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Three years ago, as I began researching for my doctoral dissertation on the Goods and Services Tax (GST), I had a premonition that the GST Council could very well be the Achilles’ heel of India’s biggest tax reform since independence. I did not expect, however, that the dismantling would begin before June 2022, when the statutorily mandated GST compensation period ends.
The rumblings of disenchantment have already begun. The finance minister of Tamil Nadu has lamented that the GST system is “badly designed and executed”; just a few weeks earlier, he also scoffed that a state like Goa, which has a far lesser population than Tamil Nadu, has an equal vote in the GST Council. West Bengal’s finance minister has argued that the GST Council’s meetings have become “acrimonious, vexing, and almost toxic with erosion of mutual trust that held fast between the state and the centre since the inception of the GST Council”.
Punjab’s finance minister has raised matters regarding “excessive delegation”, and Kerala’s new finance minister has claimed that the GST is “antithetical to federalism to begin with”. There are many more state finance ministers who hold similar views and are expected to become more vocal in the next few months as their coffers run dry. To be clear, this is not a BJP- vs non-BJP-ruled-states issue. Instead, this is an issue concerning tax sovereignty and fiscal autonomy.
Barrels of ink have been spilled describing the enormity of the GST’s significance for the Indian economy, namely, its ability to remove cascading of taxation, reduce economic distortions, improve tax administration, and create a unified national market. No wonder Prime Minister Narendra Modi pulled out all the stops at its launch four years ago with a special televised midnight session held in the Central Hall of Parliament. (Although, pressing a button – as if launching a rocket – amidst loud cheer and clapping by politicians to officially enforce a new tax on 1.3 billion people is laughable, courageous even. But I digress.) There has been little discussion, however, of the GST Council – a unique institutional design feature, which is, for all practical purposes, the backbone of the GST system.
The GST council is sui generis – an institution with no parallels in other federal countries. What makes it unique is that it is envisaged as functioning on the principles of cooperative federalism. Both its decision-making process and its enforcement mechanism require the participation and cooperation of the centre and the states.
Unresolved constitutional issue
Under the principles of cooperative federalism, each party to the arrangement has a reasonable degree of autonomy; it can bargain about the terms of cooperation and, if driven too hard, decline to cooperate. This feature of cooperative federalism – voluntary participation – is at odds with the GST council’s “majority rules” decision-making process. As a result, there is a lack of certainty regarding the status of the GST council’s decisions.
Are the GST Council’s decisions binding?
Pursuant to Article 279A(4) of the Indian constitution, the GST council is mandated to “make recommendations” on all matters concerning the GST. Interestingly, no Constitutional provision clarifies that these recommendations are binding on either the centre or the states. The ambiguity regarding the status of the GST council’s decisions could create a constitutional crisis, if one or more states decide to opt out and refuse to follow the majority’s decision.
There are three possible reasons why the GST council’s decisions may not be binding.
First, it may be believed that treating the council’s decisions as binding would be unconstitutional, on the ground that doing so would violate the legislative supremacy of both Parliament and state legislatures, given the new concurrent taxation provision relating to goods and services (article 246A of the Constitution).
Second, it may be believed that making the GST council’s decisions mandatory would have an adverse impact on federalism. The Supreme Court of India has long held that federalism is part of the basic structure of the constitution, and any amendment that violates the basic structure is invalid (the “basic structure test”). It may be believed that affecting the states’ fiscal autonomy in such a manner would violate the basic structure test.
Third, it is possible, or even probable, that there is lack of political will to make the GST council’s decisions mandatory. After all, why would the states surrender their only worthwhile constitutional right (however limited) to determine their own indirect tax policy? It is possible that the states have adopted a wait-and-watch approach. If the GST system is successful and their revenue targets are met, states may be willing to forgo that right. If instead they feel stifled, they may opt out and revert to the old system.
The joint decision-making process reduces the likelihood that such an eventuality will occur, but it does not necessarily prevent it altogether. As the Indian government has acknowledged, “the possibility of departure from the recommendations of [the GST council] cannot be completely ruled out.”
