In a judgment of significant import, the Supreme Court on Thursday ruled that the Central government and States have simultaneous powers to legislate on Goods and Service Tax (GST) [Union of India vs Mohit Minerals Pvt Ltd]..A Bench of Justices DY Chandrachud, Surya Kant and Vikram Nath observed that the GST council must work in harmonious manner to achieve workable solution between the Centre and States. "The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST," the judgment said. Pertinently, the Court ruled that the recommendation of GST Council is not binding on the Central government or States but has only persuasive value."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," the Court ruled. According to Article 246A, both parliament and State legislature have equal power to legislate on matters of taxation, the Court added."Article 246A treats the Centre and States as equal units by conferring a simultaneous power of enacting law on GST. Article 279A in constituting the GST Council envisions that neither the Centre nor the States can act independent of the other," the judgment said.Interestingly, the Court in its judgment made important observations on co-operative federalism.The Court said that while the Indian Constitution necessarily provides Union government higher share of power to avoid chaos, but relation between two constitutional units may not always be collaborative."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 Court emphasised. .The Supreme Court was hearing an appeal filed the Central government against a judgment of a division bench of the Gujarat High Court that had held two of its notifications regarding the levy of GST ultra vires the Integrated Goods and Services Tax Act (IGST Act). The High Court Bench was led by Justice JB Pardiwala, now elevated to the top court. The question of law was whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax on a reverse-charge basis, on the component of ocean freight paid by the foreign seller to a foreign shipping line..The Central government had submitted before the High Court that although tax was being paid twice on the value of ocean freight, the same was not unconstitutional as the tax is on two different aspects of the transaction, namely, the supply of service and import of goods. The notifications remove the disparity between Indian and foreign shipping lines as the former are unable to claim input tax credit.Counsel for the respondents before the top court submitted that the objective of a tax or levy cannot validate an ultra vires levy, and that the IGST Act does not envisage a person other than the supplier or the recipient as liable to pay tax. The present levy was thus extra-territorial, it was contended. Further, a cost-insurance-freight (CIF) contract is indivisible and thus, cannot be subject to separate taxes levied on goods and services portions..The Supreme Court held that the provisions of the law governing GST cannot be construed to imply that any taxable person identified for payment of reverse charge would automatically become the recipient of such goods or service. The deeming fiction of treating the importer as a recipient must be found in the IGST Act which the Act in this case does not create, the Court noted. On the appellant's argument that the CIF contracts with the exporter and the importer must be viewed and taxed separately, the Bench observed," ... the Union Government urges that the contracts must be viewed as separate transactions, operating in silos. We are unable to subscribe to this view. The Union of India cannot be heard to urge arguments of convenience – treating the two legs of the transaction as connected when it seeks to identify the Indian importer as a recipient of services while on the other hand, treating the two legs of the transaction as independent when it seeks to tide over the statutory provisions governing composite supply."Holding that the notifications were validly issued under Sections 5(3) and 5(4) of the IGST Act, but are in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation, the Bench noted,"To levy the IGST on the supply of the service component of the transaction would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation," the judgment said. .The Court, thus, came to the following conclusions:"(i) The recommendations of the GST Council are not binding on the Union and States for the following reasons:(a) The deletion of Article 279B and the inclusion of Article 279(1) by the Constitution Amendment Act 2016 indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units;(b) Neither does Article 279A begin with a non-obstante clause nor does Article 246A state that it is subject to the provisions of Article 279A. The Parliament and the State legislatures possess simultaneous power to legislate on GST. Article 246A does not envisage a repugnancy provision to resolve the inconsistencies between the Central and the State laws on GST. 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; and(c) The Government while exercising its rule-making power under the provisions of the CGST Act and IGST Act is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by virtue of the power Article 279A (4) are binding on the legislature’s power to enact primary legislations;(ii) On a conjoint reading of Sections 2(11) and 13(9) of the IGST Act, read with Section 2(93) of the CGST Act, the import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service;(iii) The IGST Act and the CGST Act define reverse charge and prescribe the entity that is to be taxed for these purposes. The specification of the recipient – in this case the importer – by Notification 10/2017 is only clarificatory. The Government by notification did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge;(iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation;(v) The levy imposed on the ‘service’ aspect of the transaction is in violation of the principle of ‘composite supply’ enshrined under Section 2(30) read with Section 8 of the CGST Act. Since the Indian importer is liable to pay IGST on the ‘composite supply’, comprising of supply of goods and supply of services of transportation, insurance, etc. in a CIF contract, a separate levy on the Indian importer for the ‘supply of services’ by the shipping line would be in violation of Section 8 of the CGST Act.".Additional Solicitor General of India N Venkataraman appeared for the Union government. Senior Advocates V Sridharan, Harish Salve, Arvind Datar, Vikram Nankani and advocate Uchit Seth appeared for the respondents. Advocates Rajesh Kumar Gautam, C Manickam, Rajat Mittal, and Abhishek A Rastogi appeared for the intervenors. [Read Judgment]
