Image: Live Law
In a landmark judgment that upholds and defends India’s federalism, especially its fiscal federalism, the Supreme Court has ruled that both, Centre and states, have equal right to legislate on Goods and Services Tax (GST).
A bench comprising justices DY Chandrachud, Suryakant and Vikram Nath was delivering its judgment in a batch of matters pertaining to the recommendations of the GST Council in the case titled UoI & Anr. Vs. M/S Mohit Minerals Pvt. Ltd. The main point of the case as recorded in the order says, “The bone of contention is 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.”
Brief background of the case
Ocean freight was exempted from service tax prior to the GST regime, but in 2017 the exemptions were lifted and a notification was issued to levy service tax by a reverse charge mechanism. When the matter reached the Gujarat High Court, it quashed the notifications for exceeding the powers conferred by the IGST and CGST Acts.
But the Centre argued that the nature of the GST Council recommendations was binding. This stand was not only rejected by the Gujarat High Court, but also by the Supreme Court in its May 19 judgment.
Court’s observations and remarks about federalism
The court made a series of observations about India’s federal structure while delivering the judgment. While recording submissions of both parties the court noted, “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. Thus, the discussions in the GST Council impact both federalism and democracy.”
The court further delved into differences between competitive and cooperative federalism, observing, “The dual federalism model or the autonomy model views the constituting units of the Centre and States as autonomous, independent and competing units. This model is also termed as competitive federalism, where the constituent units ‘compete’ with each other. Proponents of the cooperative federalism model argue that it is a mistake to view each unit as a separate autonomous entity. According to the theory of cooperative federalism, integration and not autonomy is the objective that federalism seeks to achieve. While dual federalism is termed as ‘layer cake federalism’ due to the delineation of the structures of power, cooperative federalism is known as ‘marble cake federalism’ due to the integrated approach of the federal units.” It referred to rulings in a previous case saying, “This Court in State (NCT of Delhi) v. Union of India, has observed that India follows the model of cooperative federalism where the Union and the State Governments need to iron out the differences that arise in the course of the path of development.”
Elaborating further on federalism and its role in a democracy the court said, “The federal system is a means to accommodate the needs of a pluralistic society to function in a democratic manner. It attempts to reconcile the desire of unity and commonality along with the desire for diversity and autonomy. Democracy and federalism are interdependent on each other for their survival such that federalism would only be stable in well-functioning democracies.”
In a significant comment about Indian federalism the court said, “Indian federalism is a dialogue in which the States and the Centre constantly engage in conversations. Such dialogues can be placed on two ends of the spectrum – collaborative discussions that cooperative federalism fosters at one end of the spectrum and interstitial contestation at the other end.”
About the GST Council’s role in fiscal federalism, it said, “The GST Council is not merely a constitutional body restricted to the indirect tax system in India but is also an important focal point to foster federalism and democracy.”
The court concluded, “The recommendations of the GST Council are not binding on the Union and States,” and that, “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.”
The entire judgment may be read here:
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