GST is not a loss of States constitutional entitlement to continue recovering VAT: Kerala High Court exemplifies the constitutional scheme
A number of constitutional challenges have been raised in recent times challenging the continued enforcement of VAT and service tax laws. In some cases the High Courts have also issued interim orders being of the prima facie opinion that after the change in the constitutional scheme (in view of its amendment to bring GST) the proceedings under the VAT and service tax laws cannot be continued. In a recent decision the Kerala High Court has comprehensively examined all aspects of these challenges to opine that the amendment does not take away the entitlement of the States to continue recovery of tax liability incurred by the tax-payer under the erstwhile laws. This article examines this aspect in detail.
The Constitution (One Hundred and First Amendment) Act, 2016 (Amendment Act) amended the Constitution of India in ways myriad and unique. Two notable changes were that, firstly it created a new taxing field outside the three lists of the Seventh Schedule to be known as the Goods and Services Tax (GST), and secondly, a number of existing taxing fields from the Seventh Schedule were omitted or pruned so as to be subsumed in GST. Constitutional amendments have implications and these amendments have not been exceptional. As a result of the omission of the taxing subjects a significant number of constitutional challenges were raised before the judiciary, testing the competence of the Union and the States which continue to enforce the obligations which have been suffered by the taxpayers under the erstwhile laws. A number of High Courts have passed interim orders and even final orders in some cases. The Kerala High Court in its recent decision in Sheen Golden has adverted to and repelled these challenges. In this case the High Court has examined the entire scheme in great detail such that a number of crucial constitutional principles arise from this decision.
Background to the decision
The levy of value added tax in the State of Kerala was being undertaken in terms of the provisions of the Kerala Value Added Tax Act, 2003 (KVAT Act). This Act was enacted by the State in exercise of its constitutional empowered to levy taxes on the sale or purchase of goods other than newspapers in terms of Entry 54 of List II of the Seventh Schedule to the Constitution of India. By way of Section 17 of the Amendment Act, this Entry 54 was substituted to limit the States taxing empowerment to taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods. In other words, the power of the State to levy tax on sale was limited to the specified species of petroleum products and alcoholic liquor. Furthermore, Section 19 of the Amendment Act, a transition period was prescribed whereby a State law inconsistent with the Amendment Act could continue until amended or one year from the commencement of the Amendment Act, whichever was earlier.
The Amendment Act was notified on 16.09.2016. Thus, technically the State law enacted under unamended Entry 54 could at the most continue till 15.09.2017. However much prior to that, the State enacted and notified the Kerala Goods and Services Tax Act, 2017 (KGST Act) which came into force from 01.07.2017. Thus the KVAT Act could not continue with effect from 01.07.2017. This aspect was further exemplified in KGST Act which specifically repealed the KVAT Act. However Section 174 of the KGST Act, as a saving clause, saved all the proceedings, rights, liabilities, etc. accrued or acquired under the KVAT Act.
It is noteworthy that the KGST Act was enacted by the State of Kerala in exercise of its powers under Article 246A of the Constitution which was inserted by Section 2 of the Amendment Act. In terms of this Article 246A both the Union and the States stood constitutionally empowered to levy GST concurrently. The ambit of GST was also clarified by Article 366(12A) of the Constitution, which was also inserted by the Amendment Act, to define GST as any tax on supply of goods, or services, or both Accordingly, in terms of Article 246A, both the Union and the States simultaneously started levying a tax on supply of all goods and services with effect from 01.07.2017.
Challenge before the High Court
A number of writ petitions were filed before the Kerala High Court. In each of these petitions the challenge was to the levy of Kerala Value Added Tax under the provisions of the KVAT Act in so far as proceedings were sought to be initiated by the tax-authorities after 15.09.2017. The contention of the petitioners was that the saving clause under Section 174 of the KGST Act could not be resorted to by the tax-authorities to continue the proceedings under the erstwhile law. This contention was pedestaled on the premise that the very basis (i.e. the unamended Entry 54) of the KVAT Act ceased to subsist and thus this Section 174 lacked constitutional sanction. For this reason the vires of Section 174 of the KGST Act saving past proceedings as also the continuation of these proceedings was challenged before the High Court. The detailed contentions of the parties, as noted by the High Courts in the judgment, are reproduced in the Annexure below.
Key propositions emerging from the decision of the High Court
In its net conclusion the High Court negated the contentions and upheld the vires of the provision as also the proceedings under challenge. For arriving at this conclusion, the High Court traversed various aspects which lead to emergence of a number of principles relating to, positioning of Amendment Act in the constitutional scheme;
(A) The enforcement of the Constitution was prospective and this rule of interpretation extends even to constitutional amendments. This implies that the amendment does not affect in any manner the right of States to levy tax upto a period of 30.06.2017 when GST was introduced.
(B) The amendment in constitutional scheme owing to concurrent legislative empowerment of the Union and the States to levy GST does not denude either the Union or the States on the respective subject but only cross-empowers them to levy tax on the subject earlier exclusively available with either of them. There is no denudation of legislative power, no obliteration of Entry 54 of List II by the Amendment Act. This essentially means that levy of tax under GST is only a manner of continuation (with addition) of the earlier taxes. The key to appreciate the change is by stressing upon the premise that GST is a subsumation of the past taxes and not a repeal simplicitor.
