(This is a guest post by Karan Trehan.)
The Constitution (One Hundred and First Amendment) Act, 2016 [‘Amendment Act’], introduced the Goods and Services Tax [‘GST’] regime in India which came into force from 8th September, 2016. Various laws were also passed subsequently for implementing the GST, which became effective from 1st July, 2017. The amendment act and corresponding legislation empower both Parliament and the States to levy GST on supplies of goods and services.
Various States raised concerns regarding substantial loss of revenue as a consequence of introducing the GST, which had accrued to them earlier on account of levying numerous indirect taxes. Thus, the Goods and Services Tax (Compensation to States) Act, 2017, [‘CSA’] was enacted in order to compensate the States for this loss of revenue. Section 8 of this act provides for levy of a ‘cess’ on intra-State and inter-State supply of goods or services, or both, as a means of compensation for a period of five years, or for such period prescribed as per the recommendation of the GST Council. This cess collected has to be distributed amongst the States in the manner prescribed under the Act and the corresponding rules framed under it.
The constitutional validity of the Goods And Services Tax (Compensation To States) Act, 2017, and the Goods and Services Tax Compensation Cess Rules, 2017, came up before consideration before the Hon’ble Supreme Court [‘SC’] in Union of India v. Mohit Minerals Pvt. Ltd, AIR 2018 SC 5318. Among the contentions raised, one was that the act was beyond the legislative competence of the Parliament. The court, however, upheld the legislative competence of Parliament to enact the law, pointing out that Article 270, after the Constitution (One Hundred and First Amendment) Act, 2016, specifically empowers Parliament to levy any cess by law.
Although the court also emphasized the fact that Section 18 of the Amendment Act expressly empowers the Parliament to compensate the States for loss of revenue arising on account of implementation of the GST, ‘by law’, this factor did not form the basis of court’s decision.
Before delving any further, it is apposite at this stage to refer the language employed by Section 18. The Section states that:
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 for a period of five years.
Thus, this clause authorizes the Parliament to frame law for compensating the States on account of loss in the revenue arising due to the implementation of GST. It is pertinent to note that although Section 18 forms a part of GST amendment act, it has not been reflected in the amended text of Constitution.
This article aims to argue firstly, that Section 18 of the amendment act is not an ordinary piece of legislation and in fact has a constitutional basis [against what has been argued here]; and secondly, although Section 18 does not specifically amend the text of Constitution, it can still be considered as a source of power to frame a law providing for compensation to the States. In addition to this, the possibility of conflict of such a power with the residuary provisions under Schedule VII, and the manner of resolving such a conflict, has also been discussed.
Can a law be framed through the power granted under Section 18 of the 101st Amendment Act?
Section 18, which forms a part of the Amendment Act, has not been reflected in the Constitution. Indeed, the present case falls under a peculiar scenario, where a section that forms part of the Constitutional amendment act has not made any change to the bare language of Constitution. Hence, can one say that above clause will have the same legal status as other sections of the amendment act reflected in the Constitution? Further, can the law-making power granted be exercised to frame a law for compensating the States?
In this regard, there have been previous instances where provisions of an amendment act, though not reflected in the Constitution, have been relied upon and given full legal effect by the courts. Two of these can be traced back to the First and Forty-Second Amendment Acts to the Indian Constitution. Section 3 of the Constitution (First Amendment Act), 1951 made certain changes to Article 19. It had two sub-sections, of which the first modified clause 2 of Article 19 and substituted new words in the text for old, with retrospective effect. The second sub-section, however, did not alter any existing words but mentioned that no law in force at the commencement of the Constitution would be deemed to be void on the ground that its operation was not saved by Clause 2 of Article 19, as originally enacted. The Allahabad HC court in Purshottam Lal Sayal vs Prem Shanker, AIR 1966 All 377 while deliberating upon the above clause held:
“25. ……. Sub-section (2) of Section 3, on the passing of the Bill, became a part of the Constitution Amendment Act. Therefore, after the passing of this amending Act the Constitution stood amended in accordance with the terms of Sub-section (3).”
