GST Council – Federal Fiscal Coordination, Compensation Cess and Dispute Mechanism

Detailed Explanation

1 Constitutional Framework

The 101st Constitutional Amendment Act, 2016 amended the Constitution to enable GST by inserting Article 246A (concurrent power to levy GST), Article 269A (IGST on inter-state supply), and Article 279A (GST Council). It also amended the Seventh Schedule to remove certain entries from State and Union Lists to bring them under the concurrent GST framework.

Article 279A mandates the President to constitute the GST Council within 60 days of the Amendment's commencement. The Council is a joint forum of the Centre and States.

2 Composition and Voting

The Council comprises: (i) the Union Finance Minister as Chairperson; (ii) the Union Minister of State in charge of Finance or Revenue; and (iii) the Minister in charge of Finance or Taxation, or any other Minister nominated by each State Government and Union Territory with legislature.

The weighted voting mechanism assigns one-third of total votes to the Centre and two-thirds to all states collectively. A decision requires at least three-fourths of the weighted votes of members present and voting. This design prevents either the Centre or any single large state from unilaterally determining outcomes, though in practice, decisions have largely been by consensus.

3 Functions and Powers

The Council makes recommendations on: (a) taxes, cesses and surcharges to be subsumed under GST; (b) goods and services exempted; (c) GST rates including floor rates and bands; (d) threshold exemption limits; (e) model GST laws, principles of levy, apportionment of IGST; (f) special provisions for certain states (North-Eastern, hill states); and (g) any other matter related to GST.

4 Compensation Cess Mechanism

Since GST replaced multiple state taxes (VAT, entertainment tax, luxury tax, etc.), states feared revenue loss. To incentivise adoption, the GST (Compensation to States) Act, 2017 guaranteed states a 14% annual revenue growth over 2015-16 base year revenues for a five-year period (2017-2022). Shortfall from this guaranteed amount is compensated using proceeds from the Compensation Cess.

The Compensation Cess is levied over and above the peak GST rate on luxury items (large cars, SUVs), demerit goods (tobacco, pan masala, coal, aerated beverages). The cess was originally scheduled to end in June 2022. However, due to COVID-19 revenue shocks and borrowings made by the Centre to compensate states, the cess was extended to repay these loans — expected to continue till 2026.

The transition from compensation to a post-compensation fiscal arrangement remains a critical challenge for GST federalism.

5 Dispute Resolution and the Mohit Minerals Judgment

Article 279A(11) requires the Council to establish a mechanism to adjudicate disputes arising between the Government of India and one or more States, or between States, on GST matters. However, a formal statutory tribunal has yet to be established.

In Union of India v. Mohit Minerals Pvt. Ltd. (2022), the Supreme Court held that the recommendations of the GST Council are not binding on the Parliament or State Legislatures — they carry persuasive value but legislative sovereignty remains with Parliament and State Assemblies. This landmark ruling re-affirmed the nature of cooperative federalism under GST and has implications for how future disputes between Centre and States over GST implementation will be resolved.

Important Concepts and Subtopics

• Dual GST structure: CGST (Centre) + SGST (State) on intra-state; IGST on inter-state

• GSTN: Technology backbone, processes returns, payments; Section 25 non-government company with government equity

• Reverse Charge Mechanism (RCM): Tax paid by recipient, not supplier

• Input Tax Credit (ITC): Core GST concept enabling seamless credit chain to eliminate cascading

• Inverted duty structure: When input GST rate > output GST rate — affects refunds

• GST Appellate Tribunal (GSTAT): Constituted 2023; addresses litigation backlog

Current Relevance

• Post-compensation era: States must negotiate revenue shares without the guarantee safety net from 2022 onwards

• Rate rationalisation: Council discussions on merging 12% and 18% slabs — simplification debate

• Insurance GST: Debate over reducing GST on health/life insurance premiums — 2024-25 Council agenda

• Online gaming, casinos: Council's 28% GST decision (2023) and its implementation challenges

• GST on petroleum: States resist inclusion; critical for federal revenue architecture

• NMP 2.0 and GST implications for monetised assets — ongoing fiscal policy interface