GST Council Recommendations Not Binding On Parliament & State Legislatures : Supreme Court

In a significant verdict, the Supreme Court on Thursday held that the recommendations of the GST council are not binding on the Parliament and State Legislatures.

Though some of the recommendations of the GST council are binding on the Union and State Governments in relation to tax rate and taxable goods etc., by virtue of the provisions of the GST Act, it cannot mean that all recommendations are binding on the Parliament and the State Legislatures. 

"Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature", the Court said.

A bench led by Justice DY Chandrachud held that the Parliament intended that the recommendations of the GST Council will have persuasive value.

Importantly, the Court held that both the Parliament and the State Legislatures can equally legislate on matters of Goods and Service Tax.

"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", the Court stated in the judgment.

"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 Court added.

"Article 246A which was introduced by the Constitution Amendment Act 2016 vests the Parliament and the State legislatures with the concurrent power to make laws with respect to GST", the judgment stated(paragraph 26).

"If the GST Council was intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A. Neither does Article 279A begin with a non-obstante clause nor does Article 246A provide that the legislative power is 'subject to' Article 279A.", the bench further observed(Para 54).

There would have been express provision in Constitution if GST Council recommendations were meant to be binding

"If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendations have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act and IGST Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase 'recommendations to the Union or States' indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST", the judgment stated in paragraph 56. 

GST Council's recommendations binding on Government's rule making power; but not on legislative power

The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature's power to enact primary legislations.

The Court noted that express provisions have been made when the Parliament intended that the Council Recommendations should be binding as regards the rule-making power of the Governments.

For example, Section 5 of the IGST Act provides that the taxable event, taxable rate, and taxable value shall be notified by the government on the "recommendations of the Council". Likewise, the power of the Central Government to exempt goods or services or both from levy of tax shall be exercised on the recommendations of the GST Council under Section 6 of the IGST Act. Section 22 provides that the Government may exercise its rule making power on the recommendations of the GST Council. The CGST Act also provides for similar provisions in Sections 9, 11 and 164.

Merely because a few recommendations of GST council are binding on the Government under provisions of CGST and IGST Act,  it cannot be argued that all recommendations are binding

The fact that few recommendations of GST Council are binding as regards the tax rates, taxable events etc, it cannot mean that the all recommendations of GST Council are binding on the legislative powers.

"59. The provisions of the IGST Act and CGST Act which provide that the Union Government is to act on the recommendations of the GST Council must be interpreted with reference to the purpose of the enactment, which is to create a uniform taxation system. The GST was introduced since different States could earlier provide different tax slabs and different exemptions. The recommendations of the GST Council are made binding on the Government when it exercises its power to notify secondary legislation to give effect to the uniform taxation system. The Council under Article 279A has wide recommendatory powers on matters related to GST where it has the power to make recommendations on subject matters that fall outside the purview of the rule-making power under the provisions of the IGST and CGST Act. Merely because a few of the recommendations of the GST Council are binding on the Government under the provisions of the CGST Act and IGST Act, it cannot be argued that all of the GST Council's recommendations are binding. As a matter of first principle, the provisions of the Constitution, which is the grundnorm of the nation, cannot be interpreted based on the provisions of a primary legislation. It is only the provisions of a primary legislation that can be interpreted with reference to the Constitution. The legislature amends the Constitution by exercising its constituent power and legislates by exercising its legislative power. The constituent power of the legislature is of a higher constitutional order as compared to its legislative power. Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the Central Government for the purpose of notifying secondary legislations, it would not mean that all the recommendations of the Council made by virtue of its power under Article 279A have a binding force on the legislature."

 The reasons stated by the bench for holding that the recommendations of the GST Council are not binding on the Union and States :

(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;

(b)Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on 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; and

(c)The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature's power to enact primary legislations;

Tax Department's appeals dismissed

The bench, also comprising Justices Surya Kant and Vikram Nath, was deciding a bunch of appeals filed by the Union of India against a judgment of the Gujarat High Court in which the issue was whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax2 on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis.

Prior to the GST regime, service tax on ocean freight was exempted. However, the exemption was lifted by notifications issued in 2017 to levy  service tax on the importer, by a reverse charge mechanism.

A division bench of the Gujarat High Court quashed the notifications as unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act.

It was while defending the impugned notifications that the Centre raised the arguments relating to the binding nature of the recommendations of the GST council. The Court, after an elaborate analysis of the relevant provisions, rejected the argument.

GST Council has unequal voting structure

The Court noted that the recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union's vote counts as one-third, while the States' votes have a weightage of two-thirds of the total votes cast.

There are two significant attributions of the voting system in the GST Council. First, the GST Council has an unequal voting structure, where the States collectively have a two-third voting share and the Union has a one-third voting share; and second, since India has a multi-party system, it is possible that the party in power at the Centre may or may not be in power in various States.

Therefore, the GST Council is not only an avenue for the exercise of cooperative federalism but also for "political contestation" across party lines.

The Centre has a one-third vote share in the GST Council. This coupled with the absence of the repugnancy provision in Article 246A indicates that recommendations of the GST Council cannot be binding.

Uncooperative federalism

The judgment also discussed the concept of "uncoopeartive federalism", whereby States can use various forms of contestations within the Constitutional framework.

'Uncooperative federalism' is valuable since "it is desirable to have some level of friction, some amount of state contestation, some deliberation-generating froth in our democratic system", Justice Chandrachud said quoting Jessica Bulman and Heather K.

"When the federal units are vested with unequal power, the collaboration between them is not necessarily cooperative. Harmonised decision thrives not just on cooperation but also on contestation. Indian federalism is a dialogue in which the States and the Centre constantly engage in conversations.

The States can use various forms of contestation if they disagree with the decision of the Centre. Such forms of contestation are also within the framework of Indian federalism"

 Mr. N Venkataraman, Additional Solicitor General of India, appeared for the Union. Mr.V Sridharan, Mr.Harish Salve, Mr.Arvind Datar, Senior Advocates, Mr.Uchit Sheth, Mr.Rajesh Kumar Gautham, Dr C Manickam, Mr Rajat Mittal, and Mr Abhishek Rasthoi appeared for the respondents and intervenors.

Case Title : Union of India and Anr versus M/s Mohit Minerals Through Director

Citation : 2022 LiveLaw (SC) 500

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