Summary: In a ruling that will have major implications on the GST framework and Centre-State financial relations, the Supreme Court of India on Thursday said the recommendations of the council are not binding on the Centre and State governments. The observation followed a judgement over the applicability of Goods and Services Tax under the Reverse Charge Mechanism on transportation of imported goods through the sea route. The apex court dismissed an appeal by the Centre against an earlier Gujarat High Court judgement that said that Integrated GST on ocean freight is unconstitutional. The Supreme Court held that GST Council’s recommendations will only have a persuasive value, adding that the Parliament and state legislatures possess equal powers to legislate on GST. Abhishek A Rastogi, a partner at Khaitan & Co, who argued on behalf of importers, said there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations. The decisions in the GST Council are taken by a majority of not less than three-fourths of the weighted votes cast. The Centre has one-third weightage of the total votes cast and all the states taken together have two-thirds of the weightage. In the last five years of GST, the Council has taken all decisions on the basis of consensus, with the exception of the levy on lotteries, in which voting took place in December 2019. Abhishek A Rastogi, Partner, Khaitan & Co says GST Council’s recommendations are unconstitutional can’t be implemented. Process of voting in the GST Council remains intact. States having different GST rates will defeat the objective of GST and the states will have to debate if they want to deviate from the harmonised system. The Finance Minister of Tamil Nadu Palanivel Thiaga Rajan welcomed the court’s observation, saying it clarifies issues that he had raised last year. He had said the GST system and the Council function with an all-encompassing mandate not envisioned in the Constitution of India. He said the vesting of enormous de-facto power in bodies not directly connected with the GST Council, such as the Tax Research Unit of the Central Board of Indirect Taxes and Customs, GST Secretariat and the GST Network, is fraught with questions of constitutional legitimacy. What would the Supreme Court’s remarks mean for Centre-State relations going forward? Speaking to Business Standard, Jatin Arora, Partner, Phoenix Legal, says this will lead to interpretational issues with regard to states’ powers. Tamil Nadu govt says most of the powers related to levy of taxes rest with the Centre. It says agenda set by the Centre is followed typically in GST Council. The SC ruling gives more teeth to states to raise their concerns. Arora says it will be worrisome if states legislate on GST matters outside of the GST Council. Centre will have to be more accommodative of states’ issues. Another legal expert says that yesterday’s ruling does not change the way in which the GST Council functions. According to Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co, there is no change in provisions related to GST Council. The GST Council can deliberate on differences of opinion between states and centre and it is empowered to decide on those differences. Meanwhile, Revenue Secretary Tarun Bajaj said the ruling is 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 council’s recommendations -- a power that The official further said that states never went back and framed legislations that were not in line with the panel's recommendations even when they differed on tax rates on a particular good or service in the Council. To sum up, the SC ruling affirms that GST Council is merely a recommendatory body and its suggestions must pass the
