Taxing times – judiciary is even slower than bureaucracy

Giving its verdict on a bunch of petition challenging the powers of states to levy ‘entry tax’ a nine – judge constitution bench of the Supreme Court [SC] has upheld its constitutional validity. The SC has also held that individual cases will be decided by the concerned regular benches keeping in mind laws of the respective states.

Even as the regular benches take their own sweet time to conclude proceedings, the affected companies may get breather for a while to actually pay up. But, ‘Damocles sword’ hangs. Having already paid 50% of the amount pursuant to interim orders of apex court, they will have to cough up the balance amount sooner than later.

The total liability on the companies/dealers – mostly in infrastructure and energy sector which resort to large-scale transportation of goods in bulk across states – is about Rs 30,000 crores plus interest which itself would be a humongous amount considering that these are retrospective demands for several years in the past.

Consequent to implementation of Goods and Services Tax [GST] slated from April 1, 2017 which subsumes a host of local levies such as VAT [value added tax], turnover tax, purchase tax, octroi, entry tax etc imposed by states, this tax won’t be levied any more. So, the order of apex court is relevant for past period only.

[Meanwhile, given belligerent mood of majority of opposition parties in the wake of Modi’s decision to demonetize 1000/500 rupee notes from November 8, 2016 it is doubtful whether the necessary CGST (central GST) and IGST (integrated GST) will be passed in the winter session of parliament. If not, then GST won’t be operational from April 1, 2017 and states will continue to levy entry tax.]

The SC has justified levy of entry tax on the ground that it is not inconsistent with freedom of trade guaranteed under Article 301 of the Constitution and a non-discriminatory levy of tax does not violate Article 304(a). That states right to levy entry tax is essential to the division of tax powers between Center and states. But, it took more than 5 decades for court to arrive at this conclusion. This is bizarre!

In 1960, this was first examined by a five-judge bench in Atiabari Tea Company Ltd vs State of Assam which ruled against imposition of entry tax. In 1962, this was reversed by a seven judges bench in the Automobile Transport (Rajasthan) Company Ltd vs State of Rajasthan. This was challenged by several companies viz., Jindal Steels, Vedanta, Reliance, SAIL and Hindalco etc. In 2006, a five-judge bench directed hearing of all related cases following which, in 2008, a two-judge bench framed 10 questions for consideration by the larger bench. In 2010, the issue was referred to a 9-judge Bench. After a six-year hiatus, it is only now that SC has given its verdict.

When, think tanks and researchers look for obstacles in the way of ‘ease of doing business’ in India invariably, they point towards cumbersome procedures and red-tape in bureaucracy. But, seen in juxtaposition with the unconscionable delay by judiciary in giving this verdict, they would be compelled to change their opinion.

Without doubt, the delay in getting decisions from courts is a major factor behind lack of a conducive business environment. Chief Justice India [CJI] has expressed concern over the long queues at banks for depositing their 1000/500 notes in account or exchanging for new notes. But, what about several years of wait they are exposed to in getting justice from the judiciary?

The decision/judgment of the apex court in the instant case may fill the coffers of each state by a few thousand crores [after how long, it remains to be seen and will depend on time taken by regular benches to give their respective orders] but one cannot gloss over the collateral damage done by inordinate delay in delivering it.

The delay had the inevitable effect of destabilizing budgets of both states and companies on whom the tax demand was raised. Till the outcome of the judicial process, each side had to necessarily reflect the amount as a contingent receivable on states balance sheet [BS] and contingent liability on company’s BS. This in turn, affected their overall planning of receipts and expenditures.

Entry tax being an indirect tax adds to the cost of making an item available to consumer. It has to be reflected in the price. If, the demand raised by states is contested and hence not paid then, in all fairness, the company cannot charge from consumers. When, after a long judicial battle, it loses [as in the instant case] and is required to pay for all the past years, it will lead to piquant situation.

With the product already sold to millions of consumers, it would be well nigh impossible to chase and ask them to pay up. It may be a logical approach but it is not practical. Adjusting price on future sales to absorb the cost is not workable either. It will be unfair on the ‘would be’ customers. The affected companies will thus have no option but to absorb it leading to erosion of profit or even loss.

They cannot also mitigate hardship by defraying the liability over each of the years in the past to which the tax demand pertains. This is because accounts for all those years have already been finalized, audited and results declared. So, reopening of those accounts only to accommodate the tax shock in respective years is ruled out.

In some sectors like fertilizers where the price of end product is controlled by the central government at a low level and excess of cost of supply over this is reimbursed as subsidy, there could be scope for company to claim the amount as additional subsidy for the past period. But, that again is only theoretical as center’s subsidy scheme is not meant to fund state/local taxes.

At a time when, industries are already under serious stress [courtesy, global recession and huge burden of past loans] which is having a contagion effect on balance sheet of banks too, the huge liability flowing from apex court order will further compound their woes. But, they have on other option but to swallow this bitter pill.

For the future, even as companies will continue to approach court seeking relief against any demand that they feel is ‘unjust’ and ‘unreasonable’, the judiciary needs to gear itself for prompt delivery of its decisions.

While, Modi is trying his level best to unclog bureaucracy to improve ease of doing business, courts should not end up nullifying the gains. Hope, CJI is listening.

1 Comment

  1. rajkumar says:

    Really helpfull for civil service examination.thank you

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