Constitutional Law

GST in the Theatre of Fiscal Federalism

Kanishk Srinivas

A three Judge Bench of the Supreme Court, comprising Justices Chandrachud, Surya Kant and Vikram Nath in the U.o.I v. Mohit Minerals case held that the “recommendations” of the GST Council are merely suggestive in nature. They do not have binding value on the Parliament or State Legislatures. In this article, the author examines the nature of fiscal federalism in India and analyses the Mohit Minerals judgement in light of the federal distribution of powers and stated objectives of GST. Finally, the author proposes some solutions for improving the federal character of the GST Council as a tool for advancing fiscal federalism as envisaged envisioned by the framers of the Constitution.


A three-Judge Bench of the Supreme Court, comprising Justices Chandrachud, Surya Kant and Vikram Nath in the UoI v Mohit Minerals case held that the “recommendations” of the GST Council are merely suggestive in nature. They do not have binding value on the Parliament or State Legislatures. There have been concerns, that with this pronouncement, States may get a free hand to frame their own taxation policies, leading to the collapse of the unified GST structure. Others have argued that this judgement reflects the true “cooperative” and “collaborative” spirit of the GST Council and the authority of the States to autonomously discharge their federal functions have been affirmed. The author believes that the judgement is a step in the right direction towards reforming the GST structure in particular and achieving the goal  of fiscal federalism in general.

 This piece proceeds as follows. First, the author examines the nature of fiscal federalism in India through an analysis of the Constituent Assembly Debates, Constitutional provisions and the reports on the institution of GST. Next, the authors proceed to analyse the Mohit Minerals judgement in light of the federal distribution of powers and stated objectives of GST. Lastly, the author proposes some solutions for improving the federal character of the GST Council as a tool for advancing fiscal federalism as envisioned by the framers of the Constitution.

Fiscal Federalism: A zone of contestation

Constituent Assembly debates

The power division between the Central Government and provinces was a hotly contested issue during the Constituent Assembly Debates. There were two schools of thought – one favouring a “strong Centre” around which Provinces would revolve while another that sought a fairer devolution of powers to the provinces for pragmatic reasons. The former was guided by the exigencies of the day – Partition, communal riots and social instability – that required a concerted and centralised effort.[1] The latter was influenced by ground realities that demanded specific, localised interventions – something the Provinces alone could provide.[2]

The final Constitution reflected the demands and apprehensions of both sides – evident in the creation of three separate legislative lists under Schedule VII and the different realms of legislative powers under Article 246. The Union List contained items like defence, external affairs – issues that could be effectively handled only by a strong centre. The State list contained items that required locale-specific knowledge for effective administration like education, health and agriculture. The power of the respective governments to legislate in their realms was secured by providing distinct spheres of taxation. Provisions were also made for the transfer of some taxes from the Centre to the States to aid the latter in the performance of their tasks.[3]

Despite the recognition of States’ powers, there was a greater concentration of powers in the Centre. The Concurrent List consisted of fields that the Centre and States could both legislate upon. However, the repugnancy doctrine under Article 254 provided that the laws framed by the Centre were to prevail in case of a conflict. At the same time, there were no powers of taxation mentioned in the Concurrent List and hence the ability of the Centre and States to raise revenues for funding their activities was protected.[4]

Hence, the Constitution divided the spheres of operation of the Centre and States with some overlap. However, their powers to perform these functions were safeguarded by specifying exclusive realms of taxation. This arrangement recognised the importance of States in the development process and the need to empower them to the maximum extent possible in the discharge of these functions.

The Nature of GST

After nearly 6 decades of separate powers of taxation, the Empowered Committee of State Finance Ministers formulated the idea of GST in the First Discussion Paper. GST was attempted to be introduced in 2011 but was ultimately introduced in 2014 and came into force on 1st July 2017. The authoritative and final report on the nature of GST was the 73rd Report of the Standing Committee on Finance.[5]

The Committee recommended that the fiscal autonomy of States be respected, any deviations from the uniform GST structure be kept “to a minimum” and States be given the option of joining the GST structure when they so desire[6]. There were concerns relating to the impact of GST on the manufacturing states, states with small consumer bases and losses arising as a result of the implementation of GST.[7]

Apart from these, there were three major constitutional concerns. First, what would be the nature of the recommendations of the GST Council? Second, what would be the mode of decision-making in the Council? Third, how would the fiscal autonomy of the States be protected? The Committee approached the Attorney General for the resolution of these issues.

