News Update

 
Cess and its leviability - Constitutionally valid?

SEPTEMBER 13, 2017

By K Srinivasan

INTRODUCTION of Goods and Services Tax remained a prophecy for 17 long years for India. It was definitely a phenomenal task, given the need to bring together all the States and agree on a common ground.

The only lure the Central Government had to hold out to the State Governments was the Compensation for the loss of revenue for 5 full years due to GST implementation. Even in an insurance contract, only a percentage of loss incurred is compensated so that there are no moral hazards to such a contract of fidelity.

However, the Central Government has agreed to compensate 100% of loss in revenue to State Governments, to pave way for GST implementation. The State Governments can now earn the quantum of existing tax revenues without a hitch up to June 2021.

What is the source for such a pecuniary promise by the Central Government to the State Governments? Compensation cess levied under the Compensation Cess Act. The brunt of it is designed to be borne by the consumers, each according his capacity, to pay the said tax on most of the luxury and demerit goods and services over and above the tax.

According to Article 265 of the Constitution, "No tax can be levied and collected saved by the Authority of Law". Hence even in order to introduce any additional levies, necessary constitutional provisions need to be in place.

Section 18 of the 101 st Constitutional Amendment Act, 2016 mandates the Parliament, based on GST council recommendations, to provide for compensation to the states for loss of revenue on account of GST implementation at a bench marked growth rate of 14% per annum up to 5 years.

Article 368, Part XX of the Constitution should be fulfilled for an amendment to the Constitution to take effect. It can be initiated only by the introduction of a Bill for that purpose in either House of Parliament. And such Bill shall be passed by each House with a majority of the total membership of that House and by a majority of not less than two-thirds of the members of that House present and voting. Once it is passed by each House it is to be sent to the President for his assent.

In case of certain amendments like constitutional amendments, the Bill must also be ratified by one half of the States before it is sent for President's assent. With Bill becoming an Act post both Houses of the Parliament clearing the bill and 16 State legislatures ratifying the GST Bill, 121st Constitutional Amendment Bill, 2014 was sent for President's Assent to be passed as 101 st Constitution Amendment Act, 2016 on 8th September, 2017.

In India, Parliament sovereignty is subject to the Constitution of India, which includes judicial review. A ny amendments which pertain to the federal nature of the Constitution must be ratified by a majority of state legislatures and the parliament and amendment can be given a go ahead only after it is reviewed judicially.

The structure of our constitution being so, sec 18 of the Constitution (101st Amendment) Act, 2016 uses the phrase "Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years".

The idea is that there should not be a situation given rise to wherein the Parliament would have the power to one-sidedly repeal Section 18, and thereby do away with the need to compensate the States. As a consequence, the very promise that constituted the backbone for the negotiations to secure the consent of the States to GST could be annulled.

The most celebrated case of Kesavananda Bharati Sripadagalavaru v. State of Kerala, [1973] Suppl. S.C.R. 1 states that although "law" must ordinarily include Constitutional law there is a clear demarcation between ordinary law which is made in the exercise of legislative power and Constitutional law, which is made in the exercise of constituent power.

In the context of Article 13, "law" must be taken to mean rules or regulations made in exercise of ordinary legislative power and not amendments to the Constitution made in the exercise of constituent power with the result that Article 13(2) does not affect amendments made under Article 368 .

Hence a question arises as to whether in addition to the Constitutional Amendment Act, an ordinary law in compliance with the procedure specified under Article 107, 108, 109, 111 either as a money bill or a non-money bill was required to have been passed to ratify the attempt of the Government towards collection of Cess such that it can be called constitutional on such grounds as well.

In an attempt to find a satisfactory answer to the position in Law, the following analysis is presented below.

Turning to Article 265 once again, one would find that it is only declaratory and does not by itself for that matter lay down any criteria for testing the validity of a statute when it speaks of law.

Nevertheless, it refers to a valid law. But the validity of such law needs to be undoubtedly determined with reference to the constitution.

The term cess cannot be equated to a tax, as could be seen from the suggestion of the names of the cesses such as health cess, various welfare cesses that it is allocated to a particular cause/welfare while tax seems to stand on a different footing.

The element of tax appears to be based on a principle of compulsory exaction while the concept of a fee is based on a quid pro quo and cess on a principle of purpose/ welfare.

The fact that the compensation cess does not form part of the Consolidated Fund of India and is to be kept in a separate fund created for the purpose of compensation to the states due to possible loss of revenue on account of introduction of GST goes to show that it is not a tax.

The purpose and the period of compensation is, however, already stated in the proposal made in the CAA,2016 and has the sanction.

As long as there is no outgo from the Consolidated Fund of India, I think the imposition of cess is within the powers of Government to levy for a specified purpose as it is not a tax and cannot be taken into the consolidated fund of India calling for the interplay of Articles 107 to 117 and 118 to 122 including Article 265.

We have been collecting various cesses including under direct tax regime and there was no constitutional challenge faced so far.

However, a debate is fuelled already by the Interim order dt 26/8/2017 of the Hon'ble High Court of Delhi in the case of Mohit Minerals - 2017-TIOL-06-HC-DEL-GST that there is a prima facie case made out as regards legislative competence of the Parliament to enact the Service Tax (Compensation to States) Act, 2017 on the strength of which cess is levied under the Cess Rules and Notification NO 1/2017- Compensation Cess (Rate) dated 28/6/2017 with effect from 1 st July 2017.

The point to be made here is that Section 18 of the101 ST Amendment Act contemplates upon raising revenue and grants the sanction if not vests the power to legislate such Law as a means to raise through levy of Cess the necessary compensation avowed under it.

While Sec 18 of the Taxation Laws (Amendment) Act, 2017 is one Law that seeks to abolish cess, Compensation to States Act is another Law which creates it. How is one Law superior or inferior to the other? They both are on the same footing. One extinguishes cess and the other created it and latter one prevails in their order of supersession.

One must not forget that entry 97 of Schedule VII is still in place to come to Government's rescue as it came when entry 92C was questioned about its retrospective validity. It would still appear there is no paucity of powers to levy and collect taxes by the Government subject to of course Article 265 no doubt.

Since tax is distinguishable from cess, it would still appear that the levy of Cess can be done by an enactment for which there is inherent power with the Government to legislate a Compensation Act and through issue of attendant rules to specify the rates of cess and collect the same.

The period beyond which the said cess cannot be levied is, however, clearly stated in Section18 of the 101 st Act as not beyond 5 years and, therefore, one can safely harbour a view that till such time there appears to be no Constitutional bar in levying Cess for meeting out the Compensation to the States.

(The author is Assistant Commissioner, GST, Chennai and the views expressed are strictly personal.)

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