(C) Section 19 of the Amendment Act is not a saving clause and only allows co-existence of earlier laws in GST regime upto a period of one year. Thus, reference to Section 19 to contend that States lost power to recover VAT after one year is a misconceived contention.
(D) On the significance of Amendment Act generally.
27. That said, 101st Constitutional Amendment is the epoch-making federal feat unparalleled in constitutional democraciesalmost. It is, I may say, a constitutional coup de grâce delivered against the fiscal confusion compounded by conflicting taxation regimes. This amendment, perhaps, marks the crest of cooperative federalism. It has created even a constitutional institutionGST Council.
The High Court also noted that GST like any other nascent enactment in a nebulous field of taxation will have many teething troubles and therefore in its path to perfection, GST has much dust to settlelegislatively and judicially.
This decision of the Kerala High is very significant from a practical perspective. By rejecting the petitions the High Court has upheld the saving clause under the GST legislations in terms of which the proceedings under the erstwhile State VAT laws have been continued. This implies that (a) all the proceedings under the erstwhile State VAT laws which were pending on 15.09.2017 would continue as if the laws have not been repealed, and also (b) all the rights and liabilities which have been acquired by the tax-authorities or the tax-payers would be enforced as per the erstwhile laws notwithstanding that the proceedings were not initiated on 15.09.2017. Logically this decision will also extend to the repeal and saving clause under the Central Goods and Services Tax Act, 2017 to save the proceedings under the central laws such as Central Excise and Service Tax. Essentially therefore, subject to the outcome of the appellate proceedings in these petitions, this decision of the High Court forecloses the issue of validity of the proceedings under the erstwhile laws.
Contentions of the parties (as summarized by the High Court)
25. If I list out, even encapsulate, each counsels arguments, they run into pages, besides sounding repetitive. So for brevitys sake, I will set out their arguments compendiously and, to the extent possible, concisely, too. So the extracted arguments are party-specific, not counsel-specific;
About the 101st Constitution Amendment Act:
On and from 16.09.2016, Article 246 yielded legislative ground to the newly engrafted Article 246A. Thus, Article 246 stood amended and modified in its operation. Consequently, a few items in both List I and List II suffered significant schematic changes. Article 246A, an enabling legislative provision, contains no concomitant schedule or iteration.
Entry 54 of List II stands substituted by 16.09.2016; the Constitutional Amendment does not save it. So the pre-amended Entry 54 of List II has ceased to exist. Instead, what reigns is the substituted Entry 54.
Section 19 of the Amendment Act is the transitional provision, besides being the saving provision. Nothing from the pre-existing legislative regime saves itself from or transits across what is set out in Section 19a sunset clause.
First, Entry 54 abrogated, from 16.09.2016 the States have been denuded of the power of taxation. Second, the interim or transitional existence of the unamended Entry 54, if ever, could have survived only up to 16.09.2017, as per Section 19.
Any judicial effort to save or resurrect the erstwhile Entry 54 beyond 16.09.2017 renders Section 19 of the Amendment Act otiose, meaningless, and insignificant.
Section 19 of the Amendment Act itself provides for the repeal, for the savings, and for the consequences, too. So there remains no more power or authority for the State to have a further repeal and saving, as providederroneously thoughin Section 174 of the SGST Act. Pithily put, Section 174 of the SGST Act cannot travel beyond Section 19 of the Amendment Act.
A law under Article 246A cannot be the source of power to save legislation under List II of Entry 54 at all.
Article 367 & General Clauses Act:
Article 367, too, does not apply, as the constitutional command of repeal is explicit.
Neither KSGST nor CGST provides for repeal or re-enactment.
So, primarily, the General Clauses Act cannot resurrect or rescue the repealed enactments, even if its Sections 6 and Section 24 are invoked.
The State stands protected for the Centre undertakes to reimburse its losses.
The clear and unequivocal legislative intent of Section 19 of the Amendment Act is to stop the operation of KVAT, 2003, from 16.09.2017.
A Statutory saving-provision, such as Section 174 of KSGST, emanating from the States legislative power, cannot nullify the constitutional mandate of Section 19 of the Amendment Act, emanating from the Parliaments constituent power.
Section 174 Absence of Legislative Power:
Article 367 does not apply because repealing enactment itself provides explicitly for transition and saving. In other words, only in the absence of the repeal or saving is the General Clauses Act attracted.
Section 24 of the General Clauses Act saves the subordinate legislation and applies if there are repeals and re-enactments. Here neither is present. So machinery provisions are not saved. Then follows the well-accepted proposition: there is no tax without machinery provisions.
By the CA Act, the Parliament never intended that dealers or assessees should escape the tax network, letting the society or exchequer suffer.
