The next meeting of the GST Council is scheduled in June. It comes against the backdrop of the much-debated recent Supreme Court decision on the Goods and Services Tax (GST). Further, the compensation cess arrangement with the states is also to come to an end. The GST Council meeting thus is critical for the very future of GST.

Share Market Live

NSE

It is incumbent upon the GST Council to discuss these two elephants in the room.

Regarding the levy of integrated goods and services tax (IGST) on ocean freight service and on the nature of composite supply, it is best if the apex court decision is accepted. As has been pointed out by the Supreme Court, what was being attempted was a dissection of the supplies. This, the court has held, defeats the concept of composite supply where the tax liability was to be fastened only on the principal supply. Undoubtedly there will be substantial revenue repercussions. There will be a lot of administrative work in processing the refund claims. This should be done speedily.

The Supreme Court, while discussing the constitIonality of the levy, raised other issues. It has held that the central government and the state governments have simultaneous powers to legislate under GST. The court has gone on to say that the recommendations of the GST Council are not binding on state legislature.

Also read:

View: Centre & states must work together on GST — there's too much at stake for the country

The court’s observations regarding the role of the GST Council came in the context of the Centre’s argument that the recommendations of the council were binding. The contention being that the GST Council acts as a "converging platform for both the Union and the states" and hence was the ultimate decision-making body. This, it was contended, was borne by a combined reading of Articles 246A (the Article which stipulates that the Centre and the states have the power to make laws with respect to GST) and 279A (which deals with the contours of the GST Council including its powers).

Further it was contended that the Parliament or the state legislature cannot legislate a law on GST under Article 246A independent of the recommendations of the GST Council.

Justice DY Chandrachud has in a detailed order gone into the architecture of GST (Part C of the Supreme Court decision) and the meaning of the word ‘recommendation’ in different contexts. He has emphasised the need for cooperative federalism which permits debate and dissent. He gone on to uphold the order of the Gujarat High Court. The unambiguous conclusion being that both the Centre and the states have powers under the GST to make laws. The implication again being that the GST Council's decisions are not binding.

Undoubtedly the apex court has reiterated the provisions of the Constitution. The fact remains that if interpreted by the states to mean to legislate in defiance of the GST Council’s recommendations, it would mean chaos. Filing of a review petition can be considered to get clarity.

Also read: Centre still studying SC judgment on GST, might seek legal view to firm up its stand

This is even more needed in the context of Justice Chandrachud’s observation as reported in Live Law — that he said that he was intrigued by the articles written on the GST decision which ultimately "ruled on the aspect of composite supply".

Having said that, the Centre needs to engage with the States. It needs to spell out in dire detail the chaos which can be unleashed if each state were to act independent of the GST Council’s recommendations. It needs to be more accommodative of the concerns of the states.

The second issue which needs urgent finality is compensation cess. Clause 18 of the Constitution Amendment Act stipulates compensation be given to states for loss of revenue arising out of implementation of GST for a period of five years. This period comes to an end shortly. The indications thus far are that compensation cess will not be extended beyond five years.

Incidentally the Supreme Court had in 2018 upheld the constitutional validity of the GST (Compensation to States) Act. The Court had held that Article 248 read with articles 246 and 246A of the Constitution indicates that residuary power of legislation is with Parliament.

The Centre should seriously consider extending the period of compensation. This is an issue which has singularly strained federal relations. The states do find themselves in a difficult fiscal position. While undoubtedly it would be unfair to place the blame for this at the door of GST, a solution needs to be found.

Also read: View | Supreme Court delivers body-blow to naive belief that GST is 'One Nation, One Tax'

The Centre has taken several measures to tackle inflation — cut down cess on petrol and diesel, increase subsidy on fertiliser and LPG cylinders, and waived import duty on a range of raw materials for the steel industry. All this is going to impact revenue.

The Centre needs to impress upon the states the need to reduce the percentage at which the perceived loss is to be calculated, from 14 percent to a more realistic number. It is unlikely that the cess amount collected will be sufficient to meet the compensation requirement. The earlier arrangement of back-to-back loans to meet the shortfall can be explored.

This is certainly not the right time to have any discussion on rationalisation of rates. With inflation still a matter of concern, the Russian-Ukraine conflict persisting, there are too many "known unknowns".

This is a good time to remind ourselves of the observations of the then Chairperson of the GST Council in its early days (third council meeting). He emphasised the need to arrive at a consensus on each issue "even if it needed discussion and re-discussion". The onus is on the Centre to step in and take the lead to bridge the trust deficit.

— Najib Shah (retired) is a former chairman of the Central Board of Indirect Taxes & Customs. Views expressed here are personal.

(Edited by : Vijay Anand)

First Published:May 27, 2022 7:49 AM IST