Background
The Govt. of India (GOI- both Central and State) has consistently from time to time in the past has announced various investment-based incentives to promote economy, industrialization, and wealth distribution in industrially backward states under the Article 34 (c) of the Constitution of India (COI). Such investment-based schemes or area-based exemptions majorly constituted heavy tax or duty exemptions including 100% exemption of Central Excise duty which was specifically designed to invite and attract investors to set up businesses in such areas. In other words, GOI made a lucrative promise in terms of tax exemptions, and investors were allured to invest in such states as a reciprocation of the promise.
However, with the advent of GST implementation, the Central Government had withdrawn all such area-based exemptions and thereby broke the promise midway for those taxpayers who had invested heavily in those respective states solely in the faith of the promise made by the GOI which otherwise could have selected other viable options.
The Department of Industrial Policy and Promotion (DIPP) introduced Budgetary Support Scheme (BSS) w.e.f. 01.07.2017 [1] to the existing eligible manufacturing units operating in the States of Jammu & Kashmir, Uttarakhand, Himachal Pradesh, and North-Eastern States including Sikkim; who were drawing benefits under earlier excise duty exemption/refund schemes; for a residual period for which each of the units is eligible. The Central Government had also rescinded all earlier area-based exemption notifications (erstwhile schemes) issued by MOF as on 18.07.2017[2]. Thereby, as compared to the earlier 100 % exemption of Central excise duty, vide BSS the eligible units were only reimbursed 58% of CGST and 29% of IGST paid via cash ledger, which could be held as an arbitrary and irrational reduction. It is pertinent to note that the decision to provide such a budgetary support scheme was taken as a measure of goodwill to ease the hardships arising to the taxpayers due to the withdrawal of erstwhile 100 % area-based exemption schemes.
There are plenty of cases where the GOI has altered back from the promised benefits either fully or partly and then, the judiciary has rightly applied the doctrine of Promissory Estoppel (PE) to give justice to such taxpayers and make the GOI honor such promises except in cases where the actions of GOI were upheld in the name of public interest.
What is the Doctrine of Promissory estoppel?
The Doctrine of Promissory Estoppel (PE) works on the principle of equity, fairness, and moral conscience. Though it has not been defined in the statute books, the concept of the doctrine of PE could be perused from the celebrated judgment of Kasinka Trading[3], where the principle has been beautifully explained-
“where the one party [public authority] has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, except where the equity in the public interest so demands”
In essence, time and again courts have invoked PE in cases where GOI has altered or withdrawn promised benefits and upheld in favour of the taxpayers unless the actions of the GOI are justified in the name of public interest.
Recently the Hon’ble Supreme Court in the case of Hero Motocorp Ltd vs UOI & ors [4] had held that the doctrine of Promissory Estoppel cannot be invoked in the case of continuation of area-based exemption post introduction of GST.
The Hon’ble Apex court has made the following significant observations in support of this view:
a. By the 101st Amendment Act, a sea change in the earlier taxation regime occurred
b. Clause (c) of Section 174(2) is clear and specific. It specifically provides that any tax exemption granted as an incentive against investment through a notification shall not continue as a privilege if the said notification is rescinded on or after the appointed day.
c. Referring to the host of SC judgments on the subject, it is clear that this Court held that the plea of promissory estoppel would not be available against the exercise of the legislative functions of the State. Equally, it cannot be invoked for preventing the government from discharging its functions under the law.
d. Undisputedly, the Notification dated July 18, 2017, withdrawing the exemption notifications was issued in pursuance of the statutory mandate as provided under Section 174(2)(c) of the CGST Act. If the contention as raised by the appellants is to be accepted, it would make the provisions under the proviso to Section 174(2)(c) of the CGST Act redundant and otiose.
e. It has been consistently held that where the change of policy is in the larger public interest, the State cannot be prevented from withdrawing an incentive which it had granted through an earlier notification
f. Even on the ground of a change of policy, which is in the public interest or in view of the change in the statutory regime itself on account of the GST Act being introduced as in the instant case, it will not be correct to hold the Union bound by the representation made by it, i.e., by said OM.
g. In the present case, there is no duty cast on the Union to refund 100% of CGST.
h. This Court, in a catena of judgments, have consistently held that promissory estoppel would not apply against the exercise of legislative powers of the State.
i. GST Council during its deliberations observed that the States also need to correspondingly reimburse the industrial units which were entitled to exemption under any existing incentive scheme, out of the share of revenue received through devolution, which, as per the Finance Commission, stands at 42%.
j. Taking into consideration that the units like the appellants have been established in the Himalayan and North-Eastern States based on the said O.M. and that lakhs of persons are employed in such industries, we are of the view that it will be appropriate that such States should also consider to correspondingly reimburse such units out of the share of revenue received through devolution from the Central Government.
k. It will also be appropriate that the GST Council considers making appropriate recommendations to the States in that regard.
l. Therefore, the assessee is permitted to make representations to the respective State Governments as well as to the GST Council and State Governments and the GST Council to consider such representations, if made, in accordance with what has been observed herein above in an expeditious manner.