Possible solutions to avert the impending constitutional crisis
Possible Solution No. 1
First, the most intuitive, is a constitutional amendment, clarifying that the “recommendations” of the GST council are binding on the centre and the states. This would settle the ambiguity once and for all, but would also be tough to achieve for lack of political will. Getting the states to agree on a constitutional amendment that would make it obligatory for them to accept the decision of a majority, even in situations where they register their dissent, appears improbable, at least for now. The states are yet to fully trust the GST system. This is exactly why they have resisted all forms of interference in their exclusive right to tax the sale of petroleum products.
Possible Solution No. 2
Second, is to seek a court intervention to interpret the existing GST-related legislative provisions. The wording of certain provisions suggests that the GST council’s decisions, despite being termed “recommendations,” are indeed binding. For instance, the language of section 9(1) of the CGST Act 2017 (the centre’s GST legislation) suggests that the centre can impose tax only at rates that are recommended by the GST council. The language of the states’ GST statutes is almost identical to the central law. In such circumstances, a clarification from the Supreme Court on the real meaning and effect of the GST council’s “recommendations” would be apt. It is settled law, under the principle of purposive interpretation, that a court is supposed to attach to a provision the meaning that serves the “purpose” behind it.
Possible Solution No. 3
Third, is to create a dispute resolution mechanism for the GST council that is similar to the existing interstate water disputes tribunals. These tribunals are the only quasi-judicial bodies in India that have original jurisdiction to decide interstate disputes, which would otherwise fall within the exclusive domain of the Supreme Court of India. Notably, these tribunals’ decisions are final and binding. Article 279(A)(11) requires the GST council to establish a mechanism to adjudicate centre-state and interstate disputes arising out of its recommendations (or implementation thereof). Making the decisions of such a dispute resolution mechanism final and binding could be an indirect way of making the GST council’s decisions binding.
While the first and the second possible solutions may or may not pass the Supreme Court of India’s “basic structure test,” on the ground that federalism may be affected by undermining the legislative authority of states, the third possible solution might pass judicial scrutiny, primarily because of the water disputes tribunals’ precedent.
The above three possible solutions are aimed at making the GST council’s decisions binding, thus ensuring stability of the harmonised GST structure; after all, that was one of the original goals of the GST.
Possible Solution No. 4
The fourth possible solution is to improve the existing system. This can be done by increasing the incentives for states to abide by all decisions voluntarily. For instance, the GST council is empowered to recommend a special rate for a specified period to raise additional resources during any natural calamity or disaster. The GST council exercised this power in January 2019, when it approved the state of Kerala’s proposal to levy a 1 percent cess , following a devastating flood in August 2018. Approving this proposal is a good sign; had it refused to do so, it is quite possible that the state would have had misgivings and have attempted to explore other options, including defection.
The GST council has enough tools to allow for flexibility in the event of economic exigencies while ensuring that the overarching GST structure does not collapse. However, it needs to ensure that its decision-making process does not fall prey to political partisanship.
The fear that some states may deviate in the future is real and not misplaced. Notions of fiscal autonomy run deep in all federations; federal units may simply walk away in the absence of a binding mechanism. In Canada, for instance, British Columbia pulled out of Canada’s harmonised sales tax (HST) system barely three years after agreeing to participate.
It is nothing short of a miracle that this new tax system has worked until now without incident. But will this last? Is it safe to assume that no state will ever opt out of the GST system? If a state defies the GST council’s decisions, is it not possible that other states may follow suit, leading to the eventual breakdown of the entire structure? The uncertainty surrounding the GST council’s decisions could affect its ability to function as the fulcrum for cooperative federalism. This uncertainty needs to be dealt with at the earliest opportunity to prevent a constitutional crisis.
Ajitesh Kir, a lawyer, is a doctoral candidate at the University of Michigan Law School. This article contains excerpts from a paper the author recently published in the Canadian Tax Journal.