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101st Constitutional Amendment That Introduced GST Is A Watershed Moment In Evolution Of Cooperative Federalism: Supreme Court

14 Sep 2021 7:19 AM GMT
Annual GST Returns FY 2019-20: Bombay High Court Dismisses Plea Seeking Further Extension Of Due Date

In its judgment delivered on Monday, the Supreme Court observed that One Hundred and First Amendment to the Constitution, which introduced Goods and Service Tax regime, is a watershed moment in the evolution of cooperative federalism.

It brought about a significant merger by contemplating a fiscal umbrella comprehending GST, the bench comprising Justices DY Chandrachud and MR Shah observed.

Changes Brought by Article 246A

The court noted that the object was to introduce a goods and service tax which would fulfil two fiscal priorities namely, (1) removing the cascading effect of taxes; and (2) providing for a common national market for goods and services. The court (in para 31) observed that following changes were brought by Article 246A in the constitutional scheme:

(i) Firstly, Article 246A defines the source of power as well as the field of legislation (with respect to goods and services tax) obviating the need to travel to the Seventh Schedule;

(ii) Secondly, the provisions of Article 246A are available both to Parliament and the State legislatures, save and except for the exclusive power of Parliament to enact GST legislation where the supply of goods or services takes place in the course of inter-State trade or commerce; and

(iii) Thirdly, Article 246A embodies the constitutional principle of simultaneous levy as distinct from the principle of concurrence. Concurrence, which operated within the fold of the Concurrent List, was regulated by Article 254.

Emphasis on harmony is crucial to co-operative federalism.

The court noted that the constitutional scheme embodying GST is facilitated through the composition of the GST Council under Article 279A.

"The GST Council is to consist of the Union Finance Minister, the Union Minister of State in charge of Revenue of Finance; and the Minister In-charge of Finance or Taxation or any other Minister nominated by each State Government. Clause (4) of Article 279(A) empowers the GST Council to make recommendations to the Union and the States on the aspects comprehended in sub-clauses (a) to (h) of Clause (4)", the court

It further noted Article 279A(6) which indicates that in the discharge of its functions, the GST Council is to be guided by the need for a harmonised structure of goods and services tax and the development of a harmonised national market for goods and services.

This emphasis on harmony is crucial to co-operative federalism. It underscores that in a federal arrangement where the States and Union are converging together for the first time to adopt the same event for taxation, both sets of partners must be guided by the over-arching need to preserve harmony. Harmony postulates balance, an acceptance of mutual co-existence. Clauses (7) to (11) of Article 279A contain provisions for quorum, procedure and voting. Clause (9) is a clear indicator of the absence of supremacy either of the Union of the States. Under sub clause (a) of Clause 9, the vote of the Union Government is to have a weightage of one-third of the total votes cast, while the votes of all the State Governments together are to have a weightage of two-thirds of the total votes cast. Every decision of the Council is to be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting. The principle of harmony does not postulate exact coincidence in all points of comparison or reference. Harmony is a postulate of cooperative federalism and is founded on the principle of mutual coexistence, deference and equality of the coexisting units.. (Para 34)

On this aspect, the court made further observations in (para 59)

"Sub-Section (6) of Article 279A has provided that while discharging its functions the GST Council shall be guided by the need for (a) a harmonised structure of goods and service tax; and (b) the development of a harmonised national market for goods and services. In emphasizing the need, the constitutional provision reflects a goal, object and aspiration to be achieved. By emphasizing this, the provision underscores the vision that the GST Council should bear in mind in the discharge of its constitutional functions. The constitutional object is however to be realized under the auspices of legislation duly enacted under the provisions of Article 246A. The GST Council is intended to function towards the advancement of a harmonised structure for GST and market for goods and services. Contemporary doctrine would suggest that these objects of the fiscal regime may be furthered by bearing in mind (i) the doctrine of equivalence; (ii) the doctrine of neutrality; and (iii) the need of obviating secondary stage cascading effects. The realpolitik of tax policy and governance in the real world may not always match up to ideals. In an ideal tax regime, with a uniform rate of taxes on inputs goods, input services and outward supplies, the chance of accumulating unutilized ITC as a result of an inverted rate structure would be minimal. An inverted duty structure arises where the rate of tax on inputs exceeds the rate of tax on output supplies as a result of which the unutilized ITC may get accumulated. The jurisprudential material which has been relied upon by the assesses portrays an ideal state of GST legislation."

Complex balances have had to be drawn

There can be no gain saying the fact that fiscal legislation around the world, India being no exception, makes complex balances founded upon socio-economic complexities and diversities which permeate each society. The form which a GST legislation in a unitary State may take will vary considerably from its avatar in a nation such as India where a dual system of GST law operates within the context of a federal structure. The ideal of a GST framework which Article 279A(6) embodies has to be progressively realized. The doctrines which have been emphasized by Counsel during the course of the arguments furnish the underlying rationale for the enactment of the law but cannot furnish either a valid basis for judicial review of the legislation or make out a ground for invalidating a validly enacted law unless it infringes constitutional parameters. While adopting the constitutional framework of a GST regime, Parliament in the exercise of its constituent power has had to make and draw balances to accommodate the interests of the States. Taxes on alcohol for human consumption and stamp duties provide a significant part of the revenues of the States. Complex balances have had to be drawn so as to accommodate the concerns of the states before bringing them within the umbrella of GST. These aspects must be borne in mind while assessing the jurisprudential vision and the economic rationale for GST legislation. (Para 60)

GST legislation in India is the product of hard constitutional and legislative work which stretched over several decades. Our fiscal regime is yet to arrive at an ideological position of one bundle for goods and services based on a single rate structure. Broadly speaking, goods and services are taxed at 5 per cent, 12 per cent, 18 per cent and 40 per cent. As on date, there is an absence of uniformity in rates and it is the multiplicity of rates which has given rise to an inverted duty structure. Registered persons with unutilized ITC may conceivably form one class but it is not possible to ignore that this class consists of species of different hues. Given these intrinsic complexities, the legislature has to draw the balance when it decides upon granting a refund of accumulated ITC which has remained unutilized. (Para 62)

Also from the Judgment:

Refund Cannot Be Claimed For Unutilised Input Tax Credit On Account Of Input Services: Supreme Court Upholds Validity Of Section 54(3) CGST Act

'Practical Effect Might Result In Certain Inequities': Supreme Court Points Out Anomalies In GST Refund Formula; Urges GST Council To Reconsider

Case: Union of India vs. VKC Footsteps India Pvt Ltd. ; CA 4810 of 2021
Citation: LL 2021 SC 446
Coram: Justices DY Chandrachud and MR Shah

Click here to Read/Download Judgment

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