The Arbitrariness doctrine in tax laws

 

The year started off with a set of amendments in the CGST Rules, set in to add to the arsenal of the revenue authorities to deal with the GST fraudsters. With effect from 01 January 2021, not only do the executives have more powers to cancel the GST registration1, they also have the powers flowing from the CGST Act to impose penalties on persons who supposedly retain benefits out certain transactions2.

 

 

The critics lament these provisions as harsh, despicable, repulsive, and whatnot. But all these negative features are not convincing enough for the Courts to invalidate them. The Courts after Shayara Bano case3, do however have a window to strike down in the name of ‘manifest arbitrariness’, in case the parties could showcase that the attacked provisions are outrageous to the highest magnitude.

 

 

This piece lays discussion into arbitrariness doctrine, its roots, its application to delegated and plenary legislation, the contours of arbitrariness in the context of tax laws, and finally few comments on some of the debatable provisions in the GST law apropos the arbitrariness doctrine.

 

 

Part A

 

1.  The dynamic constitution – roots of arbitrariness

 

The concept of arbitrariness has its origins in the Constitution of India (COI). Bhagwati P.N.,

J. is credited with bringing the idea of arbitrariness on the board4 and then firmly establishing its roots deeply into Article 145. But, in hindsight, it appears that the concept was the ultimate outcome of long evolving approach of interpreting the COI.

 

 

Post-independence, there was a lot of back and forth between the judgments interpreting the COI on textualist basis and purposive/ constructive basis respective. The initial judgments post-independence such as A K Gopalan6, Sajjan Singh7  were in stark contrast with the

¹ Rule 20A of the CGST Rules

² Section 122 (1A) of the CGST Act

³ (2017) 9 SCC 1

⁴ EP Royappa vs State of TN (1974) 4 SCC 3

⁵ Maneka Gandhi vs UOI (1978) 1 SCC 248, Ajay Hasia vs Khalid Mujib Sehravardi (1981) 1 SCC 722

⁶ 1950 AIR 27, 1950 SCR 88

⁷ 1965 AIR 845, 1965 SCR (1) 933

judgments coming in the 70s, most notably in Kesavananda Bharti8 so far as the interpretation of COI was concerned. Then the Maneka Gandhi judgment supra substantially tilted the flavor of COI towards a living organ approach. There was still some back and forth in the 80s and 90s9.

 

 

Having had those struggles, the judiciary in the recent decade has moved to a different level, with first formulation of the result and then articulating the COI into textualist/ purposive mode, as may be required. Perhaps, it’s this evolved approach that led the Hon’ble Supreme Court in Shayara Bano supra to revive (if it can be said os) the arbitrariness doctrine in a case involving highly contentious social/ religious debate.

 

 

Thereafter certain other social stigmatic cases have given rise/ adoption to constitutional morality doctrine/ approach, a tactic hardly even acknowledged by the judiciary in preceding times10. Even Co-operative Federalism [as a validating argument in favour of certain result] saw its rare appearance in 201811, after more than 25 long years12. Even the tax statutes have had their fair share of divergent dialogues such as first accepting Westminster principle, then questioning it13, then diluting it14, then throwing it up in the air.

 

 

The trade and industry today is fussed as to how to look at the ‘input tax credit’ in GST context, whether to adopt the Dai Ichi Karkaria’s15 so-called ‘vested right’ theory or to follow the Jayam & Co.’s16 concession theory. This dynamism is a double-edged sword [1] such that a litigant can always fancy his chances regardless of how rigid a statute is and whether it is plenary or delegated legislation, [2] but this dynamism also keeps the things uncertain, so much so there is always a chance that judicial decisions might be contrasting to the position he takes today.

 

 

 

⁸ (1973) 4 SCC 225; AIR 1973 SC 1461

⁹ State of AP vs McDowell & Co. (1996) 3 SCC 709, RK Garg vs UOI AIR 1981 SC 2138, In re, Special Courts Bill AIR 1979 SC 478

¹⁰ See “The Many Meanings of Constitutional Morality” by Abhinav Chandrachud

¹¹ NCT of Delhi (2018) 8 SCC 501

¹² S.R. Bommai and Ors. v. Union of India and Anr. MANU/SC/0444/1994 : 1994 (3) SCC 1

¹³ McDowell & Company Limited vs CTO 1986 AIR 649, 1985 SCR (3) 791, judgment of O. Chinnappa J. (the other McDowell case)

¹⁴ UOI vs Azadi Bachao Andolan 2004 (10) SCC 1, Vodafone International B.V. 2012 (6) SCC 613

¹⁵ 1999 (112) ELT 353 (SC)

¹⁶ 2018 (19) GSTL 3 (SC)

2.  Historical notion and present status quo

 

The second part of Article 14 is endowed from the American Constitution, such that equals be treated equally and un-equals be treated unequally. It is therefore both necessary to create discrimination, even when it is prohibited. To resolve this dichotomy, American courts evolved the classical ‘classification doctrine’17, and so do the Indian Courts adopted this doctrine for Article 14.

