Sandeep Goyal, Advocate & Aakriti Gupta, Advocate
INTRODUCTION
Tax is the major source of revenue for any government all across the globe. A systematic approach to tax collection is therefore, sine qua non for a stable and sustainable economy. As said by Chanakya, in Arthashastra, the government should collect tax in the same manner as a honeybee collects honey from a flower- enough for its sustenance while ensuring that the flower is left unharmed. In India, two broad category of taxes are collected by the government- Direct Tax and Indirect Tax. Direct Tax means that the charge and incidence of tax lies upon the same person whereas Indirect Tax mean that the charge and incidence of tax lies upon different people. The power to levy taxes, direct or indirect, flows from Article 265 of the Indian Constitution, which states as follows: –
“265. Taxes not to be imposed save by authority of law- No tax shall be levied or collected except by authority of law.”
Therefore, Article 265 requires that- (a) there must be a law; (b) the law must authorize the tax; (c) the tax must be levied and collected according to the law. While the direct tax is levied as per the Income Tax Act, 1961, the indirect tax is levied as per the Goods and Service Tax (“GST”) regime. The aim of this paper to discuss in detail the constitutional structure of the old tax regime and the GST regime after the enactment of the Constitution (101st Amendment) Act, 2017.
MEANING OF GST
The Goods and Service Tax has been incorporated in the constitutional structure vide the Constitution (101st Amendment) Act, 2016. GST has been defined under Article 366(12A) which states that: –
“goods and service tax means any tax on supply of goods, or services or both except taxes on the supply of alcoholic liquor for human consumption.”
GST is a destination based tax levied on supply of goods or service or both except supply of alcoholic liquor. India’s GST regime is based on the Canadian system of GST whereby the Centre and the state are given a concurrent or simultaneous power to impose and collect taxes. GST has replaced a number of indirect taxes being levied by the Union and the State Governments and intended to remove the cascading effects of taxes and provide a common national market for goods and services.[1] Therefore, the aim of introduction of Goods and Service Tax was to fulfil the purpose of “One Nation One Tax”. As a result of the Amendment, Article 246-A, Article 269-A, Article 279-A were inserted in the constitution and the Article 248, Article 249, Article 250, Article 268, Article 269, Article 270, Article 271, Article 286, Article 366 and Article 368 were amended and Article 268-A was omitted from the constitution.
OLD SCHEME OF INDIRECT TAXATION
Prior to GST, a number of different indirect taxes were levied upon goods and services by both the centre and the state as per their legislative competence under Article 246 read with Schedule VII of the Indian Constitution.
The centre levied the following kinds of indirect tax: –
(i) Excise Duty[2]
A duty of excise is a tax-levy on home-produced goods of a specified class or description, the duty being calculated according to the quantity or value of the goods and which is levied because of the mere fact of the goods having been produced or manufactured and unrelated to and not dependent on any commercial transaction in them.[3]
Illustration: “A” produces yarn from cotton. Here, “A” is liable for payment of excise duty at the point of production/ manufacture of the yarn. Let’s say that the value of yarn so produced is Rs. 100/- and the rate of Excise Duty is 10%. Now, at the time of manufacture, the value of the yarn becomes Rs. 110/- (Rs 100/- base value and Rs. 10/- excise duty.
(ii) Custom Duty[4]
Simply put, custom duty is a tax imposed upon the export and import of goods. It is not only a source of revenue but is also a tool of policy regulation in order to protect the domestic industries. It is governed by the Customs Act, 1962.
Central Sales Tax[5]
Sales Tax means tax levied on the sale or purchase of goods and includes Value added Tax. Central Sales Tax or CST was imposed on the sale or purchase of goods in the course of inter- state or commerce. CST was assigned to the state of origin, i.e, from where the goods were being sold. Here, an interesting point to note is that the goods which are being sold must have been manufactured at some point. In case, these goods are manufactured in India, the manufacturer must have also paid excise duty on the same and that excise duty so paid becomes a part of the cost of the goods.
Let’s continue with the previous example. After excise duty so levied upon the yarn by “A” the cost of the yarn had become Rs. 110/-. Now when “A” will sell that yarn to the garment producer, the transaction would be subject to CST if sold outside the producing State. Let’s say the rate of CST is 10%. Now the cost of the yarn to the garment producer will be Rs. 121 (Rs. 100/- base price, Rs. 10 Excise Duty and Rs. 11/- CST). Now, in effect, the government has collected 21% tax instead of 20% (10% excise duty and 10% CST). This is also known as the cascading effect of taxes.
