The Department of Finance is working on a detailed mechanism that can resolve Goods and Services Tax (GST) disputes raised by states while avoiding tax system distortions. The mechanism could be discussed with the States at the next meeting of the GST Council, scheduled for June.

The plan includes a Dispute Redressal Bench which will be comprised of representatives from the States, the Center and independent legal and tax experts familiar with the legal and economic implications. There will be detailed guidelines on which cases can be referred to such a process. The need for such a mechanism also follows a recent Supreme Court ruling that GST Board recommendations are not binding on states or the Center.

“We are working on the dispute resolution mechanism procedures, which some states are asking for,” a senior official told ET. “It’s being discussed. Once the project is ready, we will submit it to the council, who will take the final call.”

The GST Act has a provision for voting to resolve disputes. The Center has a one-third vote while the States represent the remaining two-thirds. In the event of a vote, a decision must be adopted or rejected by a majority of at least three quarters of the weighted votes of the members present.

GoM Resolution Model

The council has typically set up Groups of Ministers (GoMs) to deal with differences between states, whether it be a flood tax or tariff rationalization. Through this route, over the past five years, all disputes have been resolved by consensus except one, which the board decided by vote.

Opposition-led states say they are unlikely to sway the outcome because most states are ruled by the Bharatiya Janata Party (BJP), which also holds power in the Centre. They called for a mechanism that gives each state the chance to be heard legitimately. A dispute resolution chamber can potentially make decisions independently, beyond the influence of the Center.

Supreme Court decision

The Center anticipates further disputes beginning July 1, when the GST compensation cushion expires and states begin looking for ways to compensate for lost revenue.

Without an acceptable mechanism in place, most cases can end up with an already overburdened court system.

The Supreme Court’s decision in a case relating to the collection of integrated GST on ocean freight imports last month has created greater urgency in the search for a dispute resolution mechanism.

“The GST Council is the product of a collaborative discussion. It is not imperative that federal units always own a higher share,” the Supreme Court had said, adding that the GST Council’s recommendations are not binding on the states or the center.

The council is also expected to consider a report by a GoM headed by Meghalaya Chief Minister Conrad Sangma which favored the highest rate of 28% on online gambling, racing and casinos. He could also examine the issue of the integrated goods and services tax on ocean freight, which the Supreme Court had struck down.

“The Center has not made any decision and is just studying the case. They will make any decision after discussing it with the board,” another official told ET.