Certain provisions of GST Law – Ultra-vires the Constitution of India ?

GST Legislation of India- Historic backdrop: Until implementation of nationwide Goods and Services Tax, in India we had a complex web of indirect taxes.

The indirect tax regime emanates from the powers conferred by the Constitution of India which was enacted by the Constituent Assembly in the year 1949. The Constitution of India was essentially adopted from the Government of India Act, 1935, passed by the then British Government for their Indian colony. This Act had provided for certain scheme of indirect taxation for the Colony. So, essentially the scheme of indirect taxation as provided in the Constitution resembled the old model followed by the British. Perhaps the exigencies of the time would not permit time enough for a thorough review of the model of indirect taxation adopted in the Constitution

Article 246 read with Seventh Schedule of the Constitution gives bifurcation of powers for taxation between Union and States. The Article provides three lists to categorize taxes which can be levied by the Central Government, State Governments and a Concurrent List

The Central list of indirect taxes included Central Excise, Customs, Service Tax and Central Sales Tax. The State list of indirect taxes included Vat, Cess, Stamp Duty, taxes on vehicles, State Excise, Entertainment Tax, Luxury Tax and taxes on electricity. In addition, there were indirect taxes like Octroi, Entry Tax and Local Body Tax, which were collected by respective local bodies under authority of the State Government concerned. The above web of indirect taxes had resulted in complications in business operations and multi level taxation of the same item. Thus, for example, on a manufactured item there was Central Excise duty to be levied by the Centre, VAT to be levied by the State Government upon sale of the product and Entry Tax or Octroi to be levied by the municipalities

VAT would be payable on the same product more than once every time the product would move from one state to another. Octroi would be payable each time the product would enter in a different city limit. There used to be long queue of vehicles waiting to pay Octroi at city entry points, leading to long hours lost thereby.

Due to state-specific taxes, there were severe limitations posed for inter-state trade. Thus, there were invisible barriers to free trade within India. This situation was detrimental to overall economic development of the country. There was a acute need to rationalize the indirect taxation system of India.

Challenges before the Government :

Having realized the shortcomings of the indirect taxation system, the Governments appointed expert study groups to suggest improvement to the system. Attempts were made, based on the recommendations of experts, to rationalize the system so as to alleviate various drawbacks of the indirect tax regime.

However, the changes were brought about rather slowly and were in the form of ‘amendments’ to the existing laws. For example, initially there was no concept of Value Added Tax’ (VAT) in the system. For the first time in the year 1986 MODVAT was introduced for Central Excise regime whereby input tax credit became available to taxpayers. This was followed by substitution of MODVAT by CENVAT in the year 2004 and extension of the concept of VAT to the State Sales Tax regimes in the year 2005. All these changes in the indirect tax regime were brought about through ‘amendments’ to the existing legislations. Thus, the basic structure of the indirect tax regime

continued in the same style as originally defined in the Constitution. These amendments could not provide solutions to the anomalies resulting under the indirect tax regime. The anomalies which existed were, inter-alia, as follows:

  • i. Cascading of taxes;
  • ii. Multiplicity of taxes;
  • iii. Need to deal with multiple tax authorities;
  • iv. Hurdles in interstate trade;
  • v. Overall obstructions to ease of doing business

Solution to come out of the straight jacket was to substitute the entire indirect tax scheme with a single tax that would eliminate cascading of taxes by ensuring instant VAT credit on any transaction of supply anywhere in the country. This implied abolition of all existing indirect taxes and launch of a single tax in substitution.

However, many states and local bodies, especially the industrially advanced states had strong reservations to abolition of some of the existing taxes which brought in major revenues to their respective treasuries. For example, the state of Gujarat and Maharashtra would loose substantial revenue if the state VAT would be abolished. Similarly, local bodies like the Mumbai Municipal Corporation would stand to loose the major source of revenue if the Octroi duty was done away with. Thus, although very laudable, the substitution of one tax for the existing web of indirect taxes was by no means an easy task.

The first ever proposal for introduction of a nation-wide single tax was made by the UPA Government at the centre under Prime Minister Manmohan Singh. However, owing to opposition from various state governments, the proposal to introduce a single tax could not see light of the day.

It was only after a majority Government led by Prime Minister Narendra Modi got installed at the Centre in the year 2014, that introduction of the vital one-nation- one-tax proposal started taking shape under the leadership of the then Finance Minister late Arun Jaitley. The Goods and Services Tax finally brought in force from July 1, 2017 was thus a major ‘reform’ of the Indian indirect tax system.

It must have been a herculean task for the Government to bring together all state leaderships, assuring the states that there will be no loss of revenue, drafting a scheme of legislation that would ensure smooth subsumption of multitude of indirect taxes into one tax and smooth transition into the new tax regime.

It would have been pretty unreasonable to expect a completely flawless piece of legislation to come out at the very introduction of GST. As expected, a number of objections and grievances pointing anomalies in the GST scheme started emerging from day one. Anticipating this scenario the designers of the GST legislation had provided for the grievance redressal mechanism in the form of the GST Council. Taking note of the various concerns of taxpayers, based on the recommendations of the GST Council, a large number of Notifications and Clarifications were issued by the Central Government from time to time. Of course, these frequent changes often led to confusion for the taxpayers, and there were the critiques of GST to declare it a total failure. However, the matters are getting stabilized and the nation has started enjoying the perceived benefits of the new one-nation-one-tax regime.

Certain provisions of GST unconstitutional ?

