States can withdraw tax exemptions from industries in public interest: Supreme Court

The Supreme Court recently held that State governments can withdraw tax exemptions granted to industries in public interest [The State of Maharashtra & Ors. vs. Reliance Industries Ltd. & Ors.].

A Bench of Justices PS Narasimha and Alok Aradhe observed that exemptions granted by States under fiscal statutes are concessions and can be withdrawn when required in public interest.

“The very nature of exemption implies that it may be modified or withdrawn if the Government considers such course of action necessary in public interest,” it said.

The Bench further clarified that industries do not have a legally enforceable right to insist upon the continuation of tax exemptions indefinitely.

It underscored that governments must retain flexibility to recalibrate fiscal policies in public interest.

The Court was hearing appeals filed by the State of Maharashtra challenging Bombay High Court judgments that had struck down notifications issued in 2000 and 2001, withdrawing electricity duty exemptions granted to captive power generators, including large industrial units such as Reliance Industries.

The exemption had originally been introduced in 1994 to encourage industries to generate electricity for their own consumption through captive power plants. However, the State later modified and withdrew the concession for a period between April 2000 and April 2005, citing fiscal considerations and revenue requirements.

Captive power producers challenged the withdrawal before the High Court, arguing that they had invested heavily in setting up power plants based on the State’s earlier promise of exemption and that the withdrawal was arbitrary and discriminatory.

The High Court accepted the challenge, struck down the notifications issued by the State and held that the decision to withdraw the exemption was arbitrary and suffered from non-application of mind.

This led the State of Maharashtra to move the Supreme Court.

Before the top court, the State argued that exemption from electricity duty was a statutory concession granted as a matter of policy and could be withdrawn in public interest.

It contended that industries did not have any legal right to the continuation of the exemption and that withdrawal of the same was necessary to augment public revenue and address fiscal constraints.

Accepting the State’s contention in part, the Supreme Court held that the withdrawal of the exemption in public interest is permissible and that doctrines such as promissory estoppel would not prevent the State from modifying fiscal policy where public interest demands it.

However, the Court held that such a withdrawal must be implemented reasonably and with fairness by giving affected industries sufficient time to adjust to the changed policy framework.

“The principles of fair play demand that such withdrawal should not operate in a manner that causes undue hardship to those who have structured their affairs on the basis of concession earlier extended to them,” it said.

In the present case, the Court held that a period of one year would constitute reasonable notice before the withdrawal of the exemption.

Accordingly, the Court set aside the High Court’s judgments and upheld the validity of the notifications withdrawing the exemption.

The State was represented by Senior Advocate Shyam Mehta along with advocates Siddharth Dharmadhikari, Aaditya Aniruddha Pande, Shrirang B Varma and Varad Kilor.

The respondents were represented by Senior Advocates CS Vaidyanathan, Harish M Jagtiani, and Basava S Prabu Patil.

[Read Judgement]