 

 

For the longest period, Article 14 was understood in the light of classification doctrine, until Justice Bhagwati P.N. went on to ascribe another unique meaning to Article 14 in EP Royappa case, essentially saying that “Equality is antithetic to arbitrariness. The former belongs to the Rule of law while the latter belongs to whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both and is therefore violative of Article 14”.

 

 

This gave rise to a notion that even if certain provision is not discriminatory, but arbitrary [based not rule of law (sound and known principles)] but based on certain someone’s whims and caprice, then also it can be stuck drown as being contrary to Article 14. Since this notion moved a judge’s position of interpreter of law to an arbiter of law, it was always going to invite critics.

 

 

That being said, the doctrine was given its firm establishment in subsequent judgment in Maneka Gandhi and Ajay Hasia, wherein the doctrine was equated with rule of law and substantive due process. In McDowell & Co. supra case, however, the Supreme Court categorically repelled the arbitrariness doctrine. More than 20 years after, R.F. Nariman, J. again revived the doctrine on the cusp of Triple Talaq controversy, holding that McDowell case ignored several larger bench decisions, and also was not based on sound logic.

 

 

Since then there have been various judgments in the context of both civil law as well as the fiscal statute, wherein this doctrine has been used by the Supreme Court to dislodge one or the other provision of law. More recently in an income tax case of Pepsi Foods Ltd.,18 the Supreme Court categorically observed that the arbitrariness doctrine is equally applicable with respect to tax statute also. In another recent GST judgment in the case of Radha Krishan

 

 

¹⁷ Discrimination is permitted provided it is reasonable

¹⁸ Civil Appeal No. 1106 of 2021 (Arising out of SLP (Civil) No. 30284 of 2015) and others

Industries19, the Supreme Court used the tests of arbitrariness [without formally invoking it] to narrow down the scope provisional attachment of assets provision under Section 83 of the CGST Act.

 

 

As we stand today, the arbitrariness doctrine its newest form of manifest arbitrariness is in nuisance stage. The Courts understand the newest form equivalent to “a provision being so outrageous that it shocks the conscience of the Court”. For its obvious subjectivity and various other reasons, it has its critics. That said, however, it is no longer an alien argument and both the Supreme Court and High Courts take cognizance of the pleadings formed around it.

 

 

3.  Placement and versions of the doctrine

 

It’s difficult to state where exactly does arbitrariness doctrine lie. The Courts have mostly used its placement inside Article 14, but there cases that indicate this doctrine’s presence in the entire Part III of the COI [which allows the counsels to mould the argument in various ways]. There is also a sense that this doctrine is external to the COI from a pure textualist approach20.

 

 

Further it’s kind of hard to precisely define arbitrariness, but in laymen terms it can be summed up as a decision based on individual whims and discretion rather than by virtue of fixed and predictable rules, procedures, or the law. There are many meanings of arbitrariness and that too different for type of legislations;

·           For delegated legislation [DL] and executive orders [EO], arbitrariness argument was always understood to have been accepted as a ground to strike down

·           Whereas, post the Shayara Bano decision, a higher threshold of arbitrariness namely manifest arbitrariness has been given acceptance to be used as a ground to strike down plenary legislation [PL]

 

 

4.  Arbitrariness qua delegated legislation

 

The DL by its namesake suggests an enforcement agency’s work, with powers to implement and execute and legislate to the limited extent of enforcement. The arbitrariness as a ground

 

¹⁹ Civil Appeal No. 1155 of 2021 (Arising out of SLP (C) No. 1688 of 2021)

²⁰ In McDowell & Co., Jeevan Reddy J. observed that a law of parliament can be struck down only on two grounds, one of them being violation of fundamental rights or any other constitutional provision. If arbitrariness doctrine was supposedly inside Article 14, then how the inferred Court that arbitrariness is not a suffice argument.

