Implications of SC order

GST at Crossroads

The next meeting of the GST Council is scheduled to take place soon. It comes in the backdrop of GST revenue collection rising -- crossing the Rs 1.4 lakh crore mark three months at a stretch since March 2022, although it hit a peak of Rs 1.68 lakh crore in April and then fell to Rs 1.41 lakh crore in May. More importantly, the meeting will happen in the backdrop of the much-debated recent decision of the Supreme Court on GST. Further, the compensation cess arrangement with the states is also about to come to an end. The GST Council meeting thus is critical for the very future of GST.

The decision of the apex court was regarding the constitutionality of the levy of the integrated Goods and Services Tax (iGST) on ocean freight service paid for by a foreign seller to a foreign shipping line on a reverse charge basis. The order written by Justice D Y Chandrachud makes it emphatically clear that imposing the levy is untenable. This, the court has held, defeats the concept of composite supply where the tax liability was to be fastened only on the principal supply. It will be prudent to accept the apex court’s order. Undoubtedly, there will be substantial revenue implications. The consequential refund claims should be processed speedily.

However, this is not the reason why the court order made news. The Supreme Court, while discussing the constitutionality of the levy, has also discussed at length about the force of the recommendations made by the GST Council. It has ruled that “the recommendations of the GST Council are made binding on the government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system”.

Having said that, the order goes on to say that though the GST Council has wide recommendatory powers on matters related to GST, it would “not mean that all the recommendations of the Council, made by virtue of its power under Article 279A, have a binding force on the legislature”.

This is a significant distinction. Secondary legislation refers to ‘delegated legislation’. It refers to the exercise of legislative power by an agent who is lower in rank to the legislature, or who is subordinate to the legislature.

In the context of the apex court’s order, secondary legislation would mean rule-making power. It is a moot point whether this would also mean being bound by the recommendations as regards rates of taxation. It would appear so, if one goes by the court’s observation that recommendations of the Council are binding on the government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system.

The consequence of this interpretation would mean that all other recommendations are not binding on legislature; recommendations that impinge on primary legislative powers. Primary powers relate to the power to make laws. So, we have a piquant situation where recommendations of the GST Council relating to law are not binding, but recommendations relating to rules, which give flesh to the legal provisions, are.

The result has been that both the Centre and the states appear to be happy with the decision. The states have been cheering the judgement as an affirmation of federal powers. The Centre, on the other hand, has reacted to say it will be business as usual. Clarity is needed urgently – and, more importantly, an understanding and consensus between the Centre and the states as to how both would harmoniously implement the apex court’s order. In case such an agreement cannot be reached, it will be prudent to go back to the Supreme Court and seek a clarification.

This is even more necessary in the context of Justice Chandrachud’s observation, as reported in the media, wherein he said he was “intrigued” by the articles written on the GST decision which ultimately “ruled on the aspect of composite supply”. So, are we all reading more in the court order than what was intended?

The second issue that needs urgent finality is compensation cess. Clause 18 of the Constitution Amendment Act stipulates compensation to be given to states for loss of revenue arising out of the implementation of GST for a period of five years. This period comes to an end at the end of June. The indications thus far are that the compensation cess arrangement will not be extended. (Incidentally the Supreme Court had in 2018 upheld the constitutional validity of the GST (Compensation to States) Act. The court had held that Article 248, read with Articles 246 and 246A of the Constitution, indicate that residuary power of legislation is with Parliament.)

Given the fiscal stress and in the interest of harmonious federal relations, the Centre should consider extending the period of compensation to the states. However, the states should be persuaded to reduce the percentage at which the perceived loss is to be calculated from the current 14% to a more realistic number. It is unlikely that the cess amount collected will be sufficient to meet the compensation requirement. The earlier arrangement of back-to-back loans to meet the shortfall can be explored.

This is certainly not the right time to have any discussion on rationalisation of rates. With inflation still a matter of concern, the Russian-Ukraine conflict persisting, there are too many “known unknowns”.

This is a good time to remind ourselves of the observations of the then chairperson of the GST Council in its early days (its third meeting), the late Arun Jaitley. He emphasised the need to arrive at a consensus on each issue “even if it needed discussion and re-discussion”. The onus is on the Centre to step in and take the lead to bridge the trust deficit with the states.

(The writer is former chairman, Central Board of Indirect Taxes & Customs)