Supreme Court clarifies states’ power to amend VAT laws post GST implementation: State of Telangana & Ors. vs. M/S Tirumala Constructions (20 October 2023)

Introduction

Date of the Judgment: 20 October 2023
Citation: 2023 INSC 942
Judges: S. Ravindra Bhat, J. and Aravind Kumar, J.

Can states freely amend their tax laws after the implementation of a new national tax regime like the Goods and Services Tax (GST)? This question was at the heart of a recent Supreme Court judgment. The court examined whether states could alter their existing Value Added Tax (VAT) laws after the GST was introduced, impacting tax assessments and reassessments. This case is crucial for understanding the balance of power between the Union and State governments in the context of taxation.

Case Background

The case involves appeals from judgments of the Telangana, Gujarat, and Bombay High Courts. The core issue revolves around the extent to which states could amend their VAT laws after the 101st Constitutional Amendment Act, 2016, which paved the way for GST. The states of Telangana and Gujarat appealed against the High Court judgments, while assessees appealed against the Bombay High Court judgment.

In Telangana, the state government amended its local VAT Act through an ordinance on 17 June 2017, extending the period of limitation for reassessments. This ordinance was later enacted into law on 2 December 2017. Aggrieved traders challenged this amendment in the Telangana High Court, which ruled against the state.

In Maharashtra, the state amended its VAT Act on 15 April 2017, requiring a pre-deposit of 10% for appeals. This amendment was later given retrospective effect in an attempt to reverse a previous High Court judgment. Aggrieved parties challenged this amendment, but the Bombay High Court dismissed their petitions.

In Gujarat, Section 84A was added to the Gujarat Value Added Tax Act, 2003, on 6 April 2018, with retrospective effect from 1 April 2006. This section allowed the exclusion of time spent in litigation when calculating the limitation period for revisions. The Gujarat High Court struck down this amendment, citing a lack of legislative competence and arbitrariness.

Timeline

Arguments of the Appellant States

The states argued that the 101st Amendment aimed to reorganize indirect taxation powers, introducing shared powers between the Union and the states. They contended that Section 19 of the Amendment allowed states to amend or repeal existing tax laws until the GST regime was fully implemented. The states emphasized that the GST Council, with its balanced decision-making structure, ensured that the federal balance was maintained.

Telangana argued that its amendment to the VAT Act, extending the period for reassessment, was a valid exercise of its legislative power under Section 19. The state also argued that an ordinance and a law enacted by the state legislature have the same legal effect, and the later enactment of the ordinance related back to the date it was first issued.

Maharashtra contended that the amendment to the MVAT Act, requiring a pre-deposit of 10% for appeals, was procedural and did not take away any vested right of the assessee. The state argued that the power to legislate was preserved by Section 19, and the manner of exercising that power was not restricted.

Gujarat argued that Section 84A was a validating act aimed at equity and restitution, allowing tax authorities to collect taxes from dealers who had passed the tax burden to consumers but not paid it to the government. The state also argued that the time limit prescribed under Section 84A was not excessive.

Arguments of the Respondent Assessees

The assessees argued that the power to amend under Section 19 was limited to making existing laws consistent with the amended Constitution. They contended that the term ‘amend’ should be interpreted contextually, suggesting a diminishing life for the existing legislation. The assessees also argued that the states’ power to legislate on goods was restricted after the 101st Amendment, and Section 19 could not be used to expand this power.

The assessees submitted that the amendments to the VAT laws could not be sourced to Article 246A, as that article contemplates a simultaneous levy by both the state and the center, which was not the case here. They also argued that GST is a tax on ‘supply’ and is different from the tax on sales.

The assessees further argued that the Telangana ordinance was repealed without any savings clause, and the subsequent enactment could not relate back to the date of the ordinance. They also contended that the extension of limitation was intended to secure revenue and was not merely procedural.

The assessees of Maharashtra argued that Article 246-A has no relation to the earlier sales tax laws and that the term “goods and services tax” is different from the tax on the sale of goods. They also argued that the state lacked the power to make the impugned amendments as they were not for removing inconsistencies but as regular amendments under the Maharashtra Act.

The assessees of Gujarat argued that Section 84A of the Gujarat VAT Act was manifestly arbitrary and violated Articles 14 and 19(1)(g) of the Constitution. They contended that the retrospective application of the provision was onerous and that the time limit was indefinite.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. What is the scope and ambit of Section 19 of the Constitution (101st Amendment) Act, 2016?
2. Whether the power to amend or repeal under Section 19 is subject to any limitations?
3. Whether the Telangana Act is valid considering its origin as an ordinance?
4. What is the validity of the Gujarat and Maharashtra Acts?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The court relied on A.K. Roy v. UOI, (1982) 2 SCR 272* to explain that the ordinance-making power is co-extensive with the power of the Parliament to make laws. It used Krishna Kumar Singh v. State of Bihar, (2017) 5 SCR 160* to clarify that the theory of lasting effect of an ordinance cannot be supported. The court referred to Ramkrishna Ramanath v. Janpad Sabha, 1962 Suppl. (3) SCR 70* to highlight that the power to amend existed for both the Parliament and State legislatures. It used R.K. Garg v. Union of India, (1982) 1 SCR 947* to state that the ordinance-making power is co-extensive with the power of the Parliament to make laws. The court also used Fuerst Day Lawson Ltd v Jindal Exports Ltd, 2001 (3) SCR 479* to support that upon the State legislature approving the terms of the ordinance, its terms related back.

