The Goods and Services Tax (GST) Council’s recommendations are not binding on the Centre and the states and those have only “persuasive value”, the Supreme Court ruled in a landmark judgment on Thursday while striking down the integrated GST (IGST) levy in an ocean freight case.
The apex court further said Parliament and the state legislatures had equal powers to legislate on GST and the Council must work in a harmonious manner to achieve workable solutions between the Centre and the states.
“… the 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… the Parliament and the State legislatures possess simultaneous power to legislate on GST,” the court said in its judgment.
The court further said the “recommendations” of the GST Council were the product of a collaborative dialogue involving the Union and the states.
“They are recommendatory in nature. To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal powers 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,” it added.
The significant remark on the GST Council’s mandate has come at a time when the indirect tax regime is turning five in July.
Legal experts said the judgment might change the landscape of those GST provisions subject to judicial review.
“This is a significant observation as it defines the roles of the GST Council, the Centre and the states, and their interplay in the GST regime. The GST Council is a constitutional body whose role is to advise and recommend on GST issues. To accept such advice and pass appropriate amendments in law is purely the domain of the Central and State legislatures,” said Rajat Bose, partner, Shardul Amarchand Mangaldas & Co.
Abhishek A Rastogi, partner at Khaitan & Co, who argued on behalf of the importers in the IGST case, said: “As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations.”
The judgment follows an appeal by the Central government against an earlier Gujarat High Court verdict that said that IGST on ocean freight was unconstitutional. The high court order was against the Central government notification in June 2017 stating that the IGST at the rate of 5 per cent could be levied on the service of transporting goods in a vessel. Since the introduction of the rule, the Centre, along with several importers, had been fighting a case in the apex court over the applicability of GST on transporting imported goods on sea routes.
The judgement said the government, while exercising its rule-making powers under the provisions of the Central GST Act and IGST Act, was bound by the recommendations of the GST Council. However, that does not mean all the recommendations of the GST Council are binding on the legislature’s powers to enact primary legislation, it observed.
Going by the definition, the GST Council is an apex member committee to modify, reconcile, or to procure any law or regulation based on the context of GST in India. It is headed by the Union finance minister, who is assisted by finance ministers of all the states of country.
The IGST Act and the Central GST 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 the June 2017 notification — is only clarificatory.
In Mohit Minerals vs Union of India, the Gujarat High Court held no tax could be levied under the IGST Act on ocean freight for services provided by a person located in non-taxable territory by way of transporting goods by a vessel from a place outside India up to the Customs station of clearance in India.