DECEMBER 14, 2015

By Shailesh P Sheth, Advocate

C. GST Bill - A Selective Clause-wise analysis:

1. Clause 2 - Insertion of Article 246A- Grant of concurrent legislative powers to Centre and State to levy GST:

Needless to say, one of the primary purposes of the GST Bill is to grant legislative powers to the Centre to levy tax on 'value addition' at the distribution stage below the stage of production and to the States to levy tax on services. This purpose is sought to be achieved by insertion of Article 246A vide clause 2 of the Bill.

Various aspects emerging from a careful reading of Article 246A are briefly discussed below:

I. 'Non-obstante Clause':

Article 246A starts with 'Non-obstante clause' and is overriding Articles 246 and 254 of the Constitution, in so far as the proposed powers of the Parliament and the State Legislatures to make laws with respect to goods and services tax are concerned.

(i) The present Constitutional Scheme of Article 246 and Article 254:

Both, Article 246 and Article 254 play a discreet but extremely crucial role in the Indian Constitutional Scheme.

(a) Article 246 - Concept of Competence:

'Concept of Competence' as enshrined in Article 246 refers to the powers of Parliament and the State Legislature to pass laws with respect to certain matters.

Article 246 serves two functions; first, it grants the Centre and the States competence to legislate with respect to the matters enumerated in the Lists in Schedule VII of the Constitution. It is a settled law that the entries in the Legislative Lists are merely fields of legislation and that, the competence of the Centre and the States to pass laws in those fields emanates from Article 246.

See, 1. Hoechst Pharmaceuticals Ltd vs. State of Bihar - AIR 1983 SC 1019;

2. UOI vs. Harbhajan Singh Dhillon -(1971) 25 SCC 779.

Secondly, Article 246 lays down the hierarchy between laws passed by the Centre and the State relating to the areas of their respective competence. It hardly needs to be emphasized that entries in the Legislative Lists are to be construed according to 'Pith and Substance' . In no field of Constitutional Law is the comparative approach more useful than in regard to the doctrine of pith and substance. Briefly stated, what the doctrine means is that where the question arises of determining whether a particular law relates to a particular subject mentioned in one list or another, the court looks to the substance of the matter. Thus, if the substance falls within Union List, then the incidental encroachment by the law on the State List does not make it invalid. The doctrine came to be established in the pre-independence period under the Government of India Act, 1935 [See, Prafulla vs. Bank of Commerce - AIR 1047 PC 60]. The doctrine is sometimes expressed in terms of ascertaining the true character of legislation and it is also emphasized that the name given by the Legislature to the legislation in the short title is immaterial. Again, for applying the doctrine of pith and substance, regard is to be had (i) to the enactment as a whole (ii) to its main objects, and (iii) to the scope and effect of the provisions.

At the same time, it should be remembered that Pith and Substance is a concept employed to determine the competence of a legislature to pass a law, not to resolve a conflict between two laws which both legislatures had the competence to enact.

Article 246 deals only with the scope of the power of the Centre and the State to legislate with respect to the matters in the Legislative Lists. If these powers conflict, then they will be ordered and reconciled in accordance with the hierarchy laid down therein.

(b) Article 254 - Concept of Repugnance:

The principle of harmonious construction of the Legislative Lists is one of the cardinal principles of Indian Constitutional Interpretation, most succinctly laid down in the decision of the Supreme Court in Tika Ramji vs. State of UP - AIR 1956 SC 676.

The three tests of repugnance were laid down by the Supreme Court in Tika Ramji's case (supra) and affirmed in Deep Chand vs. State of UP - AIR 1959 SC 648. They are:

- Whether there is a direct conflict between the two provisions;

- Whether Parliament intended to lay down an exhaustive code in respect of subject matter replacing the Act of the State Legislature; and

- Whether the law made by Parliament and the law made by the State Legislature occupy the same field.

It is the first of these three tests which is the most relevant in the context of Clause 2 of the GST Bill inserting Article 246A in the Constitution.

In the case of Vijay Kumar Sharma vs. State of Karnataka - (1990) 2 SCC 562, a locus classicus on the issue, the Supreme Court held:

"…whenever repugnancy between the State and Central Legislation is alleged, what has to be first examined is whether the two legislations cover or relate to the same subject matter. The test for determining the same is the usual one, namely, to find out the dominant intention of the two legislations. If the dominant intention, i.e. the pith and substance of the legislations is different, they cover different subject matters, If the subject matters covered by the legislations are thus different, then merely because the two legislations refer to some allied or cognate subjects they do not cover the same field. The legislation, to be on the same subject matter must further cover the entire field covered by the other. A pro vision in one legislation to give effect to its dominant purpose may incidentally be on the same subject as covered by the provision of the other legislation. But such partial coverage of the same area in a different context and to achieve a different purpose does not bring about the repugnancy which is intended to be covered by Article 254 (2). Both the legislations must be substantially on the same subject to attract the Article."

