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Never ask questions you don’t want to know the answers to. An apt quote by Tom Krause applies perfectly in the context of the recent verdict of the Supreme Court addressing a challenge to the levy of Goods and Services Tax on ocean freight in cost, insurance, and freight transactions.

Faced against an apparent clear provision in favour of the taxpayers and a High Court decision affirming it, the government pitched the arguments in the Supreme Court at a conceptual level, to highlight how the GST Council viewed such transactions and their taxability. To buttress its case, the government contended that the observations of the GST Council are equivalent to law and should guide the courts in the interpretation of GST legislation.

The government’s misguided argument struck at the very root of policy thinking and the evolution of a common understanding of the GST design for stakeholders. Consequently, not only did the government lose this dispute, but it also gave a reason for the Supreme Court to opine upon the hitherto carefully-calibrated balance crafted by the union and states, which did not, in our view, require any judicial elocution. More importantly, it was not even an issue before the High Court which merely decided that GST was not applicable to ocean freight under the reverse charge mechanism.

The damage control exercise was evident, with the comments made by the union Revenue Secretary emphasizing that the ruling will not alter the GST regime, highlighting that the cooperative federalism principle enshrined in the historic 101st Constitutional Amendment Act will not be undermined.

GST Council Now Has Expansive Role, As Pragmatic And Democratic Platform

The decision of the Supreme Court in the Mohit Minerals case can be viewed from three distinct prisms: the legislative, constitutional, and political perspectives.

The first is rather a technical construction of whether or not an ocean freight transaction is exigible to GST, to which the Supreme Court has given the least thrust. That issue is of the least importance.

The second, i.e. the constitutional perspective, occupies the majority space in the verdict and has become the reason for animated debates across different cross-sections as regards the ‘binding’ nature of the GST Council’s recommendations and its ramifications on the functioning of the GST Council. On this front, the apex court has widely quoted parliamentary committee reports, parliamentary debates, the opinion of the then Attorney General, etc., to highlight that, in a dynamic constitutional structure, the ‘recommendations’ of GST Council shall be non-binding and it would be the spirit of federal bonhomie which shall guide the union and the States for the adoption of these recommendations. In brief, the outcome of the GST Council’s deliberations holds a persuasive value and is not a legal sanction upon either the union or the states.

In fact, the apex court turned the union government’s argument on its head, remarking that it was incorrect to believe that if GST Council’s recommendations were not binding, a doomsday scenario would unfurl and “the entire structure of GST will collapse as each state would then levy a conflicting tax and collection mechanism”.  Stressing the need for dialogue and wider implications of a multi-party system in Indian polity, the Supreme Court has instead repositioned the GST Council with an expansive role as “not only an avenue for the exercise of cooperative federalism but also for political contestation across party lines”.

Near-Unanimity Amidst A Divided Polity

Given the wide-ranging observations of the Supreme Court, balancing the center-state relationship, and the GST Council not being a “decision-making authority whose recommendations transform to legislation”, there is a frantic flutter in parts of the mainstream media that never shy away from second-guessing the stance of states, particularly those currently governed by parties that sit in opposition at the center.

In our considered view, it is not appropriate to cherry-pick observations (or even the conclusion) of the Supreme Court while interpreting the Constitution and transposing it for political gains.

Let us be realistic. What the apex court has said was apparent, and it is the cooperative federalism structure enshrined in the constitutional amendment that led then Finance Minister Arun Jaitley to negotiate a ‘grand bargain’ with states. How could states have come on board with the GST Council recommendations being binding? The Supreme Court has merely made it obvious.

A dispassionate review of the five-year GST regime reveals it has only been once—and that too on a piquant issue of taxing lotteries—that the GST Council has resorted to voting.

The GST Council’s decisions have otherwise been unanimous, notwithstanding a sharp political divide between unions and states, including on the issue of compensation during the Covid-19-induced economic downturn. Is this fact of unanimity not reflective of a mature political system and rationality in governance?

Other prominent examples of a slugfest between the two levels of government sit in contrast with the harmonious resolution carried out at the GST Council. Be it the propelling demand of sugar-producing states to levy a ‘sugar cess’ or the urgent need implored by Kerala to levy a ‘flood cess’, members of the GST Council have always engaged in ways to arrive at mutually acceptable options. Whether it be civil servants’ committees or Group-of-Ministers, never have the GST recommendations resulted in a divided house.

The apex court’s declaration on the GST Council as a constitutional pivot of cooperative federalism, in our view, has already been achieved in practice and dilutes the paranoia in sections of the public discourse that the GST architecture will break down after the verdict.

Reimagining Roles  

Having said that, one cannot brush aside the law declared by the Supreme Court and the possible interpretations that states may wish to accord. The obligation is now upon the union government to reimagine its stewardship role such that the scope for political noise is vanquished. To illustrate, the pending disbursement of the compensation cess; fast-tracking discussions on the extension of the union government’s compensation cess obligation (which expires on June 30, 2022); revisiting the rate structure and improving the ‘revenue neutral rate’; etc. are key issues facing implementation challenges.

The Supreme Court’s obiter that “different means of persuasion ranging from collaboration to contestation” exist, clearly thrusts a greater level of moral accountability on the union and the GST Council to ensure that the idea of ‘one nation one tax’ is not lost in political deadlock to continue positioning India as a business-friendly destination and wooing domestic and foreign investors.

Should states weaponize the apex court’s verdict to gain political mileage, it is evident that it would hurt them first before it harms the nation. In any case, that’s a situation business can least afford in times when economic growth is no longer an imperative but instead, a necessity. Another learning from the Supreme Court verdict is for the government not to further litigate matters when the High Court verdicts are clear.

One can earnestly hope that the GST Council closely reviews the verdict and debates with states that a consensus-driven statement is made and, if need be, seeks suitable clarifications by way of review.

Mukesh Butani and Tarun Jain are Partners at BMR Legal. Views are personal.

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