Accounting for a Brief Stint of Unconstitutionality: Equalisation Levy Fixed by GST

[Debarshi Chakraborty is a 3rd year B.A., LL.B. student at National Law University Odisha]

Considering the potential of the booming digital economy and the fast expanding nature of its business operations, it is essential to address the challenges extensively, particularly in terms of taxation of digital transactions. In addressing such challenges, and in keeping abreast with the emerging global trends (e.g. in the UK, Australia and Japan), India through the Finance Bill, 2016 has introduced an equalisation levy (“EL”) on online advertising revenue earned by non-resident e-commerce companies. Briefly speaking, EL at 6% would be levied on specified digital services, initially made applicable only for specified payments for online digital advertisements.

Besides the substantial debate that had commenced on EL, what was unforgivingly overlooked was how intertwined the 115thAmendment (“Amendment”) to the Constitution of India was in bringing into existence the EL. Fortuitously, what started as an unconstitutional EL, later turned out to be defensible under the Amendment, which was incidentally made without even realizing that it will make the levy constitutional.  

Inherent defect in EL

If one were to pay close attention to the scope defined for EL, according to the Finance Act, 2016 it is to be made applicable only on certain specified services. Specified services, elementarily referred to online advertising and any other services as the Government would notify periodically. To a significant few, online advertisements appeared as the basic testing mechanism in succeeding towards full scale implementation of EL. Nonetheless, there seems to have existed minor hurdles, which have now luckily evanesced.   

Striking at the hurdle, at a time when the Finance Act was brought into effect, a simple reading of entry 92 (as it then existed) of the Constitution clarified that the power to tax purchase and sale of newspapers including advertisements was conferred on the Union, as entry 92 fell within the Union List of Schedule VII to the Constitution. Therefore, the Union was confined to levying tax on advertisements in newspapers alone. Conversely, entry 55 of the State List covered levy of taxes on all other advertisements. Thus, from an acutely technical standpoint, levying of taxes merely on online advertisements would be unconstitutional. This may lead us to the supposition – had the constitutional validity of EL been challenged, the same would have been subject to serious vulnerability or susceptibility.

Fortunately, the Union had been overtaken by events, especially in the enactment of the Amendment, which introduced the Goods and Service Tax (“GST”). What the Goods and Services Tax Act, 2017 (“Act”) has done is that it has deleted entries 92 and 55 from the Union and the State List respectively. In consequence to that, a rather unique feature had been proposed under articles 246A and 269A of the Constitution. Under these provisions, concurrent powers has been conferred upon the Union Parliament and the State Legislature to levy GST. However, it comes with the caveat that the States may not levy GST in cases of inter-state transactions, which remains the domain or the core preserve of the Union.

Talking exclusively on e-commerce within the country, the power to levy tax is included within the purview of each State, be it an inter-state or an intra-state transaction. Nevertheless, if it happens to be an imported service, then it will typically be the subject matter of levy by the Union. The Act in this respect clarifies that on inter-state sale or purchase of goods only the Union of India would have the power to levy tax. Further, the explanation accompanying article 269A undisputedly states that any import of goods and services shall be deemed to be a sale in the course of inter-state trade and commerce. Therefore, by legal fiction, all imports of goods and services are now inter-state sales and liable to be taxed by the Union.

Given this factual milieu, it may reasonably be inferred that EL was (or is) constitutional, as it stood thereafter. But, what can surely not be denied is that for a brief stint, i.e., between the passing of the Finance Act, 2016 up to the deletion of entries 92 and 55 with the enactment of the Amendment, the entire mechanism of EL was seriously suspected. Hence, there does not arise the question regarding constitutional validity any more. Moreover, it is wholly valid for both the Union and the States to levy taxes.  

EL and its Unconstitutionality

Notwithstanding the fact that there does exist difference in opinion regarding the alleged unconstitutionality of EL, the levy had been constitutional at the time of its enactment, which is prior to the Amendment. However, such opinion often suffers from the vice of want of reason or facts to validate the same.

Assuming that what probably was not constitutional became constitutional later in time on the passing of the amendment to introduce GST, the question then arises: whether an act that was unconstitutional at the time of enactment can subsequently become constitutional owing to an amendment in the Constitution (precisely when the object and purpose of the amendment was wholly different)?

In answering the above posed question, it is necessary to note that the law at the time of drafting was unconstitutional because entry 92 conferred upon the Union the power to tax on advertisements in newspapers and the States were empowered to levy tax only on other advertisements. In such a situation and according to the Supreme Court’s decision in Union of India v. H. S. Dhillon, entry 97 (which assigns the residuary powers of legislation exclusively to the Union in the event that no entry in any of the three lists covers a piece of legislation) does not come into operation. If the subject matter is a State subject, it is completely taboo for the Union. Consequently, this strengthens the point that the levy had been invalid due to legislative incompetence.

Should EL have been re-enacted to ensure its validity?

As a matter of fact, a law could be invalid for being either in violation with regard to constitutional limitations or due to legislative incompetence. The latter phenomenon being applicable to the given situation, the Supreme Court’s decision in the Bhikaji Narain v. State of Madhya Pradesh becomes applicable. The Court observed that if a law is invalid for legislative incompetence then it would be void ab initio; moreover, the law is like a still-born child. This would require a fresh enactment of the law. However, in my opinion, this should not be the case in the present situation.

It is imperative to note that there had been a limitation on the Union’s power as they could not tax advertisements other than those in newspapers. But that limitation had also been removed by the Amendment. Therefore, reflecting upon the doctrine of eclipse, one may conclude that the law stands valid after the Amendment, and was not in want of re-enactment. Hence, the law became absolutely valid. In other words, what appeared to be invalid due to a particular defect became totally valid proprio vigore once the defect was removed.

Debarshi Chakraborty

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