In response to the first question, it was suggested that the GST Council should be seen as only making recommendations and not prescriptions. This was not to say that the Council was toothless, but that the ultimate power of legislation was to reside in the Parliament and State Legislatures as envisaged by the Constitution[8]. This was along the lines of the Empowered Committee’s recommendations that the GST Council was to serve as a forum for “consensus building” and adhere to “cooperative federalism” and “democratic governance”[9]

The second question was dealt with rather hastily by the Committee. There were two elements to the issue of decision-making in the GST Council – the weight of votes and the majority required for a recommendation to be adopted. The current weightage of votes is that the Centre has one-third of the weight of total votes while the 31 states (which includes the UTs with Legislatures) have two-thirds of the weight. This means that out of a total of 33 votes in the Council, the 2 representatives of the Centre have 11 votes amongst themselves while each “state” has a 0.709 weight. This unequal distribution of votes was justified by referring to the nature of the majority required for the adoption of a recommendation. It was argued that since a three-fourth majority was required, neither the Centre nor the States would be able to unilaterally get a recommendation passed[10]. The author will identify the problems associated with this approach in the third part of the article.

The third question was addressed by suggesting that the recommendations of the GST Council would not be mandatory. An allusion was made to the importance of preserving the autonomy of the States. A proposed GST Dispute Resolution Mechanism[11] that would allow the legislations that deviated from the recommendations of the Council to be questioned was also scrapped to protect the State’s fiscal powers.

The Mohit Minerals Position

It is in light of the aforementioned conceptions of fiscal federalism that the controversy around the Mohit Minerals case has to be interpreted. The Centre’s clear departure from the stated objectives, values and principles of GST can be seen in the nature of contentions that are raised in the SC.

The case involved the levy of a reverse charge on ocean freight under a Cost-Insurance-Freight (CIF) contract. A CIF Contract has two prongs – a contract between the foreign exporter and Indian importer and another contract between the foreign exporter and the shipping line. The foreign exporter undertakes to pay the cost of shipping, insurance etc. and the Indian importer pays the same to the exporter. The exporter then enters into a separate contract with the shipping line for the delivery of the goods.

In the case at hand, the Indian importer paid the IGST for the delivery of the goods but the Centre claimed that IGST also had to be paid for the delivery of the services of shipping as they were different elements (para 1-2). This is where the demands of the Centre go against the stated objectives of GST – the creation of a uniform taxation system and avoiding the cascading effect of taxes.[12] In the case of a CIF contract, the supply of goods and the provision of shipping services are part of the same composite supply. The IGST that the Indian importer pays for the delivery of goods includes the delivery of shipping services and by demanding that GST be separately paid for the shipping services, the Centre violates the rationale for GST.

The Gujarat HC struck down the reverse charge and an appeal was filed in the SC (para 9). Instead of recognising the flaws in the policy, the Centre raised two major contentions. First, the levy of IGST on foreign shipping lines was intended to aid Indian shipping lines. The second and more baffling contention was concerning the nature of the GST Council. This was an entirely new contestation that had not been made in the HC and was of no significance in determining the validity of a reverse charge. The Centre argued that the Council was a sui generis body that served as a point of convergence between itself and the States. This automatically converted the recommendations of the Council into legislation (para 10).

Justice Chandrachud writing a per curiam judgement, struck down the reverse charge, holding that the Centre could not make “arguments of convenience” (para 144) in tiding over the composite supply clause. The path-breaking observations were, however, made with respect to the nature of the GST Council and its recommendations. He engaged in a textual analysis of Articles 246A and 279A and noted the absence of a non-obstante clause or a clear direction in the latter that it was to override the former (para 30). He engaged in an originalist interpretation and referred to the deletion of the provision for a GST Dispute Resolution Body during the framing of the GST Policy (para 43).  This, he held, was to avoid curtailing the powers of the Parliament and State Legislatures to frame laws concerning GST and limit the scrutiny of laws because they had deviated from the recommendations of the Council. There was an emphasis on the interdependent nature of democracy and federalism (para 49). This was to allow constituent powers to check the unbridled use of powers by the other units.

The essence of the judgement was its reference to cooperative and competitive federalism. The unequal powers granted to the Centre and States under the Constitution were used to hold that the nature of their interaction could not always be cordial and collaborative. The States which are weaker vis-à-vis the Centre are entitled to use “various forms of contestation” for the protection of their interests and these practices would be “within the framework of Indian federalism” (para 49). The nature of GST organisation in Canada and Australia was referred to hold that a uniform system of taxation did not demand that the Centre override the constitutional powers of the States (para 31).

