In tax laws, every once in a while, a Supreme Court decision gets the ‘landmark’ tag.

The recent Supreme Court ruling in the Mohit Minerals case has earned that tag. The issue before the apex court was whether GST could be levied on ocean freight when IGST has been levied on the total transaction value which included freight.

The apex court struck down the levy as unconstitutional and ended the controversy over double taxation on ocean freight. What interested everyone during the course of this decision was the observations of the Court on the GST Council.

The judgment

The operative part of the court ruling was that the recommendations of the GST Council are not binding on the Union and States for the following reasons:

Parliament intended for 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.

Parliament and the State legislatures possess simultaneous power to legislate on GST.

The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and States. They are recommendatory in nature. To regard them as binding edict would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST.

It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions.

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 of Article 279A (4) are binding on the legislature’s power to enact primary legislation.

The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient — in this case the importer — by Notification 10/2017 is only clarificatory. While import of services qualifies for reverse charge under this notification, this cannot be extended to cases where IGST has already been paid.

The apex court has observed that the impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising supply of goods and supply of services of transportation, insurance, etc. in a c.i.f. contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act. In essence, the Centre cannot a tax a transaction twice.

Impact of the judgment

This judgment of the apex court is bound to have some impact on the working of the GST Council. Collaborative decision making would be the way forward — this is easier said than done since a few States have strong views on certain aspects of GST taxation and the decision in Mohit Minerals gives them more teeth.

It is expected that the GST Council would not recommend anything that could turn out to be controversial.

While the decision in Mohit Minerals does not give State governments unilateral powers of taxation, it sends a message to the GST Council to listen to all voices including those of protest.

The writer is a chartered accountant