Noting the importance of “cooperative federalism” for the good of democracy, the Supreme Court on Thursday said the Center and state legislatures have “equal, simultaneous and unique powers” to make laws on the Goods and Services Tax (GST). ” Huh. ) and recommendations of GST Council are not binding on them.
The Supreme Court’s decision came when Confirmation of Gujarat High Court’s decision That the Center cannot levy Integrated Goods and Services Tax (IGST) on maritime goods from Indian importers.
“The recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the States. They are recommendatory in nature… Recommendations have only a persuasive value. Treating them as binding will hamper fiscal federalism when both the Center and the states are given equal power to make laws on GST,” the bench headed by Justice DY Chandrachud held.
The court emphasized that Article 246A of the Constitution (which empowers states to make laws with respect to GST) treats the Union and the states as “like entities”.
Justice Chandrachud explained, “It confers power (on the Center and the States) together to make laws on GST … Article 279A, in the constitution of the GST Council, neither the Center nor the States actually over the other.” are dependent.”
cooperative federalism
He said the Center and the states were “autonomous, independent and even competing entities” at the time of making the GST law. “Cooperative federalism is treated like marble cake federalism because of the unified approach of federal units,” he compared.
The judgment said that though the Center may have the bulk of the power to prevent anarchy and provide security in certain cases, the states still have the power.
“India is a multi-party system. It is possible that the party in power at the center may or may not be in power in other states… even if the states are given less power [in certain situations]They may still oppose the mandate of the Union by using a variety of political rivalry permitted by the Constitution… it is not mandatory that one of the federal units [Centre or the States] There should always be a greater share of power over other units,” the court said.
“The federal system is a means of accommodating the needs of a frugal society … Democracy and federalism are interdependent. Federalism will only be stable in a well-functioning democracy. Additionally, there are components of a federal polity. Units check the use of each other’s powers to prevent one group from exercising dominant power,” the court said.
In the GST Council, the states and the Center have to work in a “cohesive” manner. The discussion in the GST Council crossed party lines and influenced federalism and democracy as a whole. But harmony is essential to the nation’s well-being, and its financial security can be achieved not only by cooperation but also by “competition” between the Center and the states. The Bench argued that the cause of federalism and democracy can also go ahead with consultations between the Center and the states.
Ultimately, the court said, “Indian federalism is a dialogue between cooperative and non-cooperative federalism where federal units are free to use various means of persuasion, from cooperation to dispute”.
The decision also resolved a protracted battle that the government is raging against companies for levying their IGST on sea freight on reverse charge basis.
The issue gained importance following reports of new tax questions on maritime freight, despite the dispute pending in the apex court.
relief for importers
Ending the dispute in favor of the importers and granting them major relief, Justice Chandrachud observed that since “the Indian importer is liable to pay IGST on the aggregate supply of goods including supply of goods and services of transport, insurance, etc. is, freight insurance cost [CIF] Contract, a separate levy on Indian importers for supply of services by shipping line would be in violation of the Central GST Act.
were at the center of controversy two notifications Issued on June 28, 2017, levying IGST on sea freight. The Gujarat High Court in January 2020 declared the levy ultra vires for the IGST Act. It said he lacked “legislative qualifications”. It had concluded that IGST on maritime goods was “not permissible in law” under the provisions of the notifications.
‘Ocean freight’ is the cost of carrying goods into India internationally. An agreement has been reached between the two foreign parties in this regard. The agreement is usually between an exporter, a foreign entity and a shipping line to transport goods into India.
Importer’s complaint
The importers had complained that IGST was being levied twice on the same transaction. “The fact is that the importer, at the time of import, in addition to the customs duty, also pays IGST under the IGST Act on the imported goods at the value prescribed under the Customs Tariff Act. This price includes the value of ocean freight. In case of goods purchased on CIF basis, the cost itself is on the basis of cost, insurance and freight. Thus, the government, through the 2017 notifications, has sought to levy IGST again,” he had submitted.
The Center had argued in the apex court that the government was within its powers to determine the mode of collection of tax under the IGST Act. Liability to pay GST on service of imported sea freight received from a foreign shipping line can be placed on any registered person in India. Import of goods and service of transportation of imported goods were different activities between two different persons. Two or more taxable events may be involved in the same transaction (i.e., import of goods – customs duty on the import aspect and GST for the transport service rendered aspect). The overlapping of the two aspects did not take away the power to tax both the aspects.
‘Decision may change the landscape of provisions under GST’
Abhishek A Rastogi, Partner, Khaitan & Co., said, “This decision may change the landscape of provisions under GST that are subject to judicial review.”
“Since the Court has categorically held that the recommendations of the GST Council have only persuasive value, there shall be a pragmatic approach to such provisions which are subject to judicial review as to challenge the constitutionality of such provisions based on the recommendations of the GST Council” He mentioned.
“The Supreme Court has held that GST on sea freight paid in case of import of goods is unconstitutional. As a consequence, Indian importers paying such tax will be eligible for refund. Also, importers who had not paid tax on import of services would no longer be required to pay tax due to this decision of the Supreme Court,” informed Mr. Rastogi Hindu,
Vivek Jalan, Partner, Tax Connect Advisory Services, explained that generally the value of imported goods includes cost, insurance and freight components and customs duty and GST are levied on that value.
“However, the Central Board of Indirect Taxes and Customs sought levy of 5% GST on the value of imported goods treating 10% of the value of imported goods as sea freight. This meant 0.5% GST on the value of goods imported as services, plus customs duty and GST which is around 28% and is charged as goods,” he elaborated.
(With inputs from Vikas Dhoot)