Positioning GST Constitutional Scheme and Validity of GST Compensation Act: A Case Comment

INTRODUCTION

The introduction of the Goods and Services Tax (GST) regime was effectuated by the Constitution (One Hundred and First Amendment) Act, 2016 (Amendment Act) which came into force in September 2016. As a follow-up the GST legislations were enacted which became effective from 1-7-2017. The “Goods and Services Tax (Compensation to States) Act, 2017” (Compensation Act) formed a part of these legislations and carried two underlying objectives; (a) providing for compensation by the Union to the States for any loss of revenue on account of implementation of GST; and (b) levy and collection of a cess for the purpose of carrying out this compensation obligation of the Union.

The validity of this Compensation Act was considered recently by the Supreme Court and upheld in its decision in Union of India v. Mohit Minerals (P) Ltd.[1] which forms the subject-matter of analysis in this article. This decision is in a sense landmark for various reasons:

(i) This is the first Supreme Court decision in the context of GST and therefore it sets the tone for judicial appreciation of changes effected on account of GST.

(ii) This decision traverses the constitutional and legislative changes brought about on account of GST so as to bring into context the relevant variables required to be traversed in order to be appreciated in the restated legislative scheme.

(iii) The decision is set in the specific context of the Compensation Act which in itself has a special position in the grand design of GST as it enlivens an invisible trust factor between the Union and the States required to calibrate GST as a “dual levy”.

(iv) By upholding the constitutional validity of the GST the Supreme Court has affirmed the constitutional changes, albeit in part, brought on account of GST. This would set to naught a number of disputes pending across High Courts wherein inter alia the validity of legislations, etc. is under challenge.

BACKGROUND TO THE DISPUTE

The Amendment Act enabled both Parliament and the States to levy GST on supplies of goods and services. However an apprehension was expressed by various quarters that the States would not be able to shore up its requisite revenue from levy of GST alone. This led to an agreement between the Union and the States that the former will compensate the latter if they were unable to garner sufficient revenue by levy of GST. This was besides the fact that the taxes on petroleum products are currently kept outside the scope of GST such that the revenue arising therefrom can act as kind of a safety valve for the States’ fiscal autonomy.

Accordingly Section 18 of the Amendment Act provided for “Compensation to States for loss of revenue on account of introduction of goods and services tax”. This provision encapsulated that “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.” As evident, the rationale for this provision was both (i) to incentivise States to agree to GST and come on board the grand reform; and also (ii) to protect States from any loss of revenue which arose in view of the transition from VAT to GST regime.[2]

It was in furtherance of this scheme that Parliament enacted the Compensation Act. In terms of Sections 3 to 7 of the Compensation Act, the States were to be compensated by the Union in the event their GST collections did not meet the tax plus 14% incremental growth over revenue collection in Financial Year 2015-2016. This was to be computed in terms of the detailed methodology where even the periodicity of the compensation payout is prescribed within the Compensation Act itself.

For the purpose of providing this compensation, Section 8 of the Compensation Act provides for levy of the “goods and services tax compensation cess” (compensation cess) on supplies in addition to the levy of GST under the appropriate GST legislation. In terms of Section 10 it is further provided that this compensation cess is to be credited to a “a non?lapsable fund known as the goods and services tax compensation fund” and the compensation to the States is to be paid out of this fund. The enumeration of the supplies which are subject to this cess is laid out in the Schedule to the Compensation Act. This list comprises of tobacco products, coal products, aerated waters, etc.

DISPUTE BEFORE THE SUPREME COURT

A writ petition was filed before the Delhi High Court challenging the validity of the Compensation Act and the Rules made thereunder.[3] The challenge was in the context of the levy of cess on coal supplied by the petitioner. The High Court passed an interim order in favour of the petitioner prima facie doubting the legislative competence of Parliament in enacting the Compensation Act. An appeal was filed by the Government of India (GoI) before the Supreme Court challenging this order of the High Court. An application to transfer the petition pending before the High Court to the Supreme Court was also filed. Accepting the request of the GoI, the Supreme Court ordered the transfer and took upon itself the hearing of the petition concerning the challenge to the validity of the Compensation Act.

