The Supreme Court on Thursday held that the recommendations of the GST Council are not binding on the Union and States. It also struck down the levying of Integrated Goods & Services Tax (IGST) on ‘Ocean Freight’, thus giving relief to importers.

The judgment was welcomed by the opposition-ruled States, particularly those that interpreted it as a reiteration of the States’ right to legislate on taxation, thereby starting a public debate on whether the concept of “one nation, one tax” itself was under stress. The Centre, on its part, ruled out any disturbance in the functioning of GST. The Centre also claimed that the Apex Court has merely established legal position. Legal experts expected the Centre to file a review petition.

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The Apex Court, while disposing of an appeal filed by the Centre against a Gujarat High Court ruling, listed three reasons why recommendations of the GST Council are not binding on the Union and States. “The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. A bench comprising Justices Dhananjaya Y Chandrachud, Surya Kant, and Vikram Nath held that “To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST,”

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‘Persuasive value’

The bench held that it is not imperative that one of the federal units always possess a higher share of the power for the federal units to make 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 said.

Further, the deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that Parliament intended the recommendations of the GST Council to only have a “persuasive value,” particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units.

The bench also said that 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 the recommendations of the GST Council made by virtue of the power contained in Article 279A (4) are binding on the legislature’s power to enact primary legislations,” it said.

In the present matter, the bone of contention was whether an Indian importer can be subject to the levy of IGST on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis. The bench said that such a levy would be a violation of GST Law and accordingly rejected the appeal by the Centre against the High Court ruling which had ruled no levy.

Centre’s take

Revenue Secretary Taun Bajaj said that the court has not said anything new. “The GST law says that it will recommend, but it had nowhere said that it will mandate. It is a constitutional body, executive body created by constitution which consist of centre and state which will recommend and based on its recommendation we have created our laws on GST. This is the scheme of things,” he said.

States differ

The Finance Minister of Tamil Nadu, P Thiaga Rajan, said: “SC judgement clarifies all confusions regarding the GST Council recommendations.” Rajan’s counterpart from Kerala, KN Balagopal, maintained that, “It is a verdict that upholds the federal rights of States and the people. The CPI (M) has always been sceptical about the role of the GST Council.” According to Chhattisgarh FM TS Singh Deo, the judgement reiterates the States’ right to taxation. “It restores the federal balance in the GST Council, where a majoritarianism has been prevailing for some time,” Singh Deo told BusinessLine.

Review?

Pradeep Rai, Senior Advocate, expected the government to file a review petition. “There could be two options in the case of a review petition; either it will be dismissed or if accepted, then it can be referred to a larger bench, even a constitutional bench,” he explained. Further, if the review petition is dismissed, then the government can opt for a curative petition, which will be presented before five judge bench.