The May 19 ruling of the Hon’ble Supreme Court (SC) confirming a Gujarat High Court ruling that the Centre cannot levy Integrated Goods and Services Tax (IGST) on ocean freight on Indian importers may have some unintended consequences, not exactly following from its ruling in this particular case but from its further observation that the Union and the State legislatures have “equal, simultaneous and unique powers” to make laws on GST and that the recommendations of the GST Council are not binding on them. This was a position well understood by both the Centre and the states, but the specific observation may alter the landscape in our fractious political landscape and may have given the opposition-ruled states which may have some grievance against the Centre on the issue of GST further grist to the mill. While the Court may have intended to promote “cooperative federalism”, it may have harmed it unintentionally.

But first let us go into the case which deals with an old contentious issue.

For international trade, goods can be transported from one country to another through air or sea routes. For import of goods, services provided by the carriers are not treated equally under the GST regime.

While air freight ~ that is, the cost of services provided by the air transporter ~ is exempt from GST, ocean freight is charged under reverse charge mechanism in case the transporter is based abroad. Usually, it is the supplier of goods and services who should pay the GST on the supplied goods and services, but under the reverse charge mechanism, it is the receiver ~ in this case the importer ~ who pays the GST since the  chargeability is reversed.

Imports can be either free on board (FOB) when the importer is liable to pay the freight in which case there is no dispute regarding chargeability of tax, but problem arises in the case of cost-insurance and freight (CIF) transactions in which the exporter pays the freight in addition to the cost of goods and insurance.

Under a notification issued in June 2017 after recommendation of the GST Council, the Central Board of Indirect Taxes and Customs (CBIC) levied GST at 5 per cent on the value of imported goods considering 10 per cent of the value of imported goods as “deemed ocean freight”, which translates into a levy of 0.5 per cent GST on the value of imported goods as GST on services, besides Customs duty and GST on the imported goods.

The case with Indian importers is that while they are not paying for the freight, they are liable to pay the GST on it just because the exporter is based abroad in a non-taxable jurisdiction. In 2020, in the case of Union of India & Others Vs Mohit Minerals, an importer, the Gujarat High Court had held that the said notification did not have the force of law and struck down the levy on the ground that the reverse charge was ultra vires the parent enactment, the  IGST Act of 2017.The government then approached the SC which has upheld the Gujarat High Court ruling.

The importers who had paid GST on freight will now be eligible for refund of the GST paid to the extent that has not been utilised as input credit.

So far there is no problem, but the problem arises in respect of the additional observations of the SC which may indeed alter the GST landscape, and lead to a fresh set of litigations and challenges to earlier Council decisions.

“The recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the states.

To regard them as binding would disrupt fiscal federalism when both the Union and the states are conferred equal power to legislate on GST,” the SC has observed, noting further, and correctly, that the “federal system is a means to accommodate the needs of a pluralistic society… Democracy and federalism are interdependent to each other. Federalism would only be stable in a well-functioning democracy. Additionally, the constituent units of a federal polity check the exercise of powers of one another to prevent one group from exercising dominant power”.

But while observing that Article 246A of the Constitution, which gives the states power to make laws with respect to GST, treats the Union and the States as “equal units” and that “it confers a simultaneous power (on Union and States) for enacting laws on GST”, the SC probably did not consider adequately how the GST Council, represented by the Union and the states, has been functioning so far.

The Court’s interpretation that the Centre and the States are “autonomous, independent and even competing units” for the purpose of GST and that Article 279A constituting the GST Council envisions non-dependence of the Centre and the states on each may be correct only theoretically, but in reality, they are very much dependent on each other, and no spirit of cooperative federalism can prosper without such dependence. The ruling emphasised that the Parliament and state legislatures possess equal powers to legislate on GST. If the states ~ say those ruled by the opposition ~ take a cue from this and start legislating on GST bypassing the GST Council, a constitutional body created under the 101st Constitution Amendment, the Council itself may be rendered redundant, striking at the very root of the GST mechanism.

For the sake of records, the Finance Ministry has inferred that the SC order only reiterates the spirit in which the GST Council has been functioning and does not change anything.

Rules require that every decision of the Council to be supported by a majority of at least three-fourths of the weighted votes of the members present. The vote of the central government has a weightage of one third of the total votes cast, and the votes of all the state governments taken together have a weightage of two-thirds of the total votes cast in any meeting.

Of the 30 states and union territories, 18 are ruled by the NDA. This automatically makes voting an academic exercise only, unless the BJP’s allies in the NDA switch sides. Yet so far, save a lone decision that hiked the rate on lotteries from 12 to 28 per cent, all decisions of the Council have been taken unanimously, reinforcing the spirit of cooperative federalism even in a country where opposition and the party in power at the Centre rarely look eye to eye on practically any issue.In the GST Council, the states and the Centre, despite their differences, function rather harmoniously with discussions veering on the merit and objectivity of the cases cutting across party lines.

The decisions reached in the Council are implemented by the Centre and the states through the normal legislative route under the respective acts, viz, the Central GST Act, the State GST Act and the Union Territory Act, and the IGST Act in case of imports and inter-state trade.

Ever since its inception, even where the states have voiced disagreements or given dissenting notes, they have implemented the decision of the GST Council in the right spirit.

Harmony does not necessarily imply perfect unanimity and may very well include contestations, but ultimately it is through the collaboration in reaching and implementing the decisions of the Council that the true spirit of cooperative federalism in our democracy is asserted.

In that sense, the GST Council is a unique and successful experiment that needs to be replicated in other areas of our polity and economy to resolve conflicting positions between the Centre and the states. It would wrong to argue that the majoritarianism that is visible in some other domains of our polity also underpins the working of the Council.

The SC may have correctly observed that in case it was intended to make the GST Council a decision-making authority, such a qualification would have been included in articles 246A or 279A. But to treat the GST legislations mechanically without considering their long and arduous journey through the maze of our treacherous political system over a period spanning more than three decades would be tantamount to severely undermining the promise held out by GST to transform India into a common market by supplanting our antiquated, multi layered, multi-point, multi-tax system circumscribed by an odious Inspector Raj.

In making the GST functional, both the Centre and especially the states had made a huge sacrifice in surrendering their taxing powers; it would also diminish this sacrifice.

Yes, the GST Council has seen some acrimonious exchanges, especially on the issue of GST compensation to the states that threatened to disrupt the cooperative federal architecture that the GST Council envisions. Now with the compensation regime coming to an end in another month’s time, the SC ruling may have given an extra ammunition to the opposition ruled states to demand extension of the compensation scheme. It may also open a legal Pandora’s Box with states challenging the constitutionality of earlier GST Council decisions. A unique federal institution without precedent that despite its inadequacies has been a shining example of cooperative federalism needs only to be strengthened to become instrumental in bringing convergence between the Centre and the states beyond politics.

It must not be allowed to become dysfunctional by any device, least by the apex court of the country.

(The writer is a commentator, author and an academic)