The imposition of value-added tax (VAT) being round the corner, there are a few legal wrangles that may arise.
One such issue is double taxation, raised in the context of the power proposed to be given to the state governments to levy a 4 per cent VAT or less on sugar, tobacco products and textiles, in addition to the excise duty being levied by the Centre.
The Centre has the power to levy this tax in lieu of sales tax. A share of the tax collected is given to the states. Now, if the states charge VAT on the same goods, it will also be in lieu of sales tax. Hence, the goods will be taxed twice, once by the Centre and again by the states.
The Budget for 2003-04 has said the Additional Duties Act will be amended to make provision for this. The issue raised by manufacturers is that double taxation is not permissible by law. They have been encouraged by the judgment of the Supreme Court in the case of Hind Plastics vs C.C Bombay 1994 (71) ELT 325 (S.C), where the Court held, "There cannot double taxation on the same article".
That, however, is not the whole story. The rule of interpretation that is settled is that double taxation can be permitted only if the statute expressly provides for it. It is not permitted by an interpretation of the statute. By an interpretation of the law, an income or turnover cannot be taxed twice.
However, nothing in the law provides that double taxation cannot be enacted. The Court, therefore, leans in favour of an interpretation that avoids double taxation.
One of the most well known judgments on the income tax side was in the case of Jain Brothers v U.O.I 1970(77) 107 S.C, wherein the court said the Constitution did not contain any prohibition against double taxation.
There can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted that they cannot be interpreted as to tax the same subject twice. In the case of Ajam Jha Bahadur vs Expenditure Tax Officer ,1971 (3)SCC 621, the Court held that under the Expenditure Tax Act, 1967, though there was no bar to double taxation, the legislature must distinctly enact it.
In a sales tax case under the Orissa Sales Tax Act, 1947, in the case of State of Orissa vs Titagar Paper Mills 1985 Supp SCC 280,322, the state wanted to tax logs and the subsequent sale of timber. The Supreme Court set it aside on the ground that there was no specific provision in the law for double taxation and so it could not be interpreted to allow double taxation.
In another Central Excise case of Tata Iron & Steel, 1977(1) ELT (J61) S.C, the Supreme Court thwarted the effort of the revenue department from charging duty on ingots made out of duty-paid pig iron mixed with non-duty paid pig iron by saying that the notification did not specifically provide for double taxation.
The substance of the matter is that if the legislature makes a clear law providing for double taxation, the imposition is not illegal, but when double taxation is resorted to by an interpretation of the statute, such interpretation is illegal.
The author is a former member (Budget) of CBEC