Constitutional validity of certain provisions of GST is being challenged and such challenges have been upheld at the High Court level. Here let us consider some of the important cases :

1. Siddharth Enterprises Vs Nodal Officer (Gujarat High Court) :

S. 140 of the CGST Act, 2017 provides for carry forward of balance input tax credit under the earlier regime. Provisions of the various sub-sections of S. 140 are to be given effect to in the manner prescribed in the relevant CGST Rules. The instant case of Siddharth Enterprises pertains to ITC credit claimed by them under the provisions of S. 140(3) of the CGST Act, 2017, on stocks in hand as on 1st July, 2017.

S.140(3) of the CGST Act. provides that a taxpayer, who was not liable to be registered under the earlier regime but is a registered person under GST, and who has in his stock as on 1st July, 2017 inputs on which duties have been paid under the earlier regime, and which are eligible for ITC under GST regime, is entitled to avail ITC in respect of such carried forward stocks.

However, as per Rule 117 of the CGST Rules, such ITC on carried forward stocks can be availed only provided the registered person files a declaration in Form TRAN 1. Further, the said Rule117 also stipulates the date by which such declaration in Form TRAN 1 is to be filed.

Siddharth Enterprises failed to file their TRAN 1 Form by the stipulated date and consequently their claim for the relevant ITC on stocks held by them on 1st July, 2017 was rejected by the department.

In the instant case, the honorable High Court has held that transitional credit of CENVAT, etc. cannot be denied even if the requisite Form TRAN 1 is not filed by the taxpayer within the prescribed due date.

The Honorable Gujarat High Court granted the appeal in favor of Siddharth Enterprises on the following grounds: (Reproduced in bold italics from the judgement of the Hon. High Court.)

  • (1) Section 140(3) of the CGST Act provides for a substantive right which cannot be curtailed or defeated on account of the procedural lapses.
  • (2) The entitlement of the credit of carry forward of the eligible duties is a vested right.
  • (3) The rights accrued under the existing law have been saved by the CGST Act.
  • (4) The right to carry forward the CENVAT credit is a constitutional right.

In this connection, the Hon. High Court has provided explanation as under :

Article 300A provides that no person shall be deprived of property saved by authority of law. While right to the property is no longer a fundamental right but it is still a constitutional right. CENVAT credit earned under the erstwhile Central Excise Law is the property of the writapplicants and it cannot be appropriated for merely failing to file a declaration in the absence of Law in this respect. It could have been appropriated by the government by providing for the same in the CGST Act but it cannot be taken away by virtue of merely framing Rules in this regard.

(5) It is arbitrary, irrational and unreasonable to discriminate in terms of the time limit to allow the availment of the input tax credit with respect to the purchase of the goods and services made in the pre-GST regime and post-GST regime and the same could be termed as violative of Article 14 of the Constitution of India.

(S. 16 (4) of the CGST Act permits availment of ITC on the supplies received during a financial year until the date of filing the monthly GSTR 3B Return for the month of September of the following year. Whereas ITC under S. 140(3) could be availed only within 90 days from the appointed day, i.e. until 28th September, 2017, which was subsequently extended until 27th December, 2017.)

(6) The doctrine of legitimate expectation also could be said to be violated.

(7) By not allowing the right to carry forward the CENVAT credit for not being able to file the form GST TRAN- 1 within the due date would definitely have a serious impact on the working capital of the writ-applicants and such action could be termed as violative of Article 19(1) (g) of the Constitution of India.

Thus, it appears from the judgement of the Hon. Gujarat High Court that the Rule 117 of the CGST Rules is in certain respect violative of the Constitution to the extent that it stipulates time limit for filing the claim through

Form TRAN 1 for carried forward CENVAT credit accrued under the earlier regime.

2. Bharati Telemedia Ltd. :

Another case before the Hon. Delhi High Court is a writ petition filed by Bharati Telemedia Ltd. challenging validity of S. 16(2)(c), second proviso to S. 16(2)(d) and proviso to S. 16(4). Also challenged in the petition is validity of S. 43A(6) which is not yet operational.

S. 16(2)(c) stipulates as one of the prerequisites for availing ITC credit, that ITC credit cannot be availed by the recipient unless the supplier has actually paid to the Government the relevant tax. It is the case of the writ applicants that the Government has been vested with sufficient powers to recover from the supplier the unpaid dues of tax. Hence, it is not right to deprive the recipient of the ITC credit on account of the default of the supplier over whom the recipient has hardly any control. It is submitted by the appellants that this provision is violative of Article 14 of the Constitution.

The second proviso to S. 16(2)(d) stipulates that if the recipient fails to make full payment of an invoice within 180 days, the ITC availed by the recipient in respect of such invoice is to be reversed with interest. It is clear that the good intention of the legislature is to promote good business practices and protect the supplier from financial distress. However, the appellants have challenged this provision as being violative of Article 14 of the Constitution.

The said petition has also challenged the condition subject to which extension of time limit provided under 16(4) for claiming ITC to the date of filing GSTR 3B Return for the month of March 2019, in respect of the invoices for the first year of GST ending on 31st March, 2018. The condition challenged is that the benefit of extended time limit will be available only provided the supplier concerned has duly uploaded the invoice in his GSTR 1 Return. This restriction has been claimed being violative of Article 14 of the Constitution.

The petition has also challenged the constitutional validity of the S. 43(6) of the CGST Act. (S. 43(6) is yet to be notified.) To conclude this article, as I have said earlier, framing a comprehensive legislation like the GST Laws was a herculean task. In fact the Constitution itself had to be amended to permit passing of the great Reform. It is only to be expected that certain provisions of the legislation could have crossed the limits of the edifice of the Constitution. More such cases are sure to come up for the consideration of the judiciary.

Disclaimer: The purpose of writing this article is merely to deliberate on the developments happening in the judiciary and the legislature. It is by no means an attempt to criticize the learned judiciary or the framing of the legislation. The author does not claim any responsibility for any loss or damage suffered by any entity by using the contents of this article.

Author – CMA Arun S. Karnik