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Can states deviate from GST Council recommendations?

To endorse the principle of cooperative federalism as mandated by the Constitution of India, states must deviate in rarest of rare circumstances and any aberration must be backed by dialectical thought and pragmatism.

June 28, 2022 / 09:17 AM IST
Representative image

Representative image

The Supreme Court’s ruling with respect to taxability of ocean freight has opened healthy debates over the role of the Goods and Services Tax Council (GST Council) in implementing the idea of ‘one nation, one tax’. While adjudicating upon the constitutional challenge on the levy of GST on ocean freight for cost, insurance and freight (CIF) imports, the apex court affirmed the judgment of the Hon’ble Gujarat High Court whilst dismissing the Revenue’s special leave petition (SLP). On account of extensive deliberations on important aspects such as the “service recipient”, taxability in case of composite supplies, extra-territorial jurisdiction, aspect theory and excessive delegation, the judgment ripostes several points of contention before concluding that the levy on a composite supply is unconstitutional. The incredible and popular element in this judgment is that the GST Council’s recommendations are not binding but have persuasive value. Till date, all State notifications on the subject were simply based on the belief that the GST Council’s decisions are the last word on the subject. The opinions expressed in this judgment seem to create an illusion of a massive change in the existing system. The arguments became relevant while deciding on the constitutionality of the ocean freight provisions which were based on the recommendations of the GST Council.

There have been assumptions about this judgment reversing the court’s position taken in the case of VKC Footsteps Vs UOI & Others on which the revenue placed reliance. The VKC Footsteps judgment puts special emphasis on the need to preserve harmony in the working of both the federal units by highlighting the constitutional spirit envisaged in Article 279A(6) of the Constitution of India (Constitution). However, assuming that the ocean freight case has disturbed the contours or basis of the VKC Footsteps judgment would be a mistake. This is because the GST Council has always been a recommendatory body. The Supreme Court has simply emphasised the relevant articles’ scope and ambit rather than providing a fresh interpretation. Article 279A of the Constitution clearly uses the word “recommendation” and the Supreme Court decision has duly considered the provisions of the Constitution. As a corollary, States have an option to adopt a different stance in relation to rates, exemption, or procedure, but they opted not to do so in favour of the greater good. States implemented all of the GST Council’s decisions because they did not want to rip the consistency fabric. This does not imply that they lacked any powers to do so. The States had the ability to act independently in every case, but they chose to return to the GST Council despite having those options.

Also read: GST at 5: A structural, economic analysis and prescriptions

This judgment has only shed light on the known but not yet practised. The Constitution Amendment Act, 2016 alters the legislative distribution between the Centre and the State on indirect taxation by providing Parliament and State legislatures with ‘simultaneous powers’ and no provision for repugnancy. However, the GST Council is constitutionally mandated, particularly under Article 279A(6) of the Constitution, to promote harmony and alignment amongst the federal partners. The structure also provides for a federally balanced mechanism, wherein the recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union’s vote counts as one-third, while the States’ votes have a weightage of two-thirds of the total votes cast. In case any disputes arise between the two, wherein a State wishes to deviate from the GST Council’s recommendations, a separate dispute settlement mechanism under Article 279A(11) of the Constitution has been provided to best ensure harmony. In any case, any recommendation passed by the GST Council which does not hold true to the constitutional spirit will not get enforced, as has also happened in the ocean freight case.



The argument that the non-binding status of GST Council recommendations could disturb the entire GST mechanism does not hold enough substance, since harmony entails cooperation, and not supremacy. This is the essence of the concept of collaborative federalism, whose contours were beautifully explained by the court in this decision. It stated that the Union Government and the State Governments should try to address the shared issues with the goal of finding a solution by exemplifying statesmanship, teamwork, and honest collaboration. Only then, can both the constitutional ideals of federalism and harmony be achieved.

If States choose to perceive this decision to further their strictly political objectives, it could be a misuse of political power intended at defying the constitutional spirit. Therefore, any deviation must be reasonable, backed by enough dialectical thought and pragmatism, preferably in exceptional circumstances to best ensure the harmonious functioning of the country’s indirect tax regime. Any other interference not intended at preserving the constitutional goals or greater good of the public, has the potential to disturb the entire idea behind ‘one nation, one tax’ and its founding principles. The settlement mechanism enshrined under Article 279A of the Constitution must be the last resort. After half a decade of GST implementation, it is hoped that there are transparent and consistent policies which will help India to attain robust economic growth.

(Abhishek A Rastogi, is a Partner at Khaitan & Co. Rastogi argued on ocean freight before the Supreme Court and several other courts. Views expressed in this article are strictly personal and do not constitute legal / professional advice of Khaitan & Co.)
Abhishek A Rastogi
first published: Jun 28, 2022 09:17 am
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