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The Supreme Court today upheld the validity of the Goods and Service Tax (Compensation to States) Act, 2017 and the Goods and Services Tax Compensation Cess Rules, 2017.
The judgment was delivered by a Bench of Justices AK Sikri and Ashok Bhushan.
The petitioner Mohit Mineral Pvt. Ltd. a Company incorporated under the Companies Act was a trader of imported and Indian coal and was engaged in importing coal from Indonesia and South Africa.
The Finance Act, 2010 levied Clean Energy Cess which was in the nature of a duty of excise on the production of coal and was being collected at the time of removal of raw coal, raw lignite and raw peat from the mine to the factory.
The Constitution (One Hundred and First Amendment) Act, 2016 was passed to levy Goods and Services tax. Section 18 of the Amendment Act enabled the Parliament to levy a cess for five years to compensate the States for the loss of revenue on account of GST. On April 12, 2017, Parliament enacted three Acts, namely, (1) The Central Goods and Services Tax Act, 2017; (2) The Integrated Goods and Services Tax Act, 2017; and (3) The Goods and Services Tax (Compensation to States) Act, 2017.
On May 4, 2017, the Taxation Laws Amendment Act was enacted whereunder several cesses including Clean Energy Cess repealed. The writ petitioner, Mohit Mineral Pvt. Ltd. submitted a representation to the GST Council seeking set off of Clean Energy Cess against GST Compensation Cess.
The petitioner then moved the Delhi High Court praying that the Goods and Service Tax (Compensation to States) Act, 2017 be declared unconstitutional.
Submissions of parties
It was the submission of the petitioner that the Constitution (One Hundred and First Amendment) Act, 2016 was enacted by the Parliament with the intent to consolidate number of indirect taxes which were levied by the Union and States with the intention to reduce the Goods and Services Tax (GST) by giving concurring taxing power to Union and States for levying GST on every transaction of supply of goods or services both. There was a clear objective of the aforesaid constitutional amendment that with the introduction of Goods and Services Tax, not only the indirect taxes but the cesses and surcharges levied on goods and services shall also be subsumed in it.
The petitioner submitted that the Compensation to States Act, 2017 is repugnant to and transgresses the mandate of the Constitution (One Hundred and First Amendment) Act, 2016. It was the Parliament’s conscious decision to abolish with effect from July 1, 2017, all cesses including cess levied on coal as per mandate of the Constitution (One Hundred and First Amendment) Act, 2016.
The legislation was, therefore, colourable legislation which lacks legislative competence since no power could be traced in Section 18 to the Constitution (One Hundred and First Amendment) Act, 2016 to amend Compensation to States Act, 2017, the petitioner contended.
Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 does not empower the Parliament to levy cess and tax as it provides Parliament to make any law to provide compensation to the States for loss of revenue arising on account of implementation of GST for a period of 5 years, the petitioner argued.
The Central government, however, submitted that the cess is nothing but a special kind of tax. If the legislature is competent to levy the main tax, i.e. GST under Article 246A of the Constitution, then legislative competence of levying the cess flows from the very same power to levy the tax itself.
The phrase used in Article 246A “with respect to” has wide implication and will allow levy of cess also. Power to levy a cess, in any case, can be traced back to Article 270 of the Constitution. However, Entry 97 of List I of Seventh Schedule to the Constitution grants a residuary power to levy a tax to the Union. The Clean Energy Cess which was imposed by the Finance Act, 2010 and GST Compensation Cess are levied on entirely different transactions and both are for an entirely different purpose.
The first question which the Court addressed was whether the Compensation to States Act, 2017 is beyond the legislative competence of Parliament?
The Court first proceeded to analyse the scope of the term cess. After adverting to various decisions, the Court stated that cess “means a tax levied for some special purpose, which may be levied as an increment to an existing tax”.
The scheme of Compensation to States Act, 2017 indicates that the cess is with respect to goods and services tax.
It then placed reliance on the decision in Union of India v. Harbhajan Singh Dhillon wherein the following test was laid down while examining the legislative competence of Parliament with regard to a particular enactment:
“Is the matter sought to be legislated or included in List II or in List III or is the tax sought to be levied mentioned in List II or in List III: No question has to be asked about List I. If the answer is in the negative then it follows that Parliament has power to make laws with respect to that matter or tax.”
In the instant case, the Court ruled that in the context of GST Compensation to States Act, 2017, there is no entry in List II or List III of Seventh Schedule, which may refer to levying of cess in question.
Article 248 read with Articles 246 and 246A clearly indicate that the residuary power of legislation is with the Parliament, the Court ruled.
Further, the Court noted that after Constitution (One Hundred and First Amendment) Act, 2016, as per Article 270, Parliament can levy cess for a specific purpose under a law made by it. Article 270, thus, specifically empowers Parliament to levy any cess by law.
The Court also observed that Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 expressly provides that 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.
When Constitution empowers the Parliament to provide for Compensation to the States for loss of revenue by law, the expression “law” used therein is of wide import which includes a levy of any cess for the above purpose.
The Court, therefore, ruled that the Parliament was empowered to enact the Goods and Service Tax (Compensation to States) Act, 2017.
The second issue which the court address was whether Compensation to States Act, 2017 transgressed the mandate of Constitution (One Hundred and First Amendment) Act, 2016.
It had been contended that the objective of Constitution (One Hundred and First Amendment) Act, 2016 was to subsume various Central and States Taxes, Central and States surcharges and cesses, so far as they relate to supply of goods and services. When all taxes, surcharges, and cesses were subsumed in by Goods and Services Tax, imposition of compensation to States cess clearly falls foul to the Constitution (One Hundred and First Amendment) Act, 2016, the petitioner had argued.
The Court held that the expression used in Article 246A is “power to make laws with respect to goods and services tax”. The power to make law, thus, is not general power related to a general entry rather it specifically relates to goods and services tax. When express power is there to make a law regarding goods and services tax, such power shall include the power to levy cess on good and service tax, the Court ruled.
“We fail to comprehend that how such power shall not include power to levy cess on goods and services tax. True, that Constitution (One Hundred and First Amendment) Act, 2016 was passed to subsume various taxes, surcharges and cesses into one tax but the constitutional provision does not indicate that henceforth no surcharge or cess shall be levied.”
The court thus held that the Goods and Service Tax (Compensation to States) Act, 2017 did not transgress the mandate of Constitution (One Hundred and First Amendment) Act, 2016.
The court also held that the petitioner is not entitled to any set-off of payments made towards Clean Energy Cess in payment of Compensations to States Cess since Clean Energy Cess and States Compensation Cess are entirely different from each other, payment of Clean Energy Cess was for different purpose and has no bearing or connection with States Compensation Cess.
Advocate JP Mittal appeared for the petitioner while Attorney General KK Venugopal appeared for the Union of India.
Read the judgment below.