GST Council must uphold fiscal federalism

News: Recently, the Supreme Court has given its verdict on the nature of recommendations made by the GST Council. The verdict included an important observation on Indian federalism, especially on it being a dialogue between cooperative and uncooperative federalism.

Background of the Case

The case was an appeal to the SC against the Gujarat High Court Judgment which had quashed the two notifications that levied IGST (Integrated GST) on the ocean freight component in a CIF (cost, insurance and freight) contract on account of being unconstitutional and double taxation.

Submissions by the Union of India

As per Articles 246A and 279A, the GST Council is the ultimate policy-making and decision-making body for framing GST laws.

The GST Council recommendations would override the legislative power of Parliament and state legislatures and would be binding on Parliament and state legislatures.

The Supreme Court’s Observations on federalism in this case

The SC rejected the UOI submissions. It held that the sovereignty of Parliament and the state legislatures, as well as the fiscal autonomy of the states cannot be diminished.

Democracy and federalism are interdependent for their survival. If the states had been conferred less power, they could still resist the Union mandate through different forms of political contestation as permitted by constitutional design.

Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST. It is unlike the constitutional scheme that prevailed till 2017 in which taxing powers were clearly demarcated between the Centre and states with no overlaps.

Under Article 279A, the GST Council has to make “recommendations” on various topics including the tax rate and exemptions.

The GST Council recommendations have only a persuasive value. Both the Union and states have been conferred equal power to legislate on GST. The binding recommendations would disrupt fiscal federalism.

Article 279A has made no provision to make the decision of the majority binding on the dissenting states. Several sections in the state GST laws, CGST and IGST have made it binding on dissenting states to issue notifications to implement the recommendations of the GST Council.

The court held that the states are free to use means of persuasion ranging from collaboration to contestation on federalism in general, and fiscal federalism in particular.

Way Forward

The state legislatures can amend their GST laws if they so choose to remove the binding nature in the statutes.

The GST Council is founded on the bedrock of collaborative federalism. The GST Council should meet periodically. There should be active participation of all the states so that there is careful deliberation in the national interest. Thereafter, no state will oppose the GST Council recommendation.

The spirit of cooperative and collaborative federalism should prevail in the functioning of the GST Council.

Source: The post is based on an article “GST Council must hold fiscal federalism” published in the Indian Express on 3rd June 2022.

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