How will the SC ruling affect the GST framework?

The recent ruling by the Supreme Court of India on the Goods and services tax (GST) framework would likely have an impact on the Centre-State financial relationship where the court said that recommendations of the GST council were not binding on the Central and state governments.

The SC recently said the GST Council is not merely a constitutional body restricted to the indirect tax system in India but is also an important focal point to foster federalism and democracy, where states can use various forms of contestation if they disagree with the decision of the Centre.

"Merely because a few provisions of the Constitution provide the Union with a greater share of power, the provisions in which the federal units are envisaged to possess equal power cannot be construed in favour of the Union. The Union and the States have a simultaneous power to legislate on GST. The GST Council has the power to make recommendations on a wide range of subjects relating to GST," it said.

Also Read | GST Council’s proposals not binding on Centre, States: SC

The bench said that 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.

Generally, the decisions in the GST council are taken on the basis of a voting system where the states collectively have a two-third voting share and the Union has a one-third voting share and since India has a multi-party system, it is possible that the party in power at the Centre may or may not be in power in various states.

How will the SC ruling affect the Centre-State relationship?

After the ruling, Revenue Secretary Tarun Bajaj said that the SC ruling was unlikely to materially impact the on-nation-one-tax regime as it is only a reiteration of the existing law that gives states the right to accept or reject the panel's recommendation on taxation – a power that none has exercised in the last five years.

Also Read | Govt mulls extending April GST payment deadline; asks Infosys to fix glitch on portal

Bajaj further said that the problems can get compounded if any state decides not to accept the recommendation of the GST Council. However, he added that there will be an incentive for an entity to implement the recommendations.

On the other hand, Jatin Arora, Partner, Phoenix Legal told Business Standard that it would lead to interpretational issues with regard to states’ powers. “SC ruling gives more teeth to states to raise their concerns. Now, the Centre will have to be more accommodative of states’ issues,” he said.

At the time of the introduction of GST, it was agreed that the Centre and states would function in the spirit of cooperative federalism and take decisions on the basis of consensus.

(With agency inputs)