of attack to strike down DL was an accepted notion even before Shayara Bano. Within the arbitrariness approach itself there are multiple sub-tests on the basis of which DL can be stuck down, with the most common being ‘Wednesbury’s Principle’. In the sense of arbitrariness, the DL can be struck down on the following mischief;

·           Illegal: The exercise of power that is not provided or forbidden in the PL. The authority, if it exceeds the terms of its jurisdiction, is also acting illegally. Abuse of powers, considering irrelevant factors and not considering relevant considerations, using grounds extraneous to legislation, perversity (not appreciating the evidence on record) are some of the other examples that make the exercise of powers illegal

·           Irrationality: The anvil of irrationality inter alia includes subjectively assessing the powers with the framework in mind i.e. whether the selection of means is proportionate to the requirement. If an action is so outrageous that is in total defiance of the logic or moral standards, the action is irrational.

·           Proportionality: The doctrine of proportionality is both an independent evaluation and also a spin-off to irrationality. The proportionality test is the objective assessment of evil and the action proposed to kill evil.

·           Procedural impropriety: This test examines the fairness in the process employed for making the decision, kind of sibling to the principle of natural justice i.e. hearing the other side, ruling out the apparent bias-ness, ensuring that reasons are recorded (reasoned).

·           Other grounds: All the grounds which are available for striking down the PL are also available for striking down the DL21. In this context, given that the manifest arbitrariness test is available for striking down PL, it is always open for the Court to strike down DL for it being manifestly arbitrary.

 

 

5.  Manifest Arbitrariness for plenary legislation

 

It was held in Shayara Bano that arbitrariness is certainly a ground of attack for striking down the parliamentarian law, however, without bridging the gap between legislature’s mandate and a judge’s wisdom, the core of the doctrine would have always been a controversial field. Taking a cue from the judgment in Indian Express case supra, the doctrine was modified to the extent that for striking down parliament law, merely arbitrariness is not sufficient, but the law should be “manifestly arbitrary”.

 

 

 

²¹ Indian Express Newspapers (Bombay) Pvt Ltd. 1999 (110) ELT 3 (SC)

Effectively saying that the threshold of dislodging PL is higher when it striking down on the ground of arbitrariness. In certain cases thereafter, where the doctrine was tested, more guidance followed as to how possibly a provision could be said to be manifestly arbitrary. And there is some relevant guidance in earlier judgments as well. These can be summed up as below;

·           Manifestly arbitrary: A provision which is so capricious i.e. it is clearly out of whims, without adequate determinative principles is arbitrary and therefore violative of Article 14

·           Excessive or disproportionate: The proportionality test [discussed later] is applicable for PL also, but the threshold will be higher

·           Substantive due process: It was expressed in Mohd. Afir case22 that post Maneka Gandhi decision, the substantive due process is part of Chapter III of the Constitution. In that sense, any curtailment of freedom should not only be as per law made in this regard, but that law should also be reasonable (and not excessive23)

·           Morality of Laws: The morality of laws is a debate of its own kind, but from reference, it appears that the minimum content of morality may very well be traced to arbitrariness

 

 

The noticeable difference between arbitrariness qua DL and qua PL is the acceptability of underlying tests. The tests of the first kind of arbitrariness are well-defined and objective, whereas the tests for the second kind are a rarity and subjective.

 

 

6.  Acceptability of arbitrariness in tax legislation

 

The gone past 7-10 years have shown a distinct approach of the judiciary when it came to questions involving civil/ societal laws and fiscal laws. For towing down the social awkwardness, the judiciary is evolving all sorts of tests [manifest arbitrariness, constitutional morality, co-operative federalism, etc.], whereas the fiscal laws have been invalidated only if they are distinctly erroneous. It is therefore relevant, as to what extent the arbitrariness doctrine could be cashed in for taxation statutes.

 

 

For delegated legislation, the application of arbitrariness test has strong substance, for e.g., if a provision in the rules deploys certain outrageous consequence (blocking of Input Tax

²² 2014 (9) SCC 737

²³ This aspect would be relevant in the context of arrest provisions under the CGST Act

Credit, denial of refunds, etc.) and it de hors the opportunity of being heard, it is plainly arbitrary, and such would be in majority of the decisions is likely to be invalidated. For DL, the arbitrariness in the sense of Wednesbury principles is usually applied.

