Texts of Law provisions referred in this article are given at the bottom of the article.
Tax event, "all inter-State supplies of goods or services or both", used in section 5(1) of the IGST Act, 2017, is an event different from the event provided in clause (1) of article 269A of our Constitution. Although it appears that event has been defined in section 7 of the IGST Act but it is not true in view of legal provisions. I will like to draw your kind attention towards the following.
1. In sub-section (1) of section 5 of the IGST Act, event of levy of tax has been described as inter-State supply of goods or services or both. But it seems that the Parliament has intended to levy tax on transactions of supply of goods or services or both as defined in section 7 of the Act. Ordinarily, an "inter-State supply" does not cover a supply in the course of import into the territory of India. Secondly, term "inter-State supply" is not equivalent to term "supply in the course of inter-State trade or commerce". For the following reasons, tax could not be levied in section 5(1) on transactions described in section 7.
2. Term "inter-State supply" is heading to section 7. In the bill presented before the Parliament, terms, used as marginal notes to various clauses, are neither discussed or debated in the House nor they are passed by the House. Various clauses and sub-clauses of a clause of the Bill are called by their numbers and are also passed by calling their numbers. After the Bill is passed, clauses and sub-clauses of the Bill become section and sub-sections of the Act. However, marginal note to a clause in the bill is published as heading of the section. Thus heading of a section is not treated as part of the Act. Section 28 of the General Clauses Act, 1897 relates to citation of enactments and sections and sub-sections of the Act. It provides that any enactment may be cited by reference to the title or short title (if any) conferred thereon or by reference to the number and year thereof, and any provision in an enactment may be cited by reference to the section or sub-section of the enactment in which the provision is contained.
3. Various sub-sections of section 7 provides that which transactions of supply of goods or services or both shall be treated to be supply of goods or services or both in the course of inter-State trade or commerce. Nowhere in section 7, it has been provided that which transaction of supply of goods or services or both shall be treated "inter-State supply of goods or services or both". Therefore, section 7 does not provide any help to provisions of section 5 of the Act. Since purpose of enactment of various sub-sections of section 7 has not been provided, therefore, it can be inferred that this section has been enacted for all purposes of the Act. But at least section 7 of the Act does not uses phrase "inter-State supply of goods or services or both" and therefore, provisions of section 7 do not apply to section 5 of the Act.
Supposing that section 5 is modified to define tax event as "all supplies of goods or services or both in the course of inter-State trade or commerce", will the modification make sub-section (1) of section 5, a valid piece of legislation. I am of the view that this will not make section 5 a valid provision for the following reasons:
1. Clauses (a) and (b) describes transactions which are the same which have been defined Zero rated supplies in section 16 of the Act. Any amount collected, in respect of such transactions, will not form part of general revenue and it will be refunded to the taxpayer. Secondly, it gives an option to taxpayer to pay or not to pay tax. A tax has no such liberty. It is compulsory exaction of money by public authority for public purposes enforceable by law. One of the essential characteristics of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. Constitution Bench, comprising of seven judges, of Honorable Supreme Court, in its judgment in the case, The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Tirtha Swamiar of Shri Shirpur Mutt. Judgment dated 16 April, 1954, has observed as under:
"A neat definition of what "tax" means has been given by Latham C. J. of the High Court of Australia, in Matthews v. Chicory Marketing Board(1). A tax", according to the learned Chief Justice, "is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered". This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected revenues of the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of taxation it; that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay."
The three principal characteristics of a tax noticed by the Honorable Court, in the above passage, are:
(i) that tax is imposed under statutory power without the tax-payer's consent and the payment is enforced by law;
(ii) that tax is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and
(iii) that tax is a part of the common burden, the quantum of imposition upon the tax-payer depending generally upon the capacity of the tax payer to pay.
The following decision of the Honorable Supreme Court in the case M/s Bhawani Cotton Mills Limited vs. State of Punjab & Anr. Judgment dated April 10, 1967 is also noteworthy.
"...it is not enough for the State to say that a person who is not liable to pay tax, must nevertheless pay it in the first instance and then claim refund at a later stage. If a person is not liable for payment of tax at all, at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid."
