Supreme Court’s ruling on GST deepens the churn in the tax regime

News: Recently, the Supreme Court ruled that the decisions taken by the GST Council are merely recommendations with “persuasive value” and are not binding.

The ruling has opened up serious questions on the stability and certainty of the structure and operation of GST which is still evolving.

What has been the reaction to the SC judgement?

The states, notably those ruled by non-BJP parties, have welcomed the judgment stating that this is the triumph of cooperative federalism and provides them enough scope to have a say in the decisions.

The revenue secretary has clarified that the SC has merely stated the obvious, and, in effect, does not alter the ground situation. All the decisions taken in the Council are based on consensus (except the one on lotteries) by the Union and states (and Union Territories with legislatures), and that spirit will continue to guide the deliberations and decisions in the Council.

How the SC verdict states the obvious?

In some ways, the verdict states the obvious.

Article 246-A inserted after the 122nd constitutional amendment states, “Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every state, have the power to make laws with respect to the GST imposed by the Union or by such state.”

Thus, the power to levy the central GST (CGST) vests with Parliament, the power to levy state GST (SGST) vests with state legislatures and Parliament has exclusive power to make laws with respect to the GST on items that are part of inter-state trade or commerce. Thus, the GST Council is only an advisory body and the actual decisions regarding model GST levies, principles of levy, etc will have to be taken by either Parliament in the case of CGST and IGST or the states in the case of SGST.

In effect, decisions on the structure and operation of the tax can be made by the Centre and individual states without discussion and deliberation in the Council and both can ignore any recommendation made by the Council.

What will be the impact of the SC verdict?

Inc in bargaining strength of the states: It paves the way for more intensive bargaining and negotiations, placing states on an equal footing with the Centre in taking decisions on the structure and operations of the tax.

The immediate impact of this will be bargaining by states for extending the period of compensation for the loss of revenue. The five-year period of compensation gets over at the end of June. States have therefore been demanding the extension of the compensation period by another two-three years and this decision will now help the states to bargain hard for the extension.

The lasting solution lies in increasing the revenue productivity of the tax by pruning the list of exempted items, rationalising the rates and taking administrative measures.

Way forward

The decision that GST Council’s recommendations are not binding will have significant implications in determining the nature of the tax, which is still evolving.

Hopefully, the Court’s decision will also strengthen the cooperative spirit in reforming the domestic consumption tax system in the country.

Source: This post is based on the article “Supreme Court’s ruling on GST deepens the churn in the tax regime” published in The Indian Express on 26th May 22.

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