(iv) Service Tax[6]
Service Tax was a tax levied upon the service provider by the Centre. It was introduced in the year 1994 as a part of the Finance Act under Section 65. The tax so collected by the centre was then apportioned between the union and the state as per Article 268A[7] of the Constitution.
The State too levied multiple taxes as per the subject matters listed in List II. A few of them are as below: –
(i) Value Added Tax[8]
Value Added tax or VAT was levied on the sale and purchase of goods within the State. It is governed by the legislation made by the respective states. E.g. in Punjab, VAT is governed by the Punjab VAT Act, 2005.
(ii) Excise Duty[9]
States have been empowered to impose excise duty on alcoholic liquor for human consumption and opium, indian hemp and other narcotics, but not including medicinal and toilet preparations containing alcohol.
(iii) Entry Tax[10]
Entry tax was imposed by the States on the entry of goods in the local area for consumption, use or sale therein. It was, therefore, levied on the goods which are being moved from one state to another. The person who owned or purchases the goods at the time of entry into the State is responsible to pay the entry tax.
(iv) Electricity Tax[11]
Electricity tax was levied on the consumption and sale of electricity.
(v) Luxury Tax[12]
States were also empowered to impose tax on luxuries, including tax on entertainments, amusements, betting and gambling.
Therefore, we can see that a number of taxes were imposed by both the centre and the states as per the Schedule VII. However, the taxes so imposed were complex and more then often has a cascading effect. This also led to less compliance and tax evasion. Thus, with an aim to instill uniformity and ensure compliance, GST was introduced.
ARTICLE 246-A: SPECIAL PROVISION WITH RESPECT TO GOODS AND SERVICES TAX
The Constitution (101st Amendment) Act, 2016 inserted the new Article 246-A to the Constitution of India. It states: –
“246-A. Special provision with respect to goods and services tax.—
(1) Notwithstanding anything contained in Articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of Article 279-A, take effect from the date recommended by the Goods and Services Tax Council.”
Article 246-A is the source of power of taxation under the GST regime. The Supreme Court in the case of Union of India v. VKC Footsteps India (P.) Ltd, [2021] 130 taxmann.com 193 (SC) noted three major changes that have been brought about by the introduction of Article 246-A. These are: –
(i) Firstly, Article 246-A defined the source of power as well as the field of legislation with respect to GST and obviates the need to travel to the seventh schedule. Thus, when it comes to GST, the distribution of power as envisaged under Article 246 becomes irrelevant.
(ii) Secondly, the provisions of Article 246-A are available both to the Parliament and the State legislatures, save and except for the exclusive power of the Parliament to enact GST legislation where the supply of goods or services takes place in the course of inter- state trade or commerce.
(iii) Thirdly, Article 246A embodies the constitutional principle of simultaneous levy as distinct from the principle of concurrence. Concurrence, which operated within the fold of Concurrent List, was regulated by Article 254.
Need of separate Article 246A
One might argue that the structure of GST could be incorporated within Article 246 by listing the power related to taxing of goods and services in the concurrent list (List III) or the Union List (List I) and the State List (List II) separately. However, it was decided that a new article would be introduced in the constitution. In this regard, it can be said that Article 246A gives a simultaneous power of legislation with regard to goods and services. Article 246A is differentiated from Article 246 as Article 246A is not subject to the repugnancy clause of Article 254 of the constitution and makes the power of legislation wrt GST as simultaneous.
Excessive legislation under Article 246-A
If one goes through the GST legislations in India, they will note that the GST legislations not only make laws on the levy of the Goods and Service Tax, but also incidental matters such as investigation, arrest, penalty, interest and punishment. It can be argued that Article 246-A is not wide enough to include all the incidental laws that have been made by the Parliament/ State Legislatures because Article 246-A does not incorporate the words “laws relating to goods and service tax and matters incidental thereto”.
Moreover, the power to impose a criminal sanction is derived from Entry 1 and prescribe criminal procedure form Entry 2 of the Concurrent List (List III) of the Schedule VII of the Constitution. If Article 246-A overrides Article 246 and the Schedule VII is not applicable on Article 246-A, the Parliament and the State Legislature has no power to conduct investigation, arrest, impose any sanction.
