MARCH 09, 2020

By Dr G Gokul Kishore

GST Council is scheduled to meet this month. Reports indicate that e-invoicing may be postponed by three more months and it may be implemented from 1st July. The surge witnessed by the electronic portal/system when e-way bill was made mandatory, subsequent crash and rejig to make it robust are the lessons learnt and the government is now wiser by experience. Postponing our discussion on e-invoice, in this 76th part, we will discuss an important judgment which has significant implications.

Exemptions from tax are benefits granted by the government to achieve specific objectives. When the industrial growth and economic development in different regions of the country are not uniform and some States suffer because of their terrain or remoteness, tax exemptions seek to incentivise the industry in such areas. It is in this context that for a federal country like India, area-based tax incentives are relevant and important. When the exemption to industries in certain States/areas in respect of excise duty was granted for 10 years, new units were started to avail such benefit and to grow - both for the business as well as the State in which they are located. The fate of such excise exemption was initially uncertain when GST was about to be implemented and the GST Council decided to continue such exemption in GST regime. But such extension was restricted to the Centre's tax portion of 58% of CGST and 29% of IGST as the balance tax collections are shared with States based on the devolution formula as recommended by the Finance Commission. The decision to continue such exemption in part has been provided through budgetary support scheme by way of refund of tax paid in cash after utilising input tax credit.

The petitioner challenged such withdrawal of exemption in part and sought full relief by way of total exemption from/full reimbursement of CGST and IGST as promised in the Industrial Policy based on which excise exemption was granted. The Delhi High Court did not accept such plea on the ground that the new tax structure and merging of indirect taxes with input tax credit have resulted in a completely new tax system and the policy framed under the earlier regime was not invocable. Mere acknowledgement of difficulties faced by industry and introduction of budgetary support scheme cannot vest a right in favour of the petitioner as there was no such right in law [Hero Motocorp Ltd. v. Union of India - 2020-TIOL-530-HC-DEL-GST].

Outlining the fundamental principles of GST, the High Court said that GST was based on minimum exemptions with seamless input tax credit and Parliament was conscious of earlier incentives and, therefore, provided under Section 174(2)(c) of CGST Act (in particular, proviso thereunder) that such incentives shall not continue as privileges. It held that to achieve the objective of GST law, excise notification on area-based exemption was rescinded. The fact that the GST Council deliberated on continuation of such exemption in some manner and to the extent of GST revenues accruing to the Central exchequer, refund was granted to units having balance period of excise exemption were judicially taken note of.

In such cases, generally, doctrine of promissory estoppel is invoked and it is argued that the government is estopped from reneging on its promise to grant tax concessions based on which the other party i.e. the industry had made substantial investment in the region in which otherwise they would not have ventured considering the infrastructural bottlenecks and other issues. The jurisprudence on promissory estoppel is fairly settled now. If the law provides for something and the government does not operationalise the same by failure to issue a notification because of which industry has suffered, then it may be invocable. But if the law itself does not grant a particular thing, then it cannot be invoked. As per the High Court order, plea of promissory estoppel cannot lie against an act done as per law. Citing precedent judgment, the Court noted that the judiciary cannot direct the legislature to amend the law by using a mandamus as it would amount to violating the basic feature of separation of powers. One of the important takeaways from this judgment is that when the rescission of excise exemption notification was not challenged and when vires of Section 174(2)(c) was not assailed, promissory estoppel is not invocable.

In proceedings relating to injunction/stay, factors like prima facie case, undue hardship and balance of convenience are judicially settled as the determining factors. In writ proceedings, particularly when denial of a right is challenged, proving certain facts like existence of right under law and denial of such right on arbitrary grounds are starting points. When denial of a right under a repealed law is assailed, the basis for such denial ought to be first challenged i.e. the writ court shall be called upon to examine the validity of the provision enacted to frustrate such right. To make the judiciary intervene in such matters, prayer for a direction or mandamus may not be the remedy per se.

This judgment has been discussed for a different reason. Generally, draftsman is blamed for drafting law with lacunae and we have, in this series, pointed out several drafting issues. Sometimes, they do border on blunders causing much agony to taxpayers compelling them to knock the doors of various courts. However, the provisions relating to continuation of area-based exemptions appear to have been drafted well. Proviso to Section 174(2)(c) is unambiguous - it clearly indicates that extension of tax incentives for at least the remaining period will be expected by the industry and that the same needs to be lapsed. Excise exemption might have been rescinded based on powers under Central Excise Act but the same being consistent with the objective of GST regime and Section 174(2)(c), such action has withstood judicial scrutiny. Such judgments need to be taken note of by draftsman so that whatever be the intention, whether to grant an exemption or withdraw, the same is brought out without leaving room for divergent interpretation or grey areas thus sparing the industry from tense legal battles.

[To be continued…]

[The author is an Advocate. The views expressed are strictly personal.]

See Part 75