Constitutional validity of amendment proposed in Schedule III of CGST Act

Do you know, there is an amendment proposed in GST law where you are not entitled for refund of amount which was collected in the name of tax not due to your mistake but mistake of __________!!! Is it so?

In this article I have shared my thoughts whether taxpayer would entitle for refund of GST paid  during the period 1^st July 2017 to 31^st January 2019, in respect of the transaction mentioned in para 7 and 8 of Schedule III to CGST Act.

Background

Schedule III of the CGST Act deals with the activities or transactions which shall neither be treated as  supply of goods nor as  supply of services in the eyes of GST law. No GST shall be payable in respect of the activities/ transactions  mentioned in schedule III.  In the year 2018, para 7 and para 8 has been inserted in Schedule III by the Central Goods and Services tax (Amendment) Act, 2018, w.e.f 01.02.2019 (prospectively)  which provides no GST shall be payable in respect of –

(i) Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

(ii) Supply of warehoused goods to any person before clearance for home consumption

(iii) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption

Now it has been proposed to amend schedule III to give retrospective effect to the aforesaid amendment with effect from 1^st July 2017. Ho! It is a welcome move, but it also came with a rider stating no refund shall be made of all the tax which has been collected, but which would not have been so collected had the aforesaid amendment been in force at all times.

If the above provision is accepted at face value, is it not the genuine taxpayer who is law abiding citizen put at disadvantage position as compared to the person who does not follow the law? Is this the spirit of our Indian Constitution?

Now debate arises between “Sovereign rights of the Government vs Fundamental rights of poor taxpayer”

Relevant provisions of the Indian Constitution:

Article 265 of the Indian Constitution states, “ No taxes shall be levied or collected except by the authority of law”

On reading schedule III (along with the amendment made in the year 2018 and proposal made Finance Bill 2023) of the CGST Act, there is no law in place either to levy or collect in respect of transactions mentioned in para 7 and 8 of the Schedule III. If that be the case, how the state (Government) can retain the amount which has been wrong paid by the taxpayer in the presence of Article 265?

Is it not the obligation of the Government to repay the amount (which has been collected in the name of tax) which was paid by the genuine taxpayer by the mistake of ______?

If the department argues, there is a law which was in place at the time of collecting taxes and thereby levy and collection is valid, then the next question comes to my mind whether the following amendment proposed in the finance bill 2023 (assuming the amendment proposed becomes part of Finance Act, 2023) is a valid law?

“(2) No refund shall be made of all the tax which has been collected, but which would not have been so collected, had sub-section (1) been in force at all times”

[Refer Section 142 of the Finance Bill 2023]

Clause 2 of Article 13 of the Indian Constitution states:

The State shall not make any law which takes away or abridges the rights conferred by this part and any law made in contravention of this clause, shall, to the extent of the contravention, be void

(emphasis supplied)

Part III of the constitution deals with fundamental rights which is important part of our constitution.  From the above one can understand any law which violates any fundamental rights as provided in the Part III of the constitution shall be void.

Article 14 of the Indian constitution reads, “the state shall not deny to any person equality before the law or the equal protection of the laws within the territory of India”

It is the obligation of the state to give equal treatment and protection to all persons. The law cannot make discrimination among the equals. If it discriminates without reasonable classification, then it cannot be a valid law.

In this case, the law should have provided equal treatment (if not better treatment) between the taxpayer who has paid the tax and the taxpayer who has not paid the tax, by providing the option of claiming refund.

My humble view is that the distinction provided in subsection (2) of Section 142 of Finance Bill 2023, between the taxpayer who has paid the tax and the taxpayer who has not paid the tax is not a reasonable classification and it may not stand in the eyes of the court of law.

Judicial precedents on similar issue

Corporation Bank v. Saraswati Abharansala & Anr [(2009) 1 SCC 540 (SC)]

In this case the rate of Sales tax was reduced from 1% to 0.5% vide SRO No. 1075/99 dated 27.12.1999, which was given retrospective effect from 1.4.1999. The taxpayer who had paid the sales tax @ 1% for the period 6.4.1999 to 10.12.1999, claimed refund of the excess tax paid, i.e. over and above 0.5%. This request was rejected by the Assistant Commissioner, Sales Tax. The assessee filed the writ petition challenging the order of the Assistant Commissioner, which was dismissed by the Single Judge of the High Court. However, the taxpayer’s  intra-court appeal was allowed by the Division Bench directing the authorities to refund the excess amount collected. The said decision of the Division Bench was upheld by the Hon’ble Supreme Court holding that non-refund would not only offend equality clause contained in Article 14 of the Constitution, it would also be in the teeth of Article 265 of the Constitution which mandates that no tax shall be levied or collected, except by authority of law.

Vikram Cement & Anr vs State of M.P. & Ors [(2015) 11 SCC 708 (SC)]

Facts of the case:

The appellants had been paying entry tax for entry of these goods in the territory of the State of Madhya Pradesh under M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976. In the year 1997, the entry tax on the aforesaid items of raw materials payable under the Act was at the following rates:

COAL            –    2.5%

GYPSUM      –    2%

BAUXITE     –    10%

In the year 1999, State issued Notification No. A-3-80-98-ST-V (49) dated 4.5.1999. By this Notification it reduced the rate of entry tax, namely, coal, gypsum and bauxite by making the entry tax payable at the rate of 1% only. This Notification remained in force for a limited period, that is from 1.5.1997 to 30.09.1997. The rate of entry tax prior to 1.5.1997 and after 30.09.1997 remained the same, namely, 2.5%, 2% and 10% for coal, gypsum and bauxite respectively.

However, while reducing the entry tax to 1%, in the same very notification an Explanation was also appended stating that the amount which is already paid by the dealer at the higher rate shall not be refunded.

The issued before the Hon’ble Supreme Court is whether the appellant is entitled for the refund of excess tax paid even though the same notification restricts refund claim.

Decision

The Explanation attached to Notification dated 4.5.1999, or for that matter the Notification dated 5.7.1999, which states that the amount shall not be refunded in any case on the basis that dealer had filed the tax at a higher rate, results in invidious discrimination towards those who have paid the tax at a higher rate, like the appellants, when compared with that category of the persons who were defaulters and have now been allowed to pay the tax at the rate of 1% for the relevant period. The consequence is that it carves out two categories of tax payers who are made to pay the tax at different rates, even though they are identically situated. There is no basis for creating these two classes and there is no rationale behind it which would have any causal connection with the objective sought to be achieved. It would be pertinent to mention that on repeated query made by this Court to the learned counsel for the respondents, he could not explain or show from any material on record as to what led the authorities to provide such an Explanation. Therefore, it becomes apparent that there is no objective behind such an Explanation appended to the Notification dated 4.5.1999 which is sought to be achieved, except that the Government, after collecting the tax from those who had paid at a higher rate, did not intend to refund the same. This can hardly be countenanced, more so when it results in discrimination between the two groups, though identically situated.

In terms of retrospective reduction of taxes, the department has the liability to refund the excess amount recovered . Any explanation barring the refund is in conflict with right to equality. In order to determine as to whether a particular dealer is in fact entitled to a refund or not, the Government can go into the issue of unjust enrichment, while considering the application for refund which would depends on facts of each case.

In the presence of favourable view from the Highest Court on similar issue, I believe the legislator would tweak the provision relating to refund at the enactment stage otherwise we need to knock the door of the court to avail refund of taxes paid  in relation to activities / transactions which is covered under para 7 and 8 of Schedule III.