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VALIDITY OF CGST (COMPENSATION TO STATES) ACT, 2017 AND CGST COMPENSATION RULES, 2017

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VALIDITY OF CGST (COMPENSATION TO STATES) ACT, 2017 AND CGST COMPENSATION RULES, 2017
By: Mr. M. GOVINDARAJAN
October 9, 2018
  • Contents

GST laws

The Central Government introduced a major tax reforms in indirect tax laws.  The existing indirect laws except customs levied by the Central Government and State Governments are subsumed into one tax viz., Goods and Services Tax.  The Central Government, for this purpose, amended the Constitution providing for subsuming of various indirect taxes and Central and States surcharges and cesses so far as they relate to supply of goods and services both on interstate and Intra State.   Section 18 of the Amendment Act enabled the Parliament to levy a cess for five years to compensate the States for the loss of revenue on account of GST.  The Central Government enacted the following Acts for the purpose of GST-

To enforce the provisions of the above said Acts, the Central Government framed the following Rules-

Constitutional Validity

If any Act is enacted it is usual that the validity of the entire Act or the provisions of some of the Act will be challenged by means of writ petition either before the High Court or Supreme Court.  GST laws are not an exception to this.  The Supreme Court entertained an appeal in which the constitutional validity of the GST (Compensation to States) Act, 2017 and the rules framed there under.  The said case law is discussed in detail in this article.

Case law

In ‘Union of India and another v. Mohit Mineral Private Limited’ – 2018 (10) TMI 200 – Supreme Court of India, Mohit Mineral Private Limited (‘writ petitioner’ for short) is a Company incorporated under the Companies Act which is a trader of imported and Indian coal.  The writ petitioner imports coal from Indonesia, South Africa and also purchases coal from Indian mines.  The Finance Act, 2010 with effect from 01.07.2010 levied Clean Energy Cess which was in the nature of a duty of excise on the production of coal and was being collected at the time of removal of raw coal, raw lignite and raw peat from the mine to the factory.

On the introduction of GST laws the law relating to Clean Energy Cess was repealed.  The writ petitioner submitted a representation to the GST Council seeking set off of Clean Energy Cess against GST Compensation Cess.  The writ petitioner filed a writ petition before the Delhi High Court.  The Division Bench of the Delhi High Court passed an interim order on 25.08.2017.    In the interim order dated 25.08.2017, the Division Bench observed that there is a prima facie case made out by the writ petitioner regarding lack of legislative competence of Parliament to enact Compensation to States Act, 2017.  The High Court observed that cess is being levied on the same taxable event that is the subject matter of the levy under the CGST and IGST Acts, viz., supply of goods and services.  The High Court further held that as far as the additional levy on the stocks of coal on which it has already paid the Clean Energy Cess in terms of Finance Act, 2010, the writ petitioner should not be required to make any further payment. However, on stocks of coal on which no Clean Energy Cess under the Finance Act, 2010 was paid, any payment made in terms of the impugned Act would be subject to the result of the writ petition.

Against this order the writ petitioner as well as the Revenue filed appeal before the Supreme Court.  The writ petitioner submitted the following before the Supreme Court-

  • With the introduction of Goods and Services Tax, not only the indirect taxes but the cesses and surcharges levied on goods and services shall also be subsumed in it.
  • The Compensation to States Act, 2017 is repugnant to and transgresses the mandate of the Constitution.
  • The impugned legislation is colorable legislation which lacks legislative competence.
  • Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 does not empower the Parliament to levy cess and tax as it provides Parliament to make any law to provide compensation to the States for loss of revenue arising on account of implementation of GST for a period of 5 years.
  • On the very same transaction there cannot be two levies, one under Central GST Act and another under impugned legislation as it would amount to double taxation as levied on the same taxable event and same subject.
  • The writ petitioner has to pay clean energy cess as well as compensation cess which amounts to double taxation.
  • The petitioner may be permitted to set off the cess of ₹ 7.68 crores which was already paid on the stock lying with the petitioner on 30.06.2017.

The Revenue submitted the following before the Supreme Court-

  • Cess is nothing but a special kind of tax.
  • If the legislature is competent to levy the main tax, i.e. GST under Article 246A of the Constitution, then legislative competence of levying the cess flows from the very same power to levy the tax itself.
  • The phrase used in Article 246A “with respect to” has wide implication and will allow levy of cess also.
  • Entry 97 of List I of Seventh Schedule to the Constitution grants a residuary power to levy a tax to the Union.
  • The Clean Energy Cess was levied and collected for the purposes of financing and promoting clean energy initiatives, funding research in the area of clean energy, for any other purpose relating thereto whereas GST Compensation Cess is collected to provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax.
  • The High Court committed an error in prima facie holding that credit of Clean Energy Cess should be allowed to be utilized for paying GST Compensation Cess.

Both the parties relied on various judgments to support their views.  The Supreme Court on hearing both sides framed the following issues-

  1. Whether the Compensation to States Act, 2017 is beyond the legislative competence of Parliament?
  2. Whether Compensation to States Act, 2017 violates the 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 Compensation to States Act, 2017 is a colorable 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 30th June, 2017, the petitioner is entitled for set off in payment of Compensation to States Cess?

