The judgment in Baiju A.A. & Ors. v. State Tax Officer & State of Kerala [TS-1123-HC-2019(KER)-NT] ('Baiju Case')reignites the discussion on the effect of the 101^st Constitution Amendment (‘CAA, 2016’), on proceedings initiated or continued under the erstwhile VAT legislations, post the introduction of the GST regime w.e.f. 01.07.2017. The decision of the Hon’ble Kerala High Court which deals with two amendments made to the Kerala Value Added Tax Act, 2003 (‘KVAT Act’) (both of which amendments were made post the introduction of the CAA, 2016 on 16.09.2016) arrives at varying conclusions as regards the constitutional validity of these two amendments.

While the High Court has held the amendment dated 31.03.2018 to the KVAT Act vide the Kerala Finance Act, 2018 to be unconstitutional as being beyond the legislative competence of the State Legislature, the decision upholds the constitutionality of the amendment dated 19.06.2017 made to the provisions of the KVAT Act, vide the Kerala Finance Act, 2017. It is this contradiction which the present article seeks to discuss.

The decision of the Kerala High Court needs to be analysed in light of the following constitutional and legislative changes:

Entry 54 of List II of the VII Schedule which prescribes the ‘legislative field’ for the levy of VAT/Sales Tax was amended by Section 17 of the CAA, 2016. The said entry prior to and post such amendment, states as follows:

 Therefore, the legislative field pertaining to the right of the State Legislatures to make laws relating to tax on sale of goods (except in relation to six specified goods), was taken away from 16.09.2016.

Section 19 of the CAA, 2016 which is in the nature of a ‘savings clause’, reads as follows:  

“Section 19 - Transitional provisions:

Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is  inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier.”

[Emphasis supplied]

A strict interpretation of section 19 of the CAA, 2016 which came into effect from 16.09.2016, indicates that Section 19 of the CAA, 2016 only saves the provisions of the KVAT Act as it stood on 16.09.2016, till the date of its repeal, i.e.  22.06.2017.

The said provision only saves the provisions of the KVAT Act as on 16.09.2016, and, did not empower the State legislatures to enact fresh laws/make amendments to the KVAT Act, until the repeal of the KVAT Act.

In the Baiju case, the following questions were framed and addressed:

“(a) Whether under the provisions of Section 25 (1) of the KVAT Act, as amended by the Kerala Finance Act, 2017, and before the repeal of the KVAT Act on 22.06.2017, the six year period of limitation for re-opening assessments could be relied upon to issue pre-assessment notices in cases where, by 31.03.2017, the five year period for reopening assessments under the unamended provisions of Section 25 (1) of the KVAT Act had already expired?

(b) If issue (a) is answered in the negative, whether the amendment to the third proviso to Section 25 (1) of the KVAT Act, through the Kerala Finance Act, 2017, would enable the revenue to re-open assessments in cases where, by 31.03.2017, the five year period for re-opening assessments under the un-amended provisions of Section 25 (1) of the KVAT Act had already expired?

(c) Whether, after the CAA, 2016, and the repeal of the KVAT Act pursuant thereto, on 22.06.2017, the State legislature retained any residual power of legislation so as to amend the provisions of Section 25 (1) of the KVAT Act through the Kerala Finance Act, 2018?

(d) Whether the amendment to the provisions of Section 25 (1) of the KVAT Act, through the Kerala Finance Act, 2018, and the pre-assessment notices and assessment orders issued consequent thereto, could be justified by relying on the savings clause under Section 174 of the SGST Act?”

While the Court upheld the vires of the amendment made to the KVAT Act  vide the Kerala Finance Act, 2017 that extended the period for re-opening assessment for escaped turnover to 31.03.2018 from the earlier period ending 31.03.2016, the Court struck down the amendment to the KVAT Act vide the Kerala Finance Act, 2018 on the ground that the State Government lacked the legislative power to amend a repealed law, post the introduction of the CAA, 2016.

