The Supreme Court’s Judgment on GST – Explained, pointwise

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Introduction

The Supreme Court in the adjudication of the Union of India vs Mohit Minerals Pvt Ltd. case, has ruled that the recommendations of the GST Council are not binding on either the Union or the State Governments. While the Union Government has said that the SC’s Judgment on GST does not bring any change to the already existing framework, some Opposition-ruled States have stated that it would give them greater space to take decisions in the federal structure.

About the GST

The introduction of Goods and Services Tax (GST) meant one tax rate across the country on items covered under it. Under the GST regime, both the Union and State Governments had to surrender their tax autonomy on all goods and services when it came to force on July 1, 2017 (excluding taxes on fuel and alcohol for human consumption and electricity).

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.

About GST:

  • Goods and Services Tax(GST) is a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services throughout India. It replaced the existing taxes levied by the Union and State Governments. It is a single indirect tax for the whole nation, which made India one unified common market.
  • It is a destination-based tax applied on goods and services at the place where final/actual consumption happens.
  • GST is applied to all goods other than crude petroleum, motor spirit, diesel, aviation turbine fuel, and natural gas and alcohol for human consumption.
  • There are four slabs for taxes for both goods and services – 5%, 12%, 18%, and 28%.
  • Although GST aimed at levying a uniform tax rate on all products and services, four different tax slabs were introduced because daily necessities could not be subject to the same rate as luxury items.

About the GST Council:

  • The GST Council is the most important part of India’s GST regime. The Council is responsible for recommending rates of tax, period of levy of additional tax, principles of supply, the threshold for exemption, floor level and bands of taxation rate, special provisions to certain states, etc.
  • Article 279A of the constitution enables the formation of the GST Council by the President to administer & govern GST. 
  • The Union Finance Minister of India is the Chairperson of the GST Council. Ministers nominated by the State Governments are members of the GST Council.
  • The decisions in the GST Council are taken by the 3/4th majority. The Union Government has 1/3rd voting power and the States have 2/3rd. So far, nost of the decisions have been taken through complete consensus. 
  • A mechanism for resolving disputes arising out of its recommendations is also decided by the Council itself.
What was the case before the Supreme Court?

Mohit Minerals had filed a writ petition before the Gujarat High Court. It challenged notification of the Union Government levying IGST on the ground that customs duty is levied on the component of ocean freight and the levy of IGST on the freight element in the course of transportation would amount to double taxation.

The Union Government argued before the High Court that although tax is being paid twice on the value of ocean freight, it is not unconstitutional. The tax paid was on two different aspects of the transaction, namely, the supply of service and import of goods.

In its order passed on January 23, 2020, Gujarat High Court had quashed the Central notification levying IGST on importers for ocean freight paid by a foreign seller to a foreign shipping line.

The SC dismissed the Revenue Department’s Special Leave Petition challenging the Gujarat HC order that had gone in favour of taxpayers. It upheld the decision of the High Court.

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What is the SC’s Judgment on GST?

The Court pointed out that Article 246A 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.

What is the significance of the Judgment on GST?

First, 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. This can open a new avenue for State Governments to harness more revenue.

Second, the SC’s Judgment on GST has increased the bargaining power of the State Governments. It will prevent the Union Government from disregarding the interests of States. Many Opposition-ruled States have been criticising the functioning of the GST Council, stating that the ruling party and its allies are not appropriately addressing their concerns. 

What has been response of the Union and State Governments on the verdict?

Union Government: The Government says that the Court has not said anything new. This is because the GST law provides for recommendation and not a mandate. Article 279A(4) states that, ‘The GST Council shall make recommendations to the Union and States on-…

States: Supreme Court judgment clarifies all confusion regarding the GST Council recommendations. It is a verdict that upholds the federal rights of States and the people. 

Will SC’s Judgment on GST disrupt the GST regime?

The ruling does open an avenue for the States to opt for different tax rates than those taken by the GST Council. However, it is doubtful if any State will decide to legislate a different tax rate for goods and services currently under GST as such a move will be myopic and may be unfeasible. There may be different scenarios:

One, 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 also get very troublesome. Also, higher tax rates will make the State a less preferred destination for domestic and foreign investments. 

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.

Third, differential rates may hamper the vision of introducing GST i.e  achieving one nation, one tax

Thus, it is unlikely that any State will breakaway from the GST regime.

What lies ahead?

First, the States and the Centre need to keep the spirit of cooperative federalism going so as to ensure that the GST system functions appropriately. The Union Government should pay heed to the problems faced by States and suggest corrective measures, whenever possible.

The States should also desist from making unreasonable demands without considering the challenges in Union Government finances.

Second, the decision would help the States pressurize the Union Government for extending the period of compensation for the loss of revenue. As the 5-year period of compensation gets over at the end of June 2022 and as the tax regime is yet to stabilise, States have been demanding the extension of the compensation period for another 2-3 years. This decision will now help the states to bargain hard for the extension.

Third, focus should also be placed on increasing the revenue productivity of the tax by reducing the list of exempted items, rationalizing the rates and taking administrative measures. This would help in reducing the tussle between Centre and States on GST.

Conclusion

The Supreme Court Judgment on GST sets the stage for a fundamental revision of GST implementation and functioning of the GST Council from the perspective of cooperative federalism. The Court’s remarks open up the issues of federal flexibility in determining SGST rates and procedures.

Source: Indian Express, Indian Express, Business Standard, The Hindu Businessline

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