Why Section 129 of the Central Goods & Service Tax Act become Unconstitutional
May, 20th 2020
Section 129(1) of the Central Goods & Service Tax Act, 2017 (CGST Act for short) as well as the same section in the various State Goods & Service Tax Acts, 2017 (SGST Acts for short) / Union Territory Goods & Service Tax Acts, 2017 (UTGST Acts for short) mandates the proper officers functioning under the said Acts to detain the goods under transport in case they are transported in contravention of the provisions of the said Acts. In fact, similar provisions can be found in the erstwhile State Level Value Added Tax Acts prevailed in the various Indian States from 2005-06 FY to June 2017 as well as in their forerunners, the General Sales Tax Laws in force up to 2004-05 FY.
However, a distinguishing factor differentiating the present GST provisions from their forerunners is that in the erstwhile laws the situation which warrants demand of security deposit or tax on the detention of goods under transport and the consequential imposition of penalty is a case of attempted evasion of tax or omission of the subject transaction from the regular books of accounts.
However, section 129 of the CGST/SGST Acts which empowers the officers to levy penalty and tax upon detention does not require any such attempted evasion of tax or omission to account the subject transaction. On the other hand, only procedural lapses or clerical errors can lead to levy of tax and penalty, to any dimension.
Moreover, the contravention can be minor or major, however, section 129 does not make a distinction between various types of contraventions as far as the penal consequences are concerned. Section 129 provides that, in the case of contravention, the goods can be detained and the officer concerned can release the goods only on the payment of tax and a penalty which is equivalent to 100% of the tax applicable on the goods. For ease of reference, the provision of section 129(1) is reproduced below;
“129 (1) Notwithstanding anything contained in this Act, where any person transports any goods or stores any goods while they are in transit in contravention of the provisions of this Act or the rules made thereunder, all such goods and conveyance used as a means of transport for carrying the said goods and documents relating to such goods and conveyance shall be liable to detention or seizure and after detention or seizure, shall be released: on payment of the applicable tax and penalty equal to one hundred percent. of the tax payable on such goods and, in case of exempted goods, on payment of an amount equal to two percent. of the value of goods or twenty-five thousand rupees, whichever is less, where the owner of the goods comes forward for payment of such tax and penalty;
on payment of the applicable tax and penalty equal to the fifty percent. of the value of the goods reduced by the tax amount paid thereon and, in case of exempted goods, on payment of an amount equal to five percent. of the value of goods or twenty-five thousand rupees, whichever is less, where the owner of the goods does not come forward for payment of such tax and penalty;
upon furnishing a security equivalent to the amount payable under clause (a) or clause (b) in such form and manner as may be prescribed: Provided that no such goods or conveyance shall be detained or seized without serving an order of detention or seizure on the person transporting the goods”
A simple example will demonstrate the terror of illegality and arbitrariness of the section. See a case where a taxpayer/dealer is transporting machinery [attracting tax @ 18 %] valued at 1 crore from his head office to a branch factory within a state as an intra-state branch transfer. Apparently, the transaction is not in pursuance of a sale and as such not having any taxable consequences. The taxpayer, as usual, engaged a transporting agency to transport the goods to the destination point. Unfortunately, due to an innocent omission from the part of the accounting clerk of the transporter’s office, they omitted to fill up Part -B of the e-way bill [Transporters details]. Such omissions and lapses are sufficient enough, for invoking section 129 of the CGST/SGST Acts which warrants demand of tax & penalty equal to tax under both Acts [or under the UTGST Act as the case may be]. In this case also, while transporting the goods supported by all necessary documents, including the e-way bill, it was intercepted by the GST authorities and on finding that Part -B of the e-way bill is not filled up, demanded remittance of tax + penalty for Rs. 36,00,000.00 having the split up as below;
The taxpayer/dealer has either to remit 36,00,000.00 or to furnish a bank guarantee for the release of the goods/conveyance. In this case, interference of High Courts under Article 226 [writ petitions] is limited. That apart in the adjudication stage as well, the adjudication authority has no discretionary powers to take a lenient view and as such, the order demanding tax and penalty on the detention of vehicle/goods will be confirmed and the Bank Guarantee would consequently be encashed. Again, in appeal stages also the powers of the appellate authorities, as well as the appeal courts [High Courts & Supreme Court], are fettered by the inflexible nature of the section. This means in all cases like the one showcased above, the taxpayers will lose substantial money [ like 36,00,000.00 in the present case] for inadvertent clerical errors or procedural lapses but not for having any kind of evasion of tax or suppression of relevant facts. It is a strange situation where taxpayers have to remit huge amounts of tax and penalty where no tax has been evaded. This is what is actually happened in the Indian Roads under the GST regime.
