A 10-year tax promise. A new law. The Supreme Court said the promise dies.

When the Government’s Promise Collides with a New Law

In 2003, the Government of India made a promise to industry: set up a factory in Uttarakhand or Himachal Pradesh, and you will pay zero excise duty for ten years. Hero Motocorp and Sun Pharma took that promise seriously. They built plants, hired workers, and invested crores. Then came the Goods and Services Tax in 2017. The old excise duty vanished. And with it, the Government said, went the 100% exemption. Instead of the full waiver, the Centre offered only 58% — its share of the CGST — as reimbursement. The companies sued, arguing that the Government could not walk away from its word. The Supreme Court of India, in a judgment delivered on 17 October 2022, told them otherwise. The promise, the Court held, could not override a valid Act of Parliament.

The 2003 Promise and the 2017 Shock

The story begins with an Office Memorandum and Notification No. 50/2003-CE. Under these, industrial units setting up in specified areas of Uttarakhand and Himachal Pradesh were granted 100% exemption from excise duty for a period of ten years from the date of commencement of commercial production. Hero Motocorp and Sun Pharma were among the companies that acted on this representation. They established manufacturing facilities, confident that the tax holiday would run its full course.

Then came 1 July 2017. The Central Goods and Services Tax Act, 2017 came into force, replacing a web of central and state taxes with a single, unified GST. Section 174 of the CGST Act repealed the Central Excise Act, 1944 and a host of other laws. But the critical provision was the proviso to Section 174(2)(c). It stated, in clear terms, that any tax exemption granted as an incentive against investment through a notification “shall not continue as privilege if the said notification is rescinded on or after the appointed day.” The appointed day was 1 July 2017.

The Government did not leave the companies entirely empty-handed. It introduced a Budgetary Support Scheme, offering reimbursement of 58% of the CGST paid — effectively the Centre’s share of the tax. The remaining 42%, representing the State’s share, was not covered. Hero Motocorp and Sun Pharma wanted the full 100% they had been promised.

Two High Courts, Two Dismissals

Hero Motocorp approached the High Court of Delhi. On 2 March 2020, the Delhi High Court dismissed its writ petition, rejecting the claim for 100% budgetary support. Sun Pharma, meanwhile, moved the High Court of Sikkim. On 5 February 2021, the Sikkim High Court also dismissed the challenge to the reduction of the exemption benefit. Both companies then filed Special Leave Petitions before the Supreme Court, which were converted into Civil Appeal No. 7405 of 2022 (Hero Motocorp) and Civil Appeal No. 7406 of 2022 (Sun Pharma).

What Each Side Argued

The appellants’ case rested squarely on the doctrine of promissory estoppel. They argued that the Government had made a clear, unambiguous representation — 100% excise duty exemption for ten years. They had acted on that representation to their detriment, investing substantial capital. The Government, they contended, could not be allowed to resile from that promise simply because the tax regime had changed. They relied on a line of precedents, including Union of India v. M/s Indo-Afghan Agencies Ltd. (1968 2 SCR 366), where the Supreme Court had held that a person who acts on a government representation cannot be arbitrarily denied the benefit. They also cited Century Spinning v. Ulhasnagar Municipal Council ((1970) 1 SCC 582) and State of Bihar v. Suprabhat Steel Ltd. ((1999) 1 SCC 31) to reinforce the principle that public bodies must honour their commitments.

The Union of India, represented by the Additional Solicitor General, took a different line. The Government’s position was that promissory estoppel could not operate against a legislative enactment. The proviso to Section 174(2)(c) of the CGST Act was a valid law passed by Parliament. No executive promise, however solemn, could override it. The ASG relied on Union of India v. VKC Footsteps India Pvt. Ltd. ((2022) 2 SCC 603) to argue that the GST regime was a complete code, and that the old exemptions had been consciously extinguished by the new law.

The Supreme Court’s Answer

The two-judge Bench, comprising Justice B.R. Gavai (who authored the judgment) and Justice B.V. Nagarathna (concurring), dismissed both appeals. The core of the reasoning was simple and firm: there can be no promissory estoppel against the legislature in the exercise of its legislative functions.

The Court traced the law through a series of Constitution Bench decisions. In M. Ramanatha Pillai v. State of Kerala ((1973) 2 SCC 650), the Court had held that estoppel will not apply against the State in its governmental or sovereign capacity, except to prevent fraud or manifest injustice. In State of Kerala v. Gwalior Rayon Silk Mfg. Co. Ltd. ((1973) 2 SCC 713), the Constitution Bench had categorically stated that an agreement of the Government cannot preclude legislation. Equitable estoppel cannot operate against the legislative power exercised for the public good. The Court also referred to Excise Commissioner U.P. v. Ram Kumar, where a four-judge bench had rejected the contention that the State was estopped from levying sales tax by a subsequent notification, despite an earlier exemption given at auction.

Applying these principles, the Court held that the proviso to Section 174(2)(c) of the CGST Act was a valid legislative provision. It had the effect of extinguishing the exemption privilege that had been granted under the old excise regime. The Office Memorandum and the 2003 notification could not stand on a higher pedestal than a statutory provision enacted by Parliament. Enforcing the promise would be contrary to the legislative incorporation in the proviso.

THE PLAY: If you are relying on a government promise of tax exemption, check whether the underlying statute has been repealed or amended. Promissory estoppel will not save you against a valid legislative enactment that expressly withdraws the benefit.

The Only Exception — And Why It Didn’t Apply

The Court acknowledged that there is a narrow exception to the rule: promissory estoppel may be invoked to prevent fraud or manifest injustice. But the appellants could not bring their case within that exception. The transition to GST was a fundamental reform of the indirect tax system, driven by constitutional amendments (Articles 246A, 269A, and 279A of the Constitution). The Government had not acted arbitrarily or in bad faith. It had offered a 58% reimbursement scheme as a transitional measure. The Court noted that the remedy for the remaining 42% share might lie against the State Governments, pointing to the example of Jammu & Kashmir, which had issued a notification reimbursing the full 42% State GST share. This observation, however, was strictly obiter — not necessary for the decision, but a potential pointer for future litigation.

What This Means for Practitioners

For advocates advising corporate clients on tax incentives, this judgment is a stark reminder of the limits of executive promises. The ratio is clear: a policy representation in an Office Memorandum cannot override a statutory provision. The only exception — fraud or manifest injustice — is extremely narrow and unlikely to apply in cases of systemic tax reform.

For CFOs and founders, the takeaway is equally blunt. If your business model depends on a tax holiday or exemption, you must build in the risk that the law may change. The Government can keep its promise only as long as the underlying statute remains in force. Once Parliament repeals or amends the law, the promise dies with it — unless the new law itself provides for continuation.

The Court also left open the possibility that the Government could, under Section 11 of the CGST Act, grant a fresh exemption as a discretionary measure. But that is a matter of policy, not of right. No company can compel it.

The Bottom Line

Promissory estoppel is a powerful shield against executive arbitrariness, but it cannot pierce the armour of a valid legislative enactment. If Parliament has spoken, the Government’s earlier promise is, in law, a dead letter.