Similar arguments have been made before the Hon’ble Delhi High Court in the case of Dhruv Krishan Maggu v. Union of India, [2021] 123 taxmann.com 192 (Del)[13] where a writ is filed to declare the provisions of Arrest (Section 69 of the CGST Act, 2017) and Punishment (Section 132 of the CGST Act, 2017) as ultra vires the Constitution of India being beyond the legislative competence of the Parliament. In this regard, the Hon’ble Delhi High Court in its interim order observed as follows:-
(a) It was held that the power to make law under Article 246-A is wide enough to include the power to make “any law with respect to goods and services tax” which would include the power to made any incidental and ancillary law as well including power to arrest and impose punishment.
(b) It further held that the power to Arrest under Section 69 is not a general power and is restricted to the offences under Section 132 and is therefore, a law relating to GST and within the legislative competence under Article 246-A. Further, the doctrine of pith and substance was used declare that the CGST act has to be looked at as a whole and any law made with respect to the same will be within the arena of Article 246-A.
(c) Further, it was held that even if the power to legislate is not within the purview of Article 246-A, it can be traced back to Article 246 because the intent of Article 246-A was not to oust the power of the Parliament/ State Legislature but to empower them to make laws with respect to GST simultaneously. Therefore, the power under Article 246 remains unaffected with the introduction of Article 246-A.
However, no final judgement in this matter has been tendered so far. The observations of the bench, will be interesting to note.
Therefore, the approach has been to harmoniously construct Article 246 and Article 246-A to give maximum effect to the legislative competence of the Parliament/ State Legislature. But as per the author, a few aspects of the Seventh Schedule are looked over. Under Entry 93 List I, the power is given to the Union to make law for offences with regard to law made under List I. Similarly, under Entry 63 List II, the power is given to the State Government to make law for offences with regard to law made under List II. If the power to define offences flows from Entry 1 and Entry 2 of the List III, there would be no need for a separate entry under List I and List II. It cannot be said that the intent of the constitutional framers was to make entries for no reason whatsoever. Therefore, it cannot be said that the power to make laws on arrest and subsequently punishment flows from Entry 1 and Entry 2 of List III.
Interestingly, List 1 under Entry 97 also empowers the Union to make any laws under a residuary head whereby the union is empowered to make law on any other matter not enumerated in List II or List III including any tax. Here also, the power is limited to make law on any matter and not on matter of offences and the power to make law on offences will again has to flow from Entry 93 of List 1 which is limited to making offences with regard to law enumerated in List I which is not so in the case of Goods and Services Tax. Furthermore, arguendo, it is accepted that the Union is empowered to define offences with regard to Goods and Services Tax, no State can make any law with regard to offences under GST as the power lies with the Union and not with the State. This would defeat the very purpose of Article 246-A and make it redundant vis a vis power to make laws in respect of GST.
Article 246A and the contradiction with the aim of GST
While introducing the 2014 Amendment Bill, the Finance Minister discussed the purpose of GST wherein he highlighted that there was no uniformity in the tax rates and structures across the States. However, at the same time as per Article 246A, the States have been empowered to levy taxes on Goods and Services without any hindrance by the Centre Government as long as the transaction is an intra- State supply. This implies that there can be an entirely different structure of indirect taxation for in, say, Punjab and a completely different structure in, say, Haryana, including, provisions pertaining to charge on tax, exemption and rule- making power. This is more so because the Article 246A also overrides Article 254 of the constitution.
At the same time, the Centre government has retained the exclusive power to levy taxes on the inter- state supply of goods and services vide Article 246A(2) in the form of Integrated Goods and Services Tax (IGST). Out of the total tax that is collected in the form of IGST which is then divided equally between the State and the Centre as per Article 269A. Now, the problem arises when the State and the Centre will decide to levy different rates of taxes and provided exemptions in certain cases. Let’s take an example of a chair that is being sold in Punjab. Assume rate of PGST to be 10%, rate of CGST on 15% and IGST to be 30%. Note that the state of Punjab is within its power to notify a different rate of GST on the goods which are being sold intra state by virtue of Article 246A(1) of the Constitution. This would make the chairs which are being sold as inter- state supply less competitive as compared to the chairs that are being sold within Punjab.
| IN CASE OF INTRA- STATE SUPPLY | IN CASE OF INTER STATE SUPPLY | ||
| COST OF CHAIR | 1000/- | COST OF CHAIR | 1000/- |
| PGST ON CHAIR (Assuming 10%) | 100/- | IGST ON CHAIR (Assuming 30%) | 300/- |
| CGST ON CHAIR (Assuming 15%) | 150/- | ||
| TOTAL COST OF CHAIR TO THE CUSTOMER | 1250/- | TOTAL COST OF CHAIR TO THE CUSTOMER | 1300/- |
The author argues that in such a scenario inter- state trade would be discouraged and vice versa where the rate of IGST would be less than the State GST, intra- state trade would be discouraged.