First issue

In respect of the first issue the Supreme Court analyzed the provisions of Constitution in regard to levy of tax and the introduction of Constitution amendment Act and the objects for the introduction of GST.  One of the objects is to provide compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years. 

The Supreme Court noticed that in the Constitution (One Hundred and Twenty  Second Amendment) Bill, 2014, Clause 18 contains a provision for arrangement for assignment of additional tax on supply of goods to States for two years or such other period recommended by Council.  Clause 19 contains compensation to States for loss of revenue on account of introduction of goods and services tax.

As the Preamble indicates (Compensation to States) Act, 2017 was enacted in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016. Section 8 of the Compensation to States Act, 2017 provides for levy and collection of Cess.

Section 12(1) of the CGST (Compensation to States) Act, empowers the Central Government to make rules for carrying out the provisions of the Act on the recommendation of the Council.  Article 248 read with Articles 246 and 246A clearly indicate that residuary power of legislation is with the Parliament.  No contention has been raised before the Supreme Court that the subject matter of legislation was within the competence of State Legislature, and that the Parliament had no competence to legislate.   The Supreme Court did not find do not find any lack of legislative competence in the Parliament.

The Supreme Court held that-

The Supreme Court did not find any merit in the submission of the learned counsel for the petitioner that Parliament has no legislative competence to enact the Compensation to States Act, 2017.  Therefore the Supreme Court held that ‘The Compensation to States Act, 2017’ is not beyond the legislative competence of the Parliament.

Second and third issues

The Supreme Court next considered the second and third issues together because they are interlinked.   The Supreme Court observed that one of the objectives as noticed in Statements of Objects and Reasons was “conferring concurrent taxing powers upon Parliament and the State Legislature to make laws for levying goods and services tax”. Article 246A sub article (1) empowers the Parliament to “make laws with respect to goods and services tax”. The word “with respect to” is word of expansion.   The Supreme Court held that State compensation cess is “with respect to” goods and services tax, it is a tax.

The expression used in Article 246A is “power to make laws with respect to goods and services tax”. The power to make law, thus, is not general power related to a general entry rather it specifically relates to goods and services tax. When express power is there to make law regarding goods and services tax, the Supreme Court failed to comprehend that how such power shall not include power to levy cess on goods and services tax.  Constitution (One Hundred and First Amendment) Act, 2016 was passed to subsume various taxes, surcharges and cesses into one tax but the constitutional provision does not indicate that henceforth no surcharge or cess shall be levied.

The Supreme Court held that power of Parliament to make law providing for compensation to the States for loss of revenue was expressly included by constitutional provision.  The Preamble of Compensation to States Act, 2017 expressly mentions the Act to provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services Tax in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016. Thus, the Compensation to States Act, 2017 has been enacted under the express Constitution (One Hundred and First Amendment) Act, 2016.

The Supreme Court further held that the Parliament has full legislative competence to enact the Act and the Act having been enacted to implement the Constitution (One Hundred and First Amendment) Act and the object being clearly to fulfill the Constitution (One Hundred and First Amendment) Act’s objective, the Supreme Court rejected the submission of the petitioner that Compensation to States Act, 2017 is a colorable legislation.

The Supreme Court answered for the issues two and three as follows-

Fourth issue

The Supreme Court considered the contention of the writ petitioner that goods and services tax being already imposed by three enactments of 2017 as noticed above imposition of States Compensation Cess is levied on the same taxing event and has overlapping effect which is not permissible.  The Supreme Court held that it is well settled that two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible as “in law there is no overlapping”.   There might be overlapping but the overlapping must be in law.   The fact that there is an overlapping does not detract from the distinctiveness of the aspects. Therefore, if the taxes are separate and distinct imposts and levied on the different aspects, then there is no overlapping in law.

Goods and Services Tax imposed under the 2017 Acts and levy of cess on such intrastate supply of goods and services or both as provided under Section 9 of the CGST Act and such supply of goods and services or both as part of Section 5 of IGST Act is, thus, two separate imposts in law and are not prohibited by any law so as to declare it invalid.  The Supreme Court decided the fourth issue as below-

Levy of Compensation to States Cess is an increment to goods and services tax which is permissible in law.

Fifth issue

The Clean Energy Cess and the States Compensation Cess are collected for wholly different purposes.  As per sub section (3) of Section 83 of the Finance Act, 2010, the Clean Energy Cess was levied and collected for the purposes of financing and promoting clean energy initiatives, funding research in the area of clean energy or for any other purpose relating thereto whereas States Compensation Cess is collected to “provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax”.  The Clean Energy Cess was to be used for the purposes of the Union and not to be distributed to the States whereas States Compensation Cess has to be wholly distributed amongst the States to compensate the States.

Giving credit or set off in the payment is legislative policy which had to be reflected in the legislative scheme. Compensation to States Act, 2017 or Rules framed there under does not indicate giving of any credit or set off of the Clean Energy Cess already paid till 30.06.2017.  The Supreme Court decided the fifth issue as below-

The petitioner is not entitled for any set off of payments made towards Clean Energy Cess in payment of Compensations to States Cess.

The Supreme Court dismissed the writ petition upheld the validity of the Act and the rules made for the compensation payable to the States by collecting compensation cess.

 

By: Mr. M. GOVINDARAJAN - October 9, 2018

 

 

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