GST – Levy of Compensation Cess & the Aspect Theory- Some Musings
The introduction of the Goods and Services Tax (‘GST’) regime is a watershed event in the history of indirect taxation in India. This has been facilitated by many important changes in the Constitution of India. The power to levy GST flows directly from newly introduced Article 246A of the Constitution. The field of legislation is also governed by Article 246A, as opposed to the three lists in the VII Schedule to the Constitution of India. Hitherto, the taxing powers of the Union and the States were mutually exclusive under the constitutional scheme. The GST regime has, for the first time, introduced the concept of concurrent power of the States and the Union to levy GST on intra-state supplies of goods and/or services. While several taxes which were previously within the exclusive domain of the State are now also subject to a tax by the Union in the form of a Central Goods and Services Tax (‘CGST’), it also needs to be noted that the reverse is true and that several taxes which were within the exclusive domain of the Union have been subsumed into GST.
The Goods and Services Tax (Compensation to States) Act, 2017
One significant legislation enacted contemporaneously with the introduction of GST, was the Goods and Services Tax (Compensation to States) Act, 2017 (‘GST Compensation Act’). The need for such an enactment is reflected in the Lok Sabha debates prior to the introduction of GST. It was emphasized in these debates that the success of GST was dependent on the States being strong from a fiscal perspective. Besides, some form of compensation for revenue losses was necessary for keeping the federal structure intact and for empowering the States to effectively meet their developmental and infrastructural responsibilities.[i] Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, empowered Parliament to make laws to provide for compensation to the States for loss of revenue arising on account of implementation of GST for a period of five years. The GST Compensation Act, which has been enacted by Parliament in exercise of such power, is the legislation which deals with the compensation to the States for losses arising on account of implementation of GST. For the purposes of funding such compensation, section 8 of the GST Compensation Act provides for a “cess”, which is leviable on specified intra-state or inter-state supply of goods or services or both. The proceeds of the cess are to be credited to a non-lapsable fund known as the Goods and Services Tax Compensation Fund, which is to form part of the public fund of India and be used for making compensation to the States.
At the outset, it must be noted that in terms of Article 270 of the Constitution, unlike a tax collected by the Union, a “cess” which is collected by the Union need not be distributed between the Union and the States. If the rate of tax was increased for reason of providing compensation to the States, then not only would that distort the GST model but a percentage of any excess tax collected by the Union would require to be shared with the States. Therefore, only a percentage as opposed to the entirety would be available to the Union to provide compensation to the States. It is for this reason that the funding for GST compensation has been collected in the nature of a “cess”.
The GST Compensation Act was the subject matter of challenge before the courts. The issue has finally been decided by the Supreme Court (‘the Court’) in UOI v. Mohit Mineral Pvt. Ltd. (“Mohit Mineral”), where the constitutional validity of the GST Compensation Cess Act has been upheld.
The petitioners in Mohit Mineral had contended that the levy of cess under the GST Compensation Cess Act was illegal, as it was being levied on the same taxable event as the levy of Central Goods and Services Tax (‘CGST’) under the Central Goods and Services Tax Act, 2017 (‘the CGST Act’) and Integrated Goods and Services Tax (‘IGST’) under the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’).
It was essentially argued that there cannot be two levies on the same transaction i.e. (i) IGST or CGST; and (ii) GST compensation cess on the same taxable event. The GST Compensation Cess Act was also challenged as being without legislative competence and being in the nature of ‘colourable legislation’.
The Court while upholding the constitutional validity of the GST Compensation Cess Act, observed that:
- The only question to be asked while examining the legislative competence of Parliament with regard to a particular enactment is whether the matter sought to be legislated is included in List II or in List III or is the tax sought to be levied mentioned in List II or in List III? The Court noted that having applied the test in the S. Dhillon’s case, it did not find any lack of legislative competence in the Parliament;
- The expression “cess” means a tax levied for some special purpose, which may be levied as an increment to an existing tax;
- The power to levy any “cess” by Parliament originates from Article 270 of the Constitution of India;
- The power under Article 246A of the Constitution, extends not only to the levy of GST but also encompasses the levy of cess such as the GST compensation cess.
