Storm in a GST cup

The notion that the recent Supreme Court ruling alters the nature of fiscal federalism is misplaced, but the Council would do well to set up dispute resolution tribunals

Supreme Court Judge Justice D Y Chandrachud is justifiably “intrigued” at how his ruling on a commercial dispute, Union of India versus Mohit Minerals, over the levy of the integrated goods and services tax (GST) on ocean freight charges paid by importers has triggered a nationwide debate. Drawing inferences from, and debating the implications of his judgement, economists, political scientists and policy makers are discussing how it can potentially alter the nature of fiscal federalism in India. This is rather far-fetched, if not completely misplaced.

Contrary to being a “controversial Supreme Court ruling”, as Josh Felman and Arvind Subramanian described it (“GST: Cooler heads for constructive ends,” Business Standard, May 26), the judgment is virtually a recitation from the Constitution of India. Article 279A (4) unambiguously states that the GST Council shall “make recommendations” to the Centre and the states on all matters relating to the GST. There is no provision in the Constitution that even hints that the recommendations are binding on either the Centre or the states.

Indeed, it couldn’t have been otherwise.

Had the Constitutional amendments relating to GST made the GST Council’s recommendations binding, it would have been in violation of the legislative supremacy of both Parliament and state legislatures. So also the tax sovereignty of the national Parliament and the powers of the sub-national legislatures.  

In fact, it could have resulted in a constitutional crisis with the GST council, a creation of Parliament and state legislatures, having powers to override those of these two representative institutions.

How a ruling on a long-standing commercial dispute has been made to have a bearing on a Constitutional matter with legislative and fiscal implications is more to do with the emerging stress in Centre-state relations than with the judgment per se.

If anything, the Supreme Court ruling also endorses the broader Constitutional position of fiscal federalism by explicitly placing Centre and individual states on a par with each other in respect of GST. The observations of the bench virtually quote Article 246(A), which provides for concurrent taxation powers of the Centre and the states in relation to the levy of GST.  

It is not as if a judgment has been deliberated and delivered on a dispute between members of the GST Council, a state government or the Centre. This is important insofar as both the Centre and states have individually and collectively participated, passed, endorsed, and ratified the law in their respective legislatures.

The “persuasive value” of the GST’s Council’s deliberations, expressively articulated by the bench as it might be, has not only been on display but demonstrated in practice in the GST council, right from its first meeting on September 23, 2016. No wonder, then, all decisions of the GST Council have been based on consensus, rather than on voting, which has become the DNA of the GST Council’s decision-making structure.
 

At best, the observations of the Supreme Court on GST can be used to help the states in ensuring that skewed voting mechanism, where Centre has two-thirds and all states collectively have one-third votes, is the least desirable route to resolving a dispute with the Centre.

The real danger is of this judgment being used by the GST Council members to pursue their agendas, the Centre to renege its committed obligations, or states to get some elbow room on indirect taxation policy. That, it is obvious, will be driven more by political consideration than policy persuasions, and performance of the GST regime.  

Now with this “landmark” ruling, which has unintentionally “stirred and shaken federalism”, and called out a non-existent “constitutional oddity”, the GST Council should start and strengthen the dispute resolution mechanism that is provided for in the GST Act itself. Article 279A (11) requires the GST Council to establish a mechanism to adjudicate on any disputes arising out of its recommendations and its implementation. The deliberation in the Council had envisioned it to be a quasi-judicial body, much like the tribunals, whose decisions are final.

Had this forum been active and functioning by now, the transactional issue that led to this ruling by the Supreme Court would have been settled there rather than being escalated to a constitutional court.

The timing is of essence. In just about a month, from July 1, 2022, the states will no longer have the cushion of GST compensation. This will undoubtedly trigger dissent in the GST Council, which can quickly threaten to replace debate by disruption and consensus by confrontation.

Before the GST Council becomes a divided house, which will impair its ability, it must use its status as a constitutional body and skills as an institution that piloted far-reaching constitutional and legislative changes not so long ago, to draw up guidelines for adjudication mechanisms to address disputes amongst GST Council members.

More than being swayed by the Supreme Court’s ruling, the GST Council must start from acting on the guidance and judicial opinion of high courts on setting up GST tribunals. Otherwise, from now on, political disputes will be argued and tried as judicial ones by the constitutional courts. And that will be the beginning of the end, coming as it does at a time when the political view that state governments compromised their tax sovereignty in the GST regime is gaining currency.

While this view is a tad exaggerated, it is undoubtedly driven by the impending deadline for compensation in a month from now. More than loss of tax sovereignty of states, the GST was premised on pooling of tax sovereignty, with the Centre also having effectively given up its rights of unilaterally making indirect tax changes which formed the core of Part B of the Union Budget.

Be that as it may, the states should push to get the next Finance Commission to recognise the changes in the institutional landscape of the fiscal federalism post-GST Council. The Fifteenth Finance Commission failed to redefine the criteria for tax sharing in the new indirect tax regime. It must be recognised that the GST Council decides a large part of the revenue pool that the Finance Commission devolves. Accordingly, a new set of principles that will empower the states without disempowering the Centre must be worked on.

Finally, rather than looking up to the Centre and treating it as the sole source of wealth and wisdom, the states should use the GST Council as a forum for inter-se cooperation and agree to take the GST to the next level. This can be done, for instance, by agreeing among themselves to have uniform basic principles for GST 2.0, which includes real estate, electricity and petroleum products. While being synergistic with the existing two-tier GST, it could work out a state-specific GST outside the existing GST framework. This would help move the country from a co-operative federalism mindset to a collaborative federal system.

The author, a former finance minister of J&K, was a member of the GST Council from 2016 to 2018