While Vacating His Seat, Has CJI DY Chandrachud Strengthened Fiscal Federalism?

Recent judgments resolve questions about the regulatory overlap between the powers of the Union and the states.

After completing his two-year tenure as the Chief Justice of India, DY Chandrachud will be retiring on 10 November.

(Photo: The Quint)

Within a union of states, it is important to maintain an order of fiscal federalism. This is not achieved very often. Recently, some states have raised concerns about discrimination by the Union in the disbursement of funds.

Three months back, the Supreme Court in Mineral Area Development Authority etc vs M/S Steel Authority Of India gave an elaborative judgment on fiscal federalism and entitled states to collect royalties on extracted minerals and levy tax on mineral-bearing lands retrospectively from 2005. 

This litigation dates back several decades. It began, in 1956, when sugarcane, which was on the State, Concurrent, and Union lists, was regulated. In 1990, a seven-judge Supreme Court panel decided that states could not impose industrial alcohol taxes. Although the Uttar Pradesh government filed the first petition, this was contested by a number of states.

Different opinions were voiced in later rulings, and the Supreme Court sent the case to a nine-judge bench in 2010. In State of Uttar Pradesh vs Lalta Prasad Vaish and Sons, the bench had to determine the state’s power to regulate industrial alcohol. The 8:1 judgment majority was written by CJI DY Chandrachud and the sole dissent was by Justice BV Nagarathna, who also dissented in Mineral Area Development Authority.

In Lalta Prasad Vaish and Sons, the question at hand was whether industrial alcohol, utilised in a number of businesses, including cleaning products, cosmetics, and medicines, but not meant for human consumption, might be included under the umbrella phrase intoxicating liquor. The Centre said that industrial alcohol, classified as a regulated industry under the Industries (Development and Regulation) Act of 1961, is under its purview. Both "potable alcohol" and alcohol that can be used to harm public health are included by Entry 8 in List-II under Schedule VII of the Constitution, according to the nine-judge bench. 

Now, further expanding the federal taxing structure, and extending legislative powers to the states to have full control of liquor, takes in its fold the entire gamut of activities involving the production, sale and distribution of alcohol products, covering rectified spirit, extra-neutral alcohol and denatured alcohol.

In other words, the entry is not limited to the popular understanding of intoxicating liquor as consumed alcoholic beverages. The bone of contention was whether a central law, the Industries (Development and Regulation) Act (IDRA), 1951, which listed ‘fermentation industries’ as a scheduled subject on which the Union government could exercise control, had the effect of removing ‘industrial alcohol’ from the regulatory purview of state governments. 

In matters relating to the interpretation of lists under Schedule VII, there needs to be a liberal understanding of the entries as done in Mineral Area Development Authority and Lalta Prasad Vaish and Sons. In FN Balsara (1950), the Supreme Court reversed the Bombay High Court's ruling that the Government of India Act of 1935 and other provisional enactments suggested that the definitions of liquor and intoxicating liquor be interpreted to encompass all liquids containing alcohol, not only potable ones. In order to interpret, the word liquor must be given a wide definition to cover all alcoholic liquids that may be employed as replacements for intoxicating drinks, to the detriment of health, as per Article 47 of the Constitution.

In this, the Court ruled that states had the right to regulate industrial alcohol, even if doing so conflicted with federal regulation over other sectors. The Supreme Court also overruled Synthetics & Chemicals Ltd etc (1990) which had excluded industrial alcohol from the states' jurisdiction. For example, states such as Karnataka and Haryana have become more and more dependent on excise duty, generating extra money from alcohol consumption taxes. They will probably be able to increase their revenue through industrial alcohol taxes thanks to this increased authority.

The majority judgment worked towards balancing the federal powers, and the court opined that even if a broad meaning is given to the word industry in Entry 52, it will not impact the decision in this case because Entry 8 is the specific entry that applies to the industry of intoxicating liquor. In exercising its power under Entry 52 of List I, Parliament cannot occupy the field of the entire industry merely by issuing a declaration under this entry. Such a declaration will limit the competence of state legislatures only to the extent that it is clarified in the law made by the Union.

However, Justice BV Nagarathna's dissent in Mineral Area Development Authority and Lalta Prasad Vaish and Sons is very detailed on the point of federalism. In her judgment, she mentioned that overruling Synthetics & Chemicals Ltd etc restricts governments' authority to control industrial alcohol solely in situations where it is abused and has an adverse effect on public health.

The ruling correctly considered the significance of the insertion of Section 18G into the Industries (Development and Regulation) Act, which is a Parliamentary Law in accordance with Article 254(1) of the Constitution. When there is a discrepancy between legislation passed by Parliament and state legislatures, Article 254(1) states that the Union law takes precedence. The unplanned development of scheduled industries would occur if governments were permitted to control them. According to Article 246, the doctrine of parliamentary supremacy must yield to the principle of federal balance. 

These recent judgments significantly resolve the questions lingering around the regulatory overlap between the powers of the Union and the states under Schedule VII. It emphasises how important it is to read the Constitution fairly and impartially in light of modern developments. This demonstrates a continuing change in the judiciary's stance on federalism, i.e., the Supreme Court appears to be heading toward a broader acceptance of state autonomy in areas that have historically been deemed to require centralised control.

 (Kumar Kartikeya is a legal researcher. Kamya Wahal is an advocate practicing in Delhi. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)