 

 

The difficulty comes in gauging the arbitrariness in the legislative part of the tax code. On one hand, the classical view is that the fiscal statutes are more flexible and that they have presumed validity, while on the other hand, the argument is that the legislature was capricious when it drafted the same. The two views are hard to reconcile. The Shayara Bano case expressed that ‘rule of law’ is corollary to arbitrariness, hence as an alternative it can be judged from rule of law point of view, whether arbitrariness has good existence in tax statute or not.

 

 

Certainty: The key discipline of rule of law is ‘certainty’. The Indian experience with respect to retrospective taxation is quite proverbial. The Indian Judiciary accepts that the legislature has implicit powers to make tax laws retrospective and the legislature has used this notion has been misused by the legislature countless times. That said, the ‘retrospectivity’ would be unreasonable and hence unconstitutional, if it is unduly oppressive and confiscatory i.e. if the ‘retrospectivity’ hits a tax position that was never so originally understood, then such retrospectivity would not survive24.

 

 

The GAAR provisions in the Income-tax illustratively hits the certainty element of rule of law. In the Canadian context, the GAAR violates rule of law, whereas not so in the New Zealand context, so the application of certainity vis-à-vis tax statutes is a bit unpredictable. What can however be concluded (for the time being) is that, ‘test of certainty’ under the aegis of rule of law and arbitrariness doctrine, in deserving cases should be available to declare DL and PL as bad.

 

 

Fairness in procedure: The ‘principles of natural justice’ is an accepted conception in the taxation statutes, however, there is a level of dichotomy. If fairness is the norm, why Judiciary says that in ‘undeserving cases’, the principles of natural justice can be given a go-by. And if that is the case, who and what basis the deserving case and un-deserving cases are distinguished? The provisional attachment, arrest before adjudication, suspensions of registration (without giving notice), are cases where procedural fairness is blatantly ignored and if the Courts can rule that such practices are per se permissible, clearly then ‘taxation

²⁴ RC Tobbacco Private Limited vs UOI 2005 (7) SCC 725

statute’ does not fully gel with ‘rule of law’. Hence the per se fairness element might not have that much content to argue in favour of arbitrariness25.

 

 

Similar to above, the plenary legislation can be tested on arbitrariness argument on the aegis of number of other elements of ‘rule of law’. The decisions in Pepsi Foods supra as stated above gives due hint that the Courts are open to test the (plenary) tax statute from the point of view of arbitrariness doctrine, provided that arguments by the counsels are well placed.

 

 

7.  Ascertaining the threshold for arbitrariness

 

The arbitrariness doctrine to a very large extent displaces the legislative text and replaces it with a judge’s wisdom. This positions the Courts in obvious difficulty as to what is the breaking point of a law, when does it become palpably arbitrary. The problem is amplified if the law so attacked is a fiscal one because unlike in a social context, the conscience factor is more neutral. In order to make the doctrine more alive, it may be necessary that there should be some objective parameters based on which the arbitrariness of law could be judged consistently. The succeeding paragraphs throws some methods that may be used.

 

 

Object of law: The classification test of Article 14 is a two-part test26. The second part of this test (object of law) already contains a ‘reasonability factor’ within the realm of the judge’s wisdom. This second part can be modified in a way that can be used to test the arbitrariness of the impugned law. E.g. the excessiveness content of the provision can be gauged with respect to the object sought to be achieved (in a way this is a corollary to proportionality principle, but with the ‘object of law’ factor, the benchmark of threshold can be ascertained).

 

 

Level of judicial scrutiny: The level of scrutiny27 is a judicially crafted formula by the US Courts such that if an offending statute burdens a person’s status, then the offending statute must be analyzed under one of the three levels of scrutiny – strict, intermediate, or weak28.

 

²⁵ See generally SRI SATHYA JEWELLERY vs Principal Commissioner of Customs W.P. No. 3144 of 2016 (Madras High Court)

²⁶ [1] the classification should be based on intelligible differentia and [2] the differentia should have rational nexus with the object sought to be achieved – State of WB vs Anwar Ali Sarkar AIR 1952 SC 75

²⁷ Strict scrutiny is where the Court will assume that the measure is ex facie unreasonable and unless the defendant-State can prove that such measure was ‘absolutely necessary’, the statute be invalidated. On the other hand under the weak scrutiny or rational basis, it will be upon the plaintiff to justify that the statute is invalid qua one or the other constitutional provision.

²⁸ Refer Strict Scrutiny test in Constitutional Adjudication by Abhishek Pandey

The Indian Courts have been averse towards the application strict scrutiny test29. However, the Supreme Court has observed that in certain situations such as the statute/ action being patently unreasonable or arbitrary, against the constitutional scheme, takes away a person’s life and liberty, etc., the strict scrutiny can be applied.

