GST: SC Ruling To Give Fresh Force To Debate On States’ Financial Freedom, Say Experts

The Supreme Court’s latest ruling that the recommendations of the Goods and Services Tax (GST) Council are not binding on the central and state governments is likely to give fresh force to the debate on the financial independence of the states and the importance of cooperative federalism for the success of GST, according to experts.

A Bench, comprising Justices D Y Chandrachud, Surya Kant and Vikram Nath, on Thursday held that the recommendations of the GST Council will have a persuasive value. The Court also held that both Parliament and the state legislatures can equally legislate on the matters related to GST. It said the GST Council is only a recommendatory body and its recommendations are not binding on the Centre or states.

The Bench was deciding appeals filed by the Centre against a Gujarat High Court judgment that dealt with the issue of levying IGST on importers on the component of ocean freight paid by the foreign seller to a foreign shipping line, on a ‘reverse charge basis’.

The reverse charge is a mechanism where the recipient of the goods or services is liable to pay GST, instead of the supplier.

Before the GST regime, service tax on ocean freight was exempted but it was lifted in 2017 under the new indirect tax regime. The Gujarat High Court later in its judgment said the integrated GST (IGST) on ocean freight is unconstitutional.

Sandeep Chilana, managing partner at Chilana & Chilana Law Offices, said, “While such observations of the SC are in line with Article 279A, it is likely to give fresh force to the debate of financial independence of the states to take its own decision and the importance of cooperative federalism for the success of GST.”

He added that the SC ruling has confirmed the Gujarat High Court’s judgment that the government does not have any authority to collect GST on a reverse charge basis from any person who does not qualify as ‘recipient’ of services.

“In the instant case, the Centre and state government attempted to collect GST on ocean freight payable by foreign supplier to the shipping companies, even when the supply was on CIF (cost, insurance, and freight) basis i.e. Indian importer had no privity of contract with the shipping lines and therefore was not the recipient of such services,” Chilana added.

Rajat Bose, partner at Shardul Amarchand Mangaldas & Co, said, “This is a very significant observation from the Supreme Court as it clearly defines the roles of GST Council, Centre and states and their interplay in the GST regime.”

He added that the GST Council is a constitutional body whose role is to advise and recommend on GST issues. “To accept such advice and pass appropriate amendments in law is purely the domain of the central and state legislatures.”

Inderpal Singh Pasricha, senior partner at IP Pasricha & Co, said, “The Supreme Court has correctly ruled that the GST Council’s recommendations are not binding on Union and state governments since until such recommendations are given effect through relevant notifications/ circulars/ law amendments which alone will have the force in law that is always mentioned in press release containing recommendations of the GST Council.”

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