Context

On May 19, in Union of India vs Mohit Minerals, the Supreme Court of India delivered a ruling which is likely to have an impact far wider than what the Centre might have imagined when it brought the case up on appeal.

Background

• At stake was the validity of a levy imposed on importers, of Integrated Goods and Services Tax (IGST) on ocean freight paid by foreign sellers to foreign shipping lines.
• The Gujarat High Court had declared the tax illegal.
• The Supreme Court affirmed the ruling and held that the levy constituted double taxation — that is, that the importer, which was already paying tax on the “composite” supply of goods, could not be asked to pay an additional tax on a perceived “service” that it may have received.

Why the ruling could transform the future of fiscal federalism in India

• Equal powers to legislate on GST: While delivering the judgement, the Supreme Court held that both Parliament and the State legislatures enjoy equal power to legislate on Goods and Services Tax (GST).
• The Court said that the Goods and Services Tax Council’s recommendations were just that: recommendations that could never be binding on a legislative body.
• Until now, governments across India have treated the GST Council’s recommendations — even where they disagreed with them — as sacrosanct, because they believed that this was indeed the law.
• According to the Court, State legislatures possess the authority to deviate from any advice rendered by the GST Council and to make their own laws by asserting, in the process, their role as equal partners in India’s federal architecture.
• Conflicting taxation regimes: Because of the ruling, the State governments will be free to exercise independent power to legislate on GST.
• It is possible that this might lead to conflicting taxation regimes, with the idea of ‘One Nation One Tax’ rendered nugatory.
• Constitutional power cannot be limited through statute: The Court’s ruling does not mean that a legislature — whether Parliament or the States’ — cannot through statutory law make the Council’s recommendations binding on executive bodies.
• But a constitutional power, in the Court’s ruling, can never be limited through statute. Such curbs must flow only from the Constitution.
• And in this case, in the Court’s analysis, no restrictions on legislative power can be gleaned on a meaningful reading of the Constitution.

Background of 101st constitutional Amendment

• Unification of tax administration: When, in July 2017, the Union government introduced the GST regime through the 101st constitutional Amendment, it did so based on an underlying belief that tax administration across India needed unification.
• To give effect to this idea, many entries in the State list of Schedule VII of the Constitution were either deleted or amended.
• A power to legislate on GST was inserted through a newly introduced Article 246A.
•  No longer could State governments legislate on sale or purchase of goods barring a few exceptions, such as petroleum and liquor through the ordinary legislative route.
• GST Council: In addition, the 101st Amendment also established, through Article 279A, a GST Council.
• The Council was given the power to “make recommendations to the Union and States” on several different matters.

Implications of the judgement

• The use of the word “recommendations” suggested on the one hand that its decisions would be advisory, at best.
• But, at the same time, the fact that Article 279A directed the establishment of a mechanism to adjudicate disputes between governments on decisions taken by the Council suggested that those governments would, in fact, be bound by any advice rendered to them.
• GST would be in jeopardy: If the former reading was to be deployed, the purpose behind the introduction of a common GST would be in jeopardy.
• But the latter interpretation effectively entailed the destruction of the well-laid plans of the Constituent Assembly.
• Fiscal responsibilities that had been divided with much care and attention between the Union and the States would now stand dissolved.

Federal compact

• Although States had until now proceeded on a tacit belief that the GST Council’s recommendations were binding, such an approach, in Justice Chandrachud’s words, would run counter both to the express words of the Constitution and the philosophical values underlying the language deployed.
• Article 246A, which was introduced by the 101st Amendment provides concomitant power both to the Union and to the State governments to legislate on GST.
• It does not discriminate between the two in terms of its allocation of authority.
• That allocation, according to the Court, cannot be limited by a reading of Article 279A, which establishes a GST Council, and which treats the Council’s decisions as “recommendations”.

Conclusion

GST was conceived as a product of what some described as “pooled sovereignty”. But perhaps it is only in an administrative area, animated by contestation, where we can see synergy between different sovereign units, where our nation can take a genuine turn towards a more “cooperative federalism”.

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