[By Vaisiya Ramya B.]
The author is a student of Tamil Nadu National Law University (TNNLU).
Introduction:
In the pre-GST regime, the government to promote the investment and manufacturing sector rolled out various area-based excise and Value Added Tax (VAT) exemption schemes through the power conferred under section 5A (1) of the Central Excise Act, 1944, and the state-specific acts. However, with the implementation of GST, the Central Government withdrew these area-based exemptions, causing concern for taxpayers who had heavily invested in those regions based on the government’s promises. This resulted in an outcry from the trade sector, advocating for the continuation of these exemptions under the GST regime. Consequently, a budgetary scheme was introduced by the government but its effectiveness seemed cumbersome, amidst existing unresolved judicial trends on the applicability of the equitable doctrines of promissory estoppel and legitimate expectation in cases of withdrawal of tax exemption benefits, which ensures consistency in the public authority decision-making, and fairness in tax administration.
Thus, this article examines the rules of interpretation of tax exemption provisions and the judicial trend concerning the applicability of the equitable doctrines to the withdrawal of tax exemption benefits pre- and post-GST regimes.
Rules of Interpretation and Construction of Tax Exemptions:
Tax statutes are generally interpreted strictly based on their literal and direct grammatical meaning, without considering their consequences. In such cases, equity and presumptions cannot be relied upon, and the legislative intent cannot be read into the law. However, it is important to distinguish between the interpretation of a charging provision and an exemption clause or notification. The issue of ambiguity in the interpretation of tax exemption clauses or notifications, which can lead to two possible outcomes, has sparked a debate as to whether a strict or liberal interpretation should be adopted in such cases. This matter has been the subject of contention in several cases, leading to the establishment of new interpretative standards.
In 1997, the Supreme court in Sun Export Corporation v. Collector of Customs[i] dealt with the question of interpreting the term “animal feed” to include a blend of vitamin AD-3 animal feed supplements for the purpose of claiming a tax exemption benefit. The Court here held that in matters of taxation, when there are two possible interpretations, the one favourable to the assessee should be preferred, reflecting a leaning towards the liberal interpretation. In 2012 asimilar, stance was adopted by the court in the case of Commr. of Customs (Import) v. Konkan Synthetic Fibres.
However, in contrast, in 2018 the constitutional bench of the Supreme Court in the Commr. of Customs (Import) v. Dilip Kumar overturned the ratio established in the Sun Export case and other judgments that adopted a similar stand. And held that when there is ambiguity in an exemption notification, it is subject to strict interpretation and it must be interpreted in favour of the revenue rather than the assesee. Also in 2022, the court in the State of Gujarat v. Arcelor Mittal Nippon Steel (India) Ltd, determined that the exemption notifications or clauses should be strictly interpreted, only resorting to purposive interpretation in cases where a statutory provision is unclear or leads to irrational outcomes.
Following that interestingly in 2021, the apex court revisited the issue of interpretation of tax exemption in the case of Govt. of Kerala v. Mother Superior Adoration Convent but this time it agreed with earlier rulings on a strict interpretation of the tax statute and introduced a new line of precedent regarding beneficial exemption, establishing that even in tax exemptions, a liberal interpretation may be sought to provide an incentive for “fostering economic growth or other beneficial purposes.”
Accordingly, it can be comprehended that the general rule states that the ambiguous provisions imposing liability should be strictly interpreted in favour of the assessee, while exemption clauses should be construed in favour of the revenue. However, this rule is not rigid and has undergone changes over time, particularly in cases involving economic growth or beneficial purposes, where a more liberal interpretation of exemption provisions has been adopted. This is done for the purpose of advancing the objective of the exemption clause and promote the ease of doing business. Incentive provisions deserve such treatment as the purpose of encouraging industrial activity will otherwise get frustrated and also would affect the domestic and foreign investment on local businesses.