The Parliament has enacted the Goods and Services Tax (Compensation to States) Act, 2017, empowered by Section 18 of the Amendment Act, on the recommendation of the GST Council, though. This enactment, however, does not derive its legitimacy from any legislative entry or field of legislation enumerated in the Central List.
Similarly, Section 19 of the Amendment Act empowers the State Legislature to amend or repeal provisions of any existing law which are inconstant with the Constitution as amended by the amending Act.
The non-obstante Clause in Section 19 mandates that such legislation can be made notwithstanding anything contained in the Amendment Act. So the Entry 54, as it originally stood before the Amendment Act, remains available for the State, under Article 246 of the Constitution.
In the alternative, without Entry 54 as it originally stood, the newly introduced Article 246-A as per Section 2 of the Amending Act read with Section 19 of the amending Act, by itself gives power to the state legislature to enact the impugned provisions in the State GST Act.
A transitional provision in a Constitution Amendment Act has a higher status and better legal impact than a transitional provision in ordinary legislation. So Section 19 of the CA Act, read with Article 246-A, without any doubt, empowers the State Legislature to enact Section 174(b) and (c) of the KSGST Act, 2017.
The Legislature does not derive its power to legislate from the Entries in the three lists of the 7th Schedule; therefore, the substitution of an entry in any List of the 7th Schedule does not affect the States lawmaking power.
The Amendment Act is only prospective, and the constitutional amendment does not in any way deal with the past transactions or any rights and liabilities accrued.
The provisions contained in Sections 173 and 174 of the State Act are not inconsistent with the provisions contained in the Amendment Act.
On the General Clauses Act and Its Application:
Every latter enactment which supersedes an earlier one or puts an end to a previous state of the law is presumed to intend the continuance of rights accrued and liabilities incurred under the superseded enactment.
This interpretative presumption could be negated only if there were sufficient indications express or implied in the later enactment designed to obliterate the earlier state of the law.
If the legislative intent to supersede the earlier law is the basis upon which the doctrine of implied repeal is founded, there could be no incongruity in attributing to the later legislation the same intent which Section 6 presumes where the word repeal is expressly used.
Where an intention to effect repeal is attributed to a legislature, then the same would attract the incidence of the saving found in
Section 6 of the General Clauses Act:
The power to make a law regarding a tax comprehends, within its power, how to levy that tax and determine the persons who are liable to pay such tax, the rate at which such tax is to be paid, and the event which will attract the liability regarding such tax.
The liability to pay the tax was not dependent upon assessment or demand but was an obligation to pay the tax either annually, quarterly, or monthly as the case may be.
Tarun Jain is an Advocate, Supreme Court of India. He holds an LLM degree with specialisation in Taxation from the London School of Economics. He graduated from National Law University, Jodhpur with B.B.A., LL.B. (Hons.) topping the University and was awarded double gold medals. He is also author of Goods and Services Tax: Constitutional Law and Policy (Eastern Book Company, 2018). He can be reached at .
Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.
 For illustration, (i) order of the Rajasthan High Court in Sanwaria Sweets Pvt. Ltd. v. Union of India DBCWP No. 2031/2018; (ii) orders of the Gujarat High Court in North Western Carrying Corporation v. Union of India SCA No. 496/2019, order dated 18.01.2019 and in Oil Field Warehouse and Service Ltd. v. Union of India SCA No. 16232/2018, order dated 17.10.2018; etc.
 For illustration, (i) decisions of the Gauhati High Court in Laxmi Narayan Sahu v. Union of India WP(C) No. 2059/2018, decision dated 12.10.2018 and in Industrial Trade and Agencies v. State of Assam WP(C) No. 239/2018, decision dated 12.04.2018; (ii) decision of Kerala High Court in Earthline Services Pvt. Ltd. v. State of Kerala WP(C) No. 25972/2018, decision dated 07.08.2018; etc.
 Sheen Golden Jewels (India) Pvt. Ltd. v. State Tax Officer [Writ Petition (Civil) No. 11335/2018] [decision dated 11.01.2019]: 2019-VIL-53-Ker. It is noteworthy that the Honble High Court has extensively referred to and validated a number of conclusions drawn by the present author in his book Goods and Services Tax: Constitutional Law and Policy (Eastern Book Company, 2018).
 Section 19 of the Amendment Act provides that 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.
 Section 2 of the Amendment Act provides for insertion of Article 246A in the Constitution which states as under;
246A. Special provision with respect to goods and services tax. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation. The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council..
 Following Keshavan Madhava Menon v. State of Bombay 1951 Criminal Law Journal 680 (Supreme Court).
 Paragraph 67.
 Paragraph 136.
 Paragraph 131, 143. To elaborate, the High Court observed as under;
131. Here I must observe that Section 19 is not a saving clause; any saving clause starts to operate from the day the previous Act is dead. Here, the CA Act has allowed various enactmentsthose that contradict itto coexist. Here, the repeal did not take place on 16.09.2016, when the CA Act came into force, but on 16.09.2017, when the one-year period ended. Saving Clause, in fact, if available, was needed from then on, not before. Indeed, Section 19 of the CA Act saves nothing beyond 16.09.2017.
 Paragraph 31.
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