The contentions of the petitioner to substantiate its challenge can be summarised in the following terms:

(i) The purported premise of GST is to ensure sub-summation of all taxes, cesses, and surcharges levied on goods and services. Therefore the levy of compensation cess is contrary to this declared objective underlying the introduction of GST.

(ii) Compensation cess is a colourable legislation as it cannot be traced to Section 18 of the Amendment Act which is silent on the levy of a cess for purpose of meeting the compensation obligation of the Union. In other words, Parliament does not have any power to levy compensation cess in terms of the provisions of the Amendment Act.

(iii) The levy of compensation cess amounts to double taxation as there is (i) GST as also (ii) compensation cess being levied on the same transaction. Thus there is “overlapping” in law, which does not have constitutional sanction.

Besides the above, the petitioner also pointed out that the imported coal had already suffered “clean energy cess” levied under the erstwhile indirect tax laws at the time of its import. It was argued before the Supreme Court that in the event the levy of compensation cess is sustained then the credit on account of clean energy cess may be permitted for set-off against the compensation cess obligation.

These contentions were resisted by the GoI which took a position that compensation cess is essentially a “special kind of tax” and therefore a special kind of GST. On such premise it was contended by the GoI before the Supreme Court that once Parliament was competent to enact GST, the competence to enact the levy of compensation cess was a logical concomitant. The GoI also pressed upon Article 270 to attribute another legislative enablement for levy of the compensation cess besides placing reliance upon Entry 97 of the List I of the Seventh Schedule of the Constitution to contend that the levy of compensation cess could also be enacted in exercise of its residuary powers.

Taking note of the rival contentions, the Supreme Court framed the following issues for its determination:

“(1) Whether the Goods and Services Tax (Compensation to States Act), 2017 is beyond the legislative competence of Parliament?

(2) Whether the Goods and Services Tax (Compensation to States Act), 2017 violates Constitution (One Hundred and First Amendment) Act, 2016 and is against the objective of Constitution (One Hundred and First Amendment) Act, 2016?

(3) Whether the Goods and Services Tax (Compensation to States Act), 2017 is a colourable legislation?

(4) Whether levy of compensation to States’ cess and GST on the same taxing event is permissible in law?

(5) Whether on the basis of clean energy cess paid by the petitioner till 30-6-2017, the petitioner is entitled for set-off in payment of compensation to States’ cess?”

DECISION OF THE SUPREME COURT

The Supreme Court examined the constitutional provisions relating to levy of GST in order to highlight the underlying constitutional and legislative scheme which is significant on various counts. The following can be culled out as the key attainments of this decision:

(i) The Supreme Court has placed extensive reliance upon the Statement of Objects and Reasons of the Amendment Act which highlights that the purpose of GST is to confer “concurrent taxing powers on the Union as well as the States including Union Territory with legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both”. This is a pin?pointed acknowledgement of the change of constitutional design by the Amendment Act to enact the GST regime.

(ii) As an addendum, there is a further declaration that there is no omnibus subsumation of taxing fields under the Constitution by GST. According to the Supreme Court there is no dilution of the “residuary” legislative powers of Parliament in terms of Entry 97 of the List I of the Seventh Schedule of the Constitution. Thus this expansive legislative sphere[4] can be gainfully pressed upon by Parliament to inter alia impose a “special GST” such as the compensation cess.

(iii) In respect of the arguments relating to cess, the Supreme Court has declared that cess “means a tax levied for some special purpose, which may be levied as an increment to an existing tax”.[5] Thus the power of the legislature to impose GST inherently carries the power to impose cess on GST. There is nothing in the language of the Amendment Act “that henceforth no surcharge or cess shall be levied”.