In such cases, though there is a contravention of the provisions of the Act in the strict technical sense, it is equally true that there is neither any attempted evasion of tax nor there present any element of Mens rea.
Here, it is worth to note that, a division bench of the Hon’ble High Court of Kerala in Assistant State Tax Officer, Squad No VII v. M/s Indus Towers Limited WA No 371/2018, had held that the provision [Section 129 of the CGST/SGST Acts] entitles the officers to levy tax and penalty even on a transaction which is not otherwise taxable and there is no need for any the existence of Mens rea or the intention to evade tax before levying penalty. However, in that case, since there was no challenge to the constitutional validity of Section 129(1), the division bench did not look into the reasonableness of the provisions in the light of the constitutional provisions. Now, writ petitions challenging the constitutional validity of Section 129(1) of the CGST/SGST Acts are pending before various High Courts in the country.
The Goods and Service Tax (‘GST’) was implemented in the country with effect from 01.07.2017 by replacing major indirect tax enactments like Value Added Tax Act, Central Excise Act and Chapter V of Finance Act, 1994, etc., by virtue of The Constitution (One Hundred and First Amendment) Act,2016. Article 246A was incorporated by virtue of the 101st Constitutional Amendment Act, which entitled both the center and state to levy a tax to make laws with respect to ‘goods and services tax’ imposed by the Union or by such State. For ease of reference Article 246A as incorporated by 101st Constitutional Amendment Act is extracted as below:
“246A.Notwithstanding anything containedin articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have the power to make laws with respect to goods and services tax imposed by the Union or by such State.
Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation. —The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.’’.
Thus, under 246A, the Parliament and the legislature of every state are given the power to make laws with respect to ‘goods and service tax’ imposed by the Parliament or the State legislature. The expression, “goods and service tax” are defined under Article 366(12A) of the Constitution as incorporated by the 101st Constitutional Amendment Act, 2016, which reads as below:
(12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;
A combined reading of Article 246A with Article 366(12A) would suggest that the power to legislate, as given to parliament and the state legislature is only when there is a “supply of goods and services”. The expression supply is not defined under the Constitution of India.
By virtue of the powers granted under Article 246A, the Parliament had enacted, the CGST Act, 2017 and various States/UTs had enacted corresponding SGST/UTGST Acts, 2017 dealing with the taxation of intrastate supply of goods and services. The expression supply is defined under Section – 7 of the CGST Act which reads as below:
(1)“For the purposes of this Act, the expression “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; import of services for a consideration whether or not in the course or furtherance of business; the activities specified in Schedule I, made or agreed to be made without a consideration; and the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
It could be seen from Section 7(1) extracted above; all transactions other than the activities specified in Schedule – I of the CGST Act will be treated as a supply only if there is a consideration. The activities mentioned in the schedule – I will be treated as a Supply even if there is no consideration. As per section 2 of the Integrated Goods & Service Tax Act, 2017, “Supply shall have the same meaning as assigned to it in the section- 7 of the CGST Act”
The basic power for levying tax on the intrastate supplies of goods or services is contained in Section 9(1) of the CGST/SGST Act. The Act also contains various provisions that give power to the respective tax authorities which are ancillary and incidental to the main power of levying the tax. Section 68 of the CGST Act, which is one such ancillary provision, provides that the proper officers can require the person in charge of a conveyance carrying any consignment of goods to carry with him such documents and such devices as may be prescribed. The required documents to be accompanied with the goods are prescribed under the rules. One such important document to be accompanied for any movement of the goods is the e-Way Bill, in Form EWB-01 which is generated on the GST portal, so that every transaction gets recorded with the tax department.
It is quite possible like in the above example that, there is a contravention of the provision, because of bonafide mistakes in the documents accompanying the goods, even though the transaction per se is non-taxable or no attempted evasion of tax is established. However, section 129(1) authorizes the officer to levy ‘tax’ and also exorbitant penalty of 100% of the tax, even on such nontaxable transactions because of the existence of a contravention.
