State Amendments Made To VAT Acts After GST Came Into Effect Are Invalid : Supreme Court

A Division Bench of the Supreme Court, while deciding the appeals arising from judgments of Telangana, Gujarat and Bombay High Court with respect to the validity of VAT Amendment Act in their respective states, made several significant findings regarding Section 19 of the Constitution (101st Amendment) Act (Amendment), 2016, which allowed the introduction of the Goods and Services Tax.

Inter-alia, the issue was about the legislative competence of the State enactments after 01.07.2017 i.e. beyond the time period prescribed in Section 19. This provision provided the time limit of one year to amend the laws, related to tax on goods and services, in conformity with the express terms of the Amendment. It may be noted that the GST regime came into effect from 01.07.2017.

Based on facts and circumstance, the Bench of Justices S Ravindra Bhat and Aravind Kumar., held:

“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.”

While in the case of Telangana and Gujarat, the concerned states had appealed aggrieved by the judgments as the amendments introduced were struck down however, in Maharashtra’s case, since the impugned amendment was upheld by the Bombay High Court, the appellants were assesses.

The Court also noted:

“Section 19 of the Constitution (101st Amendment) Act, 2016 and Article 246A enacted in 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.,”

Brief Background of Relevant Provisions

It may be recalled that the Amendment introduced a fundamental re-ordering of the constitutional premise of taxation by the Union and State Governments in India and to enable the introduction of the Goods and Services Tax (GST).

Since this present case broadly deals with the interpretation of Section 19 of the Amendment Act, it is imperative to understand the same. The same reads 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 expiration of one year from such commencement, whichever is earlier.”

Thus, Section 19 provided that laws relating to tax on goods or services or both “in force in any state immediately before the commencement of the amendment Act shall continue to be in force until amended or repealed by a competent legislature or other competent authority.” The other eventuality was that with or without such amendments such laws were to be in force only for a period of one year from the commencement of the amendment.

Factual Background

Telangana

The facts in relation to this State are such that the local VAT Act was amended after the Amendment was introduced. The VAT amendment was through an Ordinance, and was brought into force on 17.06.2017, i.e. 13 days before the time granted by the 101st Amendment Act, i.e. one year. This ordinance, continued till the State Legislature enacted it. The Governor then assented to the law, and it came into force on 02.12.2017.  The amendment sought to extend the period of limitation, and permitted to re-open assessments. Feeling aggrieved, many traders and VAT payers approached the Telangana High Court, challenging the amendments to the local VAT Act.

By the impugned judgment, the High Court accepted the challenge and struck it down, on various counts, including that the State had limited scope to amend its VAT Act, which in terms of Section 19 of the Amendment could have done it only to bring it in conformity with the amended Constitution. Other reasons included that the ordinance, could not have been confirmed, as the state was denuded of legislative competence after 01.07.2017.

State’s Stance

It was sought to be argued that once the State Legislature approved the ordinance and enacted the amendment, in conformity with it, the provisions of the Ordinance became part of the act. The question of legislative competence would not arise, because the mere confirmation of an ordinance is within the competence of the State legislature.

Gujrat

In the Gujarat batch of cases, Section 84A was introduced in the Gujarat Value Added Tax Act, 2003 by the Gujarat Value Added Tax (Amendment) Act, 2018, gazetted on 06.04.2018 but with retrospective effect from 1.4.2006. The High Court held the amendment to be unconstitutional on the ground that the legislature lacked competence to enact the provision having regard to Section 19 of the 101st amendment and furthermore that the amended provision was manifestly arbitrary.

State’s Stance

The state had sought to urge that being a validating enactment, which sought to cure the defect found earlier, and given that it operated retrospectively, there is no question of the amendment being invalid.

Bombay

In the batch of appeals arising from the judgment of the Bombay High Court, the parties were aggrieved by the fact that the Maharashtra VAT Amendment Act, which was initially made on 15.04.2017, was read down by a Division Bench judgment, of the Bombay High Court. That position was sought to be reversed, through an amendment which was brought into force, on 15.04.2017 and later in an effort to reverse the effect of a judgment, given retrospective effect. The writ petitions filed by such aggrieved parties, were dismissed. Thus, the appellants in this case are assesses.

