The Madras High Court, while dismissing a bunch of petitions, including LG Electronics India Pvt. Ltd has upheld the constitutional validity of section 6 of the Tamil Nadu VAT Act, 2006 providing a compounding scheme under the Act.
Pursuant to the recommendation of the Law Commission to plug the loophole as there was large-scale leakage of sales tax revenue by the adoption of various devices including the hire purchase system, a Constitutional amendment was made. Subsequently, some changes were brought to VAT Act as well.
The dealers who opt under Section 6 of the Act, are liable to pay a compounded tax on the actual value of works contract executed by them at the rate of 2% in the case of civil works contract and maintenance works contract and at 4% on all other works contract.
The petitioners alleged that the provision results in hostile discrimination between the dealers who purchase goods within the State and outside the State/country.
Rejecting the argument of the petitioner that the amendment is ultra vires to the Constitution, the bench held that “in the present case, the authority of the State to levy tax on the sale of goods is traceable to Entry 54 of List II of Seventh Schedule as it stood then. The authority to impose tax carries with it all the incidental authority to lay down the procedure, to grant exemption or concession, and to impose conditions or restrictions for availing of such exemptions and conditions. Therefore, the amendment challenged is well within the legislative competence of the State.”
“The composition scheme under Section 6 cannot be treated as provision for levy of tax on purchases or imposing any restriction on purchases from other States or imports. The conditions do not alter the rate of tax of goods imported from outside the State. The concession is granted at the point of output tax payable on the transfer of property in goods,” the Court said.
Upholding the validity of the provision, the bench held that “the compounding Scheme under Section 6 is only an option to be exercised voluntarily. There is no compulsion to opt under section 6 and it is open to a works contractor to pay taxes under section 5. The condition contained in section 6 cannot be regarded as giving any preference to one State over another or as discriminatory by levying more tax on the goods brought in from outside the State because the State by such amendment has not imposed any tax. Therefore, the Amendment does not infringe any of the guarantees or safeguards provided under the Constitution.”
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