Cooperative federalism

SC has done well to reiterate GST Council's position

A Supreme Court Bench led by Justice D Y Chandrachud in a judgment on Thursday said the recommendations of the Goods and Services Tax (GST) Council were not binding on the Central and state governments. The court further noted Parliament and the state legislatures had the powers to legislate on issues related to GST. The judgment clearly underscores the nature of the Indian federal structure and the need for cooperation. The implementation of GST after years of consultation between the states and the Union is said to be one of the finest examples of cooperative federalism. Both the Centre and the states pooled their powers to tax goods and services to attain the idea of “one country one tax”. Different levels of taxes in different states are inherently inefficient for business.

In the Mohit Minerals case, the apex court upheld the Gujarat High Court’s ruling that integrated GST (IGST) cannot be imposed on ocean freight. Any legislative gap in this context can be addressed after a discussion in the Council. Parliament has the powers to make laws in the case of IGST. However, it’s the court’s observations on the GST Council’s position that has raised concern. It is being argued that the states may not implement the Council’s decisions and the advantage of “one nation one tax” could be lost. It is worth noting here that what the court has done is to reiterate the constitutional position. Article 279A says the GST Council “shall make recommendations to the Union and the States …” regarding various aspects of the tax. But it also says that the Council will be “guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services”.

This is important because Article 246A empowers the legislature of every state to make laws in the context of goods and services. Notably, the Constitution also gives powers to the Council to determine the procedure in the performance of its functions. If gaps emerge in the functioning of GST, which is always a possibility as the system matures, the Council is in a position to plug them. Therefore, the judgment per se has not increased uncertainty in the GST system. The system is designed to build a consensus. The law gives two-thirds of the weighted votes to the states while one-third is with the Centre. Since all states are part of the process in the Council, there is, in principle, no reason for some states to act differently. Besides, the Council is guided by the need to develop a harmonised market.

There have been a number of occasions when differences emerged between the Centre and the states but they were resolved in the Council. Perhaps the biggest challenge the Council needs to address now is the augmentation of revenue. With the completion of five years of implementation, the states from July 1 will not be eligible for compensation against revenue shortfall. The Council is working on the rationalisation of rates to improve revenue collection, which will hopefully be implemented soon. Also, once the system stabilises, the need for making changes and, thus, the scope for differences in the Council will automatically decline. The judgment nonetheless underlines the need for increased cooperation. The Centre must make sure that the concerns of all states are addressed. It also shows that levies and provisions can be successfully challenged. The Union government and the Council must make sure that taxes are imposed strictly in accordance with the law.