with the power to legislate on the GST. The power of the states is, however, subject to the conferment of an exclusive domain to Parliament to levy the GST where the supply of goods or services takes place in the course of interstate trade and commerce.
The constitutional role and functions of the GST Council must be understood in the context of the simultaneous legislative power conferred on Parliament and the state legislatures. It is from that perspective that the role of the GST Council becomes relevant.
That the Centre yields more voting power in the GST Council, which is against the cooperative federalism principles on which a country like India should function.
That without the support of the Centre, the states can never muster 3/4th voting strength in the Council.
What was the issue before the Supreme Court in this case?
In this case, the Supreme court was considering the Revenue’s statutory appeal, by which it challenged the judgment of the Gujarat High Court holding that the levy of GST on Indian importers on reverse charge basis in respect of the ocean freight paid by the foreign exporter (in Cost-Insurance-Freight (‘CIF’) contracts) is unconstitutional.
The government should not have attempted to levy GST on ocean freight (paid by the foreign exporter in CIF contracts) as IGST is paid on import of goods as well, under the Customs Tariff Act, 1975, in which the freight cost is also included. The levy is absolutely improper as the same amount should not be suffering GST twice over, once under the garb of supply of service and again as supply of goods.
Before the introduction of GST, ocean freight was exempt from Service Tax under an exemption notification. However, after the GST regime ushered in, as per the advice of the GST Council, a five per cent GST was imposed on ocean freight (paid by the foreign exporter under a CIF contract) payable by the Indian importer on reverse charge basis (under Notification No. 8/2017 dated June 28, 2017).
Import transactions are considered as interstate transactions, and Integrated GST (‘IGST’) is leviable on them. Under Section 13(9) of the IGST Act, place of supply of services, in case of transportation of goods shall be the destination of the goods. Thus, by way of different provisions and notifications, the union government brought the ocean freight paid by the foreign exporter for exports to India in CIF contracts under the GST ambit on reverse charge basis, by departing from the earlier practice under Service Tax.
What were the arguments of the parties on the main issue?
The respondents all along argued that imposition of GST on ocean freight will result in double taxation, as the said amount is also included in the valuation of the imported goods for levy of Basic Customs Duty and IGST, as the basis for customs valuation is always the CIF landed cost. Further, there is no supply of services between the transporter and the importer in a CIF contract. The supply of transport services in a CIF contract is to the foreign exporter only, who is outside the ambit of Indian laws in such a transaction.
The Revenue, on the contrary, argued that although the tax is being paid twice over on the value of ocean freight, it is not unconstitutional as the tax is on two different taxable events, that is, supply of service and import of goods. It further argued that there is no revenue implication as the importer can claim input tax credit of such amount.
In my view, the argument of the respondents is a solid one, and the government should not have attempted to levy GST on ocean freight (paid by the foreign exporter in CIF contracts) as IGST is paid on import of goods as well, under the Customs Tariff Act, 1975, in which the freight cost is also included. On merits of the matter, I have no qualms to say that the levy is absolutely improper and to say in crude terms, on the face of it, looks greedy on the part of the union government and the GST Council, as the same amount should not be suffering GST twice over, once under the garb of supply of service and again as supply of goods.
Why did the Supreme Court discuss the nature of GST Council’s recommendations and federalism in this case?
If the lis before the Court was regarding applicability of GST (on reverse charge basis on the Indian importer) on ocean freight paid by a foreign exporter under a CIF contract, where do the issues of the non-binding nature of GST Council recommendations, cooperative/competitive federalism and so on come into the picture? What was the need for the court to delve into the aspect of the competency of the GST Council and its recommendations?
On carefully examining the judgment, one could come to a conclusion that the argument on “cooperative federalism” was first made by the government (appellant in the case) in its submissions (for the very first time before the Supreme Court).
Therefore, in my view, this judgment was self-invited. Most of the counsel appearing for the respondents did not deal with this aspect in their submissions at all, since they probably felt that this is irrelevant for deciding the issue on hand. The only issue involved in the matter was rather simple and straightforward, that is, whether it was constitutional to levy GST on ocean freight paid by the foreign exporter directly to the shipper outside the country in a CIF contract.
It is most surprising that an issue which was not there was sought to be agitated, and the Supreme Court was forced to give its findings on the legality of the recommendations of the GST Council.
