Imposition of tax on subsidies does not constitute taking away of a benefit : Bombay HC; dismisses challenge by Serum Institute

Dec 05,2023

MUMBAI: The mere fact that the institution of tax by virtue of a sub clause, falls more heavily on the petitioner, cannot result in the invalidity of the legal provision, held the Bombay high court dismissing a petition filed by Serum Institute of India Pvt Ltd.

The HC said, " The Constitution safeguards the right to trade under Article 19(1)(g) but does not extend this protection to the right to profit.''

" Profits, by their nature, are subject to fluctuations resulting from various factors, taxation being but one. It is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources,'' held the division bench of Justices K R Shriram and Neela Gokhale pronouncing the judgment on Monday.

The Pune-based biotechnology company manufacturing drugs and vaccines, had in 2021 petitioned the HC to challenge a 2016 amendment to Section 2(24) by the insertion of sub-cause (xviii) under the Income Tax Act, 2015 that deals with definition of ‘income’. The challenge was to include subsidy, grant, waivers, concessions or reimbursements by Centre or States or incentive in cash or kind, as ‘income’.

The HC said by including various subsidies and concessions in ‘income’ , the law “only indicates the well established jurisprudential path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital cog in the nation's fiscal machinery,’’ said the bench.

It said, “The amendment is a perfect example of a legislative endeavour to align the definition of “income” with the evolving economic landscapes and judicial precedent of it being an inclusive and elastic term.’’Additional Solicitor General Devang Vyasfor the Union Finance Ministry submitted, “It is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources.’’ The HC agreed.

The company had participated in a State scheme by making a capital investment of over RS 1500 crore, approved by the State in October 2018. The benefits under the scheme for such eligible ‘ultra mega’ projects category included stamp duty concessions, exemption from electricity duty and VAT/CST/SGST subsidy.

The company represented by senior counsel Arvind Datar contended that previously subsidies, grants, or incentives received as “capital receipts” were excluded from the definition of “income” and consequently not taxable under the Act and that position has also been accepted by the Supreme Court.

After hearing his other submissions as well, the HC said though they appear to be of fiscal concern, “ in our view, (they are) more an argument of diminished profits and a narrow interpretation of income which the Apex Court has time and again expanded.’’

Serum Institute, stated that there is no pleaded case of hardship but that they are only aggrieved by the impugned amendment order which destroys the distinction between capital and revenue subsidies. The essence of the argument was looked at by the HC. The company asserted that such taxation "effectively nullifies the distinction between capital and revenue subsidies, leading to the erosion of what they perceive as a benefit or savings.''

The HC in its judgment said, " However, this line of reasoning appears to combine the concept of fiscal incentive with absolute fiscal immunity. Subsidies and concessions are inherently designed to stimulate certain economic activities or to steer the economy in a desired direction. They are not, however, intended to serve as permanent fixtures beyond the scope of taxation, especially when such benefits have fulfilled their economic purpose. ''

The imposition of tax on these subsidies does not constitute “taking away” of a benefit but rather represents a recalibration of fiscal advantages in line with broader economic and policy considerations, the HC observed.

Source: Healthworld