SC verdict on GST Council's recommendations will have no practical impact

The Supreme Court’s judgment saying that the GST Council’s recommendations are not binding on either the Centre or the states has led to a lot of consternation. The judgment has led people to wonder if GST will now be a free-for-all with each state setting its own rate. The judgment is the result of the Centre asking the court to make the Council’s decisions binding. 

What the Supreme Court has said is this: “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 judgment goes on to say that “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”.

There are two issues here. The first is the legal aspect. The Centre had asked the Supreme Court to make GST Council decisions binding on the Centre and States. The Court decided against this, saying that doing so would supersede the legislative powers of Parliament and the state assemblies. The Centre may or may not appeal this. I doubt it will.  

The other issue is whether, in saying that the GST Council’s decisions are not binding, the Supreme Court has introduced a new element into the indirect tax structure of the country. The short answer is no.

The fact is the Supreme Court has simply restated the facts as they stand today. Apart from a few special cases, the recommendations of the GST Council are indeed non-binding and always have been because both the Centre and each of the states has to go back and pass the recommendations as law in their respective state assemblies or Parliament, as the case may be. It is only then that they become binding.

Several states have used the judgment to raise the issue of differential tax rates once again. States such as Tamil Nadu, especially, have been vocal about giving back to states the freedom over their own revenue generation that they had lost with the implementation of GST.

But the question is what has stopped them so far? Why has no state, since July 2017 when GST was implemented, set different rates for itself?

The answer is self-interest. Suppose a state or a grouping of states reduces its GST rate on a cement from 28 per cent to 18 per cent. For a while, it will benefit from the reduction because businesses will start routing their supplies through those States to benefit from the lower rate. 

This will lead to other states similarly lowering their rates to prevent businesses from moving out. The first state will then cut rates further to 12 per cent to maintain its advantage and so on.

You will soon have a race to the bottom and finally a situation where all states are again at the same rate of tax, except this time it will be at the lowest rate of 5 per cent. The system of one nation, one tax will be restored, but with significantly lower revenues.

Obviously the states understand this, and all the other benefits of homogenised rates of tax. That’s why there has been almost no unilateral defiance of the rates decided upon by the GST council. 

The only practical impact of this Supreme Court judgment will, therefore, be that GST Council meetings will become much more spirited, at least in the short term. The Union Finance Minister is in for some irritation.