Giving its verdict on a bunch of petition challenging levy of ‘entry tax’ by states, a nine judge constitution bench of Supreme Court recently upheld its constitutional validity. It directed that individual cases will be decided by the regular benches concerned keeping in mind laws of the respective states.
Even as 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! The total liability on the companies – mostly in infrastructure and energy sectors which resort to large-scale transportation of goods in bulk across states – is about Rs 30,000 crore 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] supposedly 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 the past period only.
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). But, it took more than five decades for court to arrive at this conclusion. This is bizarre!
In 1960, the issue 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-judge bench in the Automobile Transport (Rajasthan) Company Ltd vs State of Rajasthan. This was challenged by several companies – Jindal Steels, Vedanta, Reliance, SAIL and Hindalco etc.
After a long gap of four years, 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 nine-judge bench. After a six-year hiatus, it is only now that the 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.
Recently, Chief Justice India [CJI] expressed concern over the long queues at banks for depositing Rs 1,000 and Rs 500 notes [albeit old] in their account, exchanging them for new or withdrawing cash in the wake of demonetisation. But, what about several years of wait people are exposed to in getting decisions from the judiciary?
The judgment by the apex court in the instant case may fill coffers of each state by a few thousand crores of rupees but one cannot gloss over the collateral damage done by inordinate delay in delivering it. It destabilises budgets of both states and companies on whom the tax demand was raised.
For each side, the amount becomes contingent/unpredictable in their respective books. While the former won’t know whether they would get intended revenue, the latter won’t know if they will end up paying. In such a scenario, persisting for decades, how can they plan their budget?
The entry tax being an indirect tax adds to the cost of making an item available to the 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 a 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 cost is not workable either. It will be unfair on ‘would be’ customers. The affected companies will thus have no option but to absorb it leading to erosion of profit or even loss.
Mitigating hardship
They cannot also mitigate hardship by defraying the liability over each of the years in past to which tax demand pertains. This is because accounts for all those years have already been finalised, audited and results declared. So, reopening of those accounts only to accommodate tax shock in respective years is ruled out.
In some sectors like fertilisers 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 companies to claim the amount as additional subsidy for the past period. But, that again is only theoretical as the Centre’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 no other option but to swallow this bitter pill.
For the future, even as companies continue to approach courts 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 the ruling dispensation is trying its level best to unclog bureaucracy to improve ease of doing business, courts should not end up nullifying the gains.
(The writer is a New Delhi-based policy analyst)
http://www.deccanherald.com/content/586634/taxing-times-judiciary-slower-bureaucracy.html