The provisions of section 129(1) of the CGST Act and of the corresponding State/Union Territory Acts, to the extent it entitles the officers to levy a tax on a transaction which is otherwise not taxable, or there is no attempted evasion of tax, is arbitrary and unreasonable and it violates Article 14 of the Constitution of India. Further, the said provisions provide for a uniform penalty at the rate of 100% of tax amount involved without looking into the nature of the alleged contravention and therefore treats a dealer committing a bonafide mistake at par with a dealer who transports the goods with the real intention to evade payment of tax. Therefore, the provisions of section 129(1) fail to satisfy the constitutional principle that ‘unequal’s cannot be treated equally’ and therefore violates the principle of equality as guaranteed under Article 14 of the Constitution.
The powers under section 129(1) are only ancillary to the power of levy of tax under Section 9 and the said section is only in the nature of deterrence for the smooth compliance of the provisions of the Act. Such an ancillary power has been grossly abused and has transgressed the limits of the very powerful and the proper officers are vested with powers to levy a tax on an exempt transaction, or on a bonafide transaction, which on the face of it is in violation of Article 265 of the Constitution of India. The excessive power to levy penalty at the rate of 100 % of the tax even for a minor contravention, virtually partakes the character of a levy in the nature of a tax on income, as it seeks to make an inroad into the profits of the dealers. Thus, it falls outside the legislative power granted under Article 246A of the Constitution. Further, such exorbitant penalty at the rate of 100 % is unreasonable, disproportionate and amounts to an unrealistic restriction on the dealer’s fundamental right to carry on trade and therefore is violative of Article 14 and Article 19(1)(g) of the Constitution of India and is not saved by Article 19(6) of the Constitution of India.
Under the provisions of section 74 of the CGST/SGST Act, 2017, a dealer who has not paid tax or who has short paid tax by reason of fraud or willful statement or suppression of facts is entitled to a reduced penalty of 15% of the tax involved, if such payment is made within 30 days from the date of receipt of the show-cause notice. Thus, when a person who is charged with fraud and willful suppression is given the benefit of a reduced penalty, section 129 mandates a 100% penalty even for a minor, bonafide, and unintentional mistake. Section 129 does not even leave discretion with the concerned officer to examine the circumstances surrounding the alleged contravention and requires the officer to levy a uniform penalty at an exorbitant rate of 100% in all situations. Therefore, treating different types of offenders uniformly and charging 100% penalty for contraventions connection with the transportation of goods is arbitrary, discriminatory, and has no nexus with the purpose sought to be achieved by section 129(1). Further, extending the benefit of a reduced penalty of 15% to cases involving fraud and willful suppression while imposing a mandatory penalty of 100% for minor bonafide mistakes is completely discriminatory and fails the test of reasonableness.
Even though section 129(3) and Section 129(4) provides that the proper officer detaining the goods shall issue a notice specifying the tax and penalty and further that no tax, interest or penalty shall be determined without giving the person concerned an opportunity of being heard, such a procedure is an empty formality as the proceedings have to finally result in levying tax and penalty at the rate of 100% as per the provisions of section 129(1)(a) and the proper officer’s limited role is to see whether there is a contravention or not.
For the very same reasons, any appeals, filed either to the first appellate authority or to the Tribunal or to the appeal courts also become an empty formality under the circumstances narrated above.
Further, it is very strange and shocking to note that as per sub-rule (2) of Rule 140 of the CGST/SGST Rules, the taxpayer, who got the release of the consignment on furnishing bank guarantee towards tax and penalty, U/s. 129 of the Act has to produce the goods seized, whatever it may be, before the adjudicating authority on a faraway date, failing which the security furnished is liable to be encashed by the authorities. It is well –settled that the rules validly made form part of the Act. The statute must be interpreted reasonably so that it becomes workable. Interpretation must subserve a constitutional goal. Glaringly, sub-rule (2) of Rule 140 of the CGST/SGST Rules is neither workable nor subserve any constitutional goal.
Thus, the provisions coming under Section 129 of the CGST Act and of the corresponding State/Union Territory Acts and the Rules made thereunder are therefore unreasonable, arbitrary, and travels beyond the legislative competence of the central and state legislatures and thereby apparently unconstitutional.