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Will the Curtains Fall for the One Nation, One Tax Regime?

Will the Curtains Fall for the One Nation, One Tax Regime?

Or, is it a classic case of much ado about nothing? Experts say that the debate on the very survival of GST stirred by the Supreme Court's observation is unfounded, as come what may, the One Nation, One Tax regime is here to stay.

Illustration: Nilanjan Das Illustration: Nilanjan Das

For starters, it wasn’t even a judgement but an observation made by the Justice D.Y. Chandrachud-led Supreme Court (SC) bench while dismissing the central government’s appeal challenging a Gujarat High Court ruling that termed integrated GST (IGST) on ocean freight as unconstitutional. On May 19, the apex court bench remarked that the recommendations of the GST Council are persuasive in nature and, thus, not binding on the centre and the states. The remarks were made while delivering a verdict in the Union of India vs. Mohit Minerals case.

“It is not imperative that one of the federal units must always possess a higher share in the power for the federal units to make decisions. 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,” the bench wrote in its judgement. The SC upheld the Gujarat High Court’s ruling that no IGST is payable on ocean freight under the reverse charge mechanism (RCM) on cost, insurance and freight (CIF) contracts for import of goods by Indian importers since IGST is payable only on a composite supply of goods.

Within minutes of the preliminary details of the judgement emerging, an intense debate started in many quarters. Warning bells were sounded that the judgement would wreck the very foundation of the GST regime and a situation of “Many Indias, Many Taxes” would arise. It was said that the judgement would enable the centre and states to charge different levies once the GST compensation provided by the centre expired on June 30.

“The GST council was supposed to decide rates and the structure of the tax. Now some states will begin to say that this does not apply to us and this will destroy the idea of One Nation, One Tax. The entire reason for having GST would be undermined. It will enable the states to do what they like, but that will be against the idea of GST,” says economist Arun Kumar.

Welcoming the judgement, Kerala Finance Minister K.N. Balagopal had told Business Today, “Actually, the GST, from inception, has been against the interests of federalism. And this judgement has upheld the freedom of states in taxation. This will be a big boost for cooperative federalism”. Going a step further, several opposition leaders had termed the GST Council as ineffective and called for it to be dismantled.

Meanwhile, exporters have welcomed the judgement. “As far as the GST Council verdict is concerned, we still need to see the impact of it in the next GST Council meeting. We are in wait-and-watch mode as far as quashing of ocean freight is concerned. That is a welcome step for us and good for the industry,” says R.K. Jalan, Chairman of AFPL Global, a Kanpur-based exporter of leather accessories.

After the judgement, it was speculated that the IGST rates would also be impacted soon. Besides, the judgement would pave the way for a complete makeover of the Goods and Services Tax Network (GSTN) platform for filing of returns, as availing of input tax credits, issuance of notices, refund claims, etc., are all done through it. But as the days passed, it appears that the entire hullabaloo may well have been premature. Expressing surprise at the reams of conjecture being written on the judgement’s various implications, Justice Chandrachud told senior advocate Harish Salve during a hearing in a separate GST-related matter that the bench had merely ruled on “the aspect of composite supply”.

And that is what it is. “It’s an observation that explains the position of law as on date, just like the debates in 2017, when GST was implemented. The Constitution was amended for the purpose that a part of the GST will completely go to the state (SGST); a part that will be collected by the Union (CGST); and, a part that will be collected by the Union and distributed between the state and the Union (IGST),” explains Sameer Jain, Partner at PSL Advocates and Solicitors. This observation, therefore, expounds on the principle that the centre and the states need to work in a consultative manner to implement GST.

“The position concerning the GST regime remains unchanged. Article 246A of the Constitution vests the centre and the states with equal simultaneous legislative powers and this is neither subject to Article 279A (GST Council) nor does the latter override the former. Article 279A only prescribes a mechanism whereby the centre and the states collaborate to make recommendations,” says Rajat Bose, Partner at Shardul Amarchand Mangaldas & Co., a law firm. “While it was and still is open for states to legislate on their state GST rates etc., the same has not been done till today with states respecting the principles of federalism to avoid chaos in the taxation framework.”

