Five years of GST: Pain points remain

On July 1, 2022, GST laws in India would be five years young. Anyone with some exposure to the Goods and Services tax (GST) would hold the opinion that the law is still a work in progress though much headway has been made since 2017. As the law enters its sixth year, the relations between the various constituents of the GST Council would be keenly looked at. This is because of two reasons — the promised compensation to the state governments would end and a recent decision of the Supreme Court would give state governments some more skin in the game and some bargaining power at the GST Council.

In the Mohit Minerals case, the issue before the apex court was whether GST could be levied for the second time on ocean freight when IGST was levied on the total transaction value which included freight. The court struck down the levy as unconstitutional and ended the controversy over double taxation on ocean freight. However, what interested everyone more during the course of this decision was the observations of the court on the GST Council.

The operative part of the ruling was that the recommendations of the GST Council are not binding on the Union and states for the following reasons. Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units. Parliament and the state legislatures possess simultaneous power to legislate on GST. The ‘recommendations’ of the GST Council are the product of a collaborative dialogue involving the Union and states. They are recommendatory in nature. To regard them as binding edict would disrupt fiscal federalism, where both the Union and the states are conferred equal power to legislate on GST. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions.

The government, while exercising its rule-making power under the provisions of the CGST Act and IGST Act, is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power of Article 279A (4) are binding on the legislature’s power to enact primary legislation. The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient — in this case, the importer — by Notification 10/2017 is only clarificatory. The government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge. The impugned levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising a supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.

GST Council meeting

The decision of the apex court would be on the minds of the members of the GST Council in their scheduled meeting in June. While a solution to the question of compensation cess is bound to take up much airtime in the meeting, there are other aspects that also merit the attention of the GST Council. It is a disservice to the taxpayer that even after five years of GST, there are no fully functional GST Appellate Tribunals across the country.

The GST Council is proposing to institute a Dispute Resolution Mechanism in case there are differences of opinion within the Council — they would do well to establish the GST Tribunals first as taxpayers need a forum to appeal apart from the Authority for Advance Rulings (most decisions are pro-revenue) nor the high courts (not all disputes can be questions of law). While the steady increase in GST collections should please the GST Council, they should also ponder about realigning some of the rates of GST. The provisions regarding input tax credit under GST are very different today (too many conditions to be satisfied) from what they were five years ago (across-the-board availability of input tax credit across the entire supply chain). The Council should propose a small negative list of items on which credit cannot be availed and permit credit on all the rest. The GST Council has enough tools, data and information at their command to punish those who contravene these provisions.

(The writer is a Bengaluru-based tax expert)