Three aspects emerge from the Supreme Court's judgment in this case. First, the Court unequivocally adopts the view that laws which relate to entries in different legislative lists or even to different matters in the Concurrent List cannot conflict. Secondly, only conflicts relating to the same matter in the Concurrent List are to be resolved by the scheme in Article 254. Finally, other conflicts, if any, can be resolved by the application of the doctrine of pith and substance.

This interpretation of Article 254(1) has been affirmed by the Supreme Court in State of Maharashtra vs. Bharat Shantilal Shah - 2008 (12) SCALE 167 where it observed:

"Article 254 of the Constitution succinctly deals with the law relating to inconsistency between the laws made by the Parliament and the State Legislature. The question of repugnancy under Article 254 will arise when a law made by Parliament and a law made by State Legislature occupies the same field with respect to one of the matters enumerated in Concurrent List and there is a direct conflict in two laws. In other words, the question of repugnancy arises only in connection with subjects enumerated in Concurrent List."

Whereas it is difficult to take issue with this interpretation of the scope of Article 254(1), what it does is to apparently narrow the scope of the concept of repugnance such that no mechanism is available for conflicts between provisions of laws which need resolution have no mechanism to look to. The Court suggests that the doctrine of pith and substance may be used. This is a line adopted even very recently by the Court in Girnar Traders vs. State of Maharashtra - (2011) 3 SCC 1, where it observed:

"The schemes of MRTP Act and the Land Acquisition Act do not admit any conflict or repugnancy in their implementation. The slight overlapping would not take the colour of repugnancy. In such cases, the doctrine of pith and substance would squarely be applicable and rigours of Article 254(1) would not be attracted."

But, if read literally, the above observations blur the concepts of competence and repugnance. As discussed above, doctrine of 'pith and substance' is employed to determine the competence of legislature to pass a law, not to resolve a conflict between two laws which both legislatures had the competence to enact. The case of repugnance often deals with the factual conflicts between laws. Hence, the Court in Vijay Kumar Sharma, like the Court in Girnar Traders, should be understood as saying only that when there are factual conflicts, the first step is to ask whether either of the two legislative bodies was incompetent to pass the law in question. However, if after applying the doctrine of pith and substance, one concludes that both bodies were competent, there needs to be some other mechanism for resolving the conflict. Asking the Court to again look at pith and substance does not solve the problem.

The solution to this conundrum flows from the opening words of clauses (1)-(3) of the Article 246. Using the hierarchy provided there, factual repugnance between Central and State laws could be resolved. This was the position adopted by the Supreme Court in Andhra Pradesh v. J. B. Educational Society (2005) 3 SCC 212, where the Court observed that conflicts between Central laws and State laws are possible in two contexts:

"First, where the legislations, though enacted with respect to matters in their allotted sphere, overlap and conflict. Second, where the two legislations are with respect to matters in the Concurrent List and there is a conflict. In both the situations, parliamentary legislation will predominate, in the first, by virtue of the non obstante clause in Article 246 (1), in the second, by reason of Article 254(1).Clause (2) of Article 254 deals with a situation where the State Legislation having been reserved and having obtained President's assent, prevails in that State; this again is subject to the proviso that Parliament can again bring a legislation to override even such State legislation."

The same approach was adopted earlier by the Court in State of West Bengal v. Kesoram Industries Ltd., MANU/SC/0038/2004.

However, the solution, though handy, is far from satisfactory. The result of relying on Article 246 to resolve factual repugnance would ideally be that the State does not have the power to pass the law, in which case it will have to held void in entirety. This is different from the consequences of repugnance under Article 254 which merely renders the law void only to the extent of the repugnancy. Matters can be improved by reading in 'to the extent of repugnancy' into Article 246. However, that still does not solve the conceptual inelegance of shuttling from competence (Article 246) to repugnance (Article 254) and back to competence (Article 246), which would be necessary in every case where there is a factual repugnance between laws which do not deal with the same matter in the Concurrent List.

Inelegant though that may be, it is the position of law settled in India today, and has been affirmed repeatedly by the Supreme Court, with all its decisions expressly or impliedly accepting this reading of Article 254.

In sum, the current scheme relating to conflicts between Central and State laws is as follows:

- The Court must first look to determine whether both the Centre and the State had the competence to pass the respective laws. This inquiry is to be carried out using Article 246 read with the legislative lists, which are to be read harmoniously, and by using the doctrine of pith and substance.

