Challenging VAT

THERE is some irony in the fact that Dr. Ashok Mitra, former Finance Minister of West Bengal, filed the first of the many legal challenges that are expected against the introduction of Value Added Tax (VAT). West Bengal is one of the States that implemented VAT on April 1. Legal experts aver that since each State has its own VAT law, the legal challenge against VAT has to emanate from the respective States.

Ashok Mitra moved a writ petition in the Calcutta High Court asking it to prohibit the West Bengal government from implementing VAT from April 1. Although the court refused to grant his plea at the hearing on March 30, it kept the issue of the maintainability of his public interest petition application open. A Division Bench of the High Court, comprising Chief Justice V.S. Sirpurkar and Justice A.K. Ganguly, refused to stay the operation of the State's VAT Act, which was passed on December 27, 2004, because Ashok Mitra had delayed filing his petition.

However, Ashok Mitra said that he had "waited until the last moment, hoping against hope that the State government would change its mind, particularly as there was a strong undercurrent of reluctance within the party [the Communist Party of India-Marxist] to go along with VAT. I waited until I knew the contents of the Budget with the VAT provisions before I signed the writ petition".

He rested his case on the assertion that there is no provision for VAT in the State's legislative powers listed in the State List of the 7th Schedule of the Constitution. He argued that Entry 54, which provided for the levy of the sales tax, did not envisage the levy of VAT.

The former Minister argued that since VAT was a tax imposed on value addition, it implied that it was levied on products that underwent transformation. This, he argued, made it akin to excise duty rather than sales tax, which would imply that it would fall within the purview of the Centre's powers rather than that of the States. He noted that the Union Finance Minister had admitted on January 17 that VAT was similar to the excise duty. The Centre, instead of resorting to its own powers, had enticed the States by offering compensation for loss in revenues, he argued. This, in fact, required "appropriate amendments to the Constitution" and avoiding it would amount to a "fraud" on the Constitution, he contended. He alleged that the exercise was an infringement on the basic federal structure of the Constitution. He said that the long-term welfare of the nation "is crucially dependent on the maintenance and further deepening of the attributes of the country's federal structure".

Ashok Mitra said that the statement of Objects and Reasons of the West Bengal Value Added Tax Act noted that "the Chief Ministers of States and the administrators of the Union Territories have unanimously resolved in a meeting by the Union Minister on the 16th of November, 1999, to bring out major reforms in the method of taxation of commodities in the country by replacing the existing scheme of sales tax with the Value Added Tax (hereinafter referred to as the VAT) scheme". He pointed out that "the Bill seeks to introduce taxation of commodities by way of the VAT scheme in lieu of the existing scheme of sales tax". This implied that the States had agreed to the reform. But that was not enough, without amending the Constitution, he said. Ashok Mitra argued that if VAT was a replacement for sales tax, then it was no longer the sales tax as envisaged in the Constitution. He asks: "If it is another kind of sales tax, what was the difficulty in bringing in an amendment?"

Ashok Mitra argued that the Empowered Committee, headed by the current West Bengal Finance Minister, was a "creature of the Central government". Its personnel, including the Member Secretary, were officials of the Union Finance Ministry. It carried out "the wishes" of the Ministry. The Union Finance Minister called the meeting in November 1999 wherein the States agreed to replace sales tax with VAT, and he presided over the meeting on January 17, 2005, where the White Paper on VAT was released. Ashok Mitra pointed out that even the advertisements on VAT had been arranged by the Union government.

He referred to the Member Secretary's comment on March 15 in Mumbai that States that deviated from the VAT guidelines would not be eligible for compensation from the Centre, to highlight the point that the element of coercion was very much evident in the move towards VAT.