The Goods and Services Tax and Its Council

It displaces article 254. The repugnancy rule that would ordinarily resolve a conflict between a central and a State law on a shared subject does not apply either. So if a central GST law and a State GST law conflict, article 254 supplies no answer, and, as the Supreme Court observed, article 246A envisages no repugnancy provision at all.

Both levels hold the same power over the same tax. Not "the Union taxes this and the State taxes that", but both taxing the same supply, the Union by central GST and the State by State GST, simultaneously.

Except for inter-State supply, where clause (2) gives Parliament exclusive power. That is integrated GST, and article 269A governs what happens to the money.

Article 269A: the money on inter-State supply

Integrated GST is levied and collected by the Government of India, and apportioned between the Union and the States in the manner Parliament provides by law on the recommendations of the Council. The amount apportioned to a State does not form part of the Consolidated Fund of India.

Two consequences worth noting. Import of goods or services is treated as supply in the course of inter-State trade, so IGST applies to imports. And the apportionment is not a share of a divisible pool under article 270 but a distinct mechanism, so the Finance Commission's formula does not govern it.

Article 279A: the Council

Constitution. Within sixty days of the commencement of the amendment the President was to constitute the Council. Its members are the Union Finance Minister as chairperson, the Union Minister of State for revenue or finance, and the minister in charge of finance or taxation, or any other minister nominated, from each State. The members from the States choose one of themselves as vice-chairperson.

Functions. To make recommendations on the taxes, cesses and surcharges to be subsumed; the goods and services to be subjected to or exempted from the tax; model GST laws, principles of levy, apportionment of IGST and the principles governing place of supply; the threshold turnover below which goods and services may be exempted; the rates including floor rates with bands; special rates for a specified period to raise resources during a natural calamity; special provision for certain States; and any other matter the Council decides.

Quorum and voting. This is the part to learn precisely, because it is the constitutional expression of the bargain.

• The quorum is one half of the total number of members.
• Every decision must be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting.
• The vote of the Central Government has a weightage of one-third of the total votes cast.
• The votes of all the State Governments taken together have a weightage of two-thirds of the total votes cast.

Work out what that means. The Union alone cannot carry a decision, because one-third is less than three-fourths. The States alone cannot carry a decision, because two-thirds is less than three-fourths. Neither side can act without some of the other, and the Union holds a blocking third. That is a genuine federal bargain written into the Constitution, and it is unique in the Indian text.

Article 279A(11) requires the Council to establish a mechanism to adjudicate disputes between the Union and States, or among States, arising out of its recommendations.

Are the recommendations binding?

This was the central constitutional question and it has been answered.

Facts. Union of India v. Mohit Minerals Pvt Ltd, decided 19 May 2022. The issue was whether integrated GST could be levied on the ocean freight component of an import on cost, insurance and freight terms, on a reverse charge basis. The Union argued in support of the levy partly on the footing that the Council had recommended it and that its recommendations bind.

Held. The recommendations of the GST Council are not binding on the Union and the States. The Court gave three reasons. The Constitution Amendment Act as introduced had contained an article 279B providing for a dispute-settlement authority, and that provision was deleted while article 279A(11) was included, which indicates that Parliament intended the recommendations to have only persuasive value. Article 279A does not begin with a non obstante clause, and article 246A is not expressed to be subject to it; both legislatures possess simultaneous power, and article 246A envisages no repugnancy provision, so treating the recommendations as binding edicts would disrupt fiscal federalism. And it is not necessary that one federal unit must always hold the higher share of power for the units to be able to decide.

The Court added the qualification that matters in practice: the Government is bound by the recommendations when exercising its rule-making power under the CGST and IGST Acts, but that does not make every recommendation binding on the legislature's power to enact primary legislation.

It also gave the sentence most worth quoting in a federalism answer:

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.

Why it matters. It settles the status of the Council and it reframes the vocabulary. Cooperative federalism is not a duty to agree; it is a structure that makes agreement necessary and leaves disagreement lawful.

The federalism argument, both ways

For the arrangement. It is the first genuine instance of shared sovereignty in Indian fiscal arrangements. The States gave up their most important tax and got in exchange a seat at a table where the Union cannot act alone. The weighted voting is a real protection, not a formality, and the Council has in fact functioned by consensus for most of its life.

Against it. The States surrendered a power they held exclusively and received in return a vote in a body whose output is not binding, in which the Union holds a blocking third that no combination of States can overcome. Their remaining independent revenue is narrow: land, buildings, alcohol, petroleum products for the time being, electricity and vehicles. The compensation that cushioned the transition was time-limited. And because article 246A displaces article 254, there is no constitutional rule to resolve a real conflict between a central and a State GST law, only politics.

The honest conclusion, and the one to write, is that GST made India a single market at the cost of making the States fiscally dependent on a forum rather than on a power, and that the Supreme Court, by holding the recommendations non-binding, gave the States back the one thing the design had taken from them: the ability to say no.

A worked example

The GST Council recommends by the required majority that a particular service be taxed at a specified rate. State Y disagrees, and its legislature enacts a State GST law taxing that service at a lower rate. The Union says the recommendation binds.

Does article 246A permit the State law? Yes. Article 246A confers on Parliament and on the legislature of every State power to make laws with respect to goods and services tax, and the supply here is intra-State, so the State legislature has the power.

Does the recommendation bind? No. Mohit Minerals holds that the recommendations of the GST Council are not binding on the Union and the States. The reasons are that the proposed article 279B was deleted while 279A(11) was included, indicating persuasive value only; that article 279A has no non obstante clause and article 246A is not expressed to be subject to it; and that treating the recommendations as binding edicts would disrupt fiscal federalism.

Is the State law repugnant to the central GST law? Article 246A opens "Notwithstanding anything contained in articles 246 and 254", so the ordinary repugnancy rule is displaced, and article 246A envisages no repugnancy provision at all. There is no constitutional rule that resolves the conflict.

So what actually resolves it? Politics and the Council, not law. That is what the Court meant by describing Indian federalism as a dialogue between cooperative and uncooperative federalism, with the units at liberty to use means of persuasion ranging from collaboration to contestation.

One qualification. The Government IS bound by the recommendations when exercising its rule-making power under the CGST and IGST Acts. The freedom is the legislature's, not the executive's.

Quick revision

• Article 246A grants GST power directly, notwithstanding articles 246 and 254; it is not an entry in any List.
• Both Parliament and every State legislature hold the power simultaneously; Parliament alone for inter-State supply.
• Article 269A: IGST is levied and collected by the Union and apportioned; imports count as inter-State supply.
• Article 279A: the Council, chaired by the Union Finance Minister, quorum one half, decisions by three-fourths of weighted votes, Union one-third and all States together two-thirds.
• Neither side can carry a decision alone, and the Union holds a blocking third.
• Mohit Minerals: the recommendations are persuasive, not binding, though the Government is bound by them in its rule-making. Indian federalism is a dialogue between cooperative and uncooperative federalism.

Test yourself

1. Why could neither the Union nor the States tax the whole of a commercial transaction before 2016?

2. What do the opening words of article 246A displace, and what follows for repugnancy between a central and a State GST law?

3. Set out the quorum and voting rule in article 279A, and show by arithmetic why neither side can carry a decision alone.

4. Are the recommendations of the GST Council binding? Give the three reasons in Mohit Minerals, and the one qualification.

5. "The States surrendered a power and received a vote." Discuss.