2014 (12) TMI 909 - HC - VAT and Sales Tax

Reduction / Restriction of Input tax credit - Constitutional validity of section 11(6) of Gujarat Value Added Tax Act, 2003 reduction of 2% in credit when goods sold/resold in the course of interstate trade and the commerce or the goods used as input including raw material in the manufacture of goods which are sold in the course of interstate trade and commerce. - Held that - Considering section 11 of the VAT Act as a whole, the tax credit provided under Section 11(1)(a) to a purchasing dealer is conditional one and subject to subsection (2) to subsection (12) of section 11 inclusive of subsections (3) to (6) of section 11 - Therefore, as such it would be for the State Government to specify any goods or the class of dealers that shall be entitled to whole or partial tax credit, by the notification in the Official Gazette - Therefore, it is for the State Government to specify the goods or the class of dealers that shall not be entitled to whole or partial tax credit and it can be said to be the policy decision of the State Government to specify any goods or the class of dealers that shall not be entitled to whole or partial tax credit and the same shall be within the exclusive domain of the State Government for which there need not be any specific guidelines - when it is the policy decision of the State Government to specify any goods or the class of dealers that shall not be entitled to whole or partial tax credit and the Act itself confers the power upon the State Government by notification published in the Official Gazette specifying any goods or the class of dealers that shall not be entitled to whole or partial tax credit and more particularly when the tax credit provided under Section 11(1)(a) shall be subject to the provisions of subsection (2) to subsection (12) of section 11, it cannot be said that subsection (6) of section 11 is unconstitutional or violative of Article 14 of the Constitution of India on the ground that subsection (6) of section 11 gives unbridled power to the executives, as contended and/or submitted by the petitioners. The same is with a view to consolidate and amend the laws relating to levy and collection of tax on value added basis in respect of the sales or purchases of the goods in the State of Gujarat - Therefore, when the statement of object and reasons for Gujarat Value Added Tax Act, 2003 is to consolidate and amend the laws relating to levy and collection of tax on value added basis in respect of the sales or purchases of the goods in State of Gujarat, it is always permissible for the State Government to provide for and/or to specify any goods or the class of dealers that shall not be entitled to whole or partial tax credit - the intention of the legislature is not to allow the tax credit with respect to all the goods in respect of all the purchasing dealers and the same is conditional one subject to subsection (2) to subsection (12) of section 11 inclusive of subsection (6) of section 11 and Act itself provides that by publication of notification in Official Gazette, the State Government can specify any goods or the class of dealers that shall not be entitled to whole or partial tax credit - as such when such powers are provided u/s 11(6) of the VAT Act, considering section 11 as a whole it cannot be said that subsection (6) of section 11 is unconstitutional and/or ultra vires to Article 14 of the Constitution of India. Validity of Notification dated 29.06.2010 as amended vide notification dated 07.09.2010 Held that - As such section 11(6) of the VAT Act can be said to be an independent provision, which authorizes and/or permits the State Government vide notification in the Official Gazette, to specify any goods or the class of dealers that shall not be entitled to whole or partial tax credit - as already decided that section 11(6) of the VAT Act is neither unconstitutional nor violative of Article 14 of the Constitution of India - Under the circumstances and more particularly when the input tax credit under Section 11(1) of the VAT Act is subject to the provisions of section 11(2) to section 11(12) of the VAT Act, the notification/s cannot be said to be dehors the provisions of VAT Act. Reduction of input tax credit to the extent of 2% by Notification violative of Article 286(3) of the Constitution or not Held that - By impugned notifications as such the State Government is not imposing tax on, or altering the machinery provisions pertaining to tax on, the sale of goods from the State to a destination outside State - the State Government has provided input tax credit under Section 11 of the VAT Act and has reduced the input tax credit to the extent of 2% on the eventuality as mentioned in the said notifications i.e. if the goods are sold outside the State, in exercise of powers under Section 11(6) of the VAT Act - as such for sale from State to a destination outside the State, it is governed by the CST Act and by impugned notifications the State Government has not touched the said sales tax - Under the circumstances, it cannot be said that the impugned notifications are violative of Article 286(3) of the Constitution of India. The notifications are issued reducing the input tax credit to the extent of 2% on the goods supplied outside State of Gujarat in the larger public interest and to ensure adequate funds in the development programme of the State - Reduction of the rate of central sales tax from 4% to 3% with effect from 01.04.2007 and from 3% to 2% with effect from 01.06.2008 and the failure on the part of the Central Government to compensate the State for the losses on account of the aforesaid reduction can be said to be one of the cause and/or reason - as the State has suffered loss of thousands of crores of revenue due to the said reduction and the Central Government failed to compensate the said losses and it has been found that the tax revenue of the State has been adversely affected, when the impugned notifications are issued it can neither be said to be arbitrary nor illegal and/or unconstitutional Decided against petitioner.

Summary

Issues Involved:
1. Constitutionality of Section 11(6) of the Gujarat Value Added Tax Act, 2003.
2. Validity of notifications dated 29.06.2010 and 07.09.2010 reducing tax credit by 2%.
3. Alleged violation of Articles 14, 286(3), 301, and 304 of the Constitution of India.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 11(6) of the Gujarat Value Added Tax Act, 2003:
The petitioners challenged Section 11(6) of the VAT Act, arguing that it gives unbridled power to the executive to specify any goods or class of dealers that shall not be entitled to tax credit, thus violating Article 14 of the Constitution of India. The court analyzed the entire Section 11 of the VAT Act and concluded that the tax credit provided under Section 11(1)(a) is conditional and subject to subsections (2) to (12) of Section 11, including subsection (6). The court held that it is within the policy decision of the State Government to specify any goods or class of dealers that shall not be entitled to whole or partial tax credit, and such specification need not have specific guidelines. The court found that Section 11(6) is not unconstitutional or violative of Article 14, as it is a policy decision within the exclusive domain of the State Government.

2. Validity of Notifications Dated 29.06.2010 and 07.09.2010 Reducing Tax Credit by 2%:
The petitioners argued that the notifications reducing the tax credit by 2% are ultra vires to the VAT Act and violate the scheme of the Act. The court held that Section 11(6) is an independent provision that authorizes the State Government to specify any goods or class of dealers that shall not be entitled to whole or partial tax credit. Since the input tax credit under Section 11(1) is subject to the provisions of subsections (2) to (12), the impugned notifications are not dehors the provisions of the VAT Act. The court further held that the notifications were issued in the larger public interest to ensure adequate funds for the development programs of the State, and hence, they are neither arbitrary nor illegal.

3. Alleged Violation of Articles 14, 286(3), 301, and 304 of the Constitution of India:
The petitioners contended that the reduction of input tax credit by 2% violates Articles 14, 286(3), 301, and 304 of the Constitution of India. The court held that the impugned notifications do not impose any tax on or alter the machinery provisions pertaining to the tax on the sale of goods from the State to a destination outside the State, which is governed by the CST Act. The court found that the notifications do not violate Article 286(3) as they do not touch the rate of central sales tax fixed by the Central Government. The court also rejected the contention that the notifications affect the free flow of inter-State trade and commerce, thus not violating Articles 301 and 304. The court referred to several Supreme Court decisions to support its findings, including M/s. Vrajlal Manilal & Co. & Anr. v. State of Madhya Pradesh & Anr., which upheld the constitutional validity of amendments to state sales tax laws.

Conclusion:
The court dismissed all the petitions, upholding the constitutionality of Section 11(6) of the VAT Act and the validity of the impugned notifications. The court found that the notifications were issued in the larger public interest to ensure adequate funds for the State's development programs and did not violate any constitutional provisions.