 

 

It’s unsure how far the level of scrutiny can be imbibed into testing arbitrariness. But since the age is of ‘dynamic constitution’, the Courts could potentially bifurcate the subjects in a tax statute into categories such as;

·           Measures/ actions affecting a person’s life and liberty such as provisions arrest and prosecution provisions within the intermediate scrutiny test

·           Measures/ actions affecting the property (ITC) under the immediate scrutiny test

 

·           Other measures/ actions within the weak scrutiny test

 

The strict scrutiny test vis-à-vis tax statute is difficult to envisage (because the legislatures observe greater latitude), but it should not be ruled out altogether. If it still appeases to Court that a provision is outrageously and ex facie against the constitutional framework, then of course strict scrutiny should be used.

 

 

Part B

 

On the cusp of above, accepting that arbitrariness is an argument available for striking down tax legislation in next few paragraphs, certain provisions under the GST law are examined to gauge their potential arbitrariness.

 

 

8.  Disproportionate penalty in Section 129

 

The amended Section 129 of the CGST calls for a 200% penalty of tax amount in case of “transportation of goods while they are in transit in contravention of the provisions of the Act or the Rules”. A striking measure of 200% penalty, one could think that the offence must have been so despicable and filled with such extreme mala fide, that such action is being contemplated.

 

 

However, even if the offence is merely a digit error [because humans are not robots], that section 129 calls for 200% of the penalty of the tax amount. The doctrine of proportionality

²⁹ because of the difference in the COI and US Constitution – refer Abhishek Pandey supra

states that the means adopted to counter the evil should match with the necessity or the punishment should match the offence. In that sense, clearly, Section 129 is the most disproportionate provision in the law and such that it fails to recognize genuine cases. Section 129 strikes at the very core of reasonableness and is palpably arbitrary. The comparison aspect of bona fide and non-bona fide persons is the most common used approach to see if penalties for bona fide cases look disproportionate30.

 

 

There is more to Section 129 than just excessiveness. After payment of 200% of the penalty, the consignment of goods and conveyance shall be released. Post such release, while the genuine taxpayer would be required to pay tax, whereas, the nefarious person would just run away. The imposition of penalty [but not the tax] creates a hostile disparity between the bona fide persons and mala fide persons. Therefore, not only Section 129 is disproportionate, but also discriminatory, and therefore the Courts would have ample support for striking it down.

 

 

The newly introduced Section 114AB in the Customs Act, 1962 imposing penalty to the extent of five times is also ex facie disproportionate31. The object of imposition of a penalty to 5 times is effectively defeated such that offenders would rather collude with the Customs officers rather than being deterred by it. The corruption in the administration of traffic rules has increased drastically, even since the new Motor Vehicle Amendment Act, 2019 has increased the fines manifold.

 

 

9.  Indefinite time for the State to come after taxpayer

 

Section 75 of the CGST Act is one of its kind, in as much as it provides certain general provisions relating to the determination of tax. Contrary to the popular belief, the sub-sections does not lay down any significant step to create a conducive adjudication process, rather the section based on pro-assessee judicial decisions of the past tries to kill their basis.

 

 

Section 75 (11) in particular is interesting, it states that where ‘an issue’ on which Appellate Authority, the Tribunal or the High Court has given a decision [1st decision] against the revenue, and the revenue has filed a subsequent appeal against these orders [on which 2nd decision is going to be passed], then the time spent between the date of 1st decision and 2nd decision shall be excluded for the purpose of Section 73 and/ or Section 74 adjudication time

³⁰ Shree Bhagwati Steel Rolling Mills vs CCE 2015 (326) E.L.T. 209 (S.C.)

³¹ Bhagat Ram vs State of HP AIR 1983 SC 454, also see Grupa Warzywna sp. Z oo [ECJ Case C-935/19]

limit. If an order of the High Court [relevant for FY 2017-18] is decided in favour of taxpayer in say the year 2024, and if the revenue attempts to file an appeal against the same and say, the order is reversed by Supreme Court in the year 2030, then the also the revenue would have the liberty to open cases pertaining to FY 2017-18 of all other taxpayers. What Section 73 (10) and Section 74 (10) postulate, is effectively over-ridden by Section 75 (11).

