2015 (11) TMI 1635 - HC - VAT and Sales Tax

Turnover tax - textiles - Validity of tax legislations - whether, the levy of turnover tax under Section 6A of the KVAT Act, which purports to be a levy of tax on the sale of goods, traceable to Entry 54 of List II, would cease to be such solely on account of the fact that the measure of the tax is determined with reference to the sales turnover of the goods, that also constitutes the income of the selling dealer? Held that - the levy contemplated under Section 6A of the KVAT Act is essentially in the nature of a tax levied on the sale of specified goods, that were earlier enjoying an exemption from tax under the KVAT Act, under circumstances where the selling dealer has crossed a threshold turnover of Rupees one crore in the previous year in respect of the said goods. The rate of tax is 2% and, there is no material on record to suggest that the measure of the tax is so excessive that it assumes the nature of a tax on income. The contention of the petitioners that the levy is confiscatory in nature and violates their rights under Article 19(1)(g) of the Constitution cannot therefore be legally sustained. Besides, merely because the legislature, in its wisdom, has chosen not to permit the dealer in question to pass on the tax to his customer, the tax does not cease to be a tax on the sale of goods. As already noticed, this Court is not to concern itself with the reasons that weighed with the legislature in choosing to insist on a dealer paying the tax to bear the tax burden. The wisdom of the legislature in enacting such a measure cannot be gone into by this court. The State Legislature has the legislative competence to levy turnover tax on specified textile articles through the enacted provisions of Section 6A of the KVAT Act. The levy of tax under the State VAT laws has necessarily to be subject to the restrictions imposed by the Constitutional provision and accordingly, the turnover of the specified textile articles reckoned for the purposes of the levy under Section 6A of the KVAT Act cannot take in such turnover as is attributable to export sales of such goods or sales in the course of inter-state trade as defined under the CST Act. This principle of reading down a statutory provision so as to render it in conformity with the provisions of the Constitution is well settled. The Constitution is the highest law of the land and no statutory provision can violate it. If a statutory provision appears to violate the provisions of the Constitution, the court has two options - either to declare the provision as unconstitutional or to read it down to make it constitutional - It is the latter course that I choose to adopt in this case. I must clarify, however, that the restriction aforementioned applies only in respect of the turnover of sale of specified textile articles as is reckoned for the purposes of the levy, and not to the turnover of the said articles as is taken for determining the threshold turnover, of Rs. One Crore in the previous year, of those dealers on whom the levy is contemplated. Similarly, in the case of those textile articles as are declared to be goods of special importance in interstate trade or commerce under Section 14 of the CST Act, the mandate of Section 15 of the CST Act has necessarily to be followed and the State Legislation has to ensure that the tax payable under the KVAT Act in respect of the sale or purchase of such goods inside the State shall not exceed 5% of the sale price thereof. Section 6A of the KVAT Act is thus read down to the above extent. Assessments made under Section 6A of the KVAT Act for the period between 01.04.2014, when the provisions were introduced through the Kerala Finance Bill, 2014, and implemented through a declaration under Section 3 of the Kerala Provisional Collection of Revenues Act, 1985, and 23.07.2014 when the declared provisions came into force as an enactment the Kerala Finance Act, 2014-in an amended form - Held that - when the levy was introduced through the Finance Bill, it contemplated a tax @ 2%, in respect of a specified category of dealers, on their turnover of sale of all textile articles included in the I Schedule to the KVAT Act. In the Finance Act, 2014 which came into effect from 23.07.2014, however, the levy was confined to the turnover of sale of only those textile articles as were specified in Entries 17A, 46A and 51 of the I Schedule to the KVAT Act. Sections 4 and 5 of the Kerala Provisional Collection of Revenues Act, 1985 - the State Government would have to refund such taxes or other revenues as have been collected by them in terms of Section 6A, in respect of textile articles other than those specified in Entries 17A, 46A and 51 of the I Schedule to the KVAT Act. Petition disposed off - decided partly in favor of petitioner.

