Levy Of Surcharge On Retailers On Basis Of Stock Imported Into State Is Discriminatory, Unconstitutional: Kerala HC

The High Court of Kerala has struck down Section 3(1A) of the Kerala Surcharge on Taxes Act, 1957 (“Act”) for being discriminatory and violative of Articles 301 and 14 of the Constitution. The section levied surcharge of 10 percent on retail chains importing more than 50 percent of the stock from other states and fulfilling other conditions as prescribed under Section 3(1A). The judgment was delivered by Justice PB Suresh Kumar in a batch of writ petitions.

“A classification of the dealers based on the criterion viz., whether they import goods into the State is per se unjustifiable and unintelligible.”

In the main case, FabIndia v. Asst Commissioner, of the batch, the petitioner company was challenging the order issued to it under Section 3(1A) of the Act demanding surcharge at the rate of 10 per cent on the output tax collected by them for the year 2015-16. The petitioner, a dealer under the Kerala Value Added Tax Act (KVAT), was engaged in the retail sale of branded apparels etc. through its retail outlets spread across the state. The goods were stock transferred by the petitioner into the state from other states and sold in the state upon payment of taxes under the KVAT.

Sub-section (1A) of Section 3 of the Act provides:

“(1A) The tax payable under sub-sections(1) and (2) of section 6 of the Kerala Value Added Tax Act, 2003 (30 of 2004), other than declared goods as defined in section 14 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) shall, in the case of national or multinational companies functioning in the State as retail chains or direct marketing chains who import not less than fifty percent of their stock from outside the State or country and not less than seventy-five per cent of whose sales are retail business and whose total turnover exceeds five crore rupees per annum, but excluding such class of dealers of certain commodities, which may be notified by the Government from time to time, be increased by a surcharge at the rate of ten per cent, and the provisions of the Kerala Value Added Tax Act, 2003(30 of 2004) shall apply in relation to the said surcharge as they apply in relation to the tax payable under the said Act.”(emphasis supplied).

It was argued by the petitioners that dealers who do not import into the state more than 50 per cent of their stock but nevertheless fulfilling all the remaining conditions mentioned in the impugned provision are not subject to the levy under Section 3(1A). This would mean that the levy does not conform to Article 304(a) of the Constitution and is hence violative of Article 301 of the Constitution. It was further argued that taxing statutes also have to conform to the principles of equality enshrined in Article 14 of the Constitution and Section 3(1A) does not satisfy the requirements of Article 14.

It may be noted that Article 301 declares that trade, commerce and intercourse throughout the territory of India shall be free, subject to other provisions in Part XIII and acts as a fetter on the powers of the Parliament as also the State Legislatures in bringing in legislation otherwise than in accordance with the remaining provisions contained in Part XIII. Further, Article 304 confers on the legislatures of states, notwithstanding anything contained in Article 301, the power to impose restrictions on trade, commerce and intercourse among the states.

It was argued by Revenue that (i) the impugned levy is only an additional tax and does not infringe Article 301 of the Constitution (ii) the impugned levy was introduced with the specific objective of increasing the revenue of the State and for promoting indigenous and local business (iii) the state has the legislative competence to introduce the levy and (iv) policy relating to taxation cannot be subjected to judicial scrutiny.

Hearing both parties, the court observed that the object of the legislation as evident from the Budget Speech is to augment the revenue for the purpose of implementing social security measures. The contention of the revenue that impugned levy was introduced with the specific objective of promoting indigenous and local business is incorrect as it has not been specifically mentioned in the Budget Speech. Further, it was observed that irrespective of turnover, if a dealer does not import into the state goods from other states there is no liability to pay a surcharge.

Allowing the writ petitions and holding that such a levy based on whether a dealer imports or not was unconstitutional, the court ruled:

“Article 14 forbids class discrimination in the matter of imposing liabilities upon persons arbitrarily selected out of a large number of persons similarly placed. In the instant case, as noted, the object sought to be achieved is augmentation of revenue. If the object of the legislation is augmentation of revenue, according to me, a classification of the dealers based on the criterion viz., whether they import goods into the State is per se unjustifiable and unintelligible. I have, therefore, no hesitation to hold that the impugned levy is discriminatory and violative of Article 301 read with clause (a) of Article 304 as also Article 14 of the Constitution.” (emphasis supplied)

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