Balancing Legal Clarity and Legislative Fairness: The Finance Act, 2024 and the Customs Tariff Act

[Joshua Ebenezer]

Balancing Legal Clarity and Legislative Fairness: The Finance Act, 2024 and the Customs Tariff Act by – Dr. Joshua Ebenezer | Principal Consultant of NuCov Facili-Trade.

The complexities of imposing interest and penalties under the Customs Tariff Act, 1975 (CTA) have long posed challenges for businesses and legal practitioners. Courts have consistently demanded clear, explicit provisions to authorize such levies, while the government has taken steps to address these issues through the Finance Act, of 2024. However, the manner in which these provisions were introduced, without parliamentary debate has raised concerns about legislative transparency and constitutional propriety. This article explores both perspectives: the government’s effort to clarify the law and the potential legal challenges stemming from the legislative process.

Clarifying the Ambiguities: The Role of the Finance Act, 2024

The Finance Act, 2024 has brought significant amendments aimed at resolving the long-standing disputes regarding the levy/ imposition of interest and penalties under the Customs Tariff Act, particularly on IGST demands. Sections 106, 108, and other related provisions now clearly outline the process for levying these charges, addressing gaps that courts have previously highlighted.

Historically, courts such as the Bombay High Court in Mahindra & Mahindra Ltd. v. Union of India, 2022 (10) TMI 212 - BOMBAY HIGH COURT and the Delhi High Court in Pioneer Silk Mills Pvt. Ltd. v. Union of India, 1991 (9) TMI 93 - DELHI HIGH COURT have emphasized that such levies and impositions require specific and explicit statutory provisions. Without ‘clear, specific and explicit’ authority for such a levy of imposition, any attempt to impose interest or penalties has been ruled ultra vires. These cases reaffirmed the principle established by Article 265 of the Indian Constitution, which mandates that no tax can be imposed without the authority of law.

In response to this judicial stance, the Finance Act, 2024, has incorporated specific machinery provisions into the Customs Tariff Act to facilitate the imposition of interest and penalties. For instance, Section 106 (3) (12) now covers rate determination, interest recovery, refunds, and penalties in a structured manner, providing much-needed clarity and legal backing for such charges.

A Tribunal's Expansive View: Interest as Compensatory

In contrast to the stringent requirements of the higher courts, tribunals like the Kolkata Tribunal in the TEXMACO Rail Engineering Limited v. Commissioner of Customs, Kolkata, 2024 (1) TMI 902 - CESTAT KOLKATA case have taken a more liberal view. The tribunal interpreted the word "includes" in Section 28AA of the Customs Act to automatically trigger the imposition of interest as a compensatory measure. The tribunal’s reasoning was that interest compensates for delayed payments rather than serving as a punitive measure.

While this interpretation offered some relief to tax authorities, higher courts have been more cautious, emphasizing that such interpretations must be grounded in clear statutory language. The Supreme Court in J.K. Synthetics Ltd. v. Commercial Taxes Officer, 1994 (5) TMI 233 - SUPREME COURT reaffirmed that interest on delayed payments can only be levied if the statute explicitly authorizes it. The amendments introduced through the Finance Act 2024, would appear to fall short of a clear and explicit authority envisaged by Article 265.

Legislative Backdoor Entry: The Constitutional Concerns

While the Finance Act, 2024 addresses the need for clarity, its introduction of substantive provisions without debate in the Lok Sabha raises constitutional concerns. The government’s decision to incorporate key amendments directly into the Customs Tariff Act, bypassing discussion on the Finance (No. 2) Bill, 2024, has sparked debates about legislative transparency and procedural propriety.

Under the Indian Constitution, laws affecting financial matters must undergo thorough parliamentary scrutiny to ensure democratic accountability. The lack of debate on such crucial provisions may be seen as a violation of the separation of powers principle, besides running counter to the principles of accountability to the parliament as it diminishes the role of Parliament in reviewing and approving key legislative changes.

Judicial review of such practices is not unknown. In Rustom Cavasjee Cooper v. Union of India, 1970 (2) TMI 130 - SUPREME COURT (the Bank Nationalization Case), the Supreme Court struck down laws introduced without adequate legislative debate. Similarly, in K. C. Gajapati Narayan Deo and Others v. State of Orissa, 1953 (5) TMI 14 - SUPREME COURT, the court emphasized that legislative competence and transparency are crucial when introducing significant amendments to tax law.

In this context, the Finance Act 2024 provisions in this regard could be scrutinized for procedural irregularities, especially if they are challenged on the grounds of violating Article 14 (equality before the law) or Article 265.

Balancing Clarity and Constitutional Propriety

The Finance Act, of 2024 is a significant step toward resolving the long-standing disputes around interest and penalties under the Customs Tariff Act. While it appears to be the intention of the Government to set right a lacuna in the law, the manner of addressing this question has left the doors open for questioning the very objective,. Nevertheless, these changes may provide businesses with the legal certainty they need to ensure compliance with tax regulations. To this extent, the amendments are steps in the right direction in so far as safeguarding the interest of Revenue is concerned.

However, the manner in which these amendments were introduced—without parliamentary discussion raises important questions about the legislative process. While the amendments clarify the law, they also highlight the potential tension between substantive legal clarity and procedural fairness. The government’s decision to bypass debate could face judicial scrutiny, with courts potentially reviewing the constitutional validity of such legislative backdoor entries.

In the coming years, the courts will likely continue to play a crucial role in balancing these competing interests. As the legal landscape evolves, businesses and legal professionals must remain vigilant, adapting to the changes while keeping an eye on potential constitutional challenges to these provisions. The road ahead promises greater clarity in tax law, but also a renewed focus on ensuring that legislative processes remain transparent and accountable.

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