Further, in Shantilal Ambalal Mehta vs M.A. Rangaswamy, (1977) 79 BOMLR 633 and Shripatrao Dajisaheb Ghatge v. The State of Maharashtra, (1977) 79 BOMLR 259, the issue before the Bombay HC was about the enforceability of Section 58 of the Constitution (Forty-Second Amendment) Act, 1976. The Section contained some special provisions regarding pending petitions under unamended Article 226 and 227. It also did not form a part of the text of Constitution. The court in these cases held the clause to be enforceable.
It is established that as soon as the procedure enjoined for amendment under Article 368 is fulfilled, the Constitution stands amended in accordance with the terms of the Bill. Moreover, no particular phraseology for amendment is prescribed, and there is not a word in this article which requires that a Bill for amending the Constitution must alter the existing text of the Constitution.
Consequently, in simple terms, an amendment modifies/adds to the existing provisions of a Constitution. If an amendment or a certain provision of the amendment gets repealed by the legislature or is struck down by the court, the Constitution gets restored as if no change had ever taken place. It is a cardinal principle of statutory interpretation that every part of a statute must be regarded as material and given effect to and no part rejected as superfluous or decorative.
Therefore, to say that only those parts of the amendment act which explicitly bring about changes to the text of Constitution can be said to have added something to the existing provisions would be to render other provisions superfluous. This would also amount to saying that those other provisions were not included in the Bill for the purpose of amending the Constitution. This makes it difficult to comprehend the intention behind the insertion of such a provision.
Hence, in order to avoid superfluity, the terms ‘addition’ or ‘change’ to the Constitution would not only include clauses that are reflected in the text, but also others that form a part of the amendment. Thus, the Constitution has to be read along with the amendments, which, to the extent of their validity, are a part of the Constitution in entirety.
Based on the above discussion, it can be concluded that the court could have sourced the validity of GST (Compensation to States) Act, 2017 through Section 18 of Constitution (One Hundred and First Amendment) Act, 2016 without going into Article 270 so far as the power to frame a law providing for compensation to States is concerned.
Conflict with Residuary Provisions
Article 245 read with Entry 97 in List I of VII Schedule and Article 248 deals with residuary powers of Parliament to legislate with respect to any matter not enumerated in the Concurrent List or State List. [‘Residuary provisions’]. This includes the power to enact any law imposing a tax not mentioned in either of List II or III.
Article 246A empowers the Parliament and States to impose goods and services tax subject, to conditions stipulated therein. Through the GST Amendment Act, Article 246, which demarcates the subject matter over which Parliament and States can legislate and Article 254, which is the repugnancy provision; have been made inapplicable to Article 246A. Furthermore, the applicability of Article 248 has also been explicitly excluded. In addition, several heads of legislation which were earlier provided under Seventh Schedule, were also omitted through the Amendment.
Thus, by excluding the applicability of aforementioned provisions, the powers (residuary and others) which were earlier available under VII Schedule have been sourced outside exclusively to Article 246A in so far as imposition of goods and services tax is concerned. The purpose for this is clearly to avoid any conflict in terms of the source of power and subjects of legislation.
Interestingly, Section 18 has no such exclusion clause present. Hence, regardless of whether ‘law’ under Section 18 includes the power to levy cess, it can be argued that law making power provided in this section is also available under Article 245 r/w Entry 97 and Article 248 which brings it in conflict with the residuary provisions. (Since there is no other entry which deals with power to make a law for compensating States, Entry 97 is the only possibility).
It has to be noted that Section 18, like Article 246A, also forms a part of the GST regime and is an important source of power as it allows law making for purpose of compensating the States. If the Section is interpreted in manner stated earlier, this will result in overlap with respect to legislative competence of Parliament and States to enact laws which the legislature clearly did not intended. Thus, the power under Section 18 has also to be read as if it has also been sourced outside the Seventh Schedule and Article 248 (in similar manner as Article 246A). This is the only possible manner of resolving the conflict.