SEPTEMBER 26, 2016

By P R Chandrasekharan, Former Member (Technical), CESTAT, Mumbai

SINCE the issue of notification No. S.O.2986(E) dated 16th September, 2016, appointing the said date as the date on which the provisions of the Constitution (One hundred and First Amendment) Act, 2016 comes into force, there has been a lot of speculation in the social media about the vires of central excise levy on manufactured goods (other than certain specified petroleum products and tobacco products). While one view is that since entry 84 of List I of the 7th Schedule to the Constitution stands amended restricting the levy to specified petroleum and tobacco products, there cannot be any central excise levy on other manufactured goods specified in the Schedule to the Central Excise Tariff Act, 1985. This would also impinge on the levy of additional duty of customs (popularly called countervailing duty) on such imported goods. The contrary view is that since residual entry 97 of said list I empowers the Union Government to legislate on matters not enumerated in List II (State list) and List III (Concurrent list), the vires of the central excise levy under the Central Excise Act, 1944 is beyond any legal challenge. The latter appears to be the view taken by the Revenue Department. Most probably this view of the Government might be upheld by the Courts in case of any legal challenge as the hon'ble Apex Court, in a number of cases pertaining to the vires of service tax levy, has upheld such a view.

2. Be that as it may, that is not the issue for consideration in this article.Did the Government, while moving the Constitution Amendment Bill apprise the Parliament about the real implication of the legal provisions contained in the said bill? It appears more than one view is possible on the above proposition due to the bad drafting of the legal provisions.

2.1 The statement of objects and reasons of the Constitution Amendment Bill, 2014, so far as it relates to the present discussion reads as follows:-

"The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax.

2. The proposed Bill, which seeks further to amend the Constitution, inter alia, provides for-

(a) subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services;

(b) subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services;

(c) dispensing with the concept of 'declared goods of special importance' under the Constitution;

(d) levy of Integrated Goods and Services Tax on inter-State transactions of goods and services;

………………………………………………………………………………………."

2.2 Report of the Select Committee of the Rajya Sabha on the said Constitution Amendment Bill presented on 22 nd July, 2015, observes that –

"1.3 By bringing this bill into effect, the Govt. of India intends to usher in fundamental systemic reforms in the indirect taxes dispensation currently being implemented in the country by integrating and harmonizing the tax structure across the country in the form of Goods and Services Tax (GST). The proposed amendments would subsume a number of indirect taxes presently being levied by Central and State Governments into GST thereby doing away the cascading of taxes and providing a common national market for Goods and Services. The aim to bring about these amendments in the Constitution is to confer simultaneous power on Parliament and State legislatures to make laws for levying GST simultaneously on every transaction of supply and Goods and Services."

2.3 It is worth noting here that the power to levy GST by the Centre and the States has been provided by not making specific entries in the Union and State List of the 7th Schedule but by inserting a separate article in the Constitution, namely, 246A which reads as follows:-

"246A. (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. ……"

3. A combined reading of the Statement of objects and reasons, the report of the Rajya Sabha Select Committee and the amendments made to the Constitution, clearly and unequivocally lead to the conclusion that the objective of the entire exercise is to bring about a uniform and concurrent levy of GST by both the Centre and the States by subsuming the various indirect taxes specified therein. What do we understand by "subsuming"? The ordinary dictionary meaning of the word 'subsume' is "to include or place within something larger or more comprehensive;   encompass as a subordinate or component element". It would, therefore, imply that the power to levy GST would subsume the power to levy various indirect taxes such as central excise, service tax, value added tax and so on. In other words, there will not be any other provision in the Constitution to impose the 'subsumed levies' separately.

3.1 Does the constitutional amendment made sub-serve this objective? While the States would lose their powers to levy sales/value added tax and other taxes subsumed in GST within one year from the date of the notification of the provisions of the Constitution (Amendment) Act, 2016, that is, by 15th September, 2017, has the Centre given up its powers to levy union excise duty on manufactured goods (other than those specified in the amended entry 84 of the Union List) even after introduction of GST? The answer is a clear and loud "NO" as entry 97 of the Union List still gives power to the Centre to levy any tax other those enumerated in the State and Concurrent Lists. We should remember that the amendments to the Constitution have been made to acquire enabling powers to enact the law in respect of GST and not to impose the GST per se. The legal implication is that the power of the Centre to re-impose the subsumed indirect taxes continue undiminished and unrestricted (even after introduction of the GST), thanks to the residual entry, while the States lose their powers in the absence of a residual entry in the State List after the one year period gets over. Ideally entry 97of List I should have been suitably amended to take out of its purview the power to levy central excise duty on manufactured goods.

3.2 Is this co-operative federalism, when the States' power to tax gets restricted while that of the Centre continues unrestricted and unabated? In my view, it is not. India is a Union of States and the States are not mere appendages of the Centre. Therefore, while drafting constitutional provisions, there should not be the slightest hint or suggestion that the States' powers are watered down while that of the Centre gets strengthened. When the links of a chain get weakened, the chain itself becomes weak. I am not for a moment suggesting that the action is intentional or deliberate; but the extremely poor and incompetent drafting of the legal provisions has resulted in such a situation. If this is the care and caution that is exercised while amending the Constitution, one can well imagine the quality of the GST legislation that would unfold in the near future. The unholy haste in pushing the various legislations relating to GST also puts undue pressure on the draftsmen. Intelligent readers can draw their own conclusions.

4. It is imperative that while undertaking such onerous task such as amending the Constitution, extreme caution and care should have been taken to ensure that both the letter and spirit of the tax policy is clearly and unambiguously reflected in the wordings of the legal provisions. Whomsoever has drafted the provisions of the Constitution Amendment Bill (now Act) relating to GST, has either completely failed to understand and imbibe the spirit of GST or it reflects utter in competency in legislative drafting. In all fairness, while acquiring the powers to levy GST, the Centre should have given up its power to levy central excise duty on manufactured goods which it has not done. It could, therefore, be legitimately alleged that the Parliament and the nation have been misled on this score.