Author Comments
I. This is not the first time when the invocation of the doctrine of PE has been denied in the garb of ‘public interest’
- The Hon’ble Apex Court in the case of V.F Limited[5] held that withdrawal of exemption in ‘public interest’ is a matter of policy and the Courts would not bind the Government to its policy decisions, irrespective of the satisfaction of the Government that change in the policy was necessary for the public interest. It is further held that once public interest is accepted as the superior equity which can override individual equity, the doctrine of promissory estoppel will not be applicable even in the case where a period has been indicated for the operation of the promise.
- The Hon’ble Apex Court in the case of Unicorn Industries[6] held that “we have no hesitation to hold that the withdrawal of the exemption to the pan masala with tobacco and pan masala sans tobacco is in the larger public interest. As such, the doctrine of promissory estoppel could not have been invoked in the present matter. The State could not be compelled to continue the exemption, though it was satisfied that it was not in the public interest to do so. The larger public interest would outweigh an individual loss, if any.”
- Therefore, it is clear from the above that the Hon’ble Apex Court has denied the applicability of the doctrine of PE against the withdrawal of any benefit/exemption under the garb of supervening ‘public interest. It is to be noted that industrial policies such as area-based exemptions are directed by Article 39 (c) of COI in order to ensure proper wealth distribution and upliftment of the economy as a whole; whether the same is not issued under public interest. It is a general phenomenon that taxing statutes empowers Government to provide exemptions only in the public interest and not otherwise. Now the question remains, how to equate public interest and derive a conclusion of larger public interest.
- The Hon’ble Apex Court in Bihar Public Service Commission vs Saiyed Hussain Abbas Rizvi [7] held that “public interest” is not capable of a precise definition. It does not have a rigid meaning. It is elastic and takes its colour from the statute in which it occurs. The concept is varying with time and state of society and its needs. The Hon’ble Apex Court referred to the definition of “public interest” in Black’s Law Dictionary (8th Edition). It means the general welfare of public that warrants recognition and protection; something in which the public as a whole has a stake.
II. Section 174(2)(c) of CGST Act is ultra vires
- The appellant did not challenge the vires of Section 174(2)(c) of the CGST Act which is arbitrary and violative of Article 19 of the COI. The Hon’ble Apex court upheld the view of the Hon’ble Delhi High Court in this case which erred in the conclusion of the fact that the exemptions were granted as ‘privilege’ and accordingly held their withdrawal to be justified. The Hon’ble Apex court in this decision in Para 55 held that “If the contention is accepted, it will amount to enforcing a representation made in the said O.M. of 2003 and 2003 Notification contrary to the legislative incorporation in the proviso to Section 174(2)(c) of the CGST Act. In other words, it will permit an estoppel to be operated against the legislative functions of the Parliament.”
- Relevant law extract –
174 (2) The repeal of the said Acts and the amendment of the Finance Act, 1994 (hereafter referred to as “such amendment” or “amended Act”, as the case may be) to the extent mentioned in the sub-section (1) or section 173 shall not—
(c) affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts or orders under such repealed or amended Acts:
Provided that any tax exemption granted as an incentive against investment through a notification shall not continue as privilege if the said notification is rescinded on or after the appointed day;
- Section 174 (2)(c) ibid saves the rights, privileges, obligations, and liabilities of repealed Acts, but the proviso thereto only carves out exception in case ‘privilege’ is available in the form of tax exemption granted as an incentive against investment from its purview. The proviso to Section 174(2)(c) ibid has categorized the ‘tax exemption granted as an incentive as ‘privilege’.
