Validity of GST (Compensation to States) Act & UOI vs. Mohit Mineral

Looking through Validity of GST (Compensation to States) Act of 2017, and other allied matters under ‘Union of India vs. Mohit Mineral Private Ltd.’

CASE: Union of India v. Mohit Mineral Private Ltd. 

• Question
  • Validity of GST (Compensation to States) Act, 2017.
    • Act provides for cess in order to compensate states for the loss suffered by states due to GST- period of 5 years.
  • Scope of residuary tax in GST
  • What is cess? How far cess stand subsumed after GST.
• Facts
  • Mohit Mineral established under Companies Act’1956 having incorporated in 29th July,2004.
  • Trader of Indian as well as foreign coal.
  • Import coal from Indonesia and South Africa.
  • e.f 1/7/10, cess was introduced known as Clean Energy Cess. The cess was in relation to the trade of coal.
  • 400/ton as cess.
• Mohit’s arguments:
  • Have been paying clean energy cess. After GST no cess.
  • GST made an end of cess.
  • Set off of the cess already paid (around 7.68 cr)
  • First approach GST council, nothing happened.
  • Filed writ before HC of Del, wanted appropriate writ issued.
  • Act be declared as unconstitutional and the rules also are unconstitutional.
  • Notifications to also be declared unconstitutional.
  • Declaration from HC that no power to levy or collect any cess after GST
• Delhi HC issued interim order. In the interim order, found that petitioner has prima facie proved some merit in the claim made by the P regarding legislative competence of the Parliament.
  • Cess amounts to double tax and is levied on same taxable event over GST and IGST.
  • Not to make payment of cess.
  • Subject to the final conclusion of the Delhi HC, they will decide whether set off can be ordered.
• At the same time, another case was filed by Hind Energy and Coal Beneficial India Ltd. on the same point. Interim order was passed under that as well.
• Mohit Mineral interim order was challenged before the Supreme Court.
• Contentions of the Respondents:
  • Intention of the 101^st Constitution Amendment- all cess/surcharges, all indirect taxes stand subsumed. With the introduction of the GST, Parliament passed a law subsequently (Taxation Law Amendment Act) wherein many laws stand repealed. Such as Customs Tariff Act- some stand to be modified, some repealed. All direct taxes including all types of cess and surcharges stand to be subsumed. Hence, only 1 tax is there- GST. How can Parliament subsequently make a law which provides for cess?
  • Taxation Amend Act repealed many cess- one of the cess which stands to be repealed is the Clean Energy Cess.
  • Compensation Act is repugnant to 101^st Constitution Amendment Act. Parliament is passing a law which is directly contrary to the Constitution Amendment Act. Hence, direct conflict between 101^st constitution amend and Compensation Act. Therefore, Compensation Act is repugnant.
  • Colourable legislation-
  • No power to levy cess- after new amendment.
  • On same transaction, there cannot be two taxes.
• Arguments of Attorney General:
  • Legislature is competent to pass GST under Art. 246A
  • Cess is special kind of tax.
  • Cess’s competence comes from Art. 246A
    • Substantive article is sufficient to give competence to the legislature.
    • Specific entry is not required.
  • 246A has wide implications which includes cess also.
  • Particular power even if not seen under any other entry, cess is still possible under Art 270 r/w Art. 271.
  • Residuary tax entry under Entry 97.
  • Clean Energy Cess cannot be equated with Compensation Cess.
    • Clean Energy Cess is an environmental cess. In relation to use/ biz of coal, cess is made.
    • Compensation cess is in relation to the tax revenue- States when losing revenue due to GST, compensation has to be paid. For the compensation, this cess has been imposed.
  • Flow of tax credit is purely a policy decision, which has to be made by the executive, wherein the Court cannot interfere.
  • When legislative competence is proved, question of colourable legislation disappear.
• Issues-
  • Whether GST Compensation Act is beyond the legislative competence of the Parliament?
  • Whether act is violative of the Constitutional Amend Act?
  • Whether this is a colourable legislation?
  • Whether compensation Cess and GST on the same taxable event is permissible?
  • Whether setoff can be claimed for clean energy cess as against compensation cess?
• Supreme Court (SC) discussed the following provisions:
  • Statement of object and reasons for the amendment.
  • General provisions regarding Art. 265 (tax law must be on the authority of the law passed by the legislature)
  • 366- various definitions are provided.
  • Referrer to amended articles (amended by GST)- 248, 249, 250, 268, 269 ,270, 271, 286, 366
  • Insertion of new articles- 246A, 269A, 279A
  • Looked into S.18 and 19 of the 101^st Constitution Amendment.
    • 18 and 19 provides for the basis for this Compensation Act.
