Key Legal Issues under the GST Constitutional Amendment Act

Introduction:

The Constitution (One Hundred and First Amendment) Act, 2016 (hereinafter referred to as ‘GST Constitutional Amendment Act) is been recently passed by Parliament, ratified by majority of the States and received President’s assent on 08.09.2016. Subsequently, Central Government has notified various provisions of the GST Constitutional Amendment Act through notifications issued on 10.09.2016 and 16.09.2016. The President has constituted the GST Council with effect from 15.09.2016. The passage of the said Act is considered to be a major breakthrough in implementation of GST in India. In fact several legal issues are instigated during the phase of its enactment only. Let us now discuss some of the key legal issues that emanate from this GST Constitutional Amendment Act.  

Centre power to levy tax on inter-state sales is retained:

Section 18 of The Constitution (One Hundred and Twenty- Second Amendment) Bill, 2014 has provided for levy of additional origin based tax of one per cent on supply of goods in the course of inter-state trade or commerce for a period of two years. This clause was adopted by Lok Sabha but the same was withdrawn from the bill before being passed in Rajya Sabha due to pressures from Opposition political parties and of stake holders on the reason that its existence under GST regime will dilute the objectives of GST.

However, sub-clause (g) of Article 269(1) of the Indian Constitution remained untouched with respect to the power of the Central Government to levy and collect tax on sale or purchase of goods in the course of interstate trade or commerce. Further corresponding entry under List I of Seventh schedule i.e. entry 92A provides for levy of tax on sale or purchase of goods in the course of inter-state trade or commerce is also retained. Accordingly, Centre is empowered to levy tax on sale of goods in the course of interstate trade or commerce even under GST regime.

One of the reasons for proposing this one per cent additional tax on inter-state sale or purchase of goods is in order to protect the interests of the developed States like Maharashtra, Tamil Nadu etc which are manufacturing hubs of our Country. It is expected there will be a revenue loss for these producing States as GST being a destination based consumption tax, thereby Consuming states gets more revenue. It is expected that there may be loss of revenue in the initial years despite the fact that majority of the revenue loss is going to be mitigated because of conferring power on States to levy tax on services under the GST Regime.

Of course, Centre has assured compensation for loss of revenue only for a period of five years. What will happen if these States are not able to generate adequate revenue after the period of five years? Revenue appetite for each State would be different depending upon their social, economic and political factors.  Definitely, existence of such circumstances will persuade the States to compel Centre for generation of more revenue by increasing the tax burden on citizens. It is possible that if the amount compensation to be made by Centre to State is beyond a certain tolerance level, there may be an urge on Centre itself to look for new tax avenues for revenue. The Governments that are going to be formed in future both at Centre and States may not strictly adhere to the basic objectives of GST. In all these circumstances, there may be a chance for Centre to resort this power of levying tax on inter-state sale of goods. Thus continuation of Article 269(1)(g) may be considered as serious threat to objectives enshrined under GST viz. ‘uniformity in tax structure’ and ‘one nation-one market’.

Confusion over the subsumption of entry tax, octroi, entertainment tax and other local body taxes:

Under Article 243H and Article 243X, powers are conferred on the local government bodies to levy, collect and appropriate such taxes, duties, tolls and fees as the Legislature of the State may by law authorise them. The taxes that are presently levied by the local bodies include octroi in lieu of entry tax and entertainment taxes. List II of Seventh Schedule contains matters on which State Government is entitled to legislate. Entry 52 and Entry 62 deals with entry tax and entertainment tax respectively.

There is confusion over the subsumption of these taxes into GST as trade, tax experts, even bureaucrats are of the belief that that local bodies have power to levy these taxes that they are empowered to even under GST regime. Even in the First Discussion Paper that was released by Empowered Committee of State Finance Ministers, it was mentioned that entertainment tax and entry tax except those levied by local bodies are subsumed under GST. The said entries pre and post GST Constitutional Amendment Act are reproduced hereunder

State Government derives power to tax under Constitution of India. It can delegate the said authority to tax to local bodies by law in terms of Article 243H and Article 243X. Thus a local body derives the power of taxation upon express law made by State Legislature in this regard. With the omission of entry 52 under List II, States are barred from levying entry tax. Thus States cannot delegate the power of levying entry tax which they are not going to have under GST regime. In view of this, in the humble opinion of paper writer, entry tax/octroi cannot be levied by States as well as local bodies under the GST regime.

Coming to entertainment tax, unlike the case of entry tax, entry 62 is not omitted. Instead, it is amended to retain the power to State to legislate on taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or District Council. Thus this confers power on States to authorise local bodies to levy entertainment/amusement tax even under GST regime also.

Row over the Constitutional Validity on levy of Excise after giving effect to the GST Constitutional Amendment Act:

The Central Government vide Notification on 16.09.2016, has notified various sections of the GST Constitutional Amendment Act including Section 2 which provides for insertion of Article 246A and Section 17 which amends various entries in List I and List II of Seventh Schedule to the Constitution. Article 246A provides for concurrent jurisdiction to Centre and State for levy of goods and services tax on supply of goods and services. Section 17 amends various entries in List I and List II. These include amendments to entry 84 to restrict the power to levy excise duty only on manufacture of petroleum and tobacco products. In fact, there was no hurry for Central Government to notify these sections. These could have been notified at any time before the appointed date for rollout of GST. This has persuaded the social media to spread the propaganda that with effect from 16.09.2016, excise duty levy would be unconstitutional. To everyone’s surprise, some of the media houses went on to say that assesses can claim refund of the excise duty paid by them on or after 16.09.2016.

