No power to make amendments to state VAT Acts after GST came into effect: Supreme Court in State of Telangana & Ors. v. Tirumala Construction[1]. Analysis of the Apex court order and implications on competency/powers of state legislature in GST regime.
Background:
The introduction of GST was a landmark achievement in cooperative feudalism envisaged under Constitution of India. The 101st Constitution Amendment Act, 2016 (‘Amendment Act’) effective from 16 September 2016 introduced new legislative scheme under Article 246A, a stark deviation from separation of taxing powers envisaged under Union and State list of Schedule VII of Constitution. Before the Amendment Act, the States had exclusive rights to tax intra-state ‘sale’ of goods under VAT legislations introduced under Entry 54 in State List. The Amendment Act redefined India’s indirect tax system, paving the way and granting new concurrent taxing powers to the Union Parliament and State Legislative Assemblies under Article 246A to be exercised in terms of GST council recommendations. Article 246A was introduced to pave way for implementing GST and taxing ‘supply’ and at the same time, Entry 54 of List II was amended to levy VAT on ‘sale’ only for 5 petroleum-based products and alcoholic liquor for human consumption.
In the above background we will examine the decision of the Apex Court in Tirumala Construction
Facts: Appeals from divergent views taken by High Courts on powers to amend State laws after 1 July 2017
Batch of appeals in the matter arise from judgments delivered by the Telangana, Gujarat, and Bombay High Court. The concerned states (Telangana and Gujarat) have appealed aggrieved by the High Court judgments. The assessee petitioners are aggrieved by the judgments of Bombay High Court
Telangana: The amendment to VAT Act was enacted through an Ordinance effective from 2 December 2017 extending the period of limitation and permitting re-opening of assessments. The said amendment was made after the Amendment Act was already implemented on 1 July 2017 with introduction of GST. However, the High Court in Sri Sri Engineering Work and Others[2], invalidated the amendment on grounds, including lack of legislative competence of the State to amend its VAT Act from 1 July 2017 onwards and limited scope to amend in terms of Section 19 of the Amendment Act. It was observed that the State was denuded of legislative competence after 1 July 2017 and hence the ordinance was invalid.
Gujarat: Section 84A was introduced by Gujarat VAT (Amendment) Act, 2018. This amendment allowed for the exclusion of the time spent on litigation when computing the period of limitation for revisions. By giving this provision a retrospective effect, the State legislature aimed to reopen assessments that had already been finalized. However, the Gujarat High Court in Reliance Industries Ltd[3]. invalidated the amendment, citing the legislature’s lack of competence from 1 July 2017 onwards, and the amendment’s being manifestly arbitrary in nature.
Maharashtra: The Maharashtra VAT laws were amended w.e.f. 15 April 2017 to provide a mandatory pre-deposit for filing appeal. The Bombay High Court in the case of Anshul Impex Pvt. Ltd[4]. held that the requirement of pre-deposit is based on period of dispute. The provision was amended vide introduction of Explanation in 2019 to reverse the impact of High Court order. Amendment provided to make pre-deposit mandatory for every appeal, irrespective of the disputed period with retrospective effect. The Bombay High Court in the case of United Projects[5] held that powers to make amendment to VAT laws for intra-state ‘sale’ of goods can be traced to Article 246A.
Issue:
The validity of various High Court orders is in question basis following queries:
- Interpretation of Section 19 of the Amendment Act
- Validity of amendments to State VAT Acts made after the Amendment Act or the introduction of GST.
Whether these amendments are valid or void due to a lack of legislative competence.
Contention of State Governments: Section 19 is empowering
- Telangana: It argued that ordinances are laws enacted by the legislature. Therefore, amendment brought in by issuance of an ordinance is deemed valid. They asserted that as long as the power to amend existed, both legislatures could not be limited in the exercise of that power which was plenary and sovereign. Further, it mentioned that interpretation placed by the Hon’ble High Courts regarding the word “amend” is erroneous.
- Gujarat: It argued that insertion of Section 84A is neither arbitrary nor unreasonable as it does not impose new tax or liability, however, is curative in nature against the defects identified for the earlier periods.
- Maharashtra: Existence of a power to legislate is material and not the manner of exercise of that power. Therefore, the power to legislate was in terms of Section19, preserving the existing laws and allowing it’s amendment or repeal while they are in operations. The same is supported by judicial precedents. Further, requirement of pre-deposit is a procedural change and is not affecting vested rights of the taxpayer.