Assesses Grievance

As far as the Maharashtra appeals are concerned, the assesses grievance is that the retrospective amendments, made to the Maharashtra VAT Act, were void.

Court’s Observations

Interpretation of Section 19

To begin with, the Court interpreted Section 19. It stated that the same provision has three aims. The first is to preserve the existing status quo with regard to the state and central indirect tax regime, for a period of one year from the date of commencement of the Amendment or till a new law is enacted whichever is earlier. The second is authorizing the competent legislatures i.e. the State Legislatures and Parliament to amend existing laws which were in force in states and other parts of the country. The third was the repeal of such laws.

Taking its cue from the aforesaid observations, that Court stated that the fact that Section 19 was meant to be transitional cannot be doubted.

Thereafter, distinguishing between the ordinary and a constitutional law, the Court of the opinion that Section 19 was enacted in exercise of the constituent power.

In this context, it may be noted that an ordinary law such as an Act of Parliament, is a product of a legislative exercise. The source of that power is traced to the Constitution in some specific provisions or through fields of legislation enumerated in one or the other lists. Constitutional law on the other hand is that it arises out of the Constitution and creates different organs of the State, defines their power and imposes limitations on the functioning of the Executive and legislative wings through the fundamental rights and other limitations.

The Court opined that Section 19 was not comparable to a mere Parliamentary enactment and the same was adopted as part of the 101st Constitutional Amendment Act.

Whether the power of amendment or repeal is subject to limitations under Section 19

Moving forward, the Court observe that once it is conceded that Section 19 was enacted as part of the constituent power and has the same force as the rest of the constitutional amendment and is not a mere Parliamentary enactment, one has to consider the consequence of this sequitur to such a finding.

Basis this, it was opined that Section 19 itself is held to be the source which enabled Parliament and the State Legislatures (along with Article 246A) to amend the existing laws.

Elaborating on the term ‘amend’, the Court observed:

“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.”

It was, therefore, held that there were no limitations under Section 19 (read together with Article 246A), of the Amendment. That provision constituted the expression of the sovereign legislative power, available to both Parliament and state legislatures, to make necessary changes through amendment to the existing laws.

Citing the case of Ramkrishna Ramanath v. Janpad Sabha, 1962 Suppl. (3) SCR 70, wherein it was held 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.”

Validity of Telangana Act tested from the touch stone of its originating as an ordinance

In this regard, the court was of the view that the submissions of the Telangana State were not substantial. There can be no doubt that an ordinance promulgated by the Government is as much a law as much as is any binding law enacted by State legislature. The difference is that contrary to the traditional role of the executive, law making does not fall within its primary domain. The Court explained:

“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.”

Gujarat and Maharashtra Acts

In the case of the Gujarat VAT Act, the Court held that the retrospective effect, given to the amendment, which was brought into force, with effect from 2006, cannot in any way save it, after the coming into force of the GST laws, on 01.07.2017.

With respect to the latter case, the Court held that there is no quarrel with the proposition that a legislative body is competent to enact a curative legislation with retrospective effect. However, there is a lack of competence on the date the amendment was enacted i.e. in this case, 09.07.2019, the Maharashtra legislature ceased to have any authority over the subject matter as the power to change the VAT Act, ceased, on 01.07.2017, when the GST regime came into effect. Therefore, for the same reasons, as in the other cases, the amendments to the Maharashtra VAT Act cannot survive.

Court Conclusions

Apart from what has already been mentioned above, the Court concluded:

“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 in view of the vacuum created by the coming into force of the 101st Amendment, which resulted in deletion of the heads of legislation in the two lists aforesaid.”

In view of these observations, the appeals filed by the States of Telangana and Gujarat were dismissed and the appeals of the assesses against the judgment of the Bombay High Court were allowed.

Case Title: The State of Telangana & Ors. V. M/S Tirumala Constructions., Civil Appeal No(S). 1628 Of 2023

Citation : 2023 LiveLaw (SC) 927

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