1995 (2) TMI 405 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of Section 5(1)(vi) and the Sixth Schedule of the Kerala General Sales Tax Act (KGST Act) as amended by the Kerala Finance Act, 1994.
2. Levy of tax on "iron and steel" as declared goods.
3. Alleged violation of Article 286(3) of the Constitution of India and Sections 14 and 15 of the Central Sales Tax Act (CST Act).
4. Discrimination against "iron and steel" compared to other declared goods.
5. Impact on inter-State trade and commerce.

Detailed Analysis:

1. Constitutionality of Section 5(1)(vi) and the Sixth Schedule of the KGST Act:
The petitioners, dealers of iron and steel, challenged the constitutionality of Section 5(1)(vi) and the Sixth Schedule of the KGST Act as amended by the Kerala Finance Act, 1994. They argued that these provisions, which imposed a tax on iron and steel at all points of sale, were unconstitutional and void. The court found that the multi-point levy imposed by these provisions was contrary to Section 15(a) of the CST Act, which mandates that the tax on declared goods should not exceed 4% and should be levied at only one stage. Consequently, the provisions were held to be ultra vires the CST Act and unconstitutional.

2. Levy of Tax on "Iron and Steel" as Declared Goods:
The petitioners contended that iron and steel are declared goods under Section 14 of the CST Act, and as such, the tax on these goods should not exceed 4% at a single point of sale. The court agreed with the petitioners, stating that the new system of value-added tax (VAT) introduced by the Kerala Finance Act, 1994, imposed a multi-point levy on iron and steel, which violated the restrictions imposed by Section 15(a) of the CST Act. The court illustrated this with examples showing how the tax burden would exceed 4% at successive points of sale, thereby contravening the CST Act.

3. Alleged Violation of Article 286(3) of the Constitution of India and Sections 14 and 15 of the CST Act:
The petitioners argued that the amended provisions violated Article 286(3) of the Constitution, which imposes restrictions on the power of the State to levy tax on the sale or purchase of goods declared by Parliament to be of special importance in inter-State trade or commerce. The court noted that Article 286(3)(a) mandates that any State law imposing a tax on such goods must be subject to the restrictions and conditions specified by Parliament. Sections 14 and 15 of the CST Act, which declare iron and steel as goods of special importance and impose restrictions on the rate and stage of tax, were found to be violated by the impugned provisions. Therefore, the court held that the provisions were unconstitutional.

4. Discrimination Against "Iron and Steel" Compared to Other Declared Goods:
The petitioners contended that iron and steel were being discriminated against by being taken out of the Second Schedule (which contained other declared goods) and inserted into the Sixth Schedule (which included luxurious consumer goods). The court acknowledged that iron and steel were being treated differently from other declared goods, such as sugar, tobacco, and textiles, which were either exempted from tax or taxed at lower rates. However, the court focused on the violation of the CST Act and the Constitution rather than the discrimination aspect.

5. Impact on Inter-State Trade and Commerce:
The petitioners argued that the new levy would affect inter-State trade and commerce and restrict the freedom of trade. The court noted that iron and steel are essential commodities with significant importance in various sectors of the economy. The imposition of a multi-point levy would increase the tax burden on these goods, thereby affecting their price and availability. The court cited the Supreme Court's observation in Telangana Steel Industries v. State of Andhra Pradesh, which emphasized the need to minimize the tax burden on declared goods due to their special importance in inter-State trade and commerce. The court concluded that the impugned provisions were illegal and void.

Conclusion:
The court held that the provisions contained in Section 5(1)(vi) and the Sixth Schedule of the KGST Act as amended by the Kerala Finance Act, 1994, in so far as they relate to the levy of tax on declared goods "iron and steel," are illegal, ultra vires of the CST Act, and unconstitutional. The court quashed the impugned provisions and allowed the original petitions.