A contention was raised that if the GST Council’s recommendations and the powers of the Centre were not upheld, their ability to maintain the GST structure would be compromised. It was held that this was an affront to the nature of the GST Council as a constitutional body for “collaboration and contestation of ideas.” (para 51). The Court also dismissed this claim by showing that the recommendations were not intended to be binding in the first place. The wording of Article 279A and the fact that the Centre was given only one-third of the weightage of votes and not the power to override the collaborative process were seen as indications that the GST Council’s recommendations were not meant to be binding (para 51). These interpretations have led many scholars to worry about the future of GST. However, a careful reading of the judgment shows that this is a baseless concern.  The Court has distinguished between the types of recommendations made by the GST Council. It has been held that recommendations on the Government’s power to “notify secondary legislation to give effect to the uniform taxation system” will be binding (para 59). Hence, the ability of the Centre to protect the GST structure has not been eliminated. It is only with respect to the other wider powers of the GST Council that the non-binding nature of its recommendations has been highlighted. In short, this judgement is a caution against the conflation of the different types of recommendations of the Council and an assumption that its recommendations are binding in all circumstances.

The Treacherous Path Ahead

The impact of this judgement is sought to be analysed from three perspectives– the knee-jerk reaction of the States, the nature of fiscal federalism and amendments to the functioning of the GST Council.

The immediate result of this judgement will be a sense of new found freedom for the States, especially Opposition ruled ones. They will be inclined to utilise the judgement and frame their own laws with respect to GST or even create new ones outside the scope of the GST Council.  Despite the emphasis on fiscal federalism, this tendency is to be curbed. The judgement does a good job of balancing the ability to maintain the core GST structure and securing the autonomy of the States. The holding that the “recommendations” of the GST Council are not binding on the States secures their fiscal powers while the upholding of the Centre’s powers to notify secondary legislation enables the maintenance of a unified GST structure that can achieve its stated objectives of avoiding cascading taxes and easier administration.  In line with the Court’s holdings, the Centre should take proportionate measures to uphold the GST framework while allowing the States to exercise their discretion in areas that require their specialised knowledge. The rationale is that reaping the innumerable promised benefits of GST – elimination of cascading taxes, harmonised national market, ease of doing business, relief for consumers and producers, etc.[13] justifies working towards eliminating the few procedural flaws in its implementation.

The aforementioned position holds ground only as long as the values of fiscal federalism are upheld. The importance of fiscal federalism can be traced from the significance accorded to its more illustrious cousin – federalism. The SC in S R Bommai has held federalism (alongside secularism) to be a basic feature of the Constitution as envisaged by Kesavananda Bharati. A similar status, however, has not been expressly conferred upon fiscal federalism yet. This is a serious flaw given that the autonomy to raise resources (fiscal federalism) is essential for discharging the differential duties assigned to the different tiers of government (federalism). In effect, federalism is a dead Constitutional value in the absence of fiscal federalism.

The demand for fiscal federalism has other pragmatic considerations also. Given that a large number of vital matters like health and agriculture have been placed on the State List, States need sufficient autonomy to raise resources and plan their expenditure to effectively discharge these functions. This is what has been called the “form follows function” (Sudhir Krishnaswamy) mode of governance. This is not to say that the Centre does not discharge important functions. Instead, the greater public interface involved and scope for accountability in the functions performed by the States and local governments have been accorded significance. The localised and special knowledge that States possess and their ability to make effective interventions has also been recognised.

The principle of fiscal federalism can be effectively implemented only when the GST Council which in the words of the Centre is a “sui generis” body that acts as a “point of convergence” between the Centre and States and provides for collaboration and contestation, makes amendments to its lopsided procedures[14] and allows greater decision making powers to rest in States’ hands. Subject to further research and revision, the author would like to propose three solutions for enhancing fiscal federalism as currently being practised by the GST Council.

First and foremost, is the reconfiguration of the weightage of votes. In the current system, the two representatives of the Centre have 11 votes while each State representative only has 0.709 weight. While a difference in voting powers is acceptable given that the Constitution itself has a centralising drift, a stark difference as seen in the Council is an affront to the autonomy of States. This becomes even more unacceptable when we consider the fact that the States have given up some of their taxation powers and agreed to “pool their sovereignty” with the Centre. The guiding principle for such a reconfiguration of votes must be that the Centre must be incapacitated from overriding the opinions of States or acting as a judge between conflicting opinions of different groups of States. The true spirit of the GST Council – achieving consensus through debate and discussion – must not be eliminated by the brute force of the Centre’s vote weightage.