Issues Involved:
1. Legislative competence of the State Legislature to levy turnover tax under Section 6A of the KVAT Act.
2. Whether the levy of turnover tax is essentially a tax on income.
3. Compatibility of the levy with the concept of Value Added Tax (VAT).
4. Discrimination in the levy of turnover tax.
5. Absence of machinery provisions for filing returns and payment of turnover tax.
6. Retrospective effect of the amendment omitting Section 6A.
7. Compliance with Article 286 of the Constitution and Sections 14 and 15 of the CST Act.
8. Validity of assessments made under Section 6A before the enactment of the Kerala Finance Act, 2014.

Detailed Analysis:

1. Legislative Competence of the State Legislature:
The main contention is whether the State Legislature has the legislative competence to introduce Section 6A in the KVAT Act. The court noted that taxation is treated as a distinct matter for legislative competence and must be construed broadly. The levy of turnover tax is essentially a tax on the sale of specified goods and falls within the legislative competence of the State Legislature under Entry 54 of List II. The court upheld the legislative competence of the State Legislature to levy turnover tax on specified textile articles through Section 6A of the KVAT Act.

2. Tax on Income:
The petitioners argued that the levy is a tax on income since it does not allow passing on the tax to the purchaser and prohibits input tax credit. The court distinguished between the nature of a tax and its measure, stating that the measure of the tax does not necessarily determine its nature. The levy of turnover tax is on the sale of goods, not on income, and is within the legislative competence of the State Legislature. The court rejected the contention that the levy is confiscatory and violates Article 19(1)(g) of the Constitution.

3. Compatibility with VAT:
The petitioners contended that the levy goes against the concept of VAT and the understanding arrived at in the White Paper by the Empowered Committee of State Finance Ministers. The court held that a legislative provision cannot be struck down merely because it goes against a commitment to an empowered committee. The court also rejected the argument that the White Paper should be seen as an executive decision of the Central Government giving effect to the GATT Treaty proposals.

4. Discrimination:
The petitioners argued that the levy is discriminatory because no other State has imposed a similar levy and it discriminates between dealers in textile articles and other dealers within the State. The court found no merit in this contention, stating that Article 14 does not authorize striking down a law of one State on the ground that its provisions are discriminatory in contrast with a law of another State. The court also noted that the State Legislature has greater freedom in economic legislations and can reasonably pick and choose the subjects of taxation.

5. Absence of Machinery Provisions:
The petitioners contended that there is no machinery provision for filing returns and payment of turnover tax under Section 6A. The court noted that Chapter V of the KVAT Act provides for the filing of returns by every registered dealer and the prescribed forms enable dealers to report their turnover for the purposes of the levy under Section 6A. The court found the existing machinery provisions adequate and rejected the contention based on the alleged lack of machinery provisions.

6. Retrospective Effect of Amendment:
The petitioners argued that the amendment omitting Section 6A should be seen as curative and retrospective in its operation. The court held that a substantive amendment in a taxing statute should be construed as prospective unless otherwise stated. The court found that the omission of Section 6A was to take effect only from 01.04.2015 and the levy was valid till that date.

7. Compliance with Article 286 and CST Act:
The petitioners argued that the levy ignores the provisions of Article 286(1) of the Constitution and Sections 14 and 15 of the CST Act. The court held that the turnover of specified textile articles for the purposes of the levy cannot include turnover attributable to export sales or sales in the course of inter-state trade. The court read down Section 6A to ensure compliance with Article 286 and the CST Act, stating that the tax payable under the KVAT Act in respect of declared goods shall not exceed 5% of the sale price.

8. Validity of Assessments Before Kerala Finance Act, 2014:
The court noted that the levy was introduced through the Finance Bill and implemented through a declaration under the Kerala Provisional Collection of Revenues Act, 1985. The court held that the State Government must refund taxes collected in respect of textile articles other than those specified in Entries 17A, 46A, and 51 of the I Schedule to the KVAT Act during the period between 01.04.2014 and 23.07.2014. The court quashed the assessment and penalty orders for the limited purpose of enabling fresh proceedings in compliance with the judgment.

Conclusion:
The court upheld the constitutional validity of Section 6A of the KVAT Act subject to the restrictions imposed by Article 286 of the Constitution and the CST Act. The court directed the State Government to refund taxes collected in respect of non-specified textile articles and quashed the assessment and penalty orders to enable fresh proceedings.

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