Retrospective denial of Credit of Cesses, whether constitutionally valid?
OCTOBER 06, 2018
By Somesh Jain
SECTION 140 of the CGST Act has been amended retrospectively by the Central Goods and Services Tax (Amendment) Act, 2018, with effect from 1st July 2017 to restrict the carry forward of credit of cesses such as Education Cess, Secondary Higher Education Cess, Krishi Kalyan Cess, etc.
This article focuses on the question as to whether the constitutional validity of such provision can be challenged in a court of law.
Power to make laws having retrospective operation
The power of Parliament to make laws is conferred by Article 245 of the Constitution of India, which states that the Parliament may make laws for the whole or any part of the territory of India. Thus, the Parliament has plenary power to make laws. The power to make laws includes the power to give it retrospective effect.
There is nothing in the Article which states that the Parliament does not possess the power to make retrospective laws. The only express limitation imposed upon the power of retrospective legislation is under Article 20(1), i.e., in respect of penal laws. Any other law may therefore be made retrospective, including taxing laws. Thus, mere retrospective operation will not make a law unconstitutional, State of Tamil Nadu v. Arooran Sugars Ltd. - AIR 1997 SC 1815.
However, laws can be challenged as unconstitutional, irrespective of whether they have retrospective or prospective operation, on the following grounds,:
- If the legislature enacting a law does not have competence to enact the law, for instance, Parliament enacting a law on subject matter mentioned in List II of Seventh Schedule, or
- If the law violates any provision of the constitution including Part III, i.e., Fundamental Rights, State of Andhra Pradesh v. Mcdowell & Co. - 1996 AIR 1627.
Vested Rights can be taken away retrospectively
In Eicher Motors case, Eicher Motors Ltd. V. Union of India - 2002-TIOL-149-SC-CX-LB the credit lying in the Cenvat balance was sought to be lapsed by an amendment in the rules. After analysing the MODVAT scheme, the Supreme Court, held that the right to the credit becomes absolute when the input is used in the manufacture of final product, and when such credit is sought to be lapsed, it necessarily affects a right which has accrued to the assessee under the scheme. The Court held that section 37 of the Central Excise Act, 1944 which confers power to make rules, does not provide such a power to take away such a vested right.
Thus, it is generally contended that credit once validly availed becomes a vested right and cannot be taken away, specifically by retrospective amendment. However, this proposition is not as wide and all encompassing.
The issue has been dealt in several decisions of the Supreme Court and is no longer res integra. Of various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is not presumed to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. The rule applies with more conviction in case of tax laws, as tax laws are clearly in derogation of personal rights and property rights, and, therefore, subject to strict construction, Commissioner of Income Tax v. Vatika Township - 2014-TIOL-78-SC-IT-CB.
Nevertheless, a vested right can be taken away retrospectively by a law made by the Parliament under its plenary power of legislation, by an express provision or by necessary implication, Govinddas v. Income Tax Officer - 2002-TIOL-1587-SC-IT-LB. However, a delegated legislation, such as rules, cannot have retrospective operation unless the power has been conferred by the legislature on the authority making delegated legislation, Hukumchand v. Union of India - AIR 1972 SC 2427. The issue in the Eicher Motors case was regarding the delegated legislation taking away vested right retrospectively, without being conferred the power to do so.
Thus, as regards an Act of Parliament, the question is more of an interpretation than of competence, subject only to constitutional limitations.
Violation of Article 14 of the Constitution
Article 246A of the Constitution confers power on the Parliament to make law with respect to goods and services tax. Thus, the competence of Parliament to make law relating to carry forward of credit of erstwhile taxes to the GST regime, even retrospectively, cannot be questioned.
Thus, the Central Goods and Services Tax (Amendment) Act, 2018, by an express provision, restricts the carry forward of cesses. Thus, there is also no doubt as to the intention of Parliament to deny carry forward of credit of cesses. Hence, the Act can be challenged only if it violates the provisions of the Constitution.
Article 14 of the Constitution provides for equality before the law and equal protection of law. Thus, a statute discriminating between two persons or things will be upheld only if the classification is founded on an intelligible differentia which distinguishes persons or things that are grouped together from the other left out of the group, and that differentia must have a rational relation to the object sought to be achieved by the statute, Budhan Chaudhry v. State of Bihar - AIR 1955 SC 191.
Taxation laws are no exception to the doctrine of equal protection, Kunnathat Thathunni Moopil Nair v. State of Kerela - AIR 1961 SC 552. However, in the matter of taxation laws, the court permits greater latitude to the discretion of the legislature in the matter of classification, Ashirwad Films v. Union of India - (2007) 6 SCC 624.
It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints because it has to deal with complex problems which do not admit solutions through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of problems required to be dealt with, greater play in the joints has to be allowed to the legislature.
However, if the classification is clearly unreasonable and manifestly arbitrary, the courts will not hesitate in declaring the law as unconstitutional, Ayurved Pharmacy v. State of Tamil Nadu - 1989 AIR 1230.
Central Goods and Services Tax (Amendment) Act, 2018
In the present case, the Central Goods and Services Tax (Amendment) Act, 2018, restricts the carry forward of the credit of cess; whereas, credit of Excise Duty is allowed to be carried forward. Thus, the legislature has made a distinction between Excise Duty and Cesses. Such distinction made can be sustained only if such classification is founded on an intelligible differentia which has a rational relation to the object sought to be achieved by the statute.
Intelligible Differentia
The power to impose taxes as well as cess emanates from Article 245 of the Constitution. The Excise Duty and the cesses levied on manufacture of goods were both referable to Entry 84 of Seventh Schedule. However, Excise Duty and cesses can be differentiatedon the basis that the amount collected as Excise Duty goes to the Consolidated Fund of India and a percentage of such amount is also shared with the States on the recommendation of Finance Commission; however, the amount collected as cess does not form part of the Consolidated Fund of India and is not shared with the States.
Object sought to be achieved
For determining the purpose and object of the legislation, it is permissible to look into the circumstances which prevailed at the time when the law was passed and which necessitated the passing of the law. Further, it is also permissible to look at the title of the Act, preamble and the Statements of Objects and Reasons of the bill for the purpose of discerning the object of the legislation, Shashikant Lakshman Kale v. Union of India - 2002-TIOL-2506-SC-IT-LB, however little their persuasive value may be as an aid of interpretation.
The object of the tax laws, in general, is to generate revenue for the government to meet the developmental needs of the society.
The object of the introduction of GST law was to eliminate multiplicity of taxes levied on supply of goods and services, at state level and national level, which was leading to cascading of taxes. Thus, by introduction of GST, it was sought to reduce the cost of production and inflation in the economy, thereby making Indian trade and industry more competitive, domestically as well as internationally. Statement of Objects and Reasons of the CGST Bill, 2017.
Conclusion
The competence of Parliament to enact retrospective laws cannot be questioned. Further, it is perfectly valid for an Act of Parliament to take away vested rights, if such actions are not arbitrary or unreasonable.
However, the Amendment Act can still be challenged on the limited ground that restricting the credit of cesses to be carried forward does not have a rational relation with the object of GST law and which is to reduce cascading of taxes and inflation in the economy, apart from generating revenue for the government.
(The author is Associate, Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal.)
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