Supremem Court's judgement on India’s fiscal federalism

In Union of India vs Mohit Minerals, SC delivered a ruling which will have wider impact.

About the case

• At stake was validity of a levy imposed on importers, of Integrated Goods and Services Tax (IGST) on ocean freight paid by foreign sellers to foreign shipping lines.
• The Gujarat HC had declared the tax illegal.
• SC held that the levy constituted double taxation : importer, which was already paying tax on the “composite” supply of goods, could not be asked to pay an additional tax on a perceived “service” that it may have received.

Just recommendations

• Court proceeded on technical reading of various laws, in particular the provisions of Central Goods and Services Tax Act.
• It held both Parliament and State legislatures enjoy equal power to legislate on Goods and Services Tax (GST).
• Goods and Services Tax Council’s recommendations could never be binding on a legislative body.
• Union Ministry of Finance has claimed that ruling does not have any bearing on the way GST has been functioning in India, and it not fundamentally different to existing framework of GST.

Implication of judgement

• Until now, governments across India have treated GST Council’s recommendations as sacrosanct, because they believed that this was indeed the law.
• What ruling holds is that State governments need not feel circumscribed by any such limitation.
• According to Court, State legislatures possess authority to deviate from any advice given by GST Council and to make their own laws by asserting their role as equal partners in India’s federal architecture.

Advent of Articles

• 2017: Union government introduced GST regime through the 101st constitutional Amendment.
• ‘One Nation, One Tax’, was the mantra.
• To give effect many entries in State list of Schedule VII of the Constitution were either deleted or amended.
• Power to legislate on GST was inserted through a newly introduced Article 246A.
• It overrode the general dominion granted to Parliament and State legislatures to bring laws on various subjects and afforded to them an authority to make legislation on GST.
• 101st Amendment through Article 279A, established a GST Council.
  • Composition: Union Finance Minister, Union Minister of State for Finance, and Ministers of Finance from every State government.
  • Authority: make recommendations to the Union and States” on several different matters.
• Concerns:
  • Confusion on whether Council’s decisions would be binding.
  • Use of the word “recommendations” suggested that its decisions would be advisory, at best.
• But Article 279A directed establishment of a mechanism to adjudicate disputes b/w governments on decisions taken by Council suggested that those governments would be bound by any advice rendered to them.
• Fiscal responsibilities that had been divided with much care and attention between the Union and the States would now stand dissolved.

Not a symmetrical compact

• In its judgment SC has provided final word on this conundrum.
• Our federal compact is not symmetrical, there are certain areas of the Constitution that contain a “centralising drift”. Article 246A: its provision provides concomitant power both to Union and to the State governments to legislate on GST.
• It does not discriminate b/w two in terms of its allocation of authority.
• That allocation, according to the Court, cannot be limited by Article 279A, which establishes a GST Council, and which treats the Council’s decisions as recommendations.

In perspective

• The Court’s ruling does not mean that legislature — whether Parliament or the States’ — cannot through statutory law make the Council’s recommendations binding on executive bodies.
• But a constitutional power can never be limited through statute.
• Such curbs must flow only from the Constitution.
• Today, State governments will be free to exercise independent power to legislate on GST.
• This might lead to conflicting taxation regimes, with idea of ‘One Nation One Tax’ rendered nugatory.

Conclusion

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