FEDERALISM IN India is “a dialogue in which the states and the Centre constantly engage in conversations”, and though the Constitution confers “the Union with a higher share of power in certain situations to prevent chaos and provide security”, the states “can still resist the mandates of the Union by using different forms of political contestation”, the Supreme Court said.
“It is not imperative that one of the federal units (Centre or states) must always possess a higher share of power over the other units,” a three-judge bench led by Justice D Y Chandrachud said while ruling that recommendations of the Goods and Services Tax (GST) Council cannot be binding on the Centre and states.
The ruling came on an appeal against a Gujarat High Court order quashing the Central notification levying Integrated Goods and Services Tax (IGST) on importers for ocean freight. The Supreme Court upheld the High Court’s order.
The apex court bench, also comprising Justices Surya Kant and Vikram Nath, ruled that to regard the Council’s recommendations “as binding edicts would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST” and “dislodge the fine balance on which Indian federalism rests”.
Stating that “one of the important features of Indian federalism is ‘fiscal federalism’,” Justice Chandrachud, writing for the bench, sought to explain how the Council “is not merely a constitutional body restricted to the indirect tax system in India but is also an important focal point to foster federalism and democracy”.
The court pointed out that Article 246A of the Constitution stipulates that both Parliament and state legislatures have “simultaneous” power to legislate on GST — and recommendations of the Council “are the product of a collaborative dialogue involving the Union and States”.
It further pointed out that the Council has an “unequal voting structure where the states collectively have a two-third voting share and the Union has a one-third voting share”. Also, “since India has a multi-party system, it is possible that the party in power at the Centre may or may not be in power in various states”, it said.
“…therefore, the GST Council is not only an avenue for the exercise of cooperative federalism but also for political contestation across party lines. Thus, the discussions in the GST Council impact both federalism and democracy,” the court said.
Delving further on the scope of Indian federalism, the court said this may not always be cooperative in practice. “The relationship between two constituent units that are not autonomous but rely on each other for their functioning is not in practice always collaborative or cooperative,” it said.
“If the states have been conferred lesser power they can still resist the mandates of the Union by using different forms of political contestation as permitted by constitutional design. Such contestation furthers both the principle of federalism and democracy,” said the bench.
“The federal system”, the court said, “is a means to accommodate the needs of a pluralistic society to function in a democratic manner. It attempts to reconcile the desire of unity and commonality along with the desire for diversity and autonomy”.
The court said that “democracy and federalism are interdependent on each other for their survival such that federalism would only be stable in well-functioning democracies. Additionally, the constituent units in a federal polity check the exercise of power of one another to prevent one group from exercising dominant power”.
“Harmonised decision thrives not just on cooperation but also on contestation. Indian federalism is a dialogue in which the States and the Centre constantly engage in conversations. Such dialogues can be placed on two ends of the spectrum — collaborative discussions that cooperative federalism fosters at one end of the spectrum and interstitial contestation at the other end,” the judgment said.
Explaining why the Council’s recommendations can’t be binding, the court pointed to the deletion of Article 279B by which a Goods & Services Tax Dispute Settlement Authority was proposed to be set up to adjudicate any dispute or complaint referred to it by a state or the Centre — and the inclusion of inclusion of Article 279(11), which provides for the GST Council to devise a mechanism to adjudicate on any dispute that “arises out” of its recommendations.
This, the court said, “indicates that the Parliament intended for the recommendations of the GST Council to only have a persuasive value, particularly when interpreted along with the objective of the GST regime to foster cooperative federalism and harmony between the constituent units”.
The Centre had contended that if the Council cannot make binding recommendations, the GST structure would collapse as each state would then levy a conflicting tax and collection mechanism.
The court said the Centre’s argument “does not hold water”. “Such a reading of the provisions of the Constitution diminishes the role of the GST Council as a constitutional body formed to arrive at decisions by collaboration and contestation of ideas,” it said.
Reacting to the court’s order, Union Revenue Secretary Tarun Bajaj said the GST law provides for recommendation and not mandate. “It is a constitutional body, an executive body created by the Constitution which consists of Centre and states which will recommend and based on its recommendations we have created our laws on GST,” he said.
Adding that Section 9 of the CGST Act clearly states that the tax rate decision should be based on the recommendation of the Council, Bajaj said problems could get compounded if any state decides not to accept the recommendation of the Council.