 

 

The time limitation for adjudication is arbitrarily stretched to infinite period, so much so that the taxpayer is told to wait for [almost] all issues till the same is decided by Hon’ble Supreme Court. Such vague time limitation is palpably arbitrary in as much as the limitation may run upto infinity. Such dwindled tax provision directly hits the ‘certainty’ element of rule of law and non-arbitrariness. In Reliance Industries vs State of Gujarat32, the Hon’ble Gujarat High Court has struck down a similar provision contemplated in Section 84A of the Gujarat VAT Act.

 

 

10.   Interest on refund to start from the date of order of Appellate Authority/ Court

Section 56 provides for interest in case the disposal of refund is delayed beyond 60 days from the date of making a valid refund application, till the date the refund is actually given. However, the provision to Section 56 makes an exception where the refund is granted in pursuance of an order of Appellate Authority or Tribunal or Court, the date for the interest on such refund begins from the date “application for interest is filed after the date of order”.

 

 

Say if a taxpayer files for a refund on 01 April 2021, and it is rejected by adjudicating authority on say, 30 June 2021. Thereafter say, the taxpayer's appeal is rejected by Appellate Authority on 30 June 2022. (Assuming) the Tribunal is constituted by then, and finally, the refund is allowed by an order dated 30 June 2028. Effectively the proviso to Section 56 states that interest on such refund will begin only after an application in this regard is made after the order of the Tribunal (and that too if the refund is not given within 60 days of the application). 7 years of using taxpayer’s money for free is daylight robbery.

 

 

The notion in the parliament law is that there is no malice in law, but proviso to Section 56 is anything but malice. It is true that the state’s machinery is lackluster (that takes 8 years to

 

³² R/SCA 14206 of 2018 (Gujarat High Court)

process a valid refund), the prejudice of this nature is anything but with sound principles. Not only does this provision show lack of regard towards the taxpayer, but also indicates poor government infrastructure. This provision could be termed as arbitrary to the extent it stops the interest on refund post the date of application. The ratio of Pepsi Foods supra supports the view that such provision can be termed as arbitrary.

 

 

11.  Inverted Duty Structure refund – irrational

 

Section 54 (3) of the CGST Act has had its topsy-turvy narrative, 2 High Courts have been at the different end of the taxpayer’s petitions as to allowance of refund of ITC on ‘input services’ when him being under inverted duty structure. It’s true that this refund is in the nature of concession, rather than some sort of right, as the Madras High Court observed.

 

 

But who is the key conspirator of the ITC accumulation disarray in the first place, it’s the executive authority (the government, the fitment committee if it can be said so) who laid down the rate of tax on its number of questionable sentiments. Essentially the very idea behind the inverted duty structure (IDS) refund is to do away with un-wanted consequence of potential bias of executive authority. There is a very good case for input services to be considered within the IDS refund [it’s really simple maths, if you ask me].

 

 

The Madras High Court’s analogy might be right that inputs and input services are within the permissible classification33. But, not considering input services [or not reading into Section 54

(3) (ii)] for refund has virtually no basis. Think of it this way, the valuation addition in respect of any input goods happens due to the services that the trader use (and provides), in today’s competitive world it is virtually impossible that inputs can be sold by simply adding profits. That said, input services are excluded from the refund calculation, the refund becomes practically illusive.

 

 

Then there is the argument of refund being concession and the government can restrict as it may like. But it’s reasonable to say that it’s not a concession in the sense of the government’s pleasure, this concession is absolutely necessary for GST system to work, considering that the rate of tax is prerogative of delegatee which is prone to its own bias.

 

³³ On a side note, it is also possible to say that culling services for the purpose of refund is also not within the permissible reasonable classification criterion. Post GST, the goods and services do not fit under the ‘separate but equal’ treatment (the Courts needs to discard old baggage)

Consequently, on this count also, terming this a mere concession and not filling the gaps34 is advancing the inherent arbitrariness of this provision.

 

 

12.  Pegging valuation of land at 1/3rd

 

The rate notification for services provides that the value of construction supply (involving goods, services, and land) shall exclude the value of land, and such value be 1/3rd of the total amount charged for the supply35. This deeming fiction apart from susceptible to other invalidating arguments [ultra vires of Section 15, may as well be tested under arbitrariness doctrine36.

 

 

The argument of arbitrariness is twofold. One is that Explanation 2 to the service rate notification per se should not be read in a manner that would make the actual value of land nugatory (where it is available). If however, Explanation 2 is to be read so as to affix deemed value to land, then such deeming fiction is likely to face the arbitrariness-strike. Accepted that legislature is not supposed to do scientific valuation while providing the abatement in such case, but making the value mandatory indicates it’s the whims and caprice.