- The principle is well settled that two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction are permissible as “in law there is no overlapping”. That the GST imposed under the 2017 Acts and levy of cess on such intra-State supply of goods and services or both as provided under Section 9 of the CGST Act and such supply of goods and services or both as part of Section 5 of IGST Act, are two separate imposts in law and are not prohibited by any law so as to declare it invalid.
Understanding the decision
While the decision of the Supreme Court being its first final decision on GST is indeed significant, it raises two significant questions. The first question relates to tracing the origin of the power to levy “cess” by the Union. While the power to levy GST compensation cess has been traced back to Article 246A of the Constitution, it has also been read under Article 270 of the Constitution. Article 270 of the Constitution finds place in Part XII of the Constitution, which Part deals with ‘Finance, Property, Contracts and Suits’, and, reads as under:
“270. Taxes levied and distributed between the Union and the States.- (1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in Articles 268, 269 and 269A, respectively, surcharge on taxes and duties referred to in Article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2)…”
In the view of the author, the position which emerges from previous decisions of the Court, which were also referred to in Mohit Mineral, is that depending upon the object and purposes of the levy of “cess”, it can be in the nature of tax or in the nature of a fee. The power to levy “cess” would therefore flow from the legislative power relating to the levy of the tax or the fee, the nature of which the cess follows/is appended to. The above position is best illustrated by the decision of the Court in Dewan Chand Builders & Contractors v. UOI. Article 270 of the Constitution, on a plain reading, does not appear to confer the power to levy a “cess”. Rather, it only appears to deal with the distribution of the “cess” so collected. Hence, it may be technically more appropriate to conclude that the power to levy a cess, if in the nature of a tax, flows from the same power under which such tax is levied. In the present case, therefore, the power to levy GST compensation cess should only have been traced to Article 246A and not to Article 270 of the Constitution. This would also be in line with the observations of the Court that the expression “cess” only means a tax levied for some special purpose which may be levied as an increment to an existing tax.
The second question, which requires consideration is whether the dual levy of GST compensation cess, and CGST or IGST needs to be justified on the basis of the ‘aspect theory’, as has been done by the Court. In essence, the ‘aspect theory’ prescribes that different aspects of the same transaction can be taxed, as long as there is no overlapping in law. The power to levy CGST or IGST flows from Article 246A, so does the power to levy GST compensation cess. If the “GST compensation cess” is only in the nature of a tax and an increment to an existing tax, then it can only be an increment to the CGST or IGST. If that be so, then the very invocation of the ‘aspect theory’ to justify the simultaneous levy of GST compensation cess and CGST/IGST is unnecessary as also incorrect. As observed by the Court itself, the ‘aspect theory’ will be applied only when there are two taxes/imposts which are separate and distinct imposts and on two different aspects of a transaction. A “cess” which is an increment to an existing tax cannot and should not be treated as a distinct tax in itself. The manner of distribution of funds raised from the cess should not be confused with the nature of the cess. Therefore, in the author’s view the application of the ‘aspect theory’ in the present facts is technically incorrect. The justification made on the basis of the ‘aspect theory’ was never required as the Court itself has impliedly held that the ‘GST compensation cess’ is only an increment to the levy of GST in the form of CGST/IGST.
While the decision in Mohit Mineral cannot be faulted entirely, in the view of the author, the two aspects highlighted above definitely require a more nuanced discussion and analysis.
[i] Lok Sabha speeches on 05.05.2015 of Shri Kalyan Banerjee and Shri Prem Chandra Chandumajra. Also see Goods and Services Tax- Constitutional Law & Policy- by Tarun Jain; EBC publication-2018.
The author is an advocate at the Madras High Court.