India’s indirect tax architecture received a massive jolt yesterday when a three-judge Supreme Court verdict overturned the commonly understood remit of a critical constitutional body: GST Council. In the five years since GST has been rolled out, the GST Council chaired by the Union finance minister and having representatives of all states, has been the decision-making body on all key matters such as tax rates. Decisions of the Council are put to vote and seen to be binding on both GoI and states. SC’s verdict now says the Council’s decision is merely recommendatory.
It’s a tectonic shift, unsettling India’s indirect tax architecture. “To regard them as binding edicts would disrupt fiscal federalism,” said the judgment of GST Council’s decisions. In practice, it’s the other way around. To now regard the GST Council’s decisions as just recommendatory in nature will undermine the current fiscal order which was painstakingly created across governments. For economic agents, including firms and individuals, it introduces a level of uncertainty which is bound to undermine confidence. This, in turn, will act as a drag on economic activity. This is why SC’s judgment is such an unwelcome intervention.
The origin of this verdict goes back to a decision handed by a division bench of the Gujarat high court in January 2020. Companies that import coal for domestic industries challenged a tax levied by GoI under two statutory laws that are a part of the GST architecture. Gujarat HC ruled against GoI, which subsequently brought the matter to the apex court. In the apex court, GoI did categorically state that GST Council’s decisions are binding on both legislature and the executive. This argument was rejected by the apex court, thereby overturning the well-established hierarchy of decision making in GST.
The situation is now untenable. If the GST Council’s decisions are not binding it opens the door to states cherry-picking. That will defeat the whole purpose of transitioning to GST that aimed to create a common market in India by dismantling fiscal barriers between states. States voluntarily subsumed their unilateral powers over indirect taxation to usher in GST. For sure, there have been disagreements within the GST Council but the binding nature of its decisions have never been in question. This verdict is clearly one of judicial overreach and intrudes into the domain of the legislature. GoI should file a review petition right away.