(iv) The decision specifically highlights that it is already well settled that “two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible”.[6] Thus insofar as GST and compensation cess operate in their distinct spheres, the validity of both has been sustained.

(v) The contention of “double taxation” is a non-starter in the opinion of the Court. It was observed that it is already settled that “if on the same subject-matter the legislature chooses to levy tax twice over there is no inherent invalidity in the fiscal adventure unless there are some other prohibitions”.[7] Thus GST and compensation cess being “two separate imposts in law” are not prohibited. In fact compensation cess must be viewed as “an increment” to GST.

(vi) The Court has also concluded that “[g]iving credit or set-off in the payment is legislative policy which had to be reflected in the legislative scheme”. Since there is no such indication in law, accordingly the claim that credit of tax paid on account of clean energy cess be made available to discharge the liability of compensation cess cannot be entertained.

REFLECTIONS FROM THE DECISION

This decision of the Supreme Court is the first in the context of GST insofar as it takes note of the constitutional scheme and the legislative policy relating to GST.  Thus, it is a noteworthy development and welcome enunciation of legal position. It is ironical that the scheme had to be explained in the context of a levy (i.e. compensation cess) which is only transitional and aberration to the avowed objective i.e. “one nation one tax”. It would instead have been more appropriate if the appraisal was made in the context of the Constitution design regarding levy of GST per se.  Nonetheless, it does not detract from the legal position insofar as the contours of GST have been categorically addressed.

The fact that the Supreme Court has pressed into service Entry 97 of List I of the Seventh Schedule is reflective of the fact that the levy of cess need not be traced to the same legislative field from which the main levy finds constitutional sanction. To illustrate, in this case the levy of GST is traceable to Article 246-A whereas the compensation cess is traceable, even if in part, to Entry 97. Thus there exists different legislative fields for the main tax and the cess. This declaration regarding the status of “cess” under the constitutional confines and the endorsement of the legislative ability to impose cess as a sui generis levy is indeed substantive movement in jurisprudential sphere relating to cess.

However, by declaring that compensation cess is essentially a tax and not a fee, the Supreme Court has failed to conclusively advert to the controversy relating to the amorphous nature of cess i.e. whether cess is a “tax” or a “fee”. This characterisation is crucial because in the event the levy is in the nature of fee then the payer is entitled to invoke the doctrine of quid pro quo and claim justification for the levy whereas there is no such entitlement in case of a tax. Instead in Mohit Mineral[8] the Supreme Court has distinguished an earlier decision[9] wherein the validity of cess therein was sustained by declaring the levy to be a fee and not a tax. In this decision the Supreme Court has given short-shrift to this contention on the sole premise that the GoI itself has characterised compensation cess as a tax. Clearly executive characterisation cannot be the basis for determining the nature of the levy[10] and thus the decision appears to be wanting of appropriate legal reasoning in this perspective.

In respect of the contention relating to credit of clean energy cess to discharge the liability of compensation cess, the view of the Supreme Court is unequivocal that credit mechanism is the sole discretion of the legislative policy. This view is indeed echoed in certain other decisions as well.[11] However what Court has ignored is the fact that GST in itself reflects a change to the legislative outlook. The First Discussion Paper on Goods and Services Tax in India by the Empowered Committee of State Finance Ministers,[12] which forms the bedrock of GST, is clear that undoing cascading effect of tax is the prime impetus to shift from the VAT model to the GST model of indirect taxes. Multiple recommendations of the expert committees as also the debates in Parliament during the passage of the Amendment Act[13] clearly point to the fact that engrafting a value added tax scheme where input credit is available is a cherished ideal and in fact an avowed intention of the GST regime.