- It is a settled law that when a taxpayer fulfils conditions for claiming the exemption, such an exemption takes the nature of a ‘right’ and not a ‘privilege’. The Supreme Court in DGFT vs Kanak Exports & Others[8] held that –
“No doubt, the Government has, otherwise, power to amend, modify or withdraw a particular Scheme which gives benefits to a particular category of persons under the said Scheme. At the same time, If some vested right has accrued in favour of the beneficiaries who achieved the target stipulated in the Scheme and thereby became eligible for grant of duty credit entitlement, that cannot be snatched from such persons/exporters by making the amendment retrospectively” (para 128)
- Therefore, once the investors fulfill the pre-requisites for claiming the benefit of the tax exemptions then, such benefits would become a ‘right’ of the investor and would not remain a mere ‘privilege’. Further, when investors invested a reciprocation to the promise of tax benefits, it could be inferred that they had acquired a ‘vested right’ in such those benefits. Hence, the aforesaid proviso which only curtails ‘privilege’ would not be applicable in this case when the benefits tuned into a vested right
III. Excise duty exemptions were never considered for the devolution of taxes to the States – Article 270 of COI
- Post introduction of GST, the Central Government vide Budgetary Support Scheme had resolved to reimburse only 58%, due to the fact that only 58% of the CGST revenue shall remain in the Consolidated Fund of India and that the remaining 42% shall be devolved to the States.[9]
- However, before introduction of GST, the Central Government had provided 100% exemption of Central excise duty irrespective of the fact that 32% of the total excise collected was devolved to the States. Since the exemptions provided were not included in the overall tax kitty “net proceeds” as per Article 270 of COI and thereby same was not taken into consideration for devolution to the States. The same practice ought to have been continued post-GST regime as well.
- Hence, the decision of the Central Government to only reimburse 58% on the pretext that the remaining part is devolved to the States is unsustainable under law and in violation of Article 270 of COI. This aspect was overlooked in the Hon’ble Apex Court judgment of Hero Motocorp Supra.
Future course of action:
I. It has become a regular practice that the interest of taxpayers is being ignored and somewhere suffocated between the tussle of the Centre and the States which is quite clear from the minutes of GST council meetings. As per the recommendation of the Hon’ble Apex Court, the affected taxpayers should make appropriate representations to their respective State Governments as well as the GST council for reimbursement of the remaining share of taxes i.e., 42%. The GST council and respective State Governments are expected to consider the representations and provide relief accordingly taking a cue from the decision of the Government of Jammu & Kashmir which vide Notification dated 21st December 2017 resolved to reimburse the remaining 42% of the GST to the units located in the State for the remaining period.
II. Further, in case the affected taxpayers also may choose to file a writ in High Courts challenging vires of Section 174(2) (c) of CGST Act as the same is violative of article 19 of the Constitution. Also, the validity of Notification 21/2017 supra which rescinded erstwhile area-based exemptions may be challenged.
Conclusion
It is a known fact that supervening ‘public interest has always been an exception for the application of PE; however, in the author’s view the burden of proof to establish public interest always lies with the Government and the Hon’ble Apex Court merely cannot assume the same with the change of policy in the name of implementation of GST.
In the author’s view, the decisions of the Hon’ble Apex Court in V.V.F Limited supra, Unicorn Industries supra, and Hero Motocorp supra have created a huge vacuum right at the core foundation of the doctrine of PE and its fundamental application. The doctrine of PE has evolved over time in the Indian judiciary with just and fair decisions where the rights of the taxpayers have been protected whenever the GOI has broken its promise or altered promised benefits unlike the recent trend of judgments. As in the present case of withdrawal of area-based exemptions, the GOI had clearly made a promise to grant exemptions for a period of 10 years and based on such promise investors invested heavily in the respective states with an aim of a higher return on investment. However, the decision of curtailment or restriction of the benefits post introduction of GST has led to unimaginable losses not only for the taxpayers but for the respective region as a whole since it had led to a loss of lacs of jobs – whether this is not a concern of public interest.
The recent trend of unfavorable judgments will undoubtedly create doubt in the minds of potential investors including foreign players w.r.t the credibility of the budgetary support schemes and would make them reluctant to invest basis such investment-based schemes since it is likely that the GOI may roll back the incentives on a future date. There is a famous proverb in India – “ प्राण जाये पर वचन ना जाये” which means “Life may go but words must be kept”; thus the importance of keeping promises has been kept above the value of life in Indian culture. Now, whether the GOI would continue to break its promises in the name of public interest, well time will tell.
Special thanks to CA. Ashish Chaudhary and CA. Rajesh Maddi for vetting the article.Request you to give your feedback to the author at – [email protected].
[1] vide F. No. 10(1)/2017-DBA-II/NER dated 05.10.2017
[2] Vide Not. 21/2017 dated 18.07.2017
[3] 1995 AIR 874 SC
[4] TS-519-SC-2022-GST
[5] TS-232-SC-2020-EXC
[6] TS-1108-SC-2019-EXC
[7] (2012) 13 SCC 61
[8] 2015 (326) ELT 26 (SC)
[9] Para 4.1 of the minutes of 14th GST council meeting held on 18th and 19th May 2017
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