Judgment Update | Amendment to State VAT laws after repeal of VAT Act is unconstitutional

by | Jan 8, 2020 | Insight

The recent decision of the Kerala High Court in the case of Baiju A.A. & Ors v. State Tax Officer, 2019 -VIL-601-KER. In this case, the Court held that State Legislature does not have power to amend the Kerala Value Added Tax Act, 2003 (‘KVAT Act’) after the introduction of the Kerala State Goods and Services Tax Act, 2017 (‘KGST Act’).

Facts & Issues

Amendments made before introduction of GST

Section 25 of the KVAT Act was amended vide the Kerala Finance Act, 2017 with effect from April 1, 2017. The amendment increased the period of limitation for determination of escaped assessment under Section 25(1) from ‘five years’ to ‘six years’. Further, third proviso to Section 25(1) was amended to extend the limitation period for any assessment expiring on March 31, 2017 till March 31, 2018.

Amendment made after introduction of GST

The proviso to Section 25(1) was again amended vide the Kerala Finance Act, 2018 to extend the limitation period to determine any assessment expiring on March 31, 2018 till March 31, 2019.

The following issues came up for consideration before the High Court:

  • Operation of the amendments where normal period for assessment had already expired; and
  • Validity of such amendments after repeal of the KVAT Act

Decision of the Court

The High Court held as follows:

Amendments made prior to introduction of GST

  • Legislature can take away a right / immunity by retrospective amendment. However, Section 25(1) which was made effective only from April 1, 2017, has a prospective operation. Therefore, the Department cannot not issue assessment notices where limitation period expired prior to the amendment.
  • Amendment to third proviso of Section 25(1) is retrospective in nature. If the same is read to be prospective, the purpose of this amendment will not be met. Basis above, the Court held that assessment whose limitation period expired on March 31, 2017 (i.e. Financial Year 2011-12), can be undertaken till March 31, 2018.

Amendments made after introduction of GST

  • The Constitution (One Hundred and First) Amendment Act, 2016 (‘CAA’) which came into force on September 16, 2016, stripped State Legislatures of their power to legislate in respect of sale or purchase of goods covered under Entry 54 of List II of the Schedule VII of the Constitution of India. The sunset clause under Section 19 of the CAA allowed continuation of erstwhile State VAT laws till September 16, 2017 or until such statutes were repealed or amended, whichever was earlier. The KVAT Act was repealed with effect from June 22, 2017.
  • Since power to amend is a legislative power, the State Legislature lacked legislative competence to amend Section 25 of the KVAT Act after the repeal of KVAT Act on June 22, 2017. Therefore, the assessments for FY 2011-12 cannot be re-opened after March 31, 2017 (till March 31, 2018) as provided by the Kerala Finance Act, 2018.

NITYA’s Comments:

The High Court has correctly decided both the issues in the instant case.

Amendments made prior to GST

The presence of legislative competence is fundamental to the exercise of legislative functions and necessarily includes power to amend. Prior to the repeal of KVAT Act and sunset date under the CAA, the Legislature was competent to amend the KVAT Act.

The High Court also correctly interpreted the operation the third proviso, observing that the proviso is not sub-servient to the main provision. Since the Legislature specifically intended the third proviso to be retrospective, the Court is dutybound to give effect to such intention.

Amendment made after introduction of GST

Post repeal of KVAT, the savings clause under the KGST Act cannot be relied upon to make any amendments in the erstwhile VAT laws. Savings clause only saves the executive actions such as power to issue notices and pass orders under the erstwhile laws but not the power to legislate in respect of the same.

Therefore, no amendments whether prospective or retrospective can be made after the concerned erstwhile law has been amended or repealed or if one year has lapsed from the enactment of the CAA. Basis this decision, taxpayers can counter any amendment made in the Central Excise Act, 1944, the Finance Act, 1994, VAT laws, related Rules, any Notifications issued thereunder etc.