Supreme Court Ocean Freight Ruling: Do The GST Council’s Powers Stand Diminished?

In its judgment striking down the levy of ocean freight on import of goods, the Supreme Court of India also clarified that the notion that all the recommendations of the GST Council transform into legislation is far-fetched.

The judgment by the top court bench presided by Justice Chandrachud makes two key points:

• The centre and the states have equal powers to legislate on GST law.

• The recommendations of the GST Council have persuasive value and cannot bind the legislature.

The latter has led some to conclude that the GST Council’s powers stand diminished as a result of the apex court’s observation.

Two indirect tax experts, that BQ Prime spoke with, disagree with this interpretation.

The issue is fairly settled and the court has essentially reiterated it, said Saloni Roy, partner at Deloitte India.

Earlier, too, the states could’ve disregarded the GST Council’s recommendations. Now, if they choose to do it, they have the stamp of the Supreme Court, said Rajat Bose, partner at Shardul Amarchand Mangaldas. Bose was involved in cases of ocean freight levy before the high courts.

The top court examined this specific issue as one of the arguments of taxing importers on reverse charge mechanism in this case was on the basis of the council’s recommendation and the recommendations of the council are binding in nature.

The top court on Thursday upheld the Gujarat High Court’s judgment that the central government can’t levy integrated GST on ocean freights for Indian importers under a cost-freight-insurance contract.

Centre And States Have Equal Powers To Legislate

The Supreme Court in the judgment examined Article 246A, which gives the powers to the centre and state governments to legislate on GST law and Article 279A which deals with the composition of the GST council.

The bench pointed out that prior to the GST framework, both centre and states had exclusive taxation powers on their respective domains listed out in the Union and state lists.

The GST law changed that with the introduction of Article 246A by giving both of them the powers to legislate on same heads.

However, unlike Article 254 which gives the framework for removing inconsistencies between a centre and state law, Article 246A did not give anyone the primacy.

The exclusive domain of the Parliament is on levying goods and services tax when the supply takes place in the course of inter-state trade and commerce.

The top court, therefore, said that under the GST framework, both states and the centre have equal power to frame laws as far as GST is concerned.

GST Council Recommendations Are Not Binding: Supreme Court

Having explained the simultaneous power of centre and the states to legislate, the court moved on to the structure of the GST Council and whether its recommendations would override the power granted to the states and the centre under Article 246A.

The central government during the hearing took the stand that the recommendations of the council were mandatory in nature and bound both the legislature and the executive.

The argument, however, did not find favour with the court which emphasised on the federal nature of the Constitution, including in the domain of fiscal policy.

The bench pointed out to deliberations prior to enactment of the law, including the opinion of the Attorney General of India, which said that the recommendations of the council would not override the powers of the legislatures.

The bench also pointed out to the unequal voting structure in the GST council where the central government has one-third voting share and the states collectively have the remaining two-third.

Further, the bench pointed out that the language of Article 246A that gives law-making powers to centre and states in the GST framework does not make it subject to the recommendations of the GST Council.

Neither, does the provision giving the council the powers to make recommendations override the legislature‘s role in law-making, the bench pointed out.

While the tax experts said that states do have the power to differ from the council’s recommendations, they also caution that the purpose of the GST framework should not be defeated.

Deloitte's Roy pointed out that the decisions of the council till now have been unanimous barring an exception in the case of the GST rate for lottery.

"Technically, yes, it is possible that states can decide to have different rates. But the purpose around the GST is to have a uniform tax," Roy said. "And because of its composition, typically, the discussions have all been unanimous apart from one instance on tax rates for lottery."

Bose of Shardul Amarchand Mangaldas weighed in.

"The recommendations have a persuasive value, but it does not mean that the centre and the states have to blindly follow it," he said. "This may lead to an undesirable situation where one or two states for whatever reason say that we are not going to follow a recommendation on a particular tax rate. That has to be avoided."

The top court in its judgment, too, gave similar advice.

"Since the Constitution does not envisage a repugnancy provision to resolve inconsistencies between the Central and State laws on GST, the GST Council must ideally function -- as provided by Article 279A(6) -- in a harmonised manner to reach a workable fiscal model through cooperation and collaboration," it said.