Judicial Trend in applicability of Equitable doctrines in Withdrawal of Tax exemptions: Pre- and Post-GST Regime:
Position Pre-GST Regime:
In MRF Ltd. Kottayam v. Assistant Commissioner Sales Tax & Ors. the court while examining the question of whether processing raw rubber with chemicals qualifies as “manufacture” to claim tax exemption citing Section 38A(c) of the Central Excise Act, 1944 noted that tax exemption notifications apply prospectively unless there are overriding public interests, thereby the state is not permitted to make retrospective changes that impair rights that have already accrued. Thus, ruling in favour of the assessee concluded that the tax exemption notification is not revocable.
Similarly, in Bannari Amman Sugars Ltd. vs. Commercial Tax Officer & Ors, the court observed that if a decision maker denies a person’s legitimate expectation by demonstrating some superseding public interest, then the rejection of that expectation is justified. Further in State of Bihar v. Kalyanpur Cement Ltd. and Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., the court reaffirmed the principle that indefinite and unexplained justifications and a simple assertion of change of policy would not be enough to absolve the Government of its responsibility.
However, in contrast, in Shrijee Sales Corp. v. Union of India, the court observed that the government is competent to revoke a promise even if there is no evident public interest involved, provided no one is placed in an adverse situation that cannot be resolved. Hence, it can be inferred from the majority of the judicial decisions that the establishment of overriding public interest forms the pre-requisite for withdrawal of tax-exemption benefits prior to be appointed date. This thereby introduces an exception to the established rule of promissory estoppel and doctrine of legitimate expectation.
Budgetary support scheme under GST:
In response, to the withdrawal of the area-based excise tax exemption granted in the erstwhile regime with the implementation of GST the central government created a budgetary scheme to support such eligible units during the residual period in less industrialized states like “Jammu and Kashmir, Uttarakhand, Himachal Pradesh, and North-Eastern states”. The Central Government calculated a system wherein it was agreed that support would be given through partial reimbursement of “58% of the CGST paid in cash, after using the Input Tax Credit (ITC) of CGST and IGST, and for 29% of the IGST paid in cash, after using the ITC of IGST and CGST”.
Despite providing such relief, in Hero Motocorp Ltd. v. Union of India, the claim of full exemption from the CGST and IGST during the residual period was disputed. Here the court observed that the budgetary support scheme cannot be regarded as entrenched rights but rather as a charitable gesture intended to solve the current circumstances instead of as a replacement for the prior advantage and it does not warrant judicial intervention. Further observed that the breach of the doctrine of promissory estoppel is incorrect, as it cannot be enforced against the legislative powers of the state.
Again, the debate pertinent to the withdrawal of exemption benefits against the state government scheme was raised by a bunch of petitioners in the case of Tea Pvt Ltd v. Commercial tax of Silluguri . Here the issue related to the withdrawal of excise tax exemption benefit by omission of the term ‘blending of tea’ from the definition of manufacture through an amendment in west Bengal sales tax act. Here, the division bench consisting of Justice Shah and Justice Krishna Murari was in agreement with the fact that exemption benefits are not a vested right but rather an existing right that the state has the power to alter or omit. But delivered a split verdict on the applicability of the doctrine of legitimate expectation despite there being no establishment of overriding public interest in this case.This reserved approach over taking into consideration of the aspect of satisfaction overriding public interest or reasonable justification to take precedence over doctrine of legitimate expectation contravenes the rule of law and Article 14 of the constitution that fights against the contamination of arbitrary state action and misuse of power.Thus, leaving us at a crossroads till now on the application of equity doctrines in tax exemptions.
Conclusion and Suggestions:
A comprehensive analysis of the judicial precedents pre-GST regime reveals that the judiciary predominantly adopts the view that the doctrines of legitimate expectation and promissory estoppel cannot be applied in a vacuum and that courts must take into account all relevant factors, including the objectives they are trying to achieve and the public good at large, and it is clarified that public interest supersedes over legitimate expectation and stands as an exception. However, under the post-GST regime in India, the implementation of destination-based taxation and reimbursement can lead to double the financial burden on the origin state. However, in other situations, denying a tax exemption provision without justification of larger public good fails to balance the trade-off between taxpayer’s Legitimate Expectations v. Public Interest in Tax Administration. Thus, necessitating harmonious construction.
[i] Sun Export Corporation v. Collector of Customs (1997)6 SCC 564.