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Expect A Rise In GST Litigations With SC’s Ruling On The GST Council

The Supreme Court recently ruled that decisions by the GST Council, which recommends changes in GST law, do not bind or mandate the Centre or state governments for implementation

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Every new law takes considerable time to settle down in the country where it is passed. Several issues and contradictions can arise with passing time and hence the law has to undergo constant amendments and pruning. 

This becomes challenging when a federal structure prevails for implementing a “one nation-one tax” such as the Goods and Services Tax (GST) in India. There arises several scenarios where the Centre and state governments are seen at loggerheads. That’s when litigations arise and the matter is taken to the steps of the courts.

SC’s historic verdict 

The Supreme Court recently ruled that decisions by the GST Council, which recommends changes in GST law, do not bind or mandate the Centre or state governments for implementation. The historic statement comes from the case of the Union of India versus M/s Mohit Minerals Pvt. Ltd. in May 2022.

M/s Mohit Minerals Pvt. Ltd. contested the Gujarat High Court’s judgment for GST levy under a reverse charge basis on any imports. It reasoned that such a GST levy on ocean freight is unconstitutional as that is incurred by the exporters in foreign countries towards the Cost-Insurance-Freight (CIF) contracts when provided as a service. 

Such a charge can lead to double taxation as our importers are already paying Integrated GST (IGST) since the total import value includes the freight costs. Further, the government never levied any tax on ocean freight under the Service Tax era. The court had to examine such a double GST levy from a constitutional validity viewpoint.

The tax department justified the GST levy on ocean freight as being in line with the GST Council's binding recommendations that must be implemented. Hence, the matter which was earlier not part of the petition was taken up by the SC. The apex court finally confirmed if the Council’s decisions are recommendatory or mandatory for the lawmaker to implement through notifications. 

Consequently, the SC ruled that the GST Council’s decisions are not mandatorily required to be implemented but are only recommendatory at the option of the Centre or states. GST is completing five years by the end of June 2022. The SC’s verdict around this time is surely giving jitters to several stakeholders.

Present setup and process of implementing GST decisions

The GST Council is a joint setup of the Centre and all states in compliance with Article 279A of the amended Indian Constitution. It consists of the Union Finance Minister who chairs the meetings. Further, it has a representation of Finance or Taxation Ministers from all states while making decisions. 

While the Centre holds one-third of voting power, all states put together have a total of three-fourths of weighted voting power in the GST Council. Further, at least three-fourths of the weighted votes of those present in the GST Council meeting is needed to pass any decision at the GST Council meetings.

The Council meets regularly and passes recommendations on critical matters such as whether or not the Centre and states can exempt certain goods and services and the tax rates with range, procedures to comply with the GST law, rules to decide the threshold turnover limits, place of supply, etc. 

It also fixes special rates and cess to collect additional revenue to meet any contingencies arising due to natural calamities or disasters. Further, it passes recommendations for implementing special laws for certain States, etc in times of need.

The Centre and states unanimously or by way of mutual agreement pass any decisions by following the steps given above. Mostly, there is a visible impact of political play involved in voting in favour of a particular decision in the GST Council. Since a majority of the states are governed by the ruling political party or alliance. It majorly affects politically weaker states and revenue deficit states of opposite parties, affecting the true spirit of cooperative federalism.

If there are any disputes between any states and the Centre, the Group of Ministers (GoM) would be formed to study the case and mediate between the two governments to resolve the matter.

Expected changes after the SC’s ruling

The ruling states that the central government or any state government is at liberty to go against the recommendations made by the GST Council and notify its own rules or regulations under the GST law. 

The governments formed in some politically weaker states may take inspiration from the SC’s ruling. Such states may pass amendments that are contrary to rules notified by the Centre. 

For instance, the threshold limits for GST registration may change with every state compared to standard limits. Suppose, the GST Council wants to charge a certain GST rate to be reduced from 28 per cent to 18 per cent, and the revenue deficit states may continue to retain such rate at 28 per cent for higher GST collections. 

Such a move will begin to affect the end consumers as it heightens the profiteering chances of any retailers and wholesalers. The businesses operating in multiple states face difficulties in compliance leading to inefficiencies, especially when there is a bias between interstate and intrastate transactions. 

They may need to hire or consult tax experts well-versed with local rules and regulations in every state. Ultimately, businesses may have to go for litigations to deal with contradicting rules, rates, limits and regulations between the Centre and each state. 

A dispute resolution bench may be soon set up for passing independent and unbiased rulings.

Litigation instances 

Primarily, there can be many litigations surrounding the place of supply. Many cases can be about the exemption granted on products and services. Another popular matter for litigation can be the difference in the GST rate charged for the transaction as per the Centre and the respective state.

With the end of the compensation cess levy in June 2022, there can be more instances where states would begin charging higher GST rates on certain sin or luxury products. Further, the present revenue sharing mechanism of CGST and SGST for intrastate transactions could be disputed by revenue deficit states or states ruled by the opposition. Likewise, there can be several such cases where the Centre and states may disagree to shake hands.

[About the author: Archit Gupta is Founder and CEO, Clear (Formerly Cleartax)]

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