The decision in the case, M/s Bhawani Cotton Mills Limited vs. State of Punjab has continuously been followed in other cases. Levy of tax leads to quantification or assessment of tax and recovery of tax and finally amount collected becomes general revenue for the purposes of public. In view of levy of tax on following transactions is not valid.
(a) Supply of goods or services or both, when the supplier is located in India and the place of supply is outside India;
(b) Supply of goods or services or both, to a Special Economic Zone developer or a Special Economic Zone unit;
Supply mentioned in clause (a) is a zero rated supply, an export supply of goods or services or both as mentioned in clause (a) of section 16(1) and supply mentioned in clause (b) is also a zero rated supply to SEZ unit or SEZ developer. In section 16, mechanism has been evolved to make such supplies zero rated by allowing refund of amount of input tax credit, where a taxpayer makes such supplies without payment of amount of tax and by allowing refund of amount equal to amount which would have been payable if supply would not have been zero rated.
Personally, I do not feel any necessity of collecting any amount from persons making zero rated supplies. The mechanism is has been applicable under Central Excise, where levy on removal of goods is to be waved.
In the tax levy clause, term "inter-State supplies" has been used in the sense it has been used in section 5 of the IGST Act. Zero rating has not been provided in respect of cess. May be that the Government would have intended to realize cess from foreign buyers. If not, then supplies referred to in sub-section (5) of section 7 of the IGST Act, have not been treated covered in the inter-State supplies referred to in sub-section (1) of section 5 of the IGST Act.
Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 (51 of 1975) on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 (52 of 1962).
Inter-State supply.
7. (1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of goods in the course of inter-State trade or commerce.
(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
(5) Supply of goods or services or both,—
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
Zero rated supply.
16. (1) “Zero rated supply” means any of the following supplies of goods or services or both, namely:—
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:—
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
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Friends!Tax event, "all inter-State supplies of goods or services or both", used in section 5(1) of the IGST Act, 2017, is an event different from the event provided in clause (1) of article 269A of our Constitution. Although it appears that event has been defined in section 7 of the IGST Act but it is not true in view of legal provisions. I will like to draw your kind attention towards the following.
1. In sub-section (1) of section 5 of the IGST Act, event of levy of tax has been described as inter-State supply of goods or services or both. But it seems that the Parliament has intended to levy tax on transactions of supply of goods or services or both as defined in section 7 of the Act. Ordinarily, an "inter-State supply" does not cover a supply in the course of import into the territory of India. Secondly, term "inter-State supply" is not equivalent to term "supply in the course of inter-State trade or commerce". For the following reasons, tax could not be levied in section 5(1) on transactions described in section 7.
2. Term "inter-State supply" is heading to section 7. In the bill presented before the Parliament, terms, used as marginal notes to various clauses, are neither discussed or debated in the House nor they are passed by the House. Various clauses and sub-clauses of a clause of the Bill are called by their numbers and are also passed by calling their numbers. After the Bill is passed, clauses and sub-clauses of the Bill become section and sub-sections of the Act. However, marginal note to a clause in the bill is published as heading of the section. Thus heading of a section is not treated as part of the Act. Section 28 of the General Clauses Act, 1897 relates to citation of enactments and sections and sub-sections of the Act. It provides that any enactment may be cited by reference to the title or short title (if any) conferred thereon or by reference to the number and year thereof, and any provision in an enactment may be cited by reference to the section or sub-section of the enactment in which the provision is contained.
3. Various sub-sections of section 7 provides that which transactions of supply of goods or services or both shall be treated to be supply of goods or services or both in the course of inter-State trade or commerce. Nowhere in section 7, it has been provided that which transaction of supply of goods or services or both shall be treated "inter-State supply of goods or services or both". Therefore, section 7 does not provide any help to provisions of section 5 of the Act. Since purpose of enactment of various sub-sections of section 7 has not been provided, therefore, it can be inferred that this section has been enacted for all purposes of the Act. But at least section 7 of the Act does not uses phrase "inter-State supply of goods or services or both" and therefore, provisions of section 7 do not apply to section 5 of the Act.