The main question before the SC was whether the levy of GST, in addition to the customs duty already charged on the import of goods on a CIF basis, amounted to double taxation, thus creating a new levy not envisaged in the law. “It is in the context of answering the above questions that the Court examined the constitutionality and connected aspect of whether, by enacting a deeming fiction in law (a notification that allowed for importers to be treated as ‘recipients’), the GST Council had undermined the power of the legislature. The court observed that the GST Council has powers to make recommendations, and Parliament and state legislatures have the power to either accept or reject them. The same Article, that is, 279A gives the Council power to settle disputes,” says Mahesh Jaising, Partner & Leader for Indirect Tax at Deloitte India.

Ever since its roll-out on July 1, 2017, GST has often been hailed as the biggest tax reform in the country since Independence. In the five years since, it has helped digitalise the world’s sixth-largest economy, improve compliances, and steadily drive up direct tax collections. By making multiple tax filings redundant, it has enhanced the ease of doing business in the country. Measures such as the e-way bill have also contributed to faster and higher movement of goods and quicker turnaround times due to the abolition of checkposts.

Greater use of new technologies and stricter norms for input tax credit by tax authorities have resulted in a steady increase in GST collections. In FY23, gross GST collection for April 2022 reached an all-time high of Rs 1.68 lakh crore, thus surpassing the March figure of Rs 1.43 lakh crore by over Rs 25,000 crore. Gross GST revenue in May was 44 per cent higher YoY, at Rs 1.41 lakh crore, with receipts from domestic transactions and services imports at similar levels and goods imports contributing 43 per cent more in taxes.

As economic activity revives, GST collections are forecast to improve in the months ahead. Moreover, collection numbers are eagerly awaited every month as they have become a key indicator of the bottom line of India’s economy.

In such a backdrop, experts say that the possibility of disputes arising between the centre and the states is unlikely and any attempt to challenge it will be widely resisted by the industry. “This is a structural reform and there is no going back. Even the industry will resist any sort of derailment. The concept of One Nation, One Tax is here to stay,” asserts Arun Malhotra, Founding Partner and Portfolio Manager at CapGrow Capital Advisors.

With the teething problems on various slabs already resolved, the current synchronised system is unlikely to be altered. “There are enough economic incentives within the system to ensure that the progress on GST will continue. The freight costs for a lot of domestic sectors have reduced by 1-2.5 per cent, and this includes sectors like ceramics, tiles, cement, tyres, etc. Hence, all industries have benefitted,” Malhotra elaborates.

The centre and the states would avoid taking opposing views on the recommendations of the GST Council as they will not want to derail the concept of uniform taxation. “Also, the way GST law is structured today, the state government officials are responsible for administering both Central GST (CGST) and State GST (SGST) laws for multiple taxpayers. Hence, a divergence between CGST Act and SGST Act will create issues of implementation of law within the same state,” points out Ritesh Kanodia, Co-Chairperson of National Council on Indirect Taxes at ASSOCHAM.

PSL’s Jain feels that when it comes to managing the day-to-day affairs of the country, the centre and the states largely exhibit a sagacious approach to issues of national importance. “Of course, there have been litigations between the centre and the states and that will continue, but we don’t think that the SC’s observation will open the floodgates of litigation.”

There is, however, a strong possibility of the centre eventually amending the terms of reference of the GST Council. This has precedence in the past when the centre utilised the legislative route on provisions or recommendations that didn’t find favour with the judiciary.

“We have all seen the Vodafone judgement and the Bilateral Investment Treaty litigations thereafter. The SC judgement was practically overruled by way of a legislative amendment, where the transaction was then brought into the tax net. If the government thinks in their wisdom that something which is now outside the tax net needs to be brought in, they may undertake the requisite procedures by way of an amendment, introduction or repeal. It may not require an amendment into the law, but can be sorted out by way of notification or clarification as well,” says Jain.

Tax litigations are as old as the hills. Throughout history, tax assessees and collectors have been in a state of perennial conflict. In Singapore—often touted as the world’s friendliest tax regime—the revenues of tax consultants are amongst the highest in the world! The idea of One Nation, One Tax appears to be safe for now.


@manishpant22, @RajatMishra9518, @iamrahuloberoi