Wednesday, Aug 17, 2022

With SC Verdict On GST Council's Powers, Is One Nation One Tax Regime In Danger?

States had the power to legislate their own laws under the GST Act, but SC verdict gives clarity on what states can do to protect their rights.

Goods and Services Tax

A Supreme Court verdict that the Goods and Services Tax (GST) Council recommendations would not be binding on states and the Centre could provide more leverage to states, at a time when several states are at loggerheads with the Centre over financial resource sharing. 

A bench led by Justice DY Chandrachud yesterday held that Parliament and state legislatures could both equally legislate on matters pertaining to GST. "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. It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. Indian federalism is a dialogue between cooperative and uncooperative federalism where the federal units are at liberty to use different means of persuasion ranging from collaboration to contestation", the Supreme Court said.

Centre v/s states

The economic slowdown brought the Centre-state relation under stress, especially when the five-year limit to give 14 per cent compensation on revenue to states under the GST regime would end this year. From 2019 onwards, a majority of the non-BJP states, like Rajasthan, Tamil Nadu, Chhattisgarh, Kerala, West Bengal, Delhi and Punjab, have been pushing for an extension of the GST compensation period by five years.

The Covid crisis exposed the limits of states’ powers as far as revenue generation was concerned. It laid bare states’ inability to fill the shortfall in revenue from within the state by levying local taxes. They have also been pushing the Centre to increase the borrowing limit under the Fiscal Responsibility and Budget Management (FRBM) Act to 5 per cent of a state’s gross domestic product from the current 4 per cent. States also believe that the Centre should hike its contribution for Centrally sponsored schemes.

“The states have so far behaved maturely to arrive at uniform rates as well as GST compensation. No state in the last five years have broken away to use their constitutional power to do what they believed was right. Except one instance of voting, there has always been consensus voluntarily arrived or off late, as seen in the last couple of years, forced on them. This judgment reminds them that they have the power to differ, to go on your own. There is no constitutional bar if states decide to move apart and build new grounds,” former finance secretary Subhash Garg said.

Whether any state would break away after being reminded of their power to do so would depend on the willingness of the central government to forge consensus and take the states along, Garg said. If states feel that the central government was being too much of a centralizing agency, then the tendency to take their own path might increase.  

Reminder Of Rights

The clamour over resource sharing, GST compensation extension, and excessive centralisation have all contributed to the worsening of the relationship between the Centre and states. In that backdrop, the Supreme Court verdict would come as a breather for states trying to bargain a fair deal from the Centre as far as resources are concerned. 

“The observations of the Supreme Court, in my mind, will only provide a greater leverage to the States, which also may result in a delay in the decision-making process qua the changes and amendments pertaining to GST,” said Rajat Bose, partner, Shardul Amarchand Mangaldas & Co.

The Court has also held that GST Council decisions are only recommendatory in nature and hold only persuasive value. “This would have far-reaching implications on various other matters where the States are not in agreement with the decisions of the GST Council, especially in light of the compensation period coming to an end in June. This area would need to be closely looked out for,” said Mahesh Jaising, partner, Deloitte India.

States have previously disagreed with the Council’s recommendations on taxation issues but had not so far framed legislations that did not tally with the Council’s suggestions. Revenue secretary Tarun Bajaj said on Thursday that the ruling was unlikely to materially impact the one-nation-one-tax regime as it is only a reiteration of the existing law that gives states the right to accept or reject the panel’s recommendation on taxation — a power that none has exercised in the last five years. 

Would states rebel?

Bajaj argued that states, even though differing on tax rates on a particular good or service in the Council, never went back and framed legislation that was not in line with the panel’s recommendations. 

“The GST law says that it will recommend, it had nowhere said that it will mandate. It is a constitutional body, an executive body created by the constitution which consists of the Centre and state which will recommend and based on its recommendation we have created our laws on GST. This is the scheme of things,” Bajaj said.

This then leads us to the question of whether the ruling would now let states call for amendments specific to their legislation, resulting in a loss in uniformity and destroying the very basis of the GST regime. As the guaranteed compensation to states due to loss of expected revenue is set to expire in June, whether or not this verdict would result in levying of different rates by the Centre and states are key questions that policymakers would have to address. 

The principle behind the implementation of GST was the idea of one nation, one tax. The one nation, one tax notion came into play significantly in bringing under GST different state taxes levied at different rates by respective state governments. 

“The states have the constitutional power to levy State GST (SGST). However, the construct of the GST and GST Council was designed to bring about harmonization and consensus among states to levy the same rates of SGST by all states. This was the idea of one nation one tax – CGST, IGST, taxes on imports, and the common uniform SGST. This judgment reiterates what is the Constitutional scheme. If the consensus building breaks, then the SGST component of the GST might become different in different states and the notion of one nation, one tax might get diluted,” Garg said. 

 Tamil Nadu Finance Minister Palanivel Thiaga Rajan, in the light of the judgment had tweeted that the GST regime ‘requires a complete overhaul’. The Supreme Court has pointed out that the GST council, a statutory body, has powers to make only recommendations and its decisions could be implemented only after union and state governments make suitable amendments to their respective laws, he said.

He also said that the role of the GST Council was recommendatory in nature and its decisions were not binding on governments either at the state or at Centre and this aspect had been made clear in the court ruling. 

The GST regime has found itself on shaky grounds. The initial idea of taking everyone along has in the recent past been sidelined to impose the Centre’s view on taxes, states have accused. Now with the verdict reminding of the states of their right to rebel, the whole idea of a uniform indirect tax regime has been put under threat. 

“There is something known as in letter and something known as in spirit. The letter said that states have the authority but in spirit everyone agreed we would go together. The letter was therefore less prevalent than the spirit. Now the spirit has broken down in the last two years after Mr Jaitley’s (Late Arun Jaitley, former finance minister) departure. In his time the spirit was more dominant. Building consensus was the key then. Later what happened was Centre went on its own, that we will do what we have to do; you have to fall in line. Now, the tendency to exercise what is there in letter might get prevalent, thus disturbing practical scheme of GST as it was designed,” Garg said.