GST Council recommendations only have a persuasive value, clarifies Supreme Court

This year has seen a significant spike in the pricing of freight, especially for ocean freight, which also is the most preferred medium for transportation of large volumes of goods. Unfortunately, the importers of goods were burdened with the dual levy of GST on the freight value. It is because of the IGST payable at the time of clearance of goods for home consumption on the transaction value (including freight value) as well as also on the procurement of freight services, which is regarded as a separate supply of service.

In a landmark decision delivered on May 19, the Supreme Court of India upheld the decision of Gujarat High Court in relation to levy of GST on ocean freight, which had decided that GST was not applicable on procurement of freight services as an independent supply of service.

The decision of the court would benefit several taxpayers who had purchased or would procure goods on a cost, insurance, and freight (CIF) basis, when seller is liable for the cost of shipping, insurance and freight. The ruling discusses various concepts under GST legislation to ascertain whether the notification levying GST on transportation services provided by a non-taxable person for goods reaching Indian customs territory was ultra-vires, and had to be quashed.

In coming to this conclusion, the court reiterated that the GST Act is supreme and the principles enunciated in the Act cannot be disregarded by passing notifications that are not in conformity with the Act. It also clarified that the GST legislation was implemented to avoid dual levy of tax on a specific transaction both as supply of goods and as services.

While transportation service could be differentiated from supply of goods, it would be incorrect to digress form the principle of composite supply. Composite supply is made by a taxable person to a recipient consisting of two or more taxable supplies which are naturally bundled with each other in the ordinary course of business, with one of them being the main supply. Thus, the decision safeguards the interest of the importer whose cost of procurement could have cascaded with dual levy of GST had the decision of the Gujarat HC been reversed. Pursuant to this order, Indian importers who had already paid GST, would be eligible for a refund. Furthermore, the importers who had not paid GST or are in litigation, should also benefit.

Few other observations of the apex court could prove challenging in future years. It has widened the scope of recipient to include any person who may be receiving services even in the absence of a contractual relationship between the two parties. The ruling also states that if there is sufficient nexus of transaction with India, it cannot be treated as extra territorial levy. Such observations could be relied by the authorities to collect tax in future in instances.

Another important aspect that the apex court has decided in this case is about the legal status of GST Council by clarifying that the recommendations made by the council are not law since they are mere recommendations. According to the court, the GST Council has been authorised through a delegated authorisation and, hence, it must act precisely within the confines of the authority given to it, and the notion of implied intent or the idea of incidental and ancillary power is not appropriate in the exercise of fiscal power since it impacts several taxpayers. This decision of the apex court may lead to an inference that the judiciary would now have to be more proactive in the judicial review of GST legislation. This may prompt a plethora of new challenges by the taxpayers challenging discrepancies in GST Council decisions.

This decision is an important reminder to the government that the GST law concerns both state and Centre, and the Union government should not unilaterally make laws as it would defeat the principles of ‘cooperative federalism’. The constitutional harmony will remain intact if both the states and the Centre weigh the repercussions and benefits before enforcing new amendments.

SR Patnaik is Partner & Head – Taxation, and Shivam Garg is Senior Associate, Cyril Amarchand Mangaldas. Views are personal, and do not represent the stand of this publication.