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GST Council’s opinion not binding, says Supreme Court; Revenue secretary ruling won’t alter tax regime

The ruling came in a case related to levy of inter-state GST (IGST) on ocean freight. While dismissing the Centre’s special leave petition challenging the Gujarat High Court decision that had gone in favour of taxpayers, the apex court held that levy of IGST on ocean freight in case of import of goods is unconstitutional for lack of legislative competency.

There have been a number of cases when GST has been deposited under force by calling in senior office bearers like directors/promoters of the firm. This circular attempts to safeguard against that.

The Supreme Court on Thursday ruled that the Goods and Services Tax (GST) Council’s recommendations are not binding on the Union government and states but have a persuasive value as the country has a cooperative federal structure. The Centre and state governments have simultaneous powers to legislate on GST but the council must work in a harmonious manner to achieve a workable solution, the court said.

While the Union revenue secretary Tarun Bajaj said the ruling doesn’t alter the GST governance architecture from what is enshrined in the relevant laws, it may have ramifications for the council’s functioning. Finance ministry sources said while the recommendations of GST Council would have only persuasive value for primary legislation, i.e. framing of laws, its suggestions are binding in matters concerning subordinate-legislation such as issuance of notification, framing of rules, prescribing rates and taxes, etc.

“It is thus amply clear that the apex court has elaborated upon the constitutional scheme concerning GST. As stated in Article 279A, the council inter alia makes recommendation to the Union and the states on issues such as model GST law, principles of levy, apportionment of GST levies on inter-state supplies, principles relating to place of supply, GST rates and special provisions with respect to certain states,” they added.

Differences of opinion between the Centre and states, especially the Opposition-ruled ones, have surfaced often in recent months, as a 5-year revenue protection mechanism for states is due to end on June 30, 2022, and a comprehensive overhaul of the GST rate slabs is under active consideration of the council.

Stating that “legal interpretation of the verdict is awaited,” Bajaj said Section 9 of the CGST Act clearly states that rate decisions should be based on the recommendation of the council.

Analysts said the ruling could have a bearing on the tax provisions based on GST Council recommendations, which may not be supported or intended by the GST laws, including some under judicial review.

A bench of Justices DY Chandrachud, Surya Kant and Vikram Nath said that as per Article 246A, both Parliament and the state legislature have equal power to legislate on matters of taxation. “Article 246A treats Centre and state as equal and Article 279 of the Constitution says that the Centre and state cannot act independent of each other”, the court said.

The ruling came in a case related to levy of inter-state GST (IGST) on ocean freight. While dismissing the Centre’s special leave petition challenging the Gujarat High Court decision that had gone in favour of taxpayers, the apex court held that levy of IGST on ocean freight in case of import of goods is unconstitutional for lack of legislative competency.

“This levy was leading to double taxation also as ocean freight was already included in the value of imported goods and customs duty, including IGST was paid on it,” said Tarun Gulati, managing partner at PDS Legal.

“This would have far reaching implications on various other matters where the states are not in agreement with the decisions of the GST Council, especially in the light of the compensation period coming to an end in June. This area would need to be closely looked out for,” said Mahesh Jaising, partner at Deloitte India.

As per The Constitution (One Hundred and First Amendment) Act, 2016, in case of a voting, every decision of the GST Council has to be taken by a majority of not less than three-fourths of the weighted votes of the members present. The vote of the central government has a weight of one-third of the total votes cast, and the votes of all the state governments taken together have a weight of two-thirds of the total votes cast in that meeting. The voting provision has been exercised only once so far – in December 2019, six states voted against uniform tax of 28% for lotteries, but the differential tax system prevailed by majority vote.

The GST Compensation to States Act, 2017 provides for release of compensation against 14% year-on-year growth over revenues in 2015-16 from taxes subsumed in GST for a period of five years ending June 30.

The council will meet soon to deliberate on rationalising tax rates and slabs to augment revenues to the level of what a revenue neutral rate would yield. With both the Centre and states empowered to make GST laws in their respective domain, a dispute resolution mechanism was mooted for resolving the potential divergence between the Centre and states in adopting recommendations of the council, but this hasn’t materialsed yet.

Charanya Lakshimkumaran, partner, Lakshimkumaran and Sridharan Attorneys, said, “In essence, it has been recognised that the discretion vested in Parliament and states legislatures to make laws on matters vested in them is of paramount importance and thus, the council decisions can only serve as guiding principles.”

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