There are a batch of Writ Petitions pending in the Telangana and the Andhra Pradesh High Courts on the question of levy of entry tax on goods that were imported the State from outside the State.
Background
The Entry of Goods into Local Areas Act, 2001 (“Entry Tax Act”) was brought into force by the erstwhile Andhra Pradesh government.
Several states engaged in reduction of local taxes to attract businesses. Naturally, people went to these States, purchased items and brought them back into AP. This resulted in loss of business and consequent tax revenue for AP.
To curb this practice, the erstwhile AP government enacted the Entry Tax Act levying taxes on notified goods that were brought into the State of AP. Under this Act, any notified good that was imported from other States was to face an entry tax.
The AP High Court before its bifurcation in the year 2007 had struck down the Entry Tax Act as unconstitutional.
The Revenue appealed the decision to the Supreme Court. In the case of Jindal Stainless Limited 2016 (11) SCALE 1, the Supreme Court reversed the decision and upheld the levy of entry tax on principle.
The Supreme Court remitted the appeals to the High Court with a direction to the High Court to consider the matter in accordance with the principles laid down by the Supreme Court in Jindal Stainless Limited.
Pursuant to the orders of the Supreme Court, assessing authorities who were dormant since 2007 (as the Entry Tax Act was struck down by the AP High Court) started proceedings against businesses in view of the Supreme Court’s decision in Jindal Stainless Limited.
The Contentions
Several Writ Petitions are filed questioning the assessment orders passed by tax authorities before the AP and Telangana High Courts.
The contentions of the Petitioners can be classified into two broad categories.
- Petitioners have challenged the constitutional validity of the Entry Tax Act once again in light of the principles laid out in the decision of Jindal Stainless Limited.
- Even assuming that the Entry Tax Act is constitutionally valid, Petitioners have challenged assessment orders passed by tax authorities on grounds that the scheme of the Entry Tax Act does not permit authorities to levy tax.
In this article, we will be focusing on the second category of contentions.
The Law
The relevant portion of Section 3 of the Entry Tax Act reads as follows:
3. Levy and collection of tax.— (1)(a) There shall be levied and collected a tax on the entry of the notified goods into any local area for sale, consumption or use therein. The goods and the rates at which, the same shall be subjected to tax shall be notified by the Government. The tax shall be on the
value of the goods as defined in clause (n) of sub-section (1) of section 2 and different rates may be prescribed for different goods or different classes of goods or different categories of persons in the local area;
(b) the tax shall be payable by the importer in such manner and within such time as may be prescribed;
(c) the rate of tax to be notified by the Government in respect of any commodity shall not exceed the rate applicable for the commodity under the Andhra Pradesh Value Added Tax Act, 2005 or the notifications issued thereunder:
Provided that the tax payable by the importer under this Act shall be reduced by the amount of tax paid, if any, under the law relating to Value Added Tax in force in the Union Territory or State, in which the goods are purchased.
(2) Notwithstanding anything contained in sub-section (1), no tax shall be levied on the notified goods imported by a dealer registered under the Andhra Pradesh Value Added Tax Act, 2005 who brings such goods into any local area for the purpose of resale or using them as inputs for manufacture of other goods in the State of Andhra Pradesh or during the course of inter-State trade or commerce.
5 principles stand out from Section 3 of the Entry Tax Act:
- Entry tax shall be levied in respect of notified goods only (not to all imported goods);
- Levy of entry tax is for sale, consumption of use of notified goods in any local area within the State
- The rate of tax under the Entry Tax Act cannot exceed the rate of tax under the VAT Act for the period in which entry tax is sought to be imposed;
- The tax paid in the other States shall be given credit to in the calculation of Entry Tax
- Finally, if notified goods are brought into the State for the purpose of resale or for use as input for manufacture of other goods, no entry tax can be imposed
Contentions have been raised by the Petitioners on each of the above 5 grounds. Let’s look at each one separately:
1. Entry tax shall be levied in respect of notified goods only (under the relevant notification);
The first thing to see when looking at an entry tax order or show cause notice (apart from the ground of limitation) is whether goods on which entry tax is sought to be imposed are notified. For example, furnace oil is a notified good under entry tax. If furnace oil is imported into the State, the levy is attracted.
On the other hand, if entry tax is sought to be levied on an item that is not notified under any of the notifications issued by the Government, the levy cannot be sustained as there is no levy to begin with. This should be a preliminary check.
2. Levy of entry tax is for sale, consumption or use of notified goods in any local area within the State
Virtually any good that is imported into the State is done so with an intent for sale, consumption, or use. Therefore, there is not much to be argued here.
3. The rate of tax under the Entry Tax Act cannot exceed the rate of tax under the VAT Act for the period in which entry tax is sought to be imposed
This is another interesting ground that has been urged.
Let’s say for example that the tax department is demanding entry tax for item X for the period 2016-17. The tax rate of item X for 2016-17 is 5% under the VAT Act. However, let’s say the entry tax rate imposed by the Government under a notification is 12.5%. In such a scenario, the levy of entry tax fails as the entry tax rate far exceeds the rate prescribed under the VAT Act.
This anomaly occurs more frequently than is usually anticipated and it’s best to do a check for this ground.
4. The tax paid in the other States shall be given credit to in the calculation of Entry Tax
Let’s say that you paid Rs. 10/- as VAT in Karnataka on Item X. The entry tax now demanded is Rs. 12/- in the State of Telangana or AP. You will be eligible to set off Rs. 10/- that is already paid by you and only pay Rs. 2/- as entry tax.
Therefore, any taxes paid in the other State as sales tax by a business can be set off when paying entry tax within Telangana or AP.
5. Finally, if notified goods are brought into the State for the purpose of resale or for use as input for manufacture of other goods, no entry tax can be imposed
A majority of the Writ Petitions are filed under this ground.
If goods are brought into the State for the purpose of resale or be used as an input in the manufacturing process, no entry tax is to be levied.
The scope of resale is relatively simple. You import X from another State. You sell X within the State, no entry tax can be levied since it is a case of a resale.
However, the input exception is not as clear cut. Most businesses that have imported goods as raw materials to be used their manufacture processing and there is some dispute as to what constitutes an input and what doesn’t.
Section 3(2) does not levy entry tax on goods that are imported “to be used as an input for the manufacture of other goods.” The crucial words here are “inputs” “for” and “manufacture”
Every importer will need to assess whether goods that have been imported have been used as inputs for manufacturing other goods. The Supreme Court in a catena of cases has interpreted “inputs” broadly to include goods that are not just present in the final items but also items that are consumed in the manufacturing process. (See Ballapur Industries Limited (77 STC 282))
For example, if diesel or petrol is imported and is used in the manufacturing process, it still qualifies as an input even though it is not physically present in the final product.
The High Court of AP has held that an input is any item that enters into the system and should be interpreted for any item which is a raw material in the widest sense possible. See KGF Cottons Private Limited (81 VST 1)
Therefore, the High Court will have to undertake a case-by-case analysis of whether an item qualifies as an input in the manufacturing process.
Conclusion
As of now, there is a conditional order passed by the High Courts to deposit 25% of the disputed tax in order to seek a stay of the remainder 75% of the disputed tax. The final hearings for this batch of matters are pending.
