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Published on: May 30, 2022, 5:42 p.m.
Storm that wasn’t
  • Recently, the top court ruled that GST on ocean freight paid in case of import of goods is unconstitutional

By Rakesh Joshi. Executive Editor, Business India

At a time when inflation is rising and the markets are in turmoil, the last thing the Modi government would want is for some states to legislate their own tax laws that run counter to the Goods & Services Tax (GST) and lead to its erosion. There has been a remarkable upswing in GST collections in recent months, with the total amount touching a record high of Rs1.67 lakh crore in April. In terms of revenue generation, GST is now a success story. That is why the government has lost no time in playing down the excitement and anxiety that followed the ruling of the Supreme Court in the case of the Union of India vs Mohit Minerals Pvt Ltd, delivered last fortnight. 

The top court ruled that that GST on ocean freight paid in case of import of goods is unconstitutional. The upshot of the ruling is that Indian importers who had paid such tax will be eligible for refunds. Further, those importers who had not paid the tax on import of services will now not be required to pay tax. Thus, the ruling in the case of ocean freight is set to give relief to several Indian companies and importers.

While sitting in judgment on the limited question of whether GST can be levied on ocean freight paid by a foreign seller to a foreign shipping line on reverse charge basis, the SC bench dwelt at length on the constitutional framework of GST law and concepts such as co-operative federalism, un-co-operative federalism and fiscal federalism and came to the conclusion that recommendations of the GST Council are not binding on the Centre or the states.

It is not evident if the scholarly exposition by the bench comprising Justices D.Y. Chandrachud, Surya Kant and Vikram Nath was warranted, while deciding the limited question pertaining to the case. But the fact is that the Court has only spelt out what is clearly evident from reading Articles 246A and 279A of the Constitution: Parliament and state legislatures have simultaneous powers to legislate under the GST. So far, individual states have always complied with decisions made in the GST Council even when such decisions went against their interests.

This is because of the widely accepted view that benefits of a common national market for goods and services and profiting from the systemic efficiencies that this confers will be lost, if check-posts re-emerge at state borders. Investors, for instance, would migrate out of such states due to complexities in doing business.

However, some legal experts were quick to jump the gun, saying it could also change the way the GST framework operates in the country. This is because the Court also said that recommendations by the GST Council are not binding on either the Union or the state and it has only persuasive value.

“This judgment may change the landscape of those provisions under GST, which are subject to judicial review,” observed Abhishek A. Rastogi, Partner, Khaitan & Co, who argued for the petitioners before Gujarat High Court, Supreme Court and several other courts. “As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be 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”.

Preemptive move

Before such a view could gain ground, the government moved in to pre-empt the development. ‘The SC ruling will not materially impact the one-nation-one-tax regime, as it is only a reiteration of the existing law that gives states the right to accept or reject the panel’s recommendation on taxation -- a power that none has exercised in the last five years,” remarks Tarun Bajaj, Union revenue secretary.

The Constitutional amendment that brought the GST regime in July 2017 by subsuming nearly one-and-a-half-dozen Central and state levies, provided for a Council of Centre and states for decision-making. The recommendations of the GST Council, as per the Constitutional amendment, were always guidance and never mandatory compliance.

The Centre believes that, while it may be tempting for some states to break out and legislate on their own, in the long run, such an act will only work against their own interests, besides causing avoidable chaos for tax-payers. Bajaj points out that states, though differing on tax rates on a particular good or service in the Council, never went back and framed legislation that was not in line with the panel’s recommendations.

And this practice is likely to continue unhindered. The view is endorsed by other experts, including Haseeb Drabu, former finance minister of Jammu & Kashmir. The notion that the SC ruling alters the nature of fiscal federalism is misplaced, he points out.

That said, though only five years have lapsed since its introduction, it may be time already for reform of the GST. A number of outstanding issues need to be resolved in the spirit of statesmanship at the GST Council. For instance, the GST rate rationalisation exercise, which has been put on hold because of inflationary pressure and geopolitical tensions, has to be finalised.

Fewer slabs would mean that GST on some items could go up, which could make goods expensive at a time when consumer inflation has touched an eight-year high of 7.79 per cent.

The GST Council is likely to meet in June. It’s expected to take up the report of a group, headed by Conrad Sangma, CM, Meghalaya, which is reported to favour the highest 28 per cent rate on online gaming, racing and casinos. The Council is also expected to discuss integrated GST on ocean freight, now struck down by the Supreme Court.

The Council had set up another group last year headed by Basavaraj Bommai, CM, Karnataka, to suggest changes to the GST rate structure. It was tasked with suggesting rate changes to correct inverted duty structures and also to reduce the number of GST slabs from the existing 5 per cent, 12 per cent, 18 per cent and 28 per cent to just three. 

But there are larger issues at stake, which can be dealt with immediately. Drabu feels that dispute resolution tribunals should be set up by the Council. Perhaps, if such a mechanism has existed, the present controversy would not have arisen in the first place.

Persuasive powers

Then there is the issue of genuine federalism thrown up by the ruling. Ajit Ranade, economist, feels that the apex court has rightly observed that the GST Council has persuasive powers, not coercive ones. The verdict is a reminder, if any was needed, that co-operative federalism calls for more and frequent dialogue at the highest level of the Inter-State Council, and not merely at the GST Council level. 

The Council is still an inadequate mechanism to balance sensitivities over the taxation rights of the Centre and states. But there are also various other issues involving federalism that can turn into fault lines. For instance, the exercise of constituency delimitation and a proposed increase in parliamentary seats in the light of India’s changing demographic profile both call for urgent attention.

Another issue is the need to put a legislative cap on the Union government’s tendency to resort to using cess revenues that are kept outsidethe divisible pool of taxes. A third issue could be of the expanding use of Central agencies in police matters, often leading to jurisdictional overlaps, and worse, contradictions.

Finally, a fourth smaller but equally urgent issue is whether the Centre will extend the compensation formula for states to fill gaps in GST revenues, Ranade points out. The states were assured a generous formula, guaranteeing 14 per cent revenue growth so as to get them all to sign up for the new tax regime, but that assurance runs out in June 2022. 

“What next, especially with signs of a slowing economy? Of course, the original formula was too generous to begin with and states bore little risk. The revised formula should phase out compensation from 100 to zero in, say, three or four years. Co-operative federalism, thus, is still a work-in-progress. Dialogue and trust building are imperative,” Ranade adds.

The emerging view is that, while the states should have the right to dissent in the Council and their voice should not be drowned in the pursuit of unanimity in decision-making, the Centre can set an example by accommodating the demands of the states in the Council, even if it means some sacrifice on its part. After all, the onus is on it to run the Council harmoniously.

Also, if the GST has made the tax-payer’s life better, then the responsibility is on the Centre and the states to make it work. The Council should transcend political rivalries of the day.

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