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India has a federal form of government, and hence a federal
finance system. The essence of federal form of government is that
the Centre and the State Governments should be independent of each
other in their respective, constitutionally demarcated spheres of
Action. Once the fundamentals of the government are spelt out, it
becomes equally important that each of the government should be
provided with sources of raising adequate revenues to discharge
the functions entrusted to it. For the successful operation of the
federal form of government financial independence and adequacy for
the backbone.
Sales taxes are most important revenue for the
state sin India. While the taxes vary in their design, they are
generally levied in the first point of sale within the State.
Hamilton in his federalist papers stated that
Multileveled government permits various functions to be assumed by
different levels, potentially improving efficiency since different
activities have different optimal scales and hence in India with
respect to Sales Tax Federalism, The Constitutional amendment in
1956, gave the States power to impose sales tax the Central Sales
Tax Act, 1956,enacted by the Sixth Constitutional Amendment which
introduced Entry 92A in List I of the Seventh Schedule
authorizing Parliament to levy tax on the sale or purchase of
goods (other than newspapers) in the course of inter-State trade.
The revenue from this tax was assigned to the
States by amending Article 269 of the Constitution. Thus,
sale within the State (Intra-State sale) is within the
authority of State Government, while sale outside State
(Inter-State sale) is within the authority of Central Government.
Accordingly, the Central Sales Tax (CST) is levied on sale or
purchase of goods in the course of inter-State trade and commerce.
The power to levy the CST and revenue from this tax is, however,
assigned to the State occasioning the movement of goods from one
State to another (i.e., the exporting State)
An attempt has been made hereby to study the
Distribution of Power and Tax federalism in India with respect to
Sales Taxation in India Keeping in view the Central Sales Tax Act
and the Individual States Sales Tax Acts.
Fiscal Federalism In India
The federal character of public finance in India has its origin as
far as the seventies of the last century. Although at that time
the country had a unitary form of government, some division of
functions and financial powers between the Center and the state
was found administratively desirable.
Ever since then the arrangements have been revised and improved
from time to time. Fiscal federalism entails the division of
responsibilities in respect of taxation and public expenditure
among the different layers of the government, namely the Center,
the states and the local bodies. Fiscal federalism helps
governmental organization to realize cost efficiency by economies
of scale in providing public services, which correspond most
closely to the preference of the people.
From the point of view of economy, it creates a unified common
market, which promotes greater economic activity.
India has a federal form of
government, and hence a federal finance system. The essence of
federal form of government is that the Centre and the State
Governments should be independent of each provided with sources of
raising adequate revenues to discharge the functions entrusted to
it. For the successful operation of the federal form of government
financial independence and adequacy form the backbone
The Seventh Schedule (Article
246) delineates ‘the subject matter of laws made by the Parliament
and by the Legislatures of the states’ and indicates the Union
List (List I), states List (List II) and the Concurrent List (List
III).
List I invests the union with all functions of national importance
such as defence, external affairs, communications, constitution,
organization of the Supreme Court and the high courts, elections
etc, List II invests the states with a number of important
functions touching on the life and welfare of the people such as
public order, police, local government, public health,
agriculture, land etc. List III is a concurrent List, which
includes administration of justice, economic and social planning,
trade and commerce, etc.
According to Article 246, Seventh
Schedule, Parliament has exclusive powers to make laws regarding
matters enumerated in List I, not withstanding the provisions of
the other clauses of this Article. On the other hand, the
Legislature of any state has exclusive power to make laws for the
state regarding any of the matters enumerated in List II, subject
to other clauses.
With regard to List III, both the Parliament and a State
Legislature can make laws but the law listed in I or III, vests
with the Union. Thus, the Union has supremacy over a wide range of
the legislative field.
These lists include the powers
of taxation also. The union List includes among others, taxes on
income other than agricultural income, excise duties, customs and
corporation tax. The State list includes land revenue, excise on
Alcoholic liquors, tax on agricultural incomes, estate duty, taxes
on sale or purchase of goods, taxes on vehicles, on professions,
on luxuries, on entertainment, on stamp duties, etc. the
concurrent list does not include any important taxes.
Accordingly there are both mandatory
and enabling provisions in the Constitution for facilitating a
wide-ranging transfer of resources, arranged in a systematic
manner, through
1)
Levy of duties by the Center but collected and
retained by the States.
2)
Taxes and duties levied and collected by the Center
but assigned in whole to the states
3)
Mandatory sharing of the proceeds of income tax
4)
Permissible participation in the proceeds of the
Union excise duties
5)
Statutory grants –in-aid of the revenues of states
6)
Grants for any public purpose and
7)
Grants of loans for any public purpose
Thus, having provided for a
certain division of powers of taxation between the union and the
states, the Constitution gives the States a share in the resources
available to the Center. Any amendment of the lists from the Union
and the States derive their power of taxation is covered by the
Provisio to Article 368. This requires ratification by the
Legislatures of not less than one half of the States.
On
the other hand, if any provisions of the Part XII are to be
amended, this can be done under Article 368(2), which requires the
approval of only half of the members of each house of the
Parliament. This means that the share of the Union resources that
the states are entitled to, can be altered by Parliament by it’s
power of amendment.
Though considerations of national policy and
administrative convenience require that some of the more elastic
taxes should be assigned to the Union Governments, these
considerations themselves require that some of the most expansive
expenditure heads apart from defense, should be undertaken by the
States. Consequently, a salient characteristic of federal
government is legislative autonomy with financial dependence. This
feature is accentuated in a developing economy where the functions
of the States develop by leaps and bound with no corresponding
increase in the sources of revenue.