    • Difference between 18 and 19 of 122^nd Constitutional Amendment Bill, and 101^st Constitutional Amendment— talks about additional duties and compensation.
    • How 18 and 19 of the Bill transformed into the Act- the changes made have significance.
  • Three legislations were looked into by the court
    • CGST Act
    • IGST Act
    • GST (Compensation to States) Act
  • Looked into Taxation Law Amendment Act
    • Cess, IDT stand repealed.
  • SC-
  • Issue I (Whether GST Compensation Act is beyond the legislative competence of the Parliament?
    • Petitioners said
      • Through cess what is imposed is tax. (Argued because for tax what you need is legislative competence. For legislative competence look at UL)
      • For tax law there should be legislative competence.
      • Pith and substance not with the legislature.
      • No legislative competence because this tax entry is not any entry.
        • Requires a relevant tax entry
      • Residuary Power is subject to Art. 246A
        • 246A provides for GST and that GST eliminates cess.
      • Referred to various dictionary meaning and case laws to determine the meaning of cess and whether cess can be equated as tax.
        • Blacks Law Dictionary- cess is an assessment or tax.
        • Advance Law Lexicon- cess is an assessment tax levy and local tax etc.
      • Court says in various other jurisdictions such as England and Ireland, such types of taxes exist.
      • Cases referred-
        • Shinde Brothers v. Commissioner Raichur
        • India Cement Ltd v. State of TN
        • Vijaya Lakshmi Rice Mills v. CTO
      • Based on these cases, court held that definition given was that cess is another form of tax , but for certain administrative purposes.
      • Legislative Competence- HS Dhillon Test
        • When a Parliamentary law is under challenge, the only test which has to be taken into consideration is that look at state list, if SL does not have power, then no question to be asked. PL has to be declared valid.
      • Similarly, here even if specific entry is not there, residuary tax entry can cover cess.
      • Based on Entry 97, court said that the law is valid. Based on the same entry, no lack of legislative competence.
      • Two Cases (Resp relied)- When compensation act is there, which must be based on a specific entry. Both these cases, Court found that a general entry can make a general law and a tax entry can make a tax law. Basic contention- for compensation act, there should be legislative empowerment. Court said no relevance of these particular cases.
        • Hoescht Pharmaceutical Ltd v. State of Bihar
        • MPV Sundaramaniar co v. State of AP
      • 246 is there, otherwise 270, otherwise Entry 97.
      • SC Rejected the decision of the Delhi HC.
    • Issue II- Whether GST (Compensation) Act is violative of 101^st Constitutional Amendment?
      • Courts tries to make a distinction between the Bill (122^nd Bill) and the Act.
      • For the introduction of the GST, Section 18 of the Bill provided for additional tax of 1%. Additional tax was intended to provide compensation.
      • When the Bill became the Act, the additional tax was omitted. This shows that Parliament did not intend to have any additional tax or cess. Had it been implemented in the same manner, then there could have been a scope of this cess/ additional tax.
      • 246A permits tax on GST
      • Nothing in the article which prohibits cess in the future.
    • Issue III- Whether the act is a colorable legislation?
      • Resp tried to argue CL, bringing fee and cess difference into picture.
      • Court said evident difference between the two. Fee does not include cess.
      • Difference has no relevance.
      • Though additional tax was removed, when it transformed into S. 18 and 19- that provides for scope for the parliament to pass a legislation in order to compensate states for the loss of revenue.
    • Issue IV- Two taxes on same taxable event?
      • 9 of the Compensation Act provides for compensation cess whereby transactions specified under S 5 of IGST Act or S. 9 of GST Act, therein cess can be levied.
      • Court relied on two cases and held that two taxes which are distinct or different or separate are permissible. If separation, then permissible.
        • Federation of Hotel and Restaurant Association of India v. Union of India
        • Avinder Singh v. State of Punjab
          • State sales tax on liquor. Municipal tax was imposed in addition to state tax. Court held that these two taxes are for different purposes, so permissible.
        • Hence, it is permissible.
      • Issue V- Whether set off can be claimed?
        • No merit in this argument.
        • SC looked into the objective of the clean energy cess. It was introduced through S. 83, Finance Act, 2010. Energy Cess would be collected for the purpose of financing and promoting clean energy initiatives.
        • GST Compensation Cess is for States.
        • No correlation between cess. Therefore, no cess can be granted.