SC: State-Made Modifications to VAT Are Invalid After GST Implementation

A Division Bench of the Supreme Court recently rendered a significant decision on appeals arising from judgments of the Telangana, Gujarat, and Bombay High Courts. These appeals concerned the validity of the VAT Amendment Act in their respective states, particularly in the context of Section 19 of the Constitution (101st Amendment) Act of 2016. This constitutional amendment facilitated the implementation of the Goods and Services Tax (GST).

One key aspect of the case revolved around the legislative authority of the state enactments after July 1, 2017, which was the deadline set by Section 19 for amending laws related to the taxation of goods and services to align with the provisions of the Amendment. Notably, the GST regime took effect on July 1, 2017.

On the basis of the facts and circumstances, the Bench of Justices S Ravindra Bhat and Aravind Kumar. Stated that-

“The amendments in question, made to the Telangana VAT Act, and the Gujarat VAT Act, after 01.07.2017 were correctly held void, for want of legislative competence, by the two High Courts (Telangana and Gujarat High Court). The judgment of the Bombay High Court is, for the above reasons, held to be in error; it is set aside; the amendment to the Maharashtra Act, to the extent it required pre-deposit is held void.”

In the cases of Telangana and Gujarat, the respective states filed appeals in response to adverse judgments that invalidated the introduced amendments. However, in the case of Maharashtra, where the contested amendment had been upheld by the Bombay High Court, the appellants were taxpayers subject to assessment.

The Court also observed that:

“Section 19 of the Constitution (101st Amendment) Act, 2016 and Article 246A enacted in the exercise of constituent power, formed part of the transitional arrangement for the limited duration of its operation, and had the effect of continuing the operation of inconsistent laws for the period(s) specified by it and, by virtue of its operation, allowed state legislatures and Parliament to amend or repeal such existing laws.”

Quick Stage of Appropriate Conditions

It is worth remembering that the Amendment brought about a profound restructuring of the constitutional framework for taxation by both the Union and State Governments in India, paving the way for the introduction of the Goods and Services Tax (GST).

Considering that the current case primarily revolves around the interpretation of Section 19 of the Amendment Act, it is crucial to comprehend its content. The section is articulated as follows:

“19. Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until the expiration of one year from such commencement, whichever is earlier.”

Section 19 stipulated that laws about the taxation of goods or services, whether existing in any state before the amendment Act’s commencement, would remain in force until they were amended or revoked by a competent legislature or authority. Additionally, it specified that such laws, whether amended or not, would only remain in effect for a maximum period of one year from the amendment’s commencement.

Accurate Background

Telangana

In this particular state, the sequence of events unfolded in a manner where the local VAT Act was amended after the introduction of the Amendment. This VAT amendment was initiated through an Ordinance and took effect on June 17, 2017, which was just 13 days before the one-year time limit stipulated by the 101st Amendment Act.

The Ordinance continued until it was ratified by the State Legislature, after which the Governor gave assent, and it became effective on December 2, 2017. The purpose of this amendment was to extend the statute of limitations and allow for the re-opening of assessments. This prompted many traders and VAT payers to challenge the amendments to the local VAT Act in the Telangana High Court.

In its decision, the High Court upheld the challenge and invalidated the amendments on various grounds. Among these reasons was the argument that the State had limited scope to amend its VAT Act, as it could only do so to align with the amended Constitution according to Section 19 of the Amendment. Furthermore, it was contended that the Ordinance could not have been confirmed, as the state lost its legislative authority after July 1, 2017.

State’s View

It was contended that once the State Legislature endorsed the ordinance and incorporated its provisions into the act in accordance with it, the issue of legislative competence would no longer be relevant, as the act of confirming an ordinance falls within the purview of the State legislature’s authority.

Gujarat

In the Gujarat group of cases, Section 84A was introduced into the Gujarat Value Added Tax Act of 2003 by the Gujarat Value Added Tax (Amendment) Act of 2018, which was officially published on April 6, 2018, with a retrospective effect dating back to April 1, 2006. The High Court ruled the amendment unconstitutional, asserting that the legislature lacked the authority to enact this provision in light of Section 19 of the 101st Amendment, and further contended that the amended provision exhibited clear arbitrariness.

State’s View

The state had argued that, given its retrospective nature and its purpose of rectifying a previously identified flaw, as a validating enactment, there was no basis for considering the amendment as invalid.

Bombay

In the group of appeals stemming from the Bombay High Court’s judgment, the concerned parties expressed their dissatisfaction with the fact that the Maharashtra VAT Amendment Act, originally enacted on April 15, 2017, was narrowed down in scope by a Division Bench ruling of the Bombay High Court. An effort was made to reverse this situation through an amendment that took effect on April 15, 2017, and later was given retrospective application in an attempt to undo the impact of the court’s judgment. The writ petitions filed by these aggrieved parties were dismissed, rendering them appellants in this case.

Taxpayers Resentment

Regarding the appeals related to Maharashtra, the appellants contested the validity of the retrospective amendments made to the Maharashtra VAT Act.

