Compensation to States Act 2017 Constitutionally valid not beyond legislative competence – SC

The Compensation to States Act 2017 Constitution valid, not beyond the legislative competence of Parliament. No offset for Clean Energy Cess -SC

ABCAUS Case Law Citation:
ABCAUS 2555 (2018) (10) SC

Important Case Laws Cited/relied upon by the parties:
Hoechst Pharmaceuticals Ltd. & Others Vs. State of Bihar & Others, (1983) 4 SCC 45
M.P.V. Sundararamier & Co. Vs. State of A.P. & Others, AIR 1958 SC
Dewan Chand Builders and Contractors Vs.   Union   of   India   and   Others,   (2012)   1   SCC   101.

The instant bunch of case deals with the validity of the Goods and Services Tax (Compensation to  States) Act, 2017 and the Goods   and Services Tax Compensation Cess Rules, 2017.

Earlier, a Division Bench of Delhi High Court in a writ filed by a taxpayer (Petitioner) had passed ad interim  order  providing that additional levy on the stocks of coal on which writ petitioner had already paid Clean Energy Cess in terms of Finance Act, 2010, he shall not be required to make any further payment. However, on the issue of stocks of coal on which no Clean Energy  Cess was paid, the High Court had stated that it would be subject to the final result of the writ petition. 

However, the Supreme Court had stayed impugned order passed by the High Court in the SLP filed by the Government of India against the interim order of the Delhi High Court.

The case of the Petitioner was that the impugned legislation defeated the very objective of the Constitution. On the very same transaction there cannot be two levies, one under Central GST Act and another under  impugned  legislation as it would amount to double taxation. Thus, there was an overlapping in law which is not  permissible.

It was argued that Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 does not empower  the Parliament to levy cess and tax as it provides Parliament to make any law to provide compensation to the States for loss of revenue arising on account of implementation of GST for a period of 5 years. Thus, the impugned legislation is a colourable legislation which lacks legislative competence so far as collection of levy on cess is concerned.

The Hon’ble Supreme Court framed the following questions arising for consideration:

Question 1 : Whether the Compensation to States Act, 2017 is beyond the legislative competence of Parliament?

Answer: The Compensation to States Act, 2017 is not beyond the legislative competence of the Parliament. 

The Hon’ble Supreme Court clarified that after Constitution (One Hundred and First Amendment) Act, 2016, as per Article 270, Parliament can levy cess for a specific purpose under a law made by it.  Article 270,  thus, specifically empowers Parliament to levy any cess by law. Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 expressly empowers Parliament shall, “by law” on the recommendation of the Goods and Services Tax Council, provide for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax….” When Constitution provision empowers the Parliament  to provide for Compensation to the States for loss of revenue by law, the expression  “law”  used therein is  of wide import which includes levy of any cess for the above purpose.  

Question 2 : Whether Compensation to States Act, 2017 violates Constitution (101st Amendment) Act, 2016 and is against the objective of Constitution (101st Amendment) Act, 2016?

Answer: The  Compensation  to   States   Act,   2017   does   not violate   Constitution   (One   Hundred   and  First Amendment)  Act, 2016 nor is against the objective of  Constitution (One Hundred and First Amendment) Act, 2016.

Question 3 : Whether the Compensation to States Act, 2017 is a colourable legislation?

Answer: The Compensation to States Act is not a colourable legislation.   

The Hon’ble Supreme Court stated that it having held that Parliament had full legislative competence  to  enact  the Act and the Act having been enacted  to  implement  the Constitution (101st) Act and the object being clearly to fulfill the Constitution  (101st Amendment) Act’s  objective.

(4) Whether levy of Compensation to States Cess and GST on the  same  taxing  event  is permissible in law?

Answer: Levy of Compensation to States Cess is an increment to goods and services tax which is permissible in law.

The Hon’ble Supreme Court stated that Goods and Services Tax imposed under the 2017 Acts  and levy of  cess  on  such intra ­State supply of goods and services or both as provided under Section 9 of the CGST  Act  and  such  supply  of goods and services or both as part of Section 5 of IGST Act  is two separate imposts in law and  are  not  prohibited by any law so as to declare it invalid.

Question 5 : Whether on the basis of Clean Energy Cess paid by the petitioner till 30th  June, 2017, the petitioner is entitled for set off in payment of Compensation to States Cess?

Answer : The petitioner is not entitled for any set off of payments made towards Clean Energy  Cess in payment of Compensations to States Cess.

The Hon’ble Supreme Court stated that   Clean Energy Cess was imposed under the Finance Act, 2010. The  Clean Energy  Cess and the States Compensation Cess are collected for wholly different purposes. The Clean Energy Cess was levied and collected for the purposes of financing and  promoting clean energy initiatives, funding research in the area of clean energy or for any other purpose relating thereto whereas States Compensation Cess is collected to “provide for compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax.

Also, the distribution between the Union and States of the Clean Energy Cess and GST Compensation Cess  so collected are also different. the Clean Energy Cess was to be used for the purposes of the Union and not to be distributed to the States whereas States Compensation Cess has to be wholly distributed amongst the States to compensate the States.

The Hon’ble Supreme Court clarified that the submission that the petitioner should be given the credit to  the  extent of payment of Clean Energy Cess up to 30.06.2017 cannot be accepted. The Clean Energy Cess and States Compensation Cess are entirely different from each other, payment of Clean Energy Cess was for different purpose and has no bearing or connection with States Compensation Cess. Giving credit or set off in the payment is legislative policy which had to be reflected in the legislative scheme. Compensation to  States  Act,  2017  or  Rules  framed thereunder does not indicate giving of any credit or set off of the Clean Energy Cess already paid till 30.06.2017. 

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