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GST Council | Supreme Court’s judgment has multi-dimensional implications

In an already charged political atmosphere with some states adopting undisguised hostility towards the Centre, especially on matters of revenue sharing, will this judgment further escalate confrontation? 

May 20, 2022 / 08:51 AM IST
Representative image

Representative image

Opinion may be divided about the performance of the Narendra Modi government on the fiscal front, but most agree the Goods and Services Tax (GST) Act has been among its single-biggest achievement till date.

The Congress may argue that the GST was conceived under its watch. However, as we all know, taking the horse to the river is only half the job, and the deed is not over till the horse agrees to drink the water. For that the lion’s share of credit must go to the late Arun Jaitley without whose diplomatic skills and personal relations cutting across party lines the watershed reform would not have happened.

The GST is not just a piece of financial legislation. It started an epoch in Centre-state relationships. The GST Council became a living forum of ‘cooperative federalism’, a term that is often stretched out of context, and used indiscriminately.

Despite political differences with the ruling party at the Centre, Finance Ministers of opposition-ruled states who were members of the GST Council displayed a great deal of statesmanship, understanding of financial imperatives, and a spirit of accommodation in larger national interest. In many ways, the GST Council provided a template for Centre-state co-ordination.

Given this, the May 19 judgment of the Supreme Court appears to be problematic at multiple levels. Some of the top-line comments of the honourable court do raise a few apprehensions. First, the scope and sweep of the order appears to be much wider than the original question that was put before the court pertaining to the Integrated Goods and Services Tax (IGST) Act of 2007.

While upholding the Gujarat High Court Order quashing the 2017 notification of the government for levying 5 percent IGST on services of transport of goods in a vessel, the court went into larger constitutional issues.

These are weighty pronouncements that call for a study in detail to understand possible implications not only on other statutes, but about Centre-state ties within the broader federal structure.

The operative part of the judgment is “the central government and states have simultaneous powers to legislate on Goods and Service Tax (GST)”. It also held that the recommendations of the GST Council are not binding on the states.

Thereafter, the bench led by Justice DY Chandrachud went on to say, “the recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the states. They are recommendatory in nature… The recommendations only have a persuasive value. To regard them as binding would disrupt fiscal federalism when both the Union and the states are conferred equal power to legislate on GST”. Hence, the GST Council must work in a harmonious manner to achieve a workable solution between the Centre and the states, it added.

Thereafter, the lordships go on further to expound at length their views on federalism. “India is a multi-party system. It is possible that the party in power in the Centre may or may not be in power in other States… the federal units are at liberty to use different means of persuasion, ranging from collaboration to contestation”.

Here lies the nub. In an already charged political atmosphere with some states adopting undisguised hostility towards the Centre, especially on matters of revenue sharing, will this further escalate confrontation is the worrisome question. The Bench remarked, “in the GST Council, the States and the Centre have to function in a harmonious manner”. As mentioned earlier, the general perception was that the GST Council has been working well in a state of dynamic equilibrium. It is not clear what led to the hon’ble justices to raise what appears to be a flag about the GST Council’s operations.

The larger apprehension is about the judgment opening a Pandora's Box of litigation just when the GST system was showing signs of stabilising after overcoming the implementation challenges of initial years with GST collections reaching record highs month after month. If affected assesses or states move court to challenge past rulings on a retrospective basis, and challenge future rulings, it can throw the indirect tax regime into a tizzy. That may not augur well either for businesses, or the economy that is struggling against strong post-pandemic headwinds compounded by the impact of the Russia-Ukraine crisis.

Moreover, the judgment puts a virtual question mark on the legitimacy of the GST Council, and its remit. This might cause decision paralysis on changes that were on the anvil which can have further ramifications in a ‘One Nation, One Tax’ regime.

One is not clear if the Union government had anticipated the Supreme Court going into larger constitutional matters instead of limiting itself to the legality of the IGST circular. If it had done so, it may have argued the case from a higher plane. One has to wait and see the response of the government as the ruling may have far reaching and multi-dimensional implications both for the economy and fiscal governance.

Sandip Ghose is a current affairs commentator. Twitter: @SandipGhose. Views are personal, and do not represent the stand of this publication.

Sandip Ghose
first published: May 20, 2022 08:51 am