DECEMBER 27, 2023

By Vijay Kumar

PARLIAMENT of India recently passed the Provisional Collection of Taxes Act, 2023. What is Provisional Collection of Taxes? In simple terms, it means that any increase or imposition of excise and customs duties proposed in the Finance Bill will have immediate effect. Immediate effect means from the next day.

Why this Provisional Collection of Taxes Act, 2023 now?

Doesn't the Provisional Collection of Taxes Act, 1931 provide for exactly this? Why this new Act now? The Finance Minister, Ms. Nirmala Sitharaman explained in Parliament:

The Provisional Collection of Taxes Bill, 2023 which is before us proposes to replace the erstwhile Provisional Collection of Taxes Act, 1931 with just minor changes which are technical in nature. This law is in existence from 1931. We have just made minor changes and we are here, therefore, not with a new law but with a mildly amended existing law.

As it existed since 1931, we carry it forward. But then, why are we bringing it here? It is a part of the larger relook at all the Bills and if any colonial past residues are there in the Acts, we want to remove them and make them reflective of the modern India, the new India that we are trying to build.

Not required for GST

In the case of GST, all the rate changes are first of all carried out only based on recommendations of the GST Council. So, it gets decided in the Council, and then it comes here for the Central Government to pass it as a part of either Finance Bill or otherwise. On the recommendations of the GST Council the effective date of change of rate is also decided, and then it is synchronized between the Centre and the States. That is the case for the GST. Hence, the power to collect tax provisionally is not required for the GST. It is only, therefore, for the Customs and Excise Duties that we need it.

There is hardly any excise duty now and if the government wants to increase any duty of customs with immediate effect, they can do it by notification and they need not wait for the Budget.

It is well known that as per the provisions of the Provisional Collection of Taxes Act, 1931, certain Customs and Central Excise Duties have immediate effect after presentation of the Bill to Parliament. That is increase in Customs and Excise duties are effective from the midnight of the presentation of the Union Budget unlike other taxes like Income tax.

It should be noted that not all proposals in the Finance Bill relating to Customs and Excise duties have immediate effect. The general understanding is that a Finance Bill comes into force only from the date of enactment or a date to be determined by the Government after enactment if there is such a provision in a particular clause of the Finance Bill. But Provisional Collection of Taxes Act, 1931, gives the power to Government to make certain Customs and Excise Duties immediately effective.

Section 3 of the Provisional Collection of Taxes Act, 1931 gives the power to the Government to make a declaration in the Finance Bill that any provision of the Bill relating to imposition or increase of Customs or Excise Duties shall have immediate effect. It is interesting to note that first of all there has to be a declaration in the Finance Bill that certain provisions will have immediate effect. It is in compliance with this provision that we find a declaration under the Provisional Collection of Taxes Act, 1931 in the Finance Bill that certain clauses of the Finance Bill have immediate effect. It is also of interest that this immediate effect is only in relation to imposition or increase in Customs and Excise duties. Merely because a particular clause is declared to have immediate effect under the Provisional Collection of Taxes Act, 1931, it will not have immediate effect unless it relates to an imposition or increase in Customs and Excise Duties. So the natural corollary is that a decrease in Customs and Excise Duties will not have immediate effect. To give effect to such decrease immediately, exemption notifications are given.

What is Immediate Effect?

Section 4(1) of the Provisional Collection Taxes Act, 1931, states that a declared provision shall have effect immediately on the expiry of the day on which the bill is introduced in Parliament, that is, when the budget is presented on the 1st February, the provisions are effective from 0000 hours of the second day of February.

The declared provision under the Provisional Collection Taxes Act, 1931, ceases to have effect under the following conditions:

1. When it becomes an Act with or without amendments.

2. When Government by notification directs that it ceases to have effect in pursuance of a motion passed by Parliament.

3. If it does not cease to have effect under (1) or (2), then on the expiry of seventy five days after the Bill was presented to Parliament.

Thus the maximum life of a Declared provision is seventy five days. It can be seen that a Finance Bill presented to Parliament:-

1. can be passed without any amendment as is normally the case.

2. can be passed with some amendments which rarely happens.

3. may be rejected (which may mean the Government itself going out).

4. may not be passed at all (for any reason).

Now what are the consequences of each of the above situations, with regards to imposed or increased duties already collected by virtue of Provisional Collection of Taxes Act, 1931?

In the first case, that is when the budget is passed without amendment, there is no effect, as the Bill has become law.

In the second case, that is when the Finance Bill is passed with amendments and if these amendments result in certain declared increase or imposition not accepted by the Parliament, then the position is that the duties collected from the day after the presentation of the Finance Bill till its enactment which would not have been collected if the amended provision had been the declared provision, should have to be refunded.

What happens if after presentation of the Finance Bill, the Government falls and the same Finance Bill is reintroduced by the new Government?

Under the Provisional Collection of Taxes Act, 1931, the provisions of the new Bill can have effect from the date of presentation of the new bill and the old Bill not having become law ceases to have effect after seventy five days and refunds have to be given.

In the third and fourth situations, the proposals cease to have effect after seventy five days and if it so happens, all the duties collected will have to be refunded. Of course, refunds under Customs and Central Excise are granted to the parties only when the incidence of Tax is not passed on to the buyer. Otherwise the refundable amount is credited to the Consumer Welfare fund. However, if it can be proved that incidence has not been passed on, refunds can be claimed.

Nothing has changed in 2023. The 2023 Act does not bring in any changes except the year in the name. Yes, there is a small change:

Please see the table below for the new and old Acts:

So, there is an addition of with or without change in tariff classification. What is the significance of this?

Provisional Collection of Taxes Act, 1918

While the Provisional Collection of Taxes Act, 1931 is well-known, very few know about the Provisional Collection of Taxes Act, 1918, which is reproduced below:

Please note, this Act provided for immediate effect, not only for imposition (or increase), but also any variation. Thus, from 1918 to 1931, even decrease in tax rates had immediate effect.

In a book published in 1925, "The System of Financial Administration in British India" authored by P. K. WATTAL of the Indian Audit and Accounts Service, it is explained:

The Finance Bill is introduced in the Legislative Assembly the same day that the budget is presented. At the end of the Bill a clause is inserted declaring that it is expedient in the public interest that the Bill should have temporary effect under the provisions of the Provisional Collection of Taxes Act, 1918. This clause is inserted to give retrospective effect from the date of the presentation of the budget to changes proposed in customs and excise duties. Even prior to the passing of the Provisional Collection of Taxes Act, it had been the practice to give effect by executive orders to the proposed changes in taxation from the date of introduction of the budget in the Legislative Council, without waiting for such changes to be formally embodied in the law, which necessarily took some time. Such a step was and is obviously necessary in order to avoid loss to Government by the passing of goods through the Customs or the removal of goods from bond in the interval between the introduction and the passing of the Bill. Executive regulation did not, however, invariably prevent losses to Government, as some importers objected to paying duty at the higher rates pending the passing of the Bill, and when the Bill was passed with retrospective effect it was not always possible to recover the difference between the lower rate actually paid and the higher rate due under the new Act.

So, we have the Provisional Collection of Taxes Act, 2023 with all the provisions of the Provisional Collection of Taxes Act, 1931 intact.

Until next week