2015 (9) TMI 1438 - HC - VAT and Sales Tax

Levy of VAT on Liquor - constitutional validity of Entry No.59A of the III Schedule to Karnataka Value Added Tax Act, 2003 - it was contend that by virtue of this notification, the State has attempted to over come the legislative limitation imposed on the State not to exempt dealers or class of dealers from levy of tax under KVAT Act and the device adopted by the State to confer exemption in respect of liquor sold by the dealers who are not holding certain stated categories of licences under Excise Law and it amounts to class oriented discrimination. Held that - In the matters of tax laws, larger discretion is extended to the State Legislature and ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax and which it would not tax, so long as the classification made within this wide and flexible range, by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality and it would not be vulnerable to attack on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. It could be seen that State legislature in its economic wisdom of taxation has chosen to provide for levy of tax on liquor sold by certain dealers namely, Bar and Restaurants operating in urban areas i.e., licence issued in Form No.CL-9 and in respect of Star Hotels, Clubs and Hotel, Boarding Houses and Lodges located anywhere in the State considering the potential for tax collection being huge, and at the same time, exemption has been extended to similar licence holders running Bar and Restaurants by operating them in rural areas considering the fact of low value addition between the price at which liquor is purchased and sold to customers in rural areas. However, a Hotel, Boarding House or Lodge holding licence in CL-7 though located in rural area would also serve liquor only to the residents of the Hotel and their guests who are elite customers and they can afford to pay more for the comfort they enjoy with varying degree of facilities. Thus, condition of licence itself enables the licence holder to fix the price of the liquor irrespective of MRP on account of substantial value addition and as such, the legislature has brought this class of dealer also to taxation. However, Bar and Restaurants located in the same rural area which would not cater to the elite class of customers or customers of economic superiority have been exempted by virtue of notification dated 28.02.2014. The classification of dealers based on value addition criteria for the purpose of tax levy and exempting the dealers based on area criteria cannot be held to be discriminatory. - Decided against the petitioners.

Summary

Issues Involved:
1. Constitutional validity of Entry No. 59A of the III Schedule to the Karnataka Value Added Tax Act, 2003 (KVAT Act) and the notification dated 28.02.2014.
2. Whether the impugned legislation and notification are discriminatory and violate Articles 14, 19, and 304B of the Constitution of India.
3. Legislative power of the State under Section 5 of the KVAT Act.

Issue-Wise Detailed Analysis:

1. Constitutional Validity of Entry No. 59A and Notification dated 28.02.2014:
The petitioners challenged the constitutional validity of Entry No. 59A of the III Schedule to the KVAT Act, 2003, inserted by the KVAT (Amendment) Act, 2014, and the notification dated 28.02.2014. They argued that the KVAT Act does not empower the State to levy tax on a class of persons, and the impugned levy violates Articles 14, 19, and 304B of the Constitution.

The court examined the historical background, noting that the Karnataka Sales Tax Act, 1957, provided for the levy of sales tax on liquor, which was later merged with State Excise Duty. The introduction of Entry No. 59A aimed to capture substantial value addition in the retail sale of liquor by clubs, lodging houses, star hotels, bars, and restaurants in urban areas. The court found that the State had the legislative power to levy tax on liquor sold by certain dealers, considering the potential for tax collection on the huge value addition.

2. Discrimination and Violation of Articles 14, 19, and 304B:
The petitioners contended that the impugned notification discriminates between dealers in liquor carrying on business selectively, exempting certain dealers based on geographical location and type of license. They argued that this classification is arbitrary and lacks a rational nexus to the object sought to be achieved.

The court held that the classification of dealers based on value addition and geographical location is rational and does not violate Articles 14, 19, and 304B. It noted that the State has a wide discretion in selecting objects or persons to tax, and the classification must have a rational nexus to the object sought to be achieved. The court found that the impugned notification exempts liquor sold by dealers in rural areas due to low value addition, while taxing liquor sold by dealers in urban areas and certain categories of dealers with substantial value addition.

3. Legislative Power under Section 5 of the KVAT Act:
The petitioners argued that the State had no power under Section 5 of the KVAT Act to grant exemption to dealers and could only exempt goods. The court examined the relevant provisions of the KVAT Act and the erstwhile Karnataka Sales Tax Act, 1957, and found that the State had the power to grant exemptions subject to restrictions and conditions specified in the notification. The impugned notification exempted tax payable on the sale of liquor by certain dealers, which was within the State's power under Section 5(1) of the KVAT Act.

The court also referred to similar provisions under the Central Excise Act, 1944, and upheld the validity of the impugned notification, stating that it did not suffer from the vice of excessive delegation of power to exempt.

Conclusion:
The court dismissed the writ petitions, holding that the impugned legislation and notification were within the legislative power of the State, did not violate Articles 14, 19, and 304B of the Constitution, and were not discriminatory. The classification of dealers based on value addition and geographical location was found to be rational and justified. The court upheld the constitutional validity of Entry No. 59A of the III Schedule to the KVAT Act and the notification dated 28.02.2014.