No RCM on Ocean freight, and Council's recommendation has no binding on union and state govts- Apex Court

In a significant verdict, the Supreme Court on Thursday 19th May 2022, in case of Union of India versus M/s Mohit Minerals made two things clear

A) NO Reverse Charge Mechanism on Ocean Freight:

Tax Department's appeals on applicability of Reverse Charge Mechanism on Ocean Freight is dismissed. The bench was deciding a bunch of appeals filed by the Union of India against a judgment of the Gujarat High Court in which the issue was whether an Indian importer can be subject to the levy of Integrated Goods and Services Tax on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a reverse charge basis.

Prior to the GST regime, service tax on ocean freight was exempted. However, the exemption was lifted by notifications issued in 2017 to levy service on the importer, by a reverse charge mechanism. A division bench of the Gujarat High Court quashed the notifications as unconstitutional for exceeding the powers conferred by the IGST Act and the CGST Act. The imposition of IGST amounts to double taxation because it sought to tax the importers so far as ocean freight is concerned. It was while defending the impugned notifications that the Centre raised the argument relating to the binding nature of the recommendations of the GST council. The Court, after an elaborate analysis of the relevant provisions, rejected the argument.

B) The recommendations of the GST council are not binding on the Union and the State Governments:

GST Council has unequal voting structure The Court noted that the recommendations of the GST Council are not based on a unanimous decision but on a three-fourth majority of the members present and voting, where the Union's vote counts as one-third, while the States' votes have a weightage of two-thirds of the total votes cast. 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. The Centre has a one-third vote share in the GST Council. This coupled with the absence of the repugnancy provision in Article 246A indicates that  recommendations of the GST Council cannot be binding.

Importantly, the Court held that both the Parliament and the State Legislatures can equally legislate on matters of Goods and Service Tax

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", the Court stated in the judgment.

"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 Court added

"Article 246A which was introduced by the Constitution Amendment Act 2016 vests the Parliament and the State legislatures with the concurrent power to make laws with respect to GST", the judgment stated(paragraph 26).

"If the GST Council was intended to be a decision-making authority whose recommendations transform to legislation, such a qualification would have been included in Articles 246A or 279A. Neither does Article 279A begin with a non-obstante clause nor does Article 246A provide that the legislative power is 'subject to' Article 279A.", the bench further observed(Para 54).

There would have been express provision in Constitution if GST Council recommendations were meant to be binding "If the GST Council were intended to be a constitutional body whose recommendations transform into legislation without any intervening act, there would have been an express provision in Article 246A. Article 279A does not mandate tabling the recommendations in the legislature like the provisions in category 3, where the recommendation have to be mandatorily tabled in the legislature along with an explanatory note. Only the secondary legislation which is framed based on the recommendations of the Council under the provisions of the CGST Act and IGST Act is mandated to be tabled before the Houses of the Parliament. The use of the phrase 'recommendations to the Union or States' indicates that the GST Council is a recommendatory body aiding the Government in enacting legislation on GST", the judgment stated in paragraph 56.

GST Council's recommendations binding on Government's rule making power; but not on legislative power 

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.

- LDR