This article seeks to only address an important question which ought to have been raised and answered but does not appear to have been raised or answered, namely:

“Whether the Kerala State Legislature had at all in the first instance, the power to amend the KVAT Act vide the Kerala Finance Act, 2017, in view of section(s) 17 and 19 of the CAA, 2016” 

The CAA, 2016 radically altered the scope of the legislative fields of taxation w.e.f. 16.09.2016, which is prior in time to the amendment of the KVAT Act vide the Kerala Finance Act, 2017, w.e.f. 01.04.2017. As a result of the CAA, 2016, the State Legislatures have been denuded of the legislative power to enact laws pertaining to the tax on sale of goods in the course of intra-state trade (except in relation to six specific categories of goods). This flows from section 17 of the CAA, 2016 and amended Entry 54 of List II of Schedule VII to the Constitution of India.

While striking down the amendment to the KVAT Act vide the Kerala Finance Act, 2018, the Hon’ble Court in fact took note of the fact that the State Legislature no longer had the legislative power to enact laws under Entry 54 of List II of the Seventh Schedule to the Constitution, post the CAA, 2016. If that is the case, then the removal of the ‘legislative field’ w.e.f. 16.09.2016 in the manner detailed above, would have also definitely impacted the power of the Kerala State Legislature to make amendments to the KVAT vide the Kerala Finance Act, 2017. Since the legislative field can no longer be traced to Entry 54 of List II post 16.09.2016, the further incidental questions which require to be answered in the present facts, are the following:

“Does Section 19 of the CAA, 2016, only save the provisions of the KVAT Act as they stood on 16.09.2016 and which are inconsistent with the CAA, 2016 till the date of repeal of the relevant legislation or till 17.09.2016 (one year from the date of the CAA, 2016)? Or

Does section 19 of the CAA, 2016, also confer the power on the Kerala State Legislature to further legislate on the levy of VAT/Sales tax on all goods post 16.09.2016 and till the date of repeal of the KVAT Act or 17.09.2016 (one year from the date of the CAA, 2016), notwithstanding the fact that the ‘legislative field’ has been removed vide Section 17 of the CAA, 2016?”

A plain reading of section 19 of the CAA, 2016 leads to the conclusion that what is saved are only the statutory provisions of the KVAT Act as they stood on 16.09.2016. Section 19 of the CAA, 2016 does not grant the Kerala State Legislature the power to enact laws relating to the tax on sale of goods or the power to amend the KVAT Act. This interpretation is also in consonance with the general understanding of the expanse and scope of ‘savings clauses’ in legislations. Such an interpretation is also in line with the amendments made to various legislative entries including Entry 54 of List II of Schedule VII of the Constitution vide Section 17 of the CAA, 2016.

While the Court has examined the vires of the Kerala Finance Act, 2018 against the CAA, 2016, it has failed to test the validity of the amendments made vide the Kerala Finance Act, 2017 on the same ground. The High Court struck down the amendment to the KVAT Act vide the Kerala Finance Act, 2018 primarily on two grounds, i.e. (a) that the KVAT Act was repealed on 22.09.2017, post which the Act could not be amended; and (b) that post the introduction of the CAA, 2016, the State Government has lost its legislative power to amend the KVAT Act.

In holding so, the High Court has however failed to take note of the relevant date on which the State Legislature has been denuded of its power to legislate, i.e. 16.09.2016, as a result of which the Kerala Finance Act, 2017 that amended the KVAT Act on 19.06.2017 was also without the requisite legislative competence. The fact that the KVAT Act did not stand repealed on 19.06.2017 is not material, when the State has lost its legislative competence on 16.09.2016 itself.

Therefore, in the view of the authors, if a different question had been raised and addressed, then the finding of the Hon’ble Kerala High Court on the validity of the amendment to the KVAT Act vide the Kerala Finance Act, 2017 could have possibly been very different. The debate, therefore, continues to rage on and given the nature of the issue and the quantum of revenues involved, it appears that the issue will only reach finality at the level of the Supreme Court.