CONSTITUTIONAL VALIDITY OF VAT AMENDMENTS ON INTRODUCTION OF GST?

[Dr. Sanjiv Agarwal]

In THE STATE OF TELANGANA & ORS. VERSUS M/S TIRUMALA CONSTRUCTIONS - 2023 (10) TMI 1208 - SUPREME COURT, there was a challenge to the Constitutional Validity of transitional provisions in the States VAT Acts on the introduction of GST by way of special leave petitions filed by the States.

In the instant case of bunch of appeals, filed by respective States against Telangana, Gujarat and Maharashtra High Court judgments, which relate to Constitution (101^st Amendment) Act, 2016 which introduced a fundamental re-ordering of the constitutional premise of taxation by the Union and State Governments in India. It is the framework to enable the introduction of the Goods and Services Tax (GST). It conferred new powers upon the Union Parliament and State Legislative Assemblies, and also creates institutions that have a significant bearing on the federal character of the Constitution.

The coming into force of the GST regime, and the passage of the amendment demonstrates a rare unanimity, a resolve across the political spectrum, to ensure that there is a single indirect taxation regime. The effect of the Amendment is to subsume all state and union taxes, on goods and services. Both the Union and the States will ostensibly have the power to tax the supply of goods and services. The 101st Amendment Act takes away neither the Union's nor the States' taxing power but instead gives them the power to impose taxes on supply of goods and supply of services respectively. Through Article 246-A of the Constitution, the Amendment created the following:

1. a new legislative field, conferring
2. legislative authority outside the three Lists of the Seventh Schedule;
3. concurrent powers to both Parliament and the State Legislatures to enact legislations on the same subject-matter and at the same time.

Thus there was a fundamental change to the scheme of legislative relations between the Union and the States by departing from the underlying theory of exclusivity of legislative fields between Parliament and the State legislatures, in terms of the distribution of legislative powers carried out by Chapter I of Part XI of the Constitution.

It was contended that the almost the revolutionary change brought about by redistribution of indirect taxation power and the giving effect to it through the Amendment meant that both Parliamentary and state legislative powers were denuded in respect of fields of taxation as far as they covered central excise, service tax, sales tax and other taxes which the states could hitherto levy and collect. As an effect of the Amendment, the fields of taxation in Entries 84 of the Union List (List I) of the Seventh Schedule to the Constitution of India and Entries 54 and 62 of the State List, too were amended. The revamping of these fields of taxation resulted in such powers getting pooled or collected as a sovereign taxation power, shared by the state and the centre. This became the subject matter of a separate entry, i.e. Article 246A. Article 246A is expressed in overriding terms and begins with a non-obstante clause and overrides Article 246 which deals with the distribution of legislative powers vis-à-vis the Union and the States in terms of Lists 1 and 2, and of Article 254 which deals with the subject matter of Concurrent List, i.e. List III and the resolution of any conflict (in terms of repugnancy) between laws enacted by the States and the Parliament.

The Apex Court observed that Section 19 seeks to achieve three aims- The first is to preserve the existing status quo with regard to the state and central indirect tax regime, for a period of one year from the date of commencement of the Amendment or till a new law is enacted whichever is earlier. The second is authorizing the competent legislatures i.e. the State Legislatures and Parliament to amend existing laws which were in force in states and other parts of the country (obviously both Central and State laws. The third was the repeal of such laws. Now, that Section 19 was meant to be transitional cannot be doubted. In its absence, the several hundreds of state enactments and central laws which were in force, would have been jeopardized. Other than Section 19 there is no saving provision which is part of the Amendment. It is questionable whether Section 6 of the General Clauses Act, 1897, would have applied on its own force. Consequently, Parliament, acting in a constituent capacity, amended the substantive parts of the Constitution, and also, at the same time ensured through Section 19 that limited operation of existing laws continued till the legal regime was changed in accordance with the amended parts of the Constitution. Keeping in mind that the Amendment, denuded the States – and even Parliament of legislative authority in regard to the pre-existing (i.e. pre-amendment) powers and fields of taxation, the absence of such a transitional provision might have been catastrophic. It was in this context that Section 19 also clarified that not only were the laws to be continued, in force but also that the States – and Parliament, could amend, or repeal them.

The Court opined that there is no quarrel with the proposition that a legislative body is competent to enact a curative legislation with retrospective effect. Yet, the same vice that attaches itself to the Gujarat amendment, i.e. lack of competence on the date the amendment was enacted i.e. in this case, 09.07.2019, the Maharashtra legislature ceased to have any authority over the subject matter, because the original entry 54 had undergone a substantial change, and the power to change the VAT Act, ceased, on 01.07.2017, when the GST regime came into effect. Therefore, for the same reasons, as in the other cases, the amendments to the Maharashtra VAT Act cannot survive.

The apex court, therefore concluded that:

1. Section 19 of the Constitution (101st Amendment) Act, 2016 and Article 246A enacted in exercise of constituent power, formed part of the transitional arrangement for the limited duration of its operation, and had the effect of continuing the operation of inconsistent laws for the period(s) specified by it and, by virtue of its operation, allowed state legislatures and Parliament to amend or repeal such existing laws.
2. Since other 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 source 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.
3. The above finding is in view of the vacuum created by the coming into force of the 101st Amendment, which resulted in deletion of the heads of legislation in the two lists aforesaid.
4. The amendments in question, made to the Telangana VAT Act, and the Gujarat VAT Act, after 01.07.2017 were correctly held void, for want of legislative competence, by the two High Courts (Telangana and Gujarat High Court). The judgment of the Bombay High Court was held to be in error and therefore, set aside. The amendment to the Maharashtra Act, to the extent it required pre-deposit was also held to be void.

Thus, Telangana Value Added Tax (Second Amendment) Act, 2017, Gujarat Value Added Tax (Amendment) Act, 2018 and Maharashtra Value Added Tax Act, 2002 were held to be void.

These appeals filed by states of Telangana / Gujarat were therefore, dismissed and assessee’s appeal against Bombay High Court judgment was allowed.