Amidst the ongoing debate regarding the fate of various tax incentives and area-based exemptions under the coming goods and services tax (GST) regime, the recent ruling of Karnataka High Court in the case of Nandi Infrastructure is a positive sign as it reaffirms the established principle that in a constitutional democracy the government stands on the same footing as a private individual or entity so far as legal obligations are concerned.
Promissory estoppel is a common law doctrine which extends to all aspects of civil and taxation law except in situations of national importance and public policy. The sum and substance of the philosophy underlying the doctrine of promissory estoppel is that the state is bound to make good its promises to its subjects and cannot retract by claiming the cover of being “sovereign”, as by way of this doctrine the state and its subjects are to be treated equally as far as the promises made by them are concerned.
Nandi Infrastructure (the petitioner) filed a writ of mandamus before Karnataka High Court, seeking an order against the act of the government of Karnataka in not extending to infrastructure projects of the petitioner, tax concessions that had been the basis for the petitioner to undertake the investment and were available under the erstwhile Karnataka Sales Tax Act (KST Act) and guaranteed in terms of the state’s 1997 infrastructure policy.
The Karnataka Value Added Tax Act (KVAT Act), which replaced the KST Act, contained provisions in section 5(1) and 5(2) enabling the state government to provide exemptions in respect of goods and new industrial units respectively. However, no specific notification was issued by the state government exempting the tax payable by a dealer on the sale of machinery and equipment worth more than ₹10 million in each individual sale invoice and on the sale of construction material worth more than ₹2.5 million in each sale invoice effected to a dealer undertaking an infrastructure project (which were exempted under the KST Act read with the 1997 policy).
The Karnataka government’s primary defence was that the exemption could not have been extended as provided under the KST Act, as no specific provision was available under the KVAT Act corresponding to the one in the KST Act.
While disposing of the case, the high court held that the state government was duty bound to issue such an exemption notification, particularly as it had so promised in its 1997 policy and the petitioner had acted on this promise. Moreover, the court noted that there was no bar under the scheme of the KVAT Act to deny the benefit of exemption as extended under the KST Act.
What is significant is the high court’s reiteration of the Supreme Court’s ruling in the case of Nestlé India (2004). In that case, the Supreme Court held that mere cabinet approval to abolish purchase tax on milk without the statutory backing by way of an exemption notification was valid based on presence of the essential prerequisites for the operation of doctrine of promissory estoppel.
While upholding Nestlé’s contention, the Supreme Court noted that though the government cannot rely on a representation made without complying with the procedure prescribed by the relevant statutes, a citizen may and can compel the government to do so if the factors necessary for founding a plea of promissory estoppel are established. Such a proposition would not “fall foul of our constitution scheme and public policy”.
Significantly in the context of promissory estoppel, the Supreme Court in the Nestlé case relied on its observation in the case of Motilal Sugar Mills (1979) that: “It is indeed the pride of constitutional democracy and rule of law that the Government stands on the same footing as a private individual so far as the obligation of the law is concerned; the former is equally bound as the latter. It is indeed difficult to see on what principle can a Government, committed to the rule of law, claim immunity from the doctrine of promissory estoppel.” This position in law has since been approved and followed by the judiciary in umpteen subsequent decisions.
Before parting …
It is settled law that the doctrine of promissory estoppel being an equitable doctrine must yield when equity requires. This ruling reaffirms the doctrine of promissory estoppel in the sphere of taxing statutes.
India’s central government seems committed to not resort to retrospective tax amendments and is keen to foster a stable tax policy and non-adversarial administration. It is hoped that the impending GST regime will be aligned to reflect the sentiments of taxpayers in view of the prevailing tax incentives and area-based exemptions, following the spirit of the doctrine of promissory estoppel.
Kumar Visalaksh is an associate partner and Rajat Chhabra is a senior associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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