Arvind Datar, senior advocate appearing in one of the matters for a respondent, clearly submitted (see para 14 of the judgment) that:
“(vii) The GST Council which has been created by Article 279A of the Constitution is a recommendatory body, whose recommendations can be implemented by either amending the CGST Act or the IGST Act or by issuing a notification. However, notifications issued cannot be ultra vires the parent legislation;
(viii) The principles of cooperative federalism are not relevant in this case as they were not adjudicated before the High Court. The appeal must test the correctness of the impugned judgment without expanding its scope; and
(ix) Interpretation of Article 279A of the Constitution was not an issue before the High Court and the present appeal should be restricted to the validity of the impugned notification.”
Thus, it is crystal clear that the aspect of cooperative federalism and the binding nature of the decisions of the GST Council were neither part of the lis before the High Court nor were agitated by any of the respondents. In simple words, by making these arguments almost out of context, the counsel for Revenue have shot themself and the government in the foot. Having made these submissions, it was imperative for the court to consider them and return findings on the same. It is most surprising that an issue which was not there was sought to be agitated, and the court was forced to give its findings on the legality of the recommendations of the GST Council.
One of the arguments of the Revenue before the Supreme Court was that the levy of GST on this transaction is due to the binding recommendations of the GST Council, which they have to obey. In order to deal with this argument too, the Supreme Court went beyond the contours of the case (which, to repeat once again, was limited to levy of GST on ocean freight on CIF import contracts), and returned path-breaking and historical findings on the constitutionality of the GST Council and the non-binding nature of its recommendations on both the Centre as well as the states. To come to this conclusion, the Supreme Court heavily banked on Article 246A, introduced into the Constitution in 2016, which undoubtedly gives parallel legislative powers over GST to both the Centre as well as the states.
THE GIST OF THE JUDGMENT: The five nuances
The recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union’s vote counts as one-third, while the states’ votes have a weightage of two-thirds of the total votes cast.
There are two significant attributions of the voting system in the GST Council. First, the GST Council has an unequal voting structure, where the states collectively have a two-third voting share, and the Union has a one-third voting share; and 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. Thus, the discussions in the GST Council impact both federalism and democracy.
The constitutional design of the Constitution (Amendment) Act 2016 is sui generis since it introduces unique features of federalism. Article 246A treats the Centre and states as equal units by conferring a simultaneous power of enacting laws on GST. Article 279A, in constituting the GST Council, envisions that neither the Centre nor the states can act independent of the other.
Merely because a few provisions of the Constitution provide the Union with a greater share of power, the provisions in which the federal units are envisaged to possess equal power cannot be construed in favour of the Union.
The GST Council has the power to make recommendations on a wide range of subjects relating to GST. Since the Constitution does not envisage a repugnancy provision to resolve inconsistencies between the central and state laws on GST, the GST Council must ideally function, as provided by Article 279A(6), in a harmonised manner to reach a workable fiscal model through cooperation and collaboration.
When the federal units are vested with unequal power, the collaboration between them is not necessarily cooperative. Harmonised 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. Such dialogues can be placed on two ends of the spectrum – collaborative discussions that cooperative federalism fosters at one end of the spectrum and interstitial contestation at the other end.
The Supreme Court held that there is no provision which states that all the decisions of the GST Council will be binding. It further held that the GST Council’s decisions are only ‘persuasive’ in nature and non-binding. The court has, in a way, held that states can in some cases bluntly disagree with the recommendations of the GST Council and fix their own different rates of tax, exemptions and so on. That is, had the intention of the legislature been to make GST council’s decisions binding, Article 279A would have stated so.
Intentionally or unintentionally, the judgment, in my view, has the ability to embolden states to differ on issues with the National GST policy and framework, relying upon its constitutional power under Article 246A read with the judgment in this case.
If one scrutinises the detailed judgement passed by the Supreme Court, there seems nothing amiss and it looks like the court has just interpreted the provisions as it is, which are already there in the statute book. Further, to this the court added its own dimensions on cooperative federalism based on the material set out in the judgment and also the court’s own interpretation to hold that states are equal stakeholders. There is a possibility that the voice of the politically weak states may be ignored in view of the majoritarianism which is the antithesis of federalism. There is also a reference to the relatively larger voting power given to the Centre in the GST Council.
The court knew that decision will have wide ramifications on the federal structure of the country, especially in the realm of fiscal legislation, primarily the GST. That is the reason why it went to such a length in justifying its decision of holding that the word “recommendation” used in the Constitution at various places with regard to GST contextually means that the same is not binding either on states or the Centre, and it is only persuasive in nature.