 

 

That’s like putting the reasonable logic to dead-end when stamp duty values are already available. In Kunnathat Thathunni Moopil Nair case37, B.P. Sinha C.J. emphasized that the potential productivity of land is a relevant factor when imposing a tax on the land. Although the Land tax Act was struck down on classification anvil, it does vindicate that numbers created by the legislature are not invincible. Therefore the compulsion of 1/3rd deduction, even where the land value is available, likely suffers from the vice arbitrariness.

 

 

There is another aspect of arbitrariness that may be found in Explanation 2 to the extent that it considers only 1/3rd value as the deduction for land. This deduction is ex facie far-cry, if the land values in metros are to be considered [70% - 80%]. Even if the tier 2 cities are considered, then also the land value contributes approximately 50% of the total value.

 

 

 

³⁴ State of Punjab vs Khan Chand (1974) 1 SCC 549

³⁵ Explanation 2 to Notification No. 11/2017-CT (Rate)

³⁶ Also it should be remembered that, this provision being delegated legislation, the threshold of providing is not as high as the plenary legislation

³⁷ (1961) 3 SCR 77

In Indian Acrylic38, the CBIC pegged the exchange value of USD to 31.44 for the purpose of import duty, when the RBI exchange rate was 25.95, a difference of 21% on the latter. If we speak about the threshold in this respect, the Courts are likely to go by numbers. This is one area where the projection of data would help either side (the taxpayer) as well as the government in establishing/ countering that the 1/3rd value is arbitrary or otherwise

 

 

13.  Rate of tax – harshness and irrationality

 

Unlike, the service tax, central excise, or customs duty, the rate of tax under the GST law is framed as a function of the delegatee (with upper band rate of 40% given in the Act). Since the rates are notified by the delegatee, the threshold of its survival would be squat39, in case a person decides to attack the arbitrariness of the tax rates of the given commodities, see Indian Express Newspapers case supra.

 

 

In Indian Express Newspapers supra, the Supreme Court observed that the discretionary rate of tax that impedes the right of freedom of speech under Article 19 (1) (a) to such an extent it becomes highly burdensome. If the tax is so manifestly excessive that the real reason for its imposition is not raising of revenue but the preventing of the publication of newspapers, then it is faulty. Importantly, the Court read ‘arbitrariness’ into Article 19 also40. It leaves a plaintiff open that he can challenge the excessive-ness of tax rates, not only under Article 14 but under Article 19 [certain specified sectors such newspaper, pharmaceuticals, salt makers41] and Article 20 as well.

 

 

In Del Small Ice Cream Manufacturers Welfare’s Association case42, the Hon’ble Delhi High Court directed the GST Council to reconsider the exclusion of ice-cream sellers from the composition scheme. It is seen that the Court took a pragmatic view, but it is available for the Court to use arbitrariness in the aegis of Article 19 (1) (g) to overcome the ‘unreasonable restrictions posed upon the business operating in ice cream sector.

 

 

 

 

³⁸ (2000) 2 SCC 678

³⁹ Compare to if the rate was part of the plenary statute

⁴⁰ Such instance is also found in Shreya Singhal case, therefore indicating that arbitrariness doctrine just like rule of law runs through the entire vein of Part III of COI

⁴¹ Salt is not a taxable commodity, it’s a synonym to civil disobedience. Believe it or not, arbitrariness can plead under the aegis of preamble to the COI also

⁴² WP (C) 5252/2019 – Delhi High Court

Very recently in Gurcharan Singh vs Ministry of Finance43, the petitioners have sought IGST exemption on the oxygen concentrators to be imported by individuals in the light of the anarchical COVID-19 situation. Importantly, the challenge has been assailed under Article 21

i.e. right to life and personal liberty. It would not be out of place for the High Court to grant some sort of relief by virtue of arbitrariness argument, such that customs duty on life-saving equipment in the light of COVID-19 be termed as excessive and therefore becoming a matter of life and death.

 

 

14.  Restrictions on input tax credit (ITC)

 

The ITC is a highly controversial field, it’s the main source of revenue leakage. In order to ensure that the facility is not misused, the legislature has taken various measures – both provided in the Act as well provided under the rules and even other instruments also. The Supreme Court in a number of cases has held that government can obviously take measures to control ITC. That said, below are brief comments on some of the restrictions imposed on ITC that could fall vice of the arbitrariness.

