MAY 25, 2022

By Vijay Kumar

THE recent judgement of the Supreme Court in the Mohit Minerals case - 2022-TIOL-49-SC-GST-LB caused a lot of debate in the media, not for the main issue in the case but for the decision of the Apex Court that recommendations of the GST Council are not binding on the Parliament or State legislatures.

This was not really an earth-shaking decision or a novel interpretation. The Supreme Court simply stated the obvious, which was safely pushed under the carpet all these days. The issue before the Supreme Court was the legality of IGST on ocean freight, but in the course of his arguments, the erudite Additional Solicitor General of India submitted:

1. The recommendations of the GST Council are binding on the executive and the legislature-while it frames laws relating to GST by the power under Article 246A.

2. The Union and States after exercising their legislative power and discretion under Article 246A(1) have agreed to go by the recommendations of the GST Council in every aspect of the GST law wherever required.

3. The creation of the GST Council under Article 279A embodies the spirit of collaborative federalism. The GST Council is constitutionally mandated, particularly under Article 279A(6), to promote harmony and alignment amongst the federal partners.

4. Under Article 279A(4), decisions of the GST Council transform into recommendations to the Unions and the States. The GST Council is the only constitutional body that acts as a converging space or platform for the federal units to work in a harmonious matter. The principal function of the GST Council is to take decisions, which are conveyed as recommendations. These recommendations have a unique constitutional status, and they are overridden in exceptional circumstances.

And this opened the Pandora's box for the government.

Mr. Arvind Datar, Senior Counsel, in Nani Palkhiwala style, submitted:

The Supreme Court observed:

In the pre-GST regime, the Union had the exclusive power to impose indirect taxes, that is, on inter-state sale of goods, customs duty, service tax, and excise duty. The States had the exclusive power to impose tax on intra-State sale of goods, luxury tax, entertainment tax, purchase tax, and taxes on gambling and betting. The GST regime has subsumed all the indirect taxes. Article 246A which was introduced by the Constitution Amendment Act 2016 vests the Parliament and the State legislatures with the concurrent power to make laws with respect to GST.

This mutual exclusiveness is also brought out by the fact that in List III, the Concurrent Legislative List, there is no entry relating to a tax, but it only contains an entry relating to levy of fees in respect of matters given in that list other than court-fees. 

The Attorney General stated: (The Standing Committee on Finance, Ministry of Finance in its 73rd report on the 2011 Amendment Bill)

Having regard to the nature of the Constitution of GSTC, the Council would have performed useful role in making recommendations but the ultimate authority whether to accept such recommendations can and must rest only in the Legislatures, namely, Parliament and the State Legislatures. In this view of the matter, the setting up of the GSTC does not strike at the root of the legislative powers over Finance. The powers of the legislature over Finance are sacrosanct and are not affected by the setting up of the GSTC.

The arguments in favour of reading the 'recommendations' of the GST Council as binding are two-fold:

1. If the GST Council cannot make binding recommendations, the entire structure of GST will collapse as each State would then levy a conflicting tax and collection mechanism.

2. If the recommendations are non-binding, then there would be no dispute to be resolved under Article 279(11) as the States would be free to disregard the recommendations.

The arguments against interpreting the 'recommendations' of the GST Council as binding on the Union and the States are two-fold:

1. It would violate the supremacy of Parliament and State legislatures since both have a simultaneous power to legislate on GST.

2. It would violate the fiscal federalism of the States since the Centre has a one-third vote share and the States collectively have a two-third vote share. Therefore, no recommendation on a three-fourths majority can be passed without the consent of the Centre.

If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendations have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act (Section 166 of the CGST Act) and IGST Act (Section 24 of the IGST Act) is mandated to be tabled before the Houses of the Parliament. The use of the phrase 'recommendations to the Union or States' indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST.

Merely because a few of the recommendations of the GST Council are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council's recommendations are binding. As a matter of first principle, the provisions of the Constitution, which is the grundnorm of the nation, cannot be interpreted based on the provisions of a primary legislation. It is only the provisions of a primary legislation that can be interpreted with reference to the Constitution. The legislature amends the Constitution by exercising its constituent power and legislates by exercising its legislative power. The constituent power of the legislature is of a higher constitutional order as compared to its legislative power. Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature.

The Supreme Court held: The recommendations of the GST Council are not binding on the Union and States .

Uncooperative federalism?

In a recent debate in Parliament, some members observed,

You may remember what happened with GST. There was a hasty implementation. Not taking into account the ecosystem, not orienting them, did more damage than benefit.

I would like to cite the comment of a Judge of the High Court of Gujarat, during an online hearing. "It is very easy to reach the moon...we would take a chance...but to understand your policies and intricacies of this tax...Oh God, with folded hands, we say that it is beyond our capacity to understand". These are the wordings of a Judge regarding the tax structure which is prevailing in our country.

The pathetic situation of the Parliament of India is, if we want to put some tax, then the Central Government has to go to the GST Council.

And the Hon'ble Finance Minister stated,

These provisions were made as per the recommendation of the GST Council where States are also equally present.

In my column Jest GST on March 30, 2022, I asked, Is GST Council superior to Parliament? And observed,

Now, this raises important constitutional questions. Is the Parliament not empowered to pass/amend laws without the permission of the GST Council? Is the GST Council superior to Parliament

As per Article 279A (4) of the Constitution, the Council shall make  recommendations  to the Union and the States.

So, strictly, the role of the Council is only recommendatory and theoretically, Parliament is free to pass any law. But any recommendation made by the GST Council is a recommendation by the Central Government and at least twenty States. The Central Government remains a government only if it commands a majority, at least in the Lok Sabha. So, a Bill brought in by a majority government with the support of about twenty States cannot be ignored by Parliament. It is not really a pathetic situation, as described by the Hon'ble Member. But the Hon'ble Minister says,

I would go back to the GST Council's suggestions which have been brought in here. They are not mine. I just want to highlight that.

There is another complication to this problem. It is not enough if Parliament amends the CGST Act; all the States have to make identical amendments in their SGST Acts - as recommended by the GST Council. What will happen if some States don't amend their Acts?

Maybe time has come to review the GST. With our experience of five years, we should be able to clear the clutter and move forward to a Swachh GST.

Justice Goda Raghuram, a former High Court judge and President of CESTAT said in a speech, seven years ago.

When I saw the GST Bill, it is mind boggling constitutional complexity. It is neither the exclusive list nor the concurrent list; it's a fourth dimensional animal. It is post Einsteinian Physics. Heisenberg's uncertainty of quantum mechanics is elementary compared to the complexity of this. Even the political complexity of States and Union coming together on a continual basis to ratchet the policy of GST is a huge challenge. It is an economical challenge, it is a political challenge, policy challenge, an administrative challenge; it's an adjudication challenge. So that is the next animal that is waiting to pounce on you. But we have to fight, we have to survive.

I think we should be grateful to the Additional Solicitor General for raising this point, for now we know that the GST Council is not superior to Parliament. The earlier we know and accept the situation, the better for the tax administration. And we cannot relax on the premise that the Supreme Court judgement is not going to change anything. We have a constitutional problem before us.

What should we do?

1. Amend the Constitution

2. Abolish the GST Council

3. Do away with the concurrent jurisdiction (of the States and Centre)

Can we make the Central Government the single institution to administer and collect GST? But, based on the track record of the Union Government in distributing the States' share of the tax, States may not agree for such a proposal.

Knowledge is the progressive elimination of ignorance.

Until Next week