MAY 24, 2022

By Abhijit Saha

IN the case of Mohit Minerals Pvt. Ltd - 2022-TIOL-49-SC-GST-LB, the company imported non-coking coal by ocean transport on a 'Cost-Insurance-Freight' basis. The company paid IGST on the import of coal which included the value of the ocean freight as per Section 5(1) of the IGST Act, 2017, read with Section 3 of the Customs Tariff Act, 1975. The foreign exporter engaged a foreign shipping line for transportation of the goods to India from abroad. The ocean freight invoice was issued by the foreign shipping line to the foreign exporter (the Indian importer is not involved in this leg of transaction). The Department demanded IGST on such ocean freight separately, although the company has paid IGST on import of goods which included this ocean freight charges. The Hon'ble Supreme Court (SC) in an elaborate judgment has held that such IGST on ocean freight is not payable as the company has already paid IGST on import of goods as composite supply.

In the process of analyzing the issue, SC made the following observation which is the subject matter of this article:

148. Based on the above discussion, we have reached the following conclusion:

(i) The recommendations of the GST Council are not binding on the Union and States for the following reasons:

(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that 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;

(b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. The 'recommendations' of the GST Council are the product of a collaborative dialogue involving the Union and 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 power 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. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and

(c) The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature's power to enact primary legislations;

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In view of the above observation, a message would be conveyed that GST Council decisions are not binding on the central and state governments. It is also mentioned that the Union and States are conferred equal power to legislate on GST. The concern after the SC decision is whether various states will now begin pulling in different directions taking indirect tax back to the VAT era. In this situation, and given the SC ruling, there is a concern on whether the level of uniformity in GST legislation across states, presently in force, will continue in future.

As per my understanding Hon'ble SC intends to make recommendation of the GST Council binding on the legislature except to the extent such recommendation is repugnant to the objective and spirit of the GST regime. But such message, I humbly submit, has not come out loud and clear in this decision of the Supreme Court.

Article 279A of the Constitution was introduced to constitute GST Council only to foster cooperative federalism and harmony between the Central Law and the State Law of GST.

Article 279A(4): The Goods and Service Tax Council shall make recommendation to the Union and the States on –

- ………..

- The goods and services that may be subject to, or exempted from the goods and service tax.

Article 279A(6): While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonized structure of goods and services tax and for the development of a harmonized national market for goods and services.

In view of the above constitutional mandate, it is evident that GST Council recommendation has the objective to foster and ensure 'One Nation, One Tax' .

So, in deference to the Constitutional mandate, as per my understanding, the decision of the Hon'ble Supreme Court is to be interpreted to mean that the GST Council recommendation is not binding only to the extent it violates the objects and purpose of the GST Law. This is known as Doctrine of Basic Structure. Inspite of the Constitutional mandate, the GST Council recommendation to the extent it violates the Basic Structure of the GST Law, is not binding on the central and state legislature. It is in line with the 13 Member Bench decision of the Supreme Court in the case of Kesavananda Bharati [1973 AIR 1461] which struck down the amendment to the Constitution which was in violation of the fundamental architecture of the Constitution by upholding the Doctrine of Basic Structure. In fact, in para 20 of the judgment of Mohit Minerals , Hon'ble Supreme Court observed that to analyse the vires of the impugned notifications, it is pertinent to contextualize the constitutional architecture of the GST.

[The views expressed are strictly personal.]