ARTICLE 279-A: GOODS AND SERVICE COUNCIL AND THE STRUGGLE OF COOPERATIVE FEDERALISM
The GST Council is a constitutional body set up under Article 279A of the Constitution of India. The purpose of GST Council is to act as a converging platform for the Centre and the States for them to work in a harmonious manner towards a common goal. The GST Council takes decisions which are then communicated to the Centre and the State in the form of recommendations. While discussing the function of the GST Council, the Supreme Court in the case of Union of India v. VKC Footsteps (India) (P) Ltd[14] stated:
“86. Clause (6) of Article 279-A has provided that while discharging its functions the GST Council shall be guided by the need for
(a) a harmonised structure of goods and service tax; and
(b) the development of a harmonised national market for goods and services.
In emphasising the need, the constitutional provision reflects a goal, object and aspiration to be achieved. By emphasising this, the provision underscores the vision that the GST Council should bear in mind in the discharge of its constitutional functions. The constitutional object is however to be realised under the auspices of legislation duly enacted under the provisions of Article 246-A. The GST Council is intended to function towards the advancement of a harmonised structure for GST and market for goods and services….”
However, the setup and structure of the GST Council was one of the major concerns for the State Governments at the inception of GST. The composition of the GST council is such that the Central Government has 1/3rd of the voting powers and the States have 2/3rd of the voting power. Moreover, the decisions of the GST Council are taken as per the majority of 3/4th of the members present and voting. Thus, the GST Council could effectively override the legislative sovereignty of the State Legislatures because even if the State Legislature is not in agreement with a recommendation, the same can be passed, nullifying its power under Article 246A. Furthermore, it is possible that the political party which is in power in the centre is not in power in the States. Therefore, the GST council becomes an avenue for political contestation across the party lines.
As per the draft of the Article 279A under the 2011 Amendment Bill, every decision of the GST Council had to be taken with the consensus of all the members of the meeting. However, it did not find its place in the Article 279A.
In the landmark judgement of Union of India v. Mohit Minerals Pvt Ltd[15] the nature of the recommendations of the GST Council was discussed in detail. There were two arguments presented in favour of the recommendations of the GST Council to be binding-
(i) if the recommendations are not binding, the structure of GST would fail because the States will be free to enact and implement contrary law and there will be no uniformity;
(ii) if the recommendations of the GST council are not binding, there is no scope of dispute and the Article 279A(11) shall be rendered redundant.
At the same time, two arguments were presented against the binding nature of the recommendations of the GST Council-
(i) it would violate the fiscal autonomy of the Parliament and State Legislature;
(ii) it would violate the fiscal federalism of the States since the Centre has 1/3rd share and the States collectively have a 2/3rd voting share and therefore, no recommendation can be passed without the acceptance of the Centre.
The Supreme Court noted:
“48. Justice PB Sawant writing for himself and Justice Kuldip Singh in SR Bommai v. Union of India, referred to the exclusive and equal legislative distribution of heads of taxation to establish the federal nature of the Indian Constitution. Therefore, the exclusive powers held by the States and the Centre on matters of taxation was regarded as an important feature of India’s federal polity. The Constitution Amendment Act 2016 alters the legislative distribution between the Centre and the State on indirect taxation by providing Parliament and State legislatures with ‘simultaneous powers’ and no provision for repugnancy. Therefore, according to Article 246A, both Parliament and the State Legislature possess equal power to legislate on aspects of GST….”
The Supreme Court held that the recommendations of the GST Council are not binding in nature because if the recommendations are accepted as binding, it would disrupt fiscal federalism and virtually override the power of the State Legislature under Article 246A. However, the Apex Court also held that the government while exercising its rule- making power under the provisions of the CGST Act, 2017 and IGST Act, 2017 is bound by the recommendations of the GST Council. However, that does not mean that all the recommendations of the GST Council made by under Article 279A(4) are binding on the legislature’s power to enact primary legislations.
Thus, the binding power of the GST Council is limited to delegated legislation and rule making instead of the parent statute by the Supreme Court.
