Goods and Services Tax: Article 246A and the GST Council

Article 279A creates the Council within sixty days of the amendment's commencement. Its members are the Union Finance Minister as Chairperson, the Union Minister of State in charge of Revenue or Finance, and the Minister in charge of Finance or Taxation, or any other Minister nominated, of each State. Clause (9) fixes the voting: every decision requires a majority of not less than three-fourths of the weighted votes of the members present and voting, the Centre having a weightage of one-third and all the States together two-thirds.

Article 366(12A) defines goods and services tax as any tax on supply of goods, or services, or both, except taxes on the supply of the alcoholic liquor for human consumption.

The 101st Amendment also deleted or amended a long list of entries, including Entry 84 of List I and Entry 54 of List II, and provided for compensation to the States for loss of revenue for five years.

Why article 246A is a constitutional novelty

Because it is the first genuinely simultaneous power in the Constitution. The Concurrent List is not simultaneous in this sense: both may legislate, but article 254 makes the Union law prevail. Article 246A operates notwithstanding article 254, so a State law is not displaced by a Union law on the same subject.

Because it is outside the Seventh Schedule altogether. The power comes from the article, not from an entry, which is why the amendment had to delete the entries it replaced.

And because it made a bargaining institution constitutionally necessary. Two governments with power over the same tax must agree the rate or the tax cannot work, and article 279A is the machinery for that agreement.

The case

In Union of India v. Mohit Minerals Pvt Ltd, (2022) 10 SCC 700. Facts. Importers were required to pay integrated goods and services tax on ocean freight for goods imported on a cost, insurance and freight basis, on a reverse charge basis, although they had already paid the tax on the composite supply of imported goods; the Gujarat High Court had struck the notifications down. The Union argued that the Council's recommendations bound the States and the Union alike.

Held. The levy on ocean freight was bad, since the importer had already been taxed on a composite supply of which transportation was a part, and taxing the freight separately was double taxation. On the constitutional question it held that the recommendations of the Goods and Services Tax Council are not binding on the Union and the States but have persuasive value: article 246A confers simultaneous legislative power on both, article 279A does not create a body whose recommendations displace that power, and the deliberative federalism the Council embodies works by dialogue rather than by command. It described Indian federalism as a dialogue in which the States and the Centre are equal participants, and observed that both the Centre and the States are competent to legislate on the tax.

Why it matters here is that it answers the strongest objection to the amendment. The objection was that a State which surrenders its sales tax power to a Council in which it has one thirty-first of two-thirds of the vote has lost its fiscal autonomy. The answer is that the Council recommends and the legislature enacts, so the constitutional power remains with each legislature.

The counter-argument should be stated too, because it is real. A State that legislates against a Council recommendation loses the uniformity that is the whole point of the tax, and may lose compensation. Legal freedom and practical freedom are not the same thing, and a good answer says so.

A worked example

A State wishes to reduce the rate of tax on handloom textiles produced in the State, in order to support a local industry. The Council has recommended a uniform rate. What may the State do?

Constitutionally, it may legislate. Article 246A gives the State Legislature power to make laws with respect to the tax on intra-State supply, and Mohit Minerals holds that the Council's recommendation does not bind it.

Practically, three things follow, and they are the substance of the answer. First, the tax is designed as a chain of input credits, so a State rate out of step with the rest breaks the credit chain and burdens the very industry it is meant to help when the goods leave the State. Second, the State cannot alter the integrated tax on inter-State supply at all, because article 246A(2) gives Parliament exclusive power there. Third, the compensation arrangement and the political cost of departing from a Council decision are real constraints.

And a fourth point is worth making. A State could achieve its object by a subsidy rather than a rate change, which is not a tax measure at all. That is what most States do, and it shows how the constitutional and the practical interact.

Distinctions

What it does NOT mean

It does not mean the States gave up their taxing power. They exchanged a set of entries for a simultaneous power in article 246A, and Mohit Minerals holds that power intact.

It does not mean everything is inside the tax. Alcoholic liquor for human consumption is excluded by article 366(12A), and the five petroleum products are outside until the Council recommends a date.

It does not mean the Council is a legislature. It recommends; Parliament and the State Legislatures enact.

And it does not mean the Council's decisions can be ignored without cost. The tax works only if the rates match, so the practical pressure to conform is very strong even though the legal obligation is absent.

Quick revision

Constitution (One Hundred and First Amendment) Act 2016. Article 246A: simultaneous power in Parliament and every State Legislature, notwithstanding articles 246 and 254; Parliament exclusive for inter-State supply under clause (2); five petroleum products deferred by the proviso. Article 269A: inter-State tax levied and collected by the Union and apportioned, with import treated as inter-State supply. Article 279A: the Council, chaired by the Union Finance Minister, with a Minister from each State; decisions by three-fourths of weighted votes, Centre one-third and States two-thirds. Article 366(12A): the definition, excluding alcoholic liquor for human consumption. Entry 84 of List I and Entry 54 of List II were amended. Mohit Minerals 2022: the levy on ocean freight was double taxation and bad, and the Council's recommendations are persuasive and not binding, because article 246A confers simultaneous power and Indian federalism is a dialogue between equal participants.

Test yourself

1. What is constitutionally novel about article 246A? It confers simultaneous power on Parliament and on every State Legislature over the same tax, expressly notwithstanding article 254, so neither law displaces the other; and the power comes from the article itself rather than from an entry in the Seventh Schedule.

2. Which supplies does Parliament alone tax, and which instrument says so? Supplies in the course of inter-State trade or commerce, by article 246A(2), with article 269A providing for the levy, collection and apportionment of that tax and treating import into India as an inter-State supply.

3. How does the GST Council vote? Every decision requires not less than three-fourths of the weighted votes of the members present and voting, the Centre having one-third of the weight and all the States together two-thirds.

4. What did Mohit Minerals decide about the Council's recommendations, and on what reasoning? That they are persuasive and not binding, because article 246A confers simultaneous legislative power on the Union and the States and article 279A does not create a body whose recommendations displace it; Indian federalism is a dialogue in which both are equal participants.

5. Name two things that remain outside the tax. Alcoholic liquor for human consumption, excluded by the definition in article 366(12A); and the five petroleum products named in the proviso to article 246A, until the Council recommends a date.

6. State the strongest objection to calling the GST a federal reform, and the answer to it. That a State which surrenders its sales tax power to a Council where it holds a small fraction of the vote has lost its fiscal autonomy. The answer is that the Council only recommends and each legislature enacts, so the legal power remains; but the practical answer is weaker, since a State departing from a recommendation breaks the input credit chain and bears a real cost.