Prior to the enactment of the GST Constitutional (the Hundred and First Amendment) Act, 2016, the states did not possess the authority to levy tax on services or manufacture of goods, with the exception of alcoholic liquor for human consumption, opium, Indian hemp, narcotics and other narcotic drugs.
Although a separate entry could have been included in the Concurrent List enabling the levy of taxes on the supply of goods and services, Article 254(1) provides that any inconsistency between laws enacted by the Parliament and the State Legislatures, is to be resolved in favour of the Parliament, rendering the opposing State law void to that extent.
In view of Article 254(1), the addition of such an entry could not have assigned equal and concurrent powers to both the Parliament and the State Legislatures.
GST Council: Can Give Recommendations Only
Consequently, this impasse has been addressed by the introduction of Article 246A in the Constitution, which reads as under:
“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the legislature of every state, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-state trade or commerce.”
The Constitution provides for the creation of the GST Council (GSTC), which shall among other things make recommendations to the Union and the States on:
- Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;
- The rates including floor rates with bands of goods and services tax;
- Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
- Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand
The role of GSTC is limited to that of a recommendatory body.
Are the Suggestions by GST Council Binding?
It appears that the recommendations of the GSTC are mere suggestions or guidelines, which the Parliament or the State Legislature, as the case may be, may or may not accept and implement.
The concept of granting recommendatory powers to constitutional bodies is not unfamiliar. However, the existing jurisprudence does not conclusively say that the recommendations have to be adopted necessarily. Therefore, the consequences following non-implementation of the recommendations by the GSTC will have to be determined judicially.
The United States Constitution provides in Clause 2 of Section 3, known as the “Recommendation Clause”, that the President shall recommend to the Congress (Parliament) such measures as he shall judge necessary and expedient.
This clause has been interpreted by the US Supreme Court in the case of Youngstown Sheet & Tube Co. vs Sawyer to mean that the Recommendation Clause serves as a reminder that the President cannot legislate unilaterally, and further, that the President merely has the power to recommend. The prerogative to legislate is possessed exclusively by the Congress.
Similarly, in the Indian context, Article 233(2) of the Constitution provides for the recommendation of the High Court for appointment of an advocate or a pleader as the district judge.
In the case of Chandra Mohan vs State of Uttar Pradesh, the Apex Court observed that under Article 233(2), the Governor can only appoint a person recommended by the High Court.
On the other hand, in the case of Supreme Court Advocates vs. Union of India, it was observed that, “In cases governed by Article 233(2), normally as a matter of rule, the High Court's recommendation must be accepted unless there exist 'good and weighty reason' in which case the executive should communicate its views to the High Court and give the latter an opportunity to react to the same.”
Resolving Disputes
In cases where the states deviate from the recommendations of the GSTC and enact an absolutely contrary GST Law, it could lead to utter chaos and defeat the stated objective of GST.
Whether such a deviation is permissible or not, and whether the same would withstand judicial scrutiny is something that only time will tell.
However, the scope of this mechanism is opaque. It remains unclear whether it would address a situation where one state does not follow the recommendations. Further, the said article does not specifically provide that the resolution of the dispute under the mechanism would be binding.
It may be relevant to point out that under the Hundred and Fifteenth Amendment Bill, 2011, Article 279B had proposed that “Parliament may, by law, provide for the establishment of a Goods and Services Tax Dispute Settlement Authority to adjudicate any dispute or complaint referred to it by a State Government or the Government of India arising out of a deviation from any of the recommendations of the Goods and Services Tax Council constituted under article 279A that results in a loss of revenue to a State Government or the Government of India or affects the harmonised structure of the goods and services tax.”
However, the said Article was not enacted in the Constitutional Amendment Act and no other mechanism was provided for in such specific terms.
Does GST Challenge ‘Basic Structure’ Doctrine?
Primarily, the GSTC would take decisions on the basis of majority votes, however, there is a possibility that certain decisions of the GSTC, which were not accepted by some states or the centre, are challenged.
Such a challenge may have recourse to the theory of “Basic Structure” pronounced by the Apex Court in the landmark case of Kesavananda Bharati vs State of Kerala and subsequent judgements.
It can be argued that the forefathers of the Constitution had provided for the division of taxation powers to enable the Parliament and the State Legislatures to exercise their own freedom. The concept of GST itself may be challenged on the grounds of impinging upon the freedom of the States and Base Structure theory.
Centre’s Power
There is a possibility of concentration of power. On one hand, the 101st Constitutional Amendment Act, 2016 has divested the states of their powers to tax sale or purchase of goods, except for specified goods, by substituting Entry 54 of List II of the Seventh Schedule to the Constitution.
On the other hand, the Union has not divested itself of the power to tax sale/purchase of any goods in the course of inter-State trade or commerce as also of the residual power to levy tax of sale/purchase/supply of goods or services, the supply of which would already have suffered GST.
The said entries are reproduced hereunder for ease of reference:
1) Entry 54 of State List (List II):
Existing Entry: Taxes on sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.
Substituted Entry: Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.
2) Entry 92A of the Union List (List I) – to be retained as is.
“Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.”
3) Entry 97 of the Union List (List I) - to be retained as is.
"Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists."
The Constitutional Amendment seems to have been enacted without the provision of any safeguard, or effective redressal mechanisms addressing deviations from the recommendations of GST Council, thereby defeating the very principles underlying the GST reform.
(The writer is founder and managing partner, TLC Legal. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)