In the above background it was perhaps necessary for the Supreme Court to instead traverse the position in greater detail to examine if indeed it was the legislative intent to deny the benefit of input credit rather than giving a short shrift to the contention based upon a plain reading of the literal text. In fact, as the Gujarat[14] and Madras High Court[15] have recently pointed out, there is a need to test the legislative policy underlying input credits on the touchstone of reasonableness while also adequately provisioning for the vested rights accrued under the legislations which have been replaced by GST laws. It is hoped that the decision in Mohit Mineral[16] will not relegate this aspect to a foregone conclusion and indeed the attendant aspects will be revisited in near future for delineating a perhaps more considered and balanced legal position.

CONCLUSION

In summary, the decision of the Supreme Court in Mohit Mineral[17] is a timely endorsement of the large-scaled amendments brought about to the Constitution in order to usher a new era of indirect taxes. Setting aside all contentions and challenges to the levy of GST compensation cess, the Supreme Court has paved the way for its unbridled implementation of GST design as a legislative policy. While the challenge in this case was limited to a finer aspect of this grand design, the decision clearly inhibits the scope for future challenges and therefore sets tone for judicial appreciation of changes effected on account of GST. Hopefully this will only be taken as a measure of confidence by the policymakers to iron out the creases in the GST design and usher the reform in its fullest sense.

The rationale underlying the Compensation Act also posits it as a key variable for embodying the trust between the Union and the States and agreement to implement GST together in a cooperative sense. By upholding the validity of the Compensation Act the Supreme Court has thus also sustained this key pillar for conducive fiscal Centre-State relations and thus furthered the cause of the reform represented by GST.

[1] (2018) SCC OnLine SC 1727.

[2] See Chapter 18 of author’s book “Goods and Services Tax — Constitutional Law and Policy” for further details on the rationale underlying the provision for compensation to States.

[3] Mohit Minerals (P) Ltd. v. Union of India, 2017 SCC OnLine Del 12764.

[4] As expounded in terms of Union of India v. Harbhajan Singh Dhillon, (1971) 2 SCC 779 and Hoechst Pharmaceuticals Ltd. v. State of Bihar, (1983) 4 SCC 45.

[5] Following the opinion of Hidayatullah, J. in Shinde v. Commr., AIR 1967 SC 1512, followed in India Cement Ltd. v. State of T.N., (1990) 1 SCC 12; Vijayalashmi Rice Mill v. CTO, (2006) 6 SCC 763, etc.

[6] Applying the “aspect theory” enunciated in Federation of Hotel & Restaurant Assn. of India v. Union of India, (1989) 3 SCC 634.

[7] Invoking Krishna Iyer, J. in Avinder Singh v. State of Punjab, (1979) 1 SCC 137.

[8] 2018 SCC OnLine SC 1727.

[9] Dewan Chand Builders & Contractors v. Union of India, (2012) 1 SCC 101.

[10] In ITO v. Mani Ram, AIR 1969 SC 543 : (1969) 1 SCR 724 the Supreme Court has quoted with approval the decision of House of Lords in Kirkness v. John Hudson & Co. Ltd., 1955 A.C 696 : (1955) 2 WLR 135 (HL) inter alia observing “that the beliefs and assumptions of those who frame Acts of Parliament cannot make the law”.

[11] For illustration Jayam & Co. v. Commr., (2016) 15 SCC 125.

[12] Available at <http://www.gstcouncil.gov.in/sites/default/files/First%20Discussion%20Paper%20on%20GST.pdf>.

[13] See generally, Chapter 28 — Value Added Tax and Chapter 32 — Fiscal Neutrality (Input Tax Credits) of my book Goods and Services Tax — Constitutional Law and Policy (Eastern Book Company, 2018) for a detailed discussion on this aspect.

[14] Filco Trade Centre (P) Ltd. v. Union of India, 2018 SCC OnLine Guj 1419.

[15] Tara Exports v. Union of India [WP 18532/2018, decision dated 10-9-2018]

[16] 2018 SCC OnLine SC 1727.

[17] 2018 SCC OnLine SC 1727.

One comment

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    A comprehensive study I must say. I am a law student and reading this case study clarified many of my concepts. Thank you so much.

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