GOODS AND SERVICES DISPUTE RESOLUTION AUTHORITY
The 2011 Amendment Bill provided for the establishment of a Goods and Service Dispute Settlement Authority to adjudicate on the matters of deviation from the recommendations of the GST Council in the form of Article 279B. The concern was that the introduction of Article 279B would virtually make the recommendations of the GST Council as binding and as a result the States would lose their fiscal autonomy. Thus, the Article 279B was removed to address such concerns. Ultimately, the power to adjudicate upon a dispute arising from the recommendations of the GST Council was given to the GST Council itself under Article 279(11). It should be noticed that the term “deviation” did not find its place in Article 279A(11) which indicated that the legislature did not intend for the recommendations of the GST Council to be binding.
STATE COMPENSATION AND HARMONY SO FAR
One might argue that it has been five years since the introduction of the Goods and Service Tax and the problem as discussed above has not been faced so far. However, several factors have contributed to the uniform rate structure so far: –
(a) Same parties in the State and the Centre
Ever since the inception of GST, majority of the States have the same parties as the Centre which incentivizes the States to maintain a uniform tax rate structure.
(b) State Compensation Scheme
GST was resisted by the majority of States because of the apprehension that there will be a loss of revenue to the State. As a result, to incentivize the states to adopt the new GST structure, the Government inserted Section 18 in the Constitution (101st Amendment) Act, 2016. By virtue of Section 18, compensation scheme for the states was introduced for a period of five years. Section 18 states that: –
18. Compensation to States for loss of revenue on account of introduction of goods and services tax.—
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.
Accordingly, the Goods and Services (Compensation to the States) Act, 2017 was passed to compensate the states for the loss of revenue on account of GST. Under the Act, for the purpose to generate funds for the GST Compensation, a GST Compensation Cess was introduced.
The Constitution validity of the GST Compensation Cess was questioned before the Hon’ble Supreme Court of India in the case of Union of India v. Mohit Mineral (P) Ltd., (2019) 2 SCC 599 on the ground that the leyy of cess was beyond the legislative competence of the Parliament. The Supreme Court held that the expression “Cess” means a tax levied for some special purpose, which may be levied as an increment to an existing tax and the parliament is competent to levy the same under the Entry 97 of the List I of the Schedule VII. Further, it was held that the Parliament was empowered by Section 18 of the Constitution (101st Amendment) Act, 2016 to levy GST Cess and therefore, the levy of cess was not beyond the legislative competence of the Parliament. Moreover, the term “with respect to” under Article 246-A(1) was interpreted to be expansive in nature and granting power to the parliament and the state to make any law wrt GST.
However, due to covid, it was decided post the 42nd GST Council Meeting, held in Chandigarh, that the Compensation scheme would be further extended till March 2026 whereas it was supposed to end at June 2022.
CONCLUSION
Goods and Services Tax is a unique legislation and thereby, the constitutional challenges faced by it are also one of its kind. It is the only legislation which confers a simultaneous instead of concurrent power to legislate. Such a power was not accorded by the constituent assembly while framing the constitution. It has been inserted through an amendment as discussed above. The conflict between the constitution and the GST Law in its implementation is of concern especially since the competency to make law is in question. However, the biggest challenge to the GST legislation is and will continue to be the Centre- State balance of power.
[1] Statement of Objects and Reasons, the Constitution (One Hundred and First Amendment) Act, 2016, dated 08.09.2016.
[2] Schedule VII, List I, Entry 84, Constitution of India.
[3] Chhotabhai Jethabhai Patel & Co. v. Union of India, AIR 1962 SC 1006
[4] Schedule VII, List I, Entry 83, Constitution of India.
[5] Schedule VII, List I, Entry 92A, Constitution of India.
[6] Schedule VII, List I, Entry 97, Constitution of India.
[7] Inserted by Constitution (88th Amendment) Act, 2003.
[8] Schedule VII, List II, Entry 54, Constitution of India.
[9] Schedule VII, List II, Entry 51, Constitution of India.
[10] Schedule VII, List II, Entry 52, Constitution of India.
[11] Schedule VII, List II, Entry 53, Constitution of India.
[12] Schedule VII, List II, Entry 62, Constitution of India.
[13] See Also, Skill Lotto Solutions (P) Ltd v. Union of India, (2020) 122 taxmann.com 49 (SC).
[14] (2022) 2 SCC 603
[15] 2022 SCC OnLine 657
Author Bio
