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Supreme Court’s ruling of GST on Ocean Freight set to give major relief to importers ; GST Council recommendations not binding on Centre & States

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NEW DELHI : In a significant verdict, the Supreme Court on Thursday held that the recommendations of the GST council are not binding on the Union and the State Governments.

The Supreme Court’s ruling in the case of ocean freight that is set to give relief to several Indian companies and importers could also change the way the Goods and Services Tax (GST) framework operates in the country, say legal experts.

The Supreme Court on Thursday, ruling has held that GST on ocean freight paid in case of import of goods is unconstitutional. Also, the Indian importers who had paid such tax will be eligible to refund.

A bench led by Justice DY Chandrachud held that the Parliament intended that the recommendations of the GST Council will have persuasive value. Importantly the Court held that both the Parliament and the State Legislatures can equally legislate on matters of Goods and Service Tax.

The importers who had not paid the tax on import of services will now not be required to pay tax because of this Supreme Court ruling.

This judgement may change the landscape of those provisions under GST which are subject to judicial review. As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations” said Abhishek A Rastogi, Partner at Khaitan & Co, who argued for the petitioners before Gujarat High Court, Supreme Court and several other courts.

Parliament and state legislatures possess equal powers to legislate on GST, SC ruled.

Experts say that it will be interesting to observe whether this would impact some of the ongoing controversies involving the state and the centre.

The basic issue is that, in most cases, the ocean freight is paid by the seller or companies that are not based in India. So, for instance, if a company based in Europe is exporting goods to India, the company tends to enter into an agreement with shipping companies and pay ocean freight

In such cases, the tax department is unable to recover GST from the European company. The tax department hopes to recover the IGST from importers or companies that are based in India through a “reverse charge mechanism.”

The government had approached the Supreme Court against an earlier Gujarat High Court judgement that said that IGST (integrated GST) on ocean freight is unconstitutional.

In the last few months or so, the tax department has started issuing fresh tax demands and has issued notices to companies over GST on ocean freight.

“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 edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST”, the Court stated in the judgment.

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. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation”, the Court added.

Article 246A which was introduced by the Constitution Amendment Act 2016 vests the Parliament and the State legislatures with the concurrent power to make laws with respect to GST”, the judgment stated.

“If the GST Council was intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A. Neither does Article 279A begin with a non-obstante clause nor does Article 246A provide that the legislative power is ‘subject to’ Article 279A.”, the bench further observed.

If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendations have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act and IGST Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase ‘recommendations to the Union or States’ indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST”, the judgment stated in paragraph 56.

GST Council’s recommendations binding on Government’s rule making power; but not on legislative power

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 Article 279A (4) are binding on the legislature’s power to enact primary legislations

The reasons stated by the bench for holding that the recommendations of the GST Council are not binding on the Union and States :

(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the 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;

(b)Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws 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 edicts 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. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation; and

(c)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 Article 279A (4) are binding on the legislature’s power to enact primary legislations;

Tax Department’s appeals dismissed

The bench, also comprising Justices Surya Kant and Vikram Nath, was deciding a bunch of appeals filed by the Union of India against a judgment of the Gujarat High Court in which the issue was whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax2 on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis.

Prior to the GST regime, service tax on ocean freight was exempted. However, the exemption was lifted by notifications issued in 2017 to levy service tax on the importer, by a reverse charge mechanism.

A division bench of the Gujarat High Court quashed the notifications as unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act.

It was while defending the impugned notifications that the Centre raised the arguments relating to the binding nature of the recommendations of the GST council. The Court, after an elaborate analysis of the relevant provisions, rejected the argument.

GST Council has unequal voting structure

The Court noted that the recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union’s vote counts as one-third, while the States’ votes have a weightage of two-thirds of the total votes cast.

There are two significant attributions of the voting system in the GST Council. First, the GST Council has an unequal voting structure, where the States collectively have a two-third voting share and the Union has a one-third voting share; and second, 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.

Therefore, the GST Council is not only an avenue for the exercise of cooperative federalism but also for “political contestation” across party lines.

The Centre has a one-third vote share in the GST Council. This coupled with the absence of the repugnancy provision in Article 246A indicates that recommendations of the GST Council cannot be binding.

Uncooperative federalism

The judgment also discussed the concept of “uncoopeartive federalism”, whereby States can use various forms of contestations within the Constitutional framework.

‘Uncooperative federalism’ is valuable since “it is desirable to have some level of friction, some amount of state contestation, some deliberation-generating froth in our democratic system”, Justice Chandrachud said quoting Jessica Bulman and Heather K.

“When the federal units are vested with unequal power, the collaboration between them is not necessarily cooperative. Harmonised decision thrives not just on cooperation but also on contestation. Indian federalism is a dialogue in which the States and the Centre constantly engage in conversations.

The States can use various forms of contestation if they disagree with the decision of the Centre. Such forms of contestation are also within the framework of Indian federalism”

Mr. N Venkataraman, Additional Solicitor General of India, appeared for the Union. Mr.V Sridharan, Mr.Harish Salve, Mr.Arvind Datar, Senior Advocates, Mr.Uchit Sheth, Mr.Rajesh Kumar Gautham, Dr C Manickam, Mr Rajat Mittal, and Mr Abhishek Rasthoi appeared for the respondents and intervenors

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