- If there is a factual conflict between the two laws, the Court must assess whether the laws deal with the same matter in the Concurrent List. If they do, then the Court must resolve the repugnance in accordance with Article 254.

If the laws do not deal with the same matter in the Concurrent List, then the Court cannot use Article 254. The reliance must be placed on Article 246, and the hierarchy provided therein must be used to either reconcile the conflict, or give priority to the Central Law over the State Law.

It is against this backdrop that clause 2 of the Amendment Bill needs to be examined.

(ii) The proposed scheme under Clause 2 - Article 246A:

Under the proposed Clause 2 of the GST Bill, the applicability of Article 246 and 254 has been done away with and the Centre and the State have been empowered to make laws with respect to Goods and Services Tax. However, in their place, no alternative mechanism has been introduced. Given the scheme proposed in the First Discussion Paper of the Empowered Committee and as articulated in the GST Bill, it appears that an irreconcilable conflict between Centre and State laws is unlikely. However, the hypothetical possibility of such a conflict cannot be ruled out and needs to be provided for. While the Charging provisions themselves may not conflict with one another, there is a very real possibility of the machinery provisions conflicting, for which there needs to be a mechanism in place. Further, sub-clause (2) of Article 246A does not address this issue either, since it only means that State Legislature does not have the powers to pass laws with respect to Inter-state trade and commerce. It does not, however provide, a mechanism for a State law that incidentally but irreconcilably encroaches on that field.

There are potentially three ways in which this anomaly can be addressed:

- Make the proposed Article 246A subject to both Articles 246 and 254;

- Introduce a mechanism for resolving conflicts within Article 246A; and

- Make the proposed Article 246A subject only to Article 254, suitably amended.

On a deeper reflection, it would appear that most advisable alternative is to amend Article 254, if required, by insertion of an explanatory phrase therein, so as to increase its scope beyond that identified by Vijay Kumar Sharma's case (supra). The amendment shall be such so as to expand the scope of Article 254(1) to cases of irreconcilable conflict outside of the concurrent list and to ensure a seamless integration of the GST into the current Constitutional Scheme. Even from the point of view of federal scheme, far from diluting the legislative powers of the State, it would have the effect of enhancing it.

But, as said earlier, an irreconcilable conflict between Centre and State GST laws is presumed to be unlikely. Since 'uniformity' and 'unanimity' are the major driving forces of GST legislations, it has been justifiably presumed that no such conflict would arise between the Central and the State laws governing the GST regime in the country. The need for providing any 'dispute resolution mechanism' in such circumstances has not been felt at this stage apparently because Article 246A only empowers the Parliament and the State Legislatures to make laws with respect to GST. It is only when the respective legislations are in place and operative that the possibility of any conflict between the Centre and the State Legislations can be looked into, whereupon the constitutional dispute resolution mechanism may be provided.

II. Clause 2 - 'Imposed by':

Apart from the problems with the non-obstante clause as discussed above, there is yet another anomaly in Article 246A as is presently drafted. It is the use of the words 'imposed by' . The purpose of this phrase is not clear and it is susceptible to patently wrong interpretation that the power extends only to such GST laws which the Union and the States are imposing as on the date of the Constitutional amendment.

The use of the words 'imposed by' is inelegant, superfluous and confusing. These words, if at all to be retained, ought to be preceded by the words 'to be' so as to make the provision meaningful. The prospective nature of the words "to be" will not affect the GST laws already in force which are saved by clause 18 of the GST Bill.

2. Clause 3 - Relationship of Article 248 with Article 246A:

Article 248 deals with the residual power of Parliament to make laws with respect to any matter not enumerated in the State List or the Concurrent List. Since the power to impose 'Goods and Services Tax' is not being introduced in the Legislative Lists, subjecting Article 248 to Article 246A is essential. This is taken care of by the insertion of the words 'subject to' in Clause (1) of Article 248 vide Clause 3 of the GST Bill. However, the power to impose taxes which are not enumerated in the State List or the Concurrent List is dealt with separately by Article 248(2). Admittedly, the use of the words 'such power shall include' in Article 248(2) suggests that any limitation on the power granted in Article 248(1) will also narrow the scope of the power in Article 248(2).

Therefore, by way of abundant caution, it may be advisable to introduce the words 'other than goods and services tax' after the words 'imposing a tax' in Article 248(2). This would have the benefit of removing any confusion over the relationship between Article 248 and Article 246A.

(The author isSr. Advisor - Indirect Tax, BDO India LLP.)

Also See: Some food for thought on a half-cooked GST Bill - Part I

…to be continued