Section 19 of GST Constitutional Amendment Act has provided for transitional provisions which is reproduced as under—

“Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier”

On perusal of this section, it seems that the language used in this transitional provision is confusing. On one hand it talks about any provision of any law relating to tax on goods or services as in force in any state. The phrase ‘taxes in force in any state’ need not be restricted to those taxes levied State and it can include even the taxes levied by Centre also that are in force on assesses located in that State. On the other hand, it says that such provisions shall remain in force until amended or repealed by a competent Legislature or any other competent authority or until the expiry of one year. Because of the use of the phrase ‘until amended or repealed by competent Legislature or any other competent authority’, media houses and some tax experts have taken a stand that the transitional provisions under this Section 19 is only applicable for State tax laws but not of Centre’s. Hence there is confusion over the validity of excise duty presently being levied by Centre.

In humble opinion of the paper writer, the transitional provisions do not expressly say that they are only applicable for the taxes levied by State. The language used in Section 19 is that it is applicable to all laws relating to tax on goods or services that are in force in any State. Thus Section 19 covers taxes levied by Centre also. To add further, GST Constitutional Amendment Act is dealing with subject relating to taxing of goods or services by both Centre and State. The transitional provisions are equally applicable to the taxation laws of both Centre and States especially in the absence clear expression provision that they are applicable only for taxation laws of States.

Coming to the language ‘until amended or repealed by competent Legislature or any other competent authority or until the expiry of one year’, it also possible for Centre to take shelter under the phrase ‘any other competent authority’ includes Parliament with respect to taxation laws of Centre. Further, it is also possible to interpret that with respect to taxation laws of Centre, they remain in force for a maximum period of one year from the date of commencement of GST Constitutional Amendment Act unless the Centre enacts appropriate GST legislation exercising their power under Article 246A.

Even otherwise, in case the transitional provisions under Section 19 are interpreted by Courts in such a way that they are applicable only to taxation laws of States, Centre has recourse under Section 20 which says that in case any difficulty in giving effect to the provisions of the GST Amendment Act including any difficulty in transition, President is given power to modify or adapt the provisions of Constitution by issuing an order at any time before the expiry of three years from the date of such assent. In worst possible scenario, Centre has the option to put rest to this row by way of President’s order suitably amending the provisions of Constitution to validate excise duty levy for the interim period before the roll out of GST.

Definition of ‘Goods’ under Model GST is not incongruence with its definition under Constitution:

The definition of Goods under Constitution is provided under Article 366(12). Accordingly, it provides that ‘goods’ includes all materials, commodities, and articles. As laid down by Supreme Court in the case of Tata Consultancy Services vs. State of AP 2002(178)ELT22(SC), goods includes intangible property also when the said intangible property is capable of abstraction, consumption and use and can be transferred, transmitted, delivered, stored, possessed etc.

Thus, as per the Indian Constitution, goods include intangible property also. This position remains unchanged even after the rollout of GST. Further, with respect to taxes, that are going to be prevailing even under GST regime, the position remains unchanged. Say designs, drawings are covered under chapter 4911 and Information Technology Software covered under chapter 8523 of First Schedule to Customs Tariff Act, 1985. These intangibles when imported in the form of media would be treated as import of goods for the purpose of levy of customs duty.

Under the Model GST Law, it is envisaged in terms of definitions of ‘goods’, ‘services’  as per section 2(48) and section 2(49) respectively and meaning and scope of ‘Supply’ as defined under Section  3 read with Schedule II, that all intangibles are considered as services for the purpose levy of GST.  Thus the definition of ‘goods’ and ‘services’ as provided under Model GST law is incongruous with the definition of ‘goods’ as provided under Indian Constitution. This may likely to pose legal challenges as to Constitutional vires of the GST legislations on intangibles.

On the other hand, one can easily understand the intention behind treating intangibles as services for the purpose of levy under GST. This is all to put an end to the humungous litigation that is presently taking place under VAT and Service Tax Laws as to whether a particular transaction involving intangibles is to be treated as sale of goods or provision of services. It seems that the drafting committees of Model GST Law are of the view that under GST, a supply transaction needs to be taxed treating them either as goods or services. In fact it is not so.

The GST Constitutional Amendment Act has inserted a definition for ‘Goods and Services Tax’ by way of sub-clause (12A) of Article 366. Accordingly, it means any tax on supply of goods, or services or both except taxes on supply of the alcoholic liquor for human consumption. Thus GST is a tax which will be levied on a transaction involving either supply of goods alone or supply of services alone or on a composite supply involving supply of both goods and services as part of same transaction.

Under GST regime, Centre and States exercise concurrent jurisdiction thereby both the authorities levy tax on transaction involving supply of goods or services or both. Therefore, in the humble opinion of the paper writer, there is no need under Model GST law to prescribe that intangibles are deemed to be services. Instead, the law can prescribe that all transactions involving supply of intangibles (whether as goods or services) would be subject to a single rate of tax. This practice will avoid the need to ascertain whether a particular supply of intangible is supply of goods or services or to deem all supplies of intangible as services. It also avoids unnecessary litigation on Constitutional vires of deeming all intangibles as services under GST legislation.

Conclusion:

In view of the above discussion, it is more likely that GST Constitutional Amendment Act is going to pose several Constitutional challenges before Courts. GST is supposed to be the biggest tax reform since Independent India. It is supposed unify the indirect tax structure of the Nation besides simplification of tax laws. Thus it is going to play a pivotal role in the growth of our economy in the coming years. With dual structure, Centre and States are required to work in harmony for successful implementation and administration of GST. Any rift between them on legal or revenue front is likely to cripple this major tax reform. In this backdrop, it is very important that Centre should be proactive in identifying potential Constitutional and other legal issues and address them correctly to ensure successful implementation of GST in India.