Why should we worry about this judgment?
In all this, the objects and reasons behind bringing in GST in the first instance have been ignored. In final analysis, the concept of ‘one nation one tax’, which was the mantra to start with, may have been compromised. While introducing the Constitution (122nd) Amendment Bill for enabling GST, the objects and reasons provided were as under :-
“The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax.”
The then Union Finance Minister, the late Arun Jaitley, while introducing the bill in the Parliament, stated thatthe object of the constitutional amendment is to bring about a “certain amount of convergence between these taxes so that the taxation mechanism becomes extremely simple”.
The crux of the decision of the Supreme Court as to why GST Council’s recommendations cannot be made binding are succinctly articulated in paragraphs 46 and 48 of the judgment which are reproduced as under:
“46. Article 246A vests Parliament and the State Legislatures with a unique, simultaneous law-making power on GST. It is in this context that the role of the GST Council gains significance. The recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union’s vote counts as one-third, while the States’ votes have a weightage of two-thirds of the total votes cast. There are two significant attributions of the voting system in the GST Council. First, the GST Council has an unequal voting structure, where the States collectively have a two-third voting share and the Union has a one-third voting share; and 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. Thus, the discussions in the GST Council impact both federalism and democracy. The constitutional design of the Constitution Amendment Act 2016 is sui generis since it introduces unique features of federalism. Article 246A treats the Centre and States as equal units by conferring a simultaneous power of enacting law on GST.. Article 279A in constituting the GST Council envisions that neither the Centre nor the States can act independent of the other.
48 The Indian Constitution has sometimes been described as quasi-federal or a Constitution with a ‘centralising drift’. This is because when the Constitution is read as a whole, the Union is granted a larger share of the power. Instances of this centralising drift can be traced to Articles 254, 248, and 353. However, there are instances such as Article 246A, where the Centre and the States are conferred equal power. Merely because a few provisions of the Constitution provide the Union with a greater share of power, the provisions in which the federal units are envisaged to possess equal power cannot be construed in favour of the Union. The Union and the States have a simultaneous power to legislate on GST. The GST Council has the power to make recommendations on a wide range of subjects relating to GST. Since the Constitution does not envisage a repugnancy provision to resolve inconsistencies between the Central and State laws on GST, the GST Council must ideally function, as provided by Article 279A(6), in a harmonised manner to reach a workable fiscal model through cooperation and collaboration.”
The court, in no uncertain terms, held in paragraph 54 of the judgment that there is nothing in the language of Articles 246A and 279A which suggests that the GST Council’s recommendations are binding on either the Centre or the states or both, in the following words:
“54 The GST Council which is a constitutional body is entrusted with the duty to make recommendations on a wide range of areas concerning GST. The GST Council has plenary powers under Article 279A (4)(h) where it could make recommendations on ‘any other matter’ related to GST as the Council may decide. The GST Council has to arrive at its recommendations through harmonised deliberation between the federal units as provided in clause 6 of Article 279A. Unlike the other provisions of the Constitution which provide that recommendations shall be made to the President or the Governor, Article 279A states that the recommendations shall be made to the ‘Union and the States’. The recommendation of the GST Council made under Article 279A is non-qualified. That is, there is no explanation on the value of such a recommendation. Yet the notion that the recommendations of the GST Council transform into legislation in and of themselves under Article 246A would be farfetched. 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 is incredible that the Supreme Court made a constitutional institution like the GST Council toothless in a single stroke, that too without any context.
The Supreme Court ought to have restrained itself from returning findings at such length on an issue which was not at the heart of the dispute between the parties. In fact, the concerned parties, that is, the various state governments, were not there before the court.
In fact, one would expect that the litigants in such a litigation would be typically the union government on one side and one or more disgruntled state governments on the other. But if you go through the judgment, it is a simple tax dispute between an assessee and the Revenue over leviablity of GST on ocean freight.
Be that as it may, the Court ought to have restrained itself from returning findings at such length on an issue which was not at the heart of the dispute between the parties. In fact, the concerned parties, that is, the various state governments, were not there before the court. GST was brought in to rationalise taxes in the country and to facilitate the concept of ‘one nation one tax’.