Second, the weightage of the States’ votes needs to be reconfigured. At present, States like Maharashtra and Tamil Nadu (large States with a substantial manufacturing base) have the same weightage as UTs like Delhi and Puducherry. This is a grossly unfair division that does not take into account the inherent differences in the capacities, demands and aspirations of the States. While a proportional representation system like the Rajya Sabha might not be the most appropriate, alternate methods of meaningfully assigning voting weightage to the States may be examined. One method could be to develop a State Performance Index along the lines of the indicators used by the Finance Commission to devolve taxes to the State. The indicators used for the creation of this list could include compliance with the FRBM Act, progress on SDGs, implementation of social welfare legislation, etc. The use of such a composite index would be more appropriate since it devolves taxes to the States on the basis of relevant considerations like social development, legislative efficiency and fiscal prudence. This will also positively nudge States towards achieving development goals while preventing misuse of funds by errant States. However, at no cost should an indicator that attempts to measure the extent of State compliance with GST Council Recommendations be used as it would flout the very objective of having greater devolution of fiscal powers to States.

Last but not the least, the nature of support required for a recommendation to be adopted needs to be modified to “full and unconditional consensus of all members.” This is not a radical proposition given that this was the position till the 2011 version of GST[15]. The Standing Committee on Finance made the recommendation of a three-fourth majority for adoption of recommendations on the unsatisfactory ground that it would be “difficult” to obtain the consensus of all members[16]. The author believes that irrespective of the difficulties in the process, full consent of the States must be sought. There are two broad reasons for this. First, when the consent of even a single State is not taken, the specific knowledge, expectations and powers of that State with respect to its jurisdiction are effectively discarded. The impact of this dismissal is not only on the State Government but also on the people of the State who were relying on the State to protect their interests. Every time, the consent of a State is not taken while adopting a recommendation, the interests of the State’s people are being ignored. Second, the need for consensus is motivated by the possibility of the creation of “loser” States. In a system that requires a three-fourth majority for adoption of recommendations, it is quite possible for some States (most often, the Opposition ruled ones) to always be on the non-consenting side. Regardless of the reasons for the same, the outcome would be that the “loser” States will witness a constant denigration of their interests and hence, public dissatisfaction. A perception might arise that having the same political party which is in power at the Centre at the State level, is the only way of guarding their interests. This would be a huge blow to the federal structure. The repeated references by the leaders of the current ruling party during election campaigns to a “double engine government” does not inspire confidence that the aforementioned fears will not materialise.


The GST as a policy measure holds immense promise for India. However, the attainment of these benefits is no ground for flouting the Constitutional architecture and overriding the States’ fiscal powers and functions. The author firmly believes that the GST architecture must recognise the powers of the State and attempt to forge consensus on all issues. Such an approach will protect fiscal federalism, which as mentioned earlier, is fundamental for compliance with federalism (a part of the basic structure of the Constitution). Recognition of the States’ powers will also mean that their domain and locale-specific knowledge have been integrated into policymaking, resulting in effective and precise interventions. A consensus and collaboration-driven approach can work wonders for the citizens, country and Centre-State relations. Hence, it is high time that the concept of “cooperative federalism” on which GST is based is put into practice.

The author is an undergraduate student at the National Law School of India University, Bengaluru and an editor at LSPR.

[1] Gopalaswami Ayyangar on 21st August 1947 in Vol V of Constituent Assembly Debates (CAD)

[2] K Santhanam on 21st August 1947 in Vol V of Constituent Assembly Debates (CAD)

[3] Alladi Krishnaswamy Iyer on 21st August 1947 in Vol V of Constituent Assembly Debates (CAD)

[4] Tarun Jain “Goods and Services Tax – Constitutional Law and Policy” (EBC 2018)

[5] Standing Committee on Finance, 73rd Report, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011

[6] Ibid

[7] Ibid

[8] Standing Committee (n 6) para 63-64

[9] Standing Committee (n 6) Part III para 15

[10] Standing Committee (n 10) para 9

[11] Standing Committee (n 9)

[12] Standing Committee (n 6)

[13] Empowered Committee, First Discussion Paper on Goods and Services Tax, (2009)

[14] Such procedures include the disparity in the weightage of votes assigned to the Centre and States, mere three-fourth majority required for passing recommendations, equal weightage of votes for all States etc.

[15] Standing Committee (n 6) para 45

[16] Standing Committee (n 6) para 47