Contention of Taxpayers: Limitation under Section 19
- Section 19 power is limited to harmonizing inconsistent legislation with the Constitution and is not broad for any and every amendment to existing VAT laws. The intent was to let the inconsistent provisions survive temporarily. Section 19 applies to law in force before the Amendment’s commencement and where the law is declared as unconstitutional and obliterated from the statute book, such law cannot be treated as a law ‘in force'.
- Section 19 aimed to stipulate a timeframe for transitioning from erstwhile tax regime to GST. Further, the provision for reopening of assessments, especially for prior years, appears to be onerous and manifestly arbitrary and violates the Constitution of India. Article 246A requires simultaneous exercise of power by both legislatures and cannot be exercised independently by State as held by Hon’ble Bombay High Court. Lack of legislative competence was focal point of argument.
Analysis and reasoning by Hon’ble Supreme Court:
- Section 19, along with Article 246A, granted legislative power to both legislatures to amend existing laws for inconsistencies. This power was subject to a time limit of one year or amended or repealed by a competent Legislature.
- Claiming legislative competence when the ordinance was issued is invalid because when the ordinance was approved and shaped as an amendment, the State’s legislature power ceased as enactments of the State GST and the Central GST Acts had come into force from 1 July 2017.
- The invalidity of the amendment by the state legislature (conforming to the ordinance on 2 December 2017) went to its root of the jurisdiction of those acting under the amended provisions of the State GST, rendering them void and unenforceable. Further, the validity and continuance of any notice, or proceedings, initiated pursuant to the provisions of the ordinance shall be considered invalid and cannot be sustained.
- There is no quarrel with the proposition that a legislative body is competent to enact a retrospective curative law, yet the Gujarat and Maharashtra ceased the authority and power to change the VAT Act, on 1 July 2017 i.e., when GST was implemented. Therefore, due to lack of competence post GST effective date, the amendments to the Maharashtra and Gujarat VAT Act cannot survive.
Held:
A Supreme Court concluded the following:
- Section 19 and Article 246A enacted were transitional arrangement for the limited duration of its operation and had the effect of continuing the operation of inconsistent laws for the specified period(s) which allowed State legislatures and Parliament to amend or repeal existing laws.
- Provisions of the said Amendment Act had the effect of deleting heads of legislation, from List I and List II (of the Seventh Schedule to the Constitution of India), both Section 19 and Article 246A reflected the constituent expression that existing laws would continue and could be amended. The sources or fields of legislation, to the extent they were deleted from the two lists, for a brief while, were contained in Section 19. As a result, there were no limitations on the power to amend VAT Acts till the introduction of legislation under Article 246A.
- Amendments to the Telangana VAT Act, and the Gujarat VAT Act after 1 July 2017 were correctly declared void due to a lack of legislative competence by the respective High Courts. The judgment of the Bombay High Court was set aside, and the 2019 amendment to the Maharashtra Act requiring pre-deposit was held void.
Parting Note:
The Supreme Court’s decision deems all proceedings initiated and notices issued basis the amendments made to the VAT Acts post 1 July 2017 to be void. This is a favorable judgment and provides relief to taxpayers at large. The Bombay High Court’s observation on availability of power to tax intra-state sale of goods with the State legislatures under Article 246A would have created regime for dual taxation and jeopardized the objective of GST – ‘One Nation, One Tax’. With the expiry of period provided for compensation from cess collected, State legislatures are looking for avenues to increase revenue base. The impact of the Court observations on competency of the State legislature for VAT and introduction of VAT amnesty schemes by the State is an interesting academic issue to explore. The observations of the Court will have an impact on levying VAT on Extra Neutral Alcohol (ENA) used for manufacture of alcoholic liquor for human consumption. The 52nd GST Council has ceded the right to tax the ENA to the States. The implementation and legislative changes to give effect to the same will be fraught with challenges.
[The authors are Partner and Associate, respectively, in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]
[1] 2023-VIL-93-SC
[2] 2022-VIL-461-TEL
[3] 2020-VIL-182-GUJ
[4] 2018-VIL-520-BOM
[5] 2022-VIL-477-BOM