Supposing that section 5 is modified to define tax event as "all supplies of goods or services or both in the course of inter-State trade or commerce", will the modification make sub-section (1) of section 5, a valid piece of legislation. I am of the view that this will not make section 5 a valid provision for the following reasons:
1. Clauses (a) and (b) describes transactions which are the same which have been defined Zero rated supplies in section 16 of the Act. Any amount collected, in respect of such transactions, will not form part of general revenue and it will be refunded to the taxpayer. Secondly, it gives an option to taxpayer to pay or not to pay tax. A tax has no such liberty. It is compulsory exaction of money by public authority for public purposes enforceable by law. One of the essential characteristics of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. Constitution Bench, comprising of seven judges, of Honorable Supreme Court, in its judgment in the case, The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Tirtha Swamiar of Shri Shirpur Mutt. Judgment dated 16 April, 1954, has observed as under:
"A neat definition of what "tax" means has been given by Latham C. J. of the High Court of Australia, in Matthews v. Chicory Marketing Board(1). A tax", according to the learned Chief Justice, "is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered". This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected revenues of the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of taxation it; that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay."
The three principal characteristics of a tax noticed by the Honorable Court, in the above passage, are:
(i) that tax is imposed under statutory power without the tax-payer's consent and the payment is enforced by law;
(ii) that tax is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and
(iii) that tax is a part of the common burden, the quantum of imposition upon the tax-payer depending generally upon the capacity of the tax payer to pay.
The following decision of the Honorable Supreme Court in the case M/s Bhawani Cotton Mills Limited vs. State of Punjab & Anr. Judgment dated April 10, 1967 is also noteworthy.
"...it is not enough for the State to say that a person who is not liable to pay tax, must nevertheless pay it in the first instance and then claim refund at a later stage. If a person is not liable for payment of tax at all, at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid."
The decision in the case, M/s Bhawani Cotton Mills Limited vs. State of Punjab has continuously been followed in other cases. Levy of tax leads to quantification or assessment of tax and recovery of tax and finally amount collected becomes general revenue for the purposes of public. In view of levy of tax on following transactions is not valid.
(a) Supply of goods or services or both, when the supplier is located in India and the place of supply is outside India;
(b) Supply of goods or services or both, to a Special Economic Zone developer or a Special Economic Zone unit;
Supply mentioned in clause (a) is a zero rated supply, an export supply of goods or services or both as mentioned in clause (a) of section 16(1) and supply mentioned in clause (b) is also a zero rated supply to SEZ unit or SEZ developer. In section 16, mechanism has been evolved to make such supplies zero rated by allowing refund of amount of input tax credit, where a taxpayer makes such supplies without payment of amount of tax and by allowing refund of amount equal to amount which would have been payable if supply would not have been zero rated.
Personally, I do not feel any necessity of collecting any amount from persons making zero rated supplies. The mechanism is has been applicable under Central Excise, where levy on removal of goods is to be waved.
Export of goods is, presently dealt under VAT / Central Sales Tax. It is still a zero rated supply. But VAT does not require such a mechanism. After all proof of export under GST regime will be the same which had been under the VAT regime. Where supply, claimed as export supply, will fail it would have to be assessed as intra-State supply or as a supply in the course of inter-State trade or commerce.
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CESS LEVY ON EXPORTIn the tax levy clause, term "inter-State supplies" has been used in the sense it has been used in section 5 of the IGST Act. Zero rating has not been provided in respect of cess. May be that the Government would have intended to realize cess from foreign buyers. If not, then supplies referred to in sub-section (5) of section 7 of the IGST Act, have not been treated covered in the inter-State supplies referred to in sub-section (1) of section 5 of the IGST Act.
ANNEXURE: PROVISIONS OF LAW REFERRED IN THE LETTER IGST ACT:
Levy and collection.
5. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 (51 of 1975) on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 (52 of 1962).
Inter-State supply.
7. (1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of goods in the course of inter-State trade or commerce.
(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
(5) Supply of goods or services or both,—
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.
Zero rated supply.
16. (1) “Zero rated supply” means any of the following supplies of goods or services or both, namely:—
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:—
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