Statement of court

Section 19 Implementation

To commence, the Court examined the interpretation of Section 19. It articulated that this provision served three main objectives. The first was to maintain the existing status quo concerning the state and central indirect tax regime for one year from the commencement of the Amendment or until the enactment of a new law, whichever came first. The second objective was to empower competent legislatures, namely, the State Legislatures and Parliament, to amend preexisting laws that were in force in various states and regions. The third objective was the repeal of such laws.

Based on these observations, the Court asserted that the transitional nature of Section 19 was beyond dispute.

Subsequently, distinguishing between ordinary and constitutional law, the Court held the view that Section 19 was established through the exercise of constituent power.

In this context, it’s important to note that an ordinary law, such as an Act of Parliament, emerges from a legislative process. The authority for such laws is derived from specific provisions within the Constitution or from fields of GST legislation enumerated in various lists. On the other hand, constitutional law emanates from the Constitution itself, establishing different branches of the State, defining their authority, and imposing constraints on the functioning of the Executive and legislative branches through fundamental rights and other restrictions.

The Court contended that Section 19 was not akin to a typical parliamentary enactment but was incorporated as part of the 101st Constitutional Amendment Act.

Is the authority to amend or repeal subject to restrictions under Section 19?

Continuing, the Court noted that once it is acknowledged that Section 19 was established as part of the constituent power and carries the same legal weight as the remainder of the constitutional amendment, rather than being a mere legislative act, one must contemplate the implications of this conclusion.

Building upon this perspective, it was asserted that Section 19 itself serves as the foundation that empowers both Parliament and the State Legislatures (in conjunction with Article 246A) to modify existing laws.

Explaining the term ‘amend,’ the Court remarked:

“The meaning of the term ‘amend’ is well-known it takes within its sweep the idea of correcting something, adding something, deleting, or substituting something or doing something to an existing document, enactment, or rule to make it better.”

Hence it stated that in Section 19 (read together with Article 246A), of the Amendment there were no restrictions. The provision made in the expression of the sovereign legislative power, available to both Parliament and state legislatures, to do the compulsory revisions via amendment to the current statutes.

Quoting the matter of Ramkrishna Ramanath v. Janpad Sabha, 1962 Suppl. (3) SCR 70, wherein it stated that “the provision by its implication confers a limited legislative power to desire or not to desire the continuance of the levy.,” the Court, in the present case, held that this “limited legislative power was not constricted or limited, in the manner alleged by the states; it is circumscribed by the time limit, indicated (i.e. one year, or till the new GST law was enacted). It could, therefore, enact provisions other than those bringing the existing provisions in conformity with the amended Constitution.”

The validity of the Telangana Act was assessed based on its inception as an ordinance.

In this context, the court held the opinion that the arguments presented by the Telangana State lacked substance. It was beyond dispute that an ordinance issued by the government holds the same legal status as any enforceable law enacted by a State legislature. The distinction lies in the fact that, unlike the conventional role of the executive branch, lawmaking does not fall within its primary purview. The Court clarified:

“However, that argument is not tenable, because the ordinance’s validity and effect might not have been suspect on the date of its promulgation; yet, the issue is that on the date when it was in fact, approved and given shape as an amendment, the State legislature had ceased to possess the power. By that time, the State GST and the Central GST Acts had come into force (on 01.07.2017). Therefore, Section 19 ceased to be effective. In the circumstances, the state legislature had no legislative competence to enact the amendment, which approved the ordinance, which consequently was rendered void.”

Case of Gujarat and Maharashtra

For the matter of the Gujarat VAT Act, the Court determined that providing retrospective effect to the amendment, which was enforced in 2006, couldn’t preserve its validity after the implementation of the GST laws on July 1, 2017.

Regarding the latter case, the Court established that there is no dispute with the notion that a legislative body possesses the competence to enact corrective legislation with retroactive impact. However, at the time of the amendment’s enactment, i.e., July 9, 2019, in this instance, the Maharashtra legislature no longer held authority over the subject matter since the power to amend the VAT Act ceased on July 1, 2017, when the GST regime was introduced. Consequently, for the same reasons as in the other cases, the amendments to the Maharashtra VAT Act cannot be upheld.

Court Decision

In addition to the points mentioned above, the Court reached the following conclusions:

“Since other provisions of the said Amendment Act, had the effect of deleting heads of legislation, from List I and List II (of the Seventh Schedule to the Constitution of India), both Section 19 and Article 246A reflected the constituent expression that existing laws would continue and could be amended. The source or fields of legislation, to the extent they were deleted from the two lists, for a brief while, were contained in Section 19. As a result, there were no limitations on the power to amend.

The above finding is given the vacuum created by the coming into force of the 101st Amendment, which resulted in the deletion of the heads of legislation in the two lists aforesaid.”

In light of these insights, the appeals brought by the States of Telangana and Gujarat were rejected, while the appeals by the taxpayers against the Bombay High Court’s judgment were permitted.