·         Second Proviso to Section 16 (2) imposes interest on ITC re-payable by the recipient taxpayer in case they do not make payment to the supplier within a specified period. Put it in laymen's terms, there is a commercial dispute between A and B, and certain C through fiscal law prompts A to make payment to B and on its failure to do so, A gets to pay C. It’s not laughable it’s arbitrary of the State to enrich itself without proper authority of COI. This interest fails the material test of Article 265 in the sense that it loses the character of tax, and becomes the exaction of a monarch. Hence arbitrary.

·         Whimsical application of threshold, Rule 36 (4) requires that only 5% of the ITC is allowed in addition to the figure appearing in taxpayer’s ITC on the common portal. The problem with this rule is that the executive is taking monarch approach in deciding the threshold, first it’s 20%, then out of sudden becomes 10%, then 5%. The bare reason that this rule is exposed to arbitrariness is the use of unbridled powers to literally to do anything without any sound policy.

·         Rule 86A permits the Commissioner or an officer authorized to block ITC. This rule (at least on paper) has certain pre-requisites before it can be invoked, so it may not be ex facie arbitrary. It is another thing that the officers who are using without proper justification, then the respective action is challengeable on other grounds, but the rule as it may stand the attack of arbitrariness. The same can be said for Rule 86B also.

 

⁴³ WP (C) 5149/2021 – Delhi High Court

·         Excessive or disproportionate conditions, the test of proportionality requires that there should be a balance between goals and the means employed to achieve those goals. Meaning thereby measures over-arching the goals are disproportionate and arbitrary. Rule 36 (4), 86A, 86B, and the newly introduced Section 16 (2) (aa) may as well be questioned for being disproportionate.

 

 

15.  Other provisions potentially arbitrary

 

The doctrine is so alive that, in deserving cases, it gives a window to Court to declare a number of provisions under the GST Law as arbitrary. Section 171, the anti-profiteering clauses could fall falter to certainty element of rule of law such that it offers little to less guidance to a taxpayer as to what is subject to. The idea is good, but the implementation is poor. This is kind of indirect arbitrariness44 where the legislation looks neutral facially, but its operation is whimsical and capricious.

 

 

Section 107 requires a pre-deposit of tax in dispute to the tune of 10% at the time of the first appeal. Section 112 requires an additional 20% pre-deposit at the time of the second appeal. Most importantly, neither of the Sections provides for an upper cap. The question, therefore, revolves around the threshold, as in to what extent 30% is fair enough45 and why the State didn’t cap the upper amount as was the case in Service Tax and Central Excise. Further, the Act does not provide any option for stay, even for a total fallacious case booked by the revenue officers46. In Mardia Chemicals47, the provision of SRFASI law requiring 75% of the pre-deposit (at the first stage of adjudication) was invalidated on the ground of arbitrariness. This argument can definitely be built upon.

 

 

The arbitrariness doctrine is such a golden rule that it can supplement other arguments and provide more chance of success. The power enabling the government to make retrospective rules under Section 164 (3) can also be said to be arbitrary in the sense of excessive delegation. The power to cancel the registration on the cusp of not complying with anti-profiteering is excessively arbitrary in the sense of un-reasonable conditions under Article 19 (1) (g). Affixing place of supply as ‘location of supplier’ vis-à-vis intermediary

⁴⁴ Corollary to indirect discrimination, see generally Bilka-Kaufhaus GmbH v. Karin Weber von Hartz (1986) ECR 1607, Griggs v. Duke Power Co. MANU/USSC/0066/1971 : 401 U.S. 424 (1971)

⁴⁵ An increase of 20% as compare to the earlier regime

⁴⁶ The Court should be shown the kind of orders the Uttar Pradesh State government officers pass and also the relevant statistics

⁴⁷ AIR 2004 SC 2371

service provider [Section 13 (8) (b) of the IGST Act] is also arbitrary in the sense that it defeats the very framework of the consumption-based tax. And this list is endless.

 

 

Final thoughts

 

The GST legislation is a good example of what a tax should for the prosperity of a nation, but unfortunately, the legislation as it stands is also a good example of how bad the people sitting behind the curtains can ruin it. The arbitrariness doctrine is precisely solving that problem, it does not attack the legislation, but it attacks the whimsical thoughts of people making it. True that, not most of the people might not agree to what is stated above, and the criticism is accepted. Amidst all the wrongs that are often there in tax statutes, it’s hopeful that the doctrine keeps on developing and refining.