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Power To Tax In Territorial Waters

Written by: Ashish Pahariya - 3rd year, Gujarat National Law University
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The power of Sales tax on the sale of goods within state vests in State Govt. subject to Entry 92-A and Art. 286. With regard to this a question has arisen before Supreme Court, who has the power to levy tax on goods in territorial water. The issue was raised in a petition filed by the Great Eastern Shipping Company, aggrieved by a Karnataka High Court order that upheld the state Government’s decision to levy tax on goods in territorial waters adjacent to its coastal line. In a bid to decide who has the jurisdiction, the Central Government or the respective State, to levy tax on goods in territorial waters of the country, the Bench headed by Justice Ashok Bhan has asked all the nine coastal states to furnish their responses at the earliest.

The Union Ministry of Finance submitted that it has sole jurisdiction to levy tax on goods in territorial waters of the country and objected to States imposing duties in such cases. While objecting to the State government’s stand, it said that it had the exclusive right to legislate or impose tax on goods within the territorial waters as it belongs to the country as a whole. In its affidavit, the Centre argued that Article 286 of the Constitution prohibits a state from imposing or authorizing imposition of tax on the sale or purchase of goods where such sale or purchase takes place outside the state. Thus, if the operation of an Act passed by the state legislature extends beyond the boundaries of the state, in the absence of a territorial nexus, the law will be considered invalid,” the Centre said. While referring to territorial waters, continental shelf, exclusive economic zone and Other Maritime Zones Act, 1976, it stated that it notifies that India alone has sovereign power over its territorial waters, sea bed, the underlying subsoil and air space over such waters.[1]

A) Case before Karnataka High Court and Decision:

Great Eastern Shipping Company v. State of Karnataka and ors.[2]
Facts: Company entered into a charter party agreement with New Mangalore Port Trust. As after Amendment Act, 1982, a sales tax is applicable on the delivery of hire-purchase. The Respondent issued notice for payment of sales tax. The appellant, aggrieved by notice, filed the writ petition. In the writ petition, in addition to its prayer for quashing of the notice, the appellant also prayed for declaration that the provisions of the Karnataka Sales Tax Act do not extend to the territorial waters of India situated adjacent to the landmass of the State of Karnataka. A single judge bench rejected the petition from which a appeal was filed.

Contention of Appellant: The counsel on behalf of the Appellant submitted that the conclusion reached by the learned single Judge that the territorial waters abutting the landmass of the State of Karnataka forms part of the State, is erroneous in law. Elaborating this submission, he pointed out that Section 3 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (hereinafter referred to as "the Territorial Waters Act") makes it clear that the territorial waters vest with the Union of India and as such it will not form part of the State of Karnataka. He also referred that Article 297 of the Constitution of India and submitted that since all lands, minerals and other things of value underlying the ocean within the territorial waters, the continental shelf, and also the exclusive economic zone, of India is made to vest in the Union of India under Article 297 of the Constitution, the tug located on the territorial waters also must be held as being located outside the State of Karnataka.

Contention of Respondent: Rejecting the contention of Appellant, the counsel on behalf of the State contended What Sub-section (1) of Section 3 of the Territorial Waters Act only states is that the sovereignty of India extends and has always extended to the territorial waters of India ; but there is no provision in the Territorial Waters Act which excludes the territorial area being outside the part of the State land-mass. The power given to the Union of India to limit the boundaries of territorial waters cannot be understood to mean the territorial waters falls outside the State limits. So for the purpose of taxation, the territorial waters abutting the landmass of a State must be treated as a part of the State.

Decision of High Court: The Court held, The reasonable inference that should be drawn from Clause (1) of Article 297 of the Constitution is that the makers of Constitution intended to exclude the territorial waters as one vest with the Union of India. This view of ours, it appears to us, also stands to reason. Just as one State is separated by the boundaries prescribed by means of a legislation made by the Parliament from the other, the territorial waters, which is abutting the land of the State also forms part of the State. So far as the country is concerned, the Union of India has been constituted by union of States or Union Territories by means of geographical boundaries. So far as the State which is surrounded by the water, in our view, the boundary of that State, in the absence of a law made by the Parliament excluding the territorial waters as being part of that State, the same should be included as part of that State. So the court held the power to tax vests with state govt.

B) Critics
The impact of Center's stand would be felt by all coastal states in terms of collection of sales tax and other levies on transactions in the territorial waters adjacent to these states. According to my view, the power should be vested with State Govt. because of these reasons:

Rule of Convenience: The State would be able to collect more comfortably and easily. It would not be convenient for Union to go to collect tax in territorial waters of India adjacent to land. The purpose of power of centre to collect tax under Art. 286 is given to avoid conflict and unnecessary double taxation: The power to impose tax in intra-state trade and on sale or purchase which takes place outside a State was given to centre to avoid conflict between jurisdiction of State to impose tax and to avoid unnecessary burden of tax on the payer in the case when two or more state can claim the power to tax a single transaction based on the principle of Territorial nexus.

Endnotes
# See. States can’t impose duties in territorial waters: MoF to SC http://www.indianexpress.com/story/214357.html
# MANU/KA/0253/2004
# Power To Tax In Territorial Waters

The author can be reached at: apgnlu@legalserviceindia.com / Print This Article

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