The court referred to UOI & Anr. v. Mohit Minerals Private Limited, 2022 (9) SCR 300* to discuss the view that the power was traceable to the amended provisions of the Constitution. It relied on A. Hajee Abdul Shakoor & Co v. State of Madras, 1964 (8) SCR 217* to recognize the power of states to retrospectively validate assessments. The court used Mafatlal Industries Ltd. v. Union of India, 1996 Suppl. (10) SCR 585* to discuss the principle of equity and restitution in tax matters.

The court cited Sundergarh Zilla Adivasi Advocates Association and Ors v State of Odisha and Ors, (2013) 6 SCR 420* to interpret that the purpose of continuing an existing law was to enable necessary amendments to make it in consonance with Part IX-A. It referred to Union of India v. VKC Footsteps India (P)Ltd, 2021 (15) SCR 169* to interpret that harmony means legislative harmony between the State and the Centre. The court used R. Abdul Quader v. Sales Tax Officer, (1964) 6 SCR 867* to state that incidental and ancillary powers are exercised in aid of the main legislation. It relied on State of Madhya Pradesh v. M.V. Narasimhan, (1976) 1 SCR 6* to hold that borrowed provisions become an integral part of the subsequent act and are unaffected by any amendment in the previous act.

The court also referred to Vipulbhai M Chaudhary v Gujarat Milk Mktg Federation Ltd, 2015 (3) SCR 997* to observe that the Constitution enables the competent legislature to amend the existing provisions in their laws in tune with the constitutional mandate. It cited Bondu Ramaswamy v. Bangalore Development Authority, (2010) 6 SCR 29* to state that the benefit of Article 243-ZF is available only in regard to laws relating to “municipalities”. The court used Synthetics and Chemicals Ltd. and Ors. v. State of U.P. & Ors., 1989 Supp (1) SCR 623* to state that the widest amplitude should be given to the language of the entries in three Lists. It referred to Bimolangshu Roy (Dead) through L.Rs. v. State of Assam & Ors, [2017] 13 SCR 301* to discuss the sources of authority to legislate under the Constitution of India.

The court cited Shri Prithvi Cotton Mills Ltd. v. Broach Borough Municipality, 1970 (1) SCR 388*, Government of Andhra Pradesh v. Hindustan Machine Tools Ltd, [1975] Supp (1) SCR 394*, and Ujagar Prints v. Union of India, [1988] Supp 3 SCR 770* to state that a purely curative and validating enactment, if made retrospective, is unexceptionable. It also referred to Kerala State Electricity Board v. Indian Aluminium Co. Ltd., [1976] 1 SCR 552* to state that an existing law could be amended or repealed only by the Legislature which would be competent to enact that law. The court also cited Union of India v Mohit Mineral Pvt. Ltd, 2018 (13) SCR 139* to hold that the power to make law regarding goods and services tax does not exclude the power to levy cess. Finally, the court cited Jaya Thakur v Union of India & Ors, 2023 SCC OnLine SC 813* to state that the challenge to the legislative Act would be sustainable only if it is established that the legislature concerned had no legislative competence.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily driven by the need to uphold the constitutional scheme of distribution of legislative powers, particularly in the context of taxation. The court emphasized that the 101st Constitutional Amendment Act, 2016, brought about a significant change in the taxation regime, and the states’ powers to legislate on VAT were curtailed. The court’s reasoning was influenced by the following factors:

• Constitutional Scheme: The court emphasized the need to maintain the balance of power between the Union and the States, as envisioned by the Constitution.
• Legislative Competence: The court focused on the legislative competence of the states at the time of enacting the amendments, holding that the states lacked competence to amend VAT laws after the GST regime came into force.
• Transitional Provisions: The court clarified that Section 19 of the Amendment Act was a transitional provision with a limited duration and did not grant states unlimited powers to amend their laws.
• Ordinance and Law: The court distinguished between the effect of an ordinance and a law enacted by the legislature, holding that the later enactment of the ordinance by the Telangana legislature was void due to a lack of legislative competence.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

Final Order

The Supreme Court allowed the appeals filed by the assessees and dismissed the appeals filed by the states. The court held as follows:

• Telangana: The court held that the Telangana Act was void due to the state legislature’s lack of competence to enact the amendment after the GST laws came into force.
• Gujarat: The court held that Section 84A of the Gujarat Value Added Tax Act, 2003, was void due to the state legislature’s lack of competence on the date the amendment was enacted.
• Maharashtra: The court held that the amendment to the MVAT Act was void due to the state legislature’s lack of competence on the date the amendment was enacted.

Implications of the Judgment

This judgment has significant implications for state governments, businesses, and the overall tax landscape in India:

• State Governments: State governments cannot freely amend their VAT laws after the implementation of GST. They must ensure that any amendments are within their legislative competence.
• Businesses: Businesses will have clarity on the validity of tax assessments and reassessments under the old VAT laws. This judgment provides relief to businesses that were facing reassessments based on amendments made after the GST implementation.
• Tax Landscape: The judgment reinforces the constitutional scheme of distribution of legislative powers and ensures that the GST regime is implemented effectively. It also emphasizes the importance of the GST Council in maintaining the federal balance.
• Legal Precedent: This judgment sets a legal precedent for the interpretation of transitional provisions in constitutional amendments and clarifies the limits of state legislative powers in the context of taxation.

Conclusion

The Supreme Court’s judgment in State of Telangana & Ors. vs. M/S Tirumala Constructions is a landmark decision that clarifies the extent of states’ powers to amend their VAT laws after the implementation of GST. The court held that states cannot freely amend their tax laws after the GST regime came into force and emphasized the importance of legislative competence. This judgment reinforces the constitutional framework for taxation and provides clarity for both state governments and businesses.