The Supreme Court stirred a hornet’s nest by highlighting the fact that the recommendations of the GST Council are not binding on either the Centre or the States. The Court delivered its ruling in the case involving Union of India vs Mohit Minerals Pvt Ltd. The Bench, which included Justices DY Chandrachud, Surya Kant and Vikram Nath, decided to go beyond the case to expound on the fundamental construct of the GST system itself. 

The Court pointed out that Article 246A, introduced through an amendment to the Constitution made in 2016, gives both Parliament and State legislatures the power to make laws relating to GST. The Constitution has not specifically mentioned that all GST Council decisions will become law. If that was the intention, Article 279A would have included clarifications to this effect.  

It concluded that the GST Council decisions are only ‘persuasive’ and not binding.  

Why is this order considered significant? 

The order has reminded the States that they can reject decisions made by the GST Council and set different rates for goods and services in their jurisdiction. The point to note is that the Court has only highlighted what was already in the Constitution.  

To give you a background, since GST meant one tax rate across the country, States had to give up their right to determine the tax rate on all goods and services, excluding taxes on fuel and alcohol for human consumption and electricity, since July 1, 2017.  

To ensure that every State could play a part in decisions involving GST rates, exemptions, thresholds, relaxations and procedural issues, the GST Council was formed to decide on all these matters. The GSTC is headed by the Union Finance Minister and includes all State Finance Ministers. Decisions in GSTC are taken by a majority of not less than three-fourths of weighted votes cast. The Centre has one-third weightage of the total votes cast, and all the States taken together have two-thirds of the weightage of the total votes cast. 

Will the order disrupt the functioning of the GST regime? 

Many Opposition-ruled States have been criticising the functioning of the GST Council, stating that the ruling party and its allies are not paying heed to them. 

But it is doubtful if any disgruntled States will decide to legislate a different tax rate for goods and services currently under GST. While it may seem like a bright idea for garnering revenue, such a move will be myopic and may be unfeasible. Let us consider two scenarios. 

One, if a State remains in the GST system, but sets higher tax rates on few goods and services. This will mean that taxpayers will be unable to claim the input tax credit on the goods outside GST, increasing their tax incidence. Taxpayers’ compliance burden for return filing will get very troublesome. Besides, higher tax rates will make the State less preferred by domestic and foreign companies. 

Two, if the State moves out of the GST system completely, there will be complete chaos. Other States will not want to share their GST revenue with the breakaway State, thus bringing down its revenue share from the Centre. Inter-State business with the breakaway State will collapse and FDI will move away from the State. 

Therefore, it may be difficult for any State or UT to move away from GST, either partially or entirely. 

Why are some calling it a victory for co-operative federalism? 

The spirit of co-operative federalism is already entrenched in GST. The Court has not brought about any change to the law.  The States and the Centre need to keep the spirit going to ensure that the GST system functions. Despite having a brute majority, the Centre should pay heed to the problems faced by States and suggest corrective measures, whenever possible. 

The States should also desist from making preposterous demands without considering the problems in Central Government finances.  

What has been the reaction of the Central Government? 

The Centre appears confident that there will be no disruption to the functioning of the GST system due to this.