Ignoring for a moment all the transitional and implementation issues for the time being, we all will agree that the GST law was slowly and steadily getting accepted by the business community at large, and many of its members are extremely happy with the transparency and forward looking nature of GST. People had also by and large accepted the GST Council as the final authority whose recommendations will be the basis of the legal provisions, rates, procedures, processes and other nitty gritties. I am not suggesting that the decisions of GST Counsel are not subject to legal scrutiny and judicial review. However, subjecting the Council’s existence and relevance itself to judicial review in a case of this nature stumps me.
In my humble view, without questioning the legality of this judgment, and the competence of the court to pass such a decision, I must submit that it is, definitely in my opinion, retrograde for the concept of GST in India. In fact, a fully empowered GST Council as a constitutional body as against a mere recommendatory body would have been good for the country, as also for economic well-being and fiscal uniformity.
Had there been any threat to cooperative federalism, I am sure the concerned parties/states would have themselves taken the issue to court for a solution. For more than five years, nobody questioned it. This means that everything was going fine. Even if there are a few political and practical nibbles, I am sure those were being handled at the GST Council level itself.
Some opposition party-ruled states have rejoiced at the judgment, as an unexpected shot in their political arm. Their rejoicing will be short-lived and they will have to understand that uniformity in law, procedures, and rates, among other things, is extremely important to the taxpayer and the man who is at the lowest end of the spectrum.
THE GIST OF THE JUDGMENT: The seven reasons in defence
Therefore, 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. The GST Council is not merely a constitutional body restricted to the indirect tax system in India, but is also an important focal point to foster federalism and democracy.
The Centre has a one-third vote share in the GST Council. This, coupled with the absence of the repugnancy provision in Article 246A, indicates that recommendations of the GST Council cannot be binding.
The argument that if the recommendations of the GST Council are not binding, then the entire structure of GST would crumble, does not hold water. Such a reading of the provisions of the Constitution diminishes the role of the GST Council as a constitutional body formed to arrive at decisions by collaboration and contestation of ideas.
The court discussed at length the relevant Article 246A, which treats states and the Centre as equal. Article 279A provides that states and the Centre cannot act independently of each other. This also points towards competitive federalism.
The court did not agree with the Centre’s argument that recommendations of the GST Council should be binding on all parties.
Thus, the court is of the view that though the role of the GST Council is significant, the decisions are never unanimous. In effect, the court held that there is a possibility that the minority view in the council meetings may be buried in the din.
After noting the competing arguments, the Supreme Court held that the recommendations of the GST Council are not binding on the union and the states. To come to this conclusion, the court, after analysing a lot of material, parliamentary debates, and select committee reports, among other things, banked on the intention of the Parliament holding that it intended the recommendations to have persuasive value.
I sincerely hope that good sense prevails and no bickering happens in the GST Council after this judgment, and the concerned parties on their own understand what will be in the national interest. If anything contrary happens, we can expect multiple tax rates and multiple interpretations, like the earlier indirect tax regime in India. That apart, if states start taking their own calls against the GST Council’s recommendation, it may lead to bureaucratic red tape at different levels. The beautiful offerings of GST, including uniformity in rates, procedures and documentation may be a thing of the past. The interpretation of identical facts and legal provisions may be different by the Centre and the states. For multi locational businesses, there can be a lot of struggle with multiple codes and multiple rates.
The relative peace and tranquillity which was seen in the GST Council for most of the time it has been in existence, is in jeopardy. If the situation is not handled with maturity and with speed, I have a feeling that what is going to happen is exactly the opposite of what the court suggested. Collaborative federalism itself will be under threat, once a constitutional institution like the GST Council is rendered toothless.
The relative peace and tranquillity which was seen in the GST Council for most of the time it has been in existence, is in jeopardy. If the situation is not handled with maturity and with speed collaborative federalism itself will be under threat, once a constitutional institution like GST council is rendered toothless.
In my view, the executive and the legislature should take some immediate measures, the first of which is filing a review petition before the Supreme Court. There should also be brainstorming on how the GST Council should be given back its teeth (either through constitutional amendments or otherwise) in the interest of cooperative federalism.
In the last decade or so, we have all seen the unintended consequences of well-meaning judgments on the Indian economy. In the times to come, similar end-results can be expected as a consequence of this judgement, unless the same is fixed by all the concerned stakeholders by showing their unity through cooperative federalism. This is the need of the hour to save the country from fiscal annihilation.
Majority vote (with checks and balances) is the fulcrum of any Parliamentary democracy. To hold anything contrary to this proposition has the ability to impede the credibility of the democratic process.