The Concept Of Sales Taxation In India
Sales tax is the most important revenue for the States in India.
It can be defined as a tax on sale of goods. The liability to pay sales
tax arises on making sales of goods. Sales tax is levied on the
sale of a commodity, which is produced or imported and sold for
the first time. If the product is sold subsequently without being
processed further, it is exempt from sales tax.
According to
John Due, "A sales Tax is levy imposed upon the sales, or element
incidental to sales, such as receipts from them, of all or a wide
range of commodities."A
sales tax may be levied upon all the transactions through which
the commodities pass or upon one or a small number of stages only.
It is presumed that the tax will be shifted forward to the
consumers, the selling firm being regarded as merely an agent to
collect tax.
The present day sales taxes may be classified into
three major groups:
·
Multiple-stage taxes:
they apply to all the stages in production and distribution, in
other words all the transactions from initial production to final
sale to the consumers.
·
Single-stage
taxes: they apply to commodities only once in productionand
distribution channels.
·
Value Added taxes:
it bears the characteristics of both multi stage taxes and single
stage taxes, since “it involves the multiplication of the tax rate
but produces the same overall distribution on commodity as a
single stage tax.
Sales taxation differs in different countries
according to the breadth of the coverage. In the United States of
America there are at least six different types of sales tax. In
some countries the sales tax is on the sale of the manufacturer
only, or on the whole saler or the retailers only. In many
countries the retailers were not taxed until recently.
In India, the law for levying sales tax is provided in the Central
Sales Tax Act, 1966. This act was passed by the Parliament and
applies to the entire country. The main objects of this act are :-
1. To
formulate the principles for determining as to when sale or
purchase of goods takes place (i) in the course of inter-state
trade or commerce or (ii) outside a state or (iii) in the course
of import into or export from India.
2. To
provide for the levy, collection and distribution of taxes on
sales of goods in the course of inter-state trade or commerce
3. To
declare certain goods to be of special importance in interstate
trade or commerce.
To specify the
restrictions and conditions in respect of State laws which impose
taxes on the sale or purchase of such goods of special importance.
Sales tax can be levied either by the Central or State Government,
Central Sales tax department. Also, 4 per cent tax is generally
levied on all inter-State sales. Depending on the type of sales,
which can be classified into three categories:
Intra-state sales
Sales during import and export
Inter-state sales
State
sales taxes that apply on sales made within a State have rates
that range from 4 to 15 per cent. Sales tax is also charged on
works contracts in most States and the value of contracts subject
to tax and the tax rate vary from State to State. However, exports
and services are exempt from sales tax. Sales tax is levied on the
seller who recovers it from the customer at the time of sale.
Central Sales Tax Act And Tax Federalism In India
The period following the adoption of the Constitution up to 1955
could be described as a transitory phase for sales taxation. It
was only with the Supreme Court judgment in 1955 and through the
resultant. Constitutional amendment in 1956, that the States power
to impose sales tax was clearly demarcated. Thus, the taxes on
sale or purchase of goods in the course of inter-State trade or
commerce were brought expressly within the purview of the
legislative jurisdiction of Parliament.
As a result,
the Central Sales Tax Act, 1956,enacted by the Sixth
Constitutional Amendment which introduced Entry 92A
in List I
of the Seventh Schedule authorizing Parliament to levy tax
on the sale or purchase of goods (other than newspapers)in
the course of inter-State trade. The revenue from this tax was
assigned to the States by amending Article 269 of the
Constitution.
Thus,
sale within the State (Intra-State sale) is within the
authority of State Government, while sale outside State
(Inter-State sale) is within the authority of Central Government.
Accordingly, the Central Sales Tax (CST) is levied
on sale or purchase of goods in the course of inter-State trade
and commerce. The power to levy the CST and revenue from this tax
is, however, assigned to the State occasioning the movement of
goods from one State to another (i.e., the exporting State)
In addition,
section 15 of the Central Sales Tax Act laid down certain
restrictions on the powers of the States in regard to the levy of
inter - State sales tax on goods declared as of special importance
within their respective territories.
In addition to the above, since 1975, the Union
Government entered into an agreement with the States to abolish
sales tax on textiles, sugar and tobacco including manufactured
tobacco.
According to the agreement, the Union Government
levies an additional Excise Duty in lieu of Sales tax (IDEALIST)
on these 3 commodities. In recompense, the entire proceeds of the
IDEALIST are assigned to the States. Thus, the Union Government
entered into a tax-rental arrangement with the States who were
given the Constitutional right to cancel the agreement and impose
sales tax on these commodities, whenever they so desired. But the
right of States to levy sales tax on these commodities was
restricted by including these three items under the of "Good of
Special Importance",
Hence, the rate of sales tax on these commodities
can't exceed the rate of the Central Sales Tax which, at
present, is four percent If the product is sold subsequently
without being processed further, it is exempt from sales tax.
Sales tax can be levied either by the Central or State Government,
Central Sales tax department.
Sales Tax And The
Division
Of Taxing Power
In federal constitution the powers of taxation are distributed
between the Union and the States as a part of the overall
distribution of the Legislative Powers. In India it is under
Article 246, it is mentioned in Part XII of the Constitution that
makes some of the taxes that are within the exclusive power of the
Union, under this article are divisible between the Union and the
States. One can argue that the Intention is to strengthen the
states and this can be achieved by increasing their powers of
taxation. It is the power to tax that strengthen the States and
not merely the proceeds from a tax.
Various procedures for framing the rules under the
Central sales tax Act can be broadly divided under the following
three heads:
(a)
rules framed by
the Central Government
(b)
rules framed by
the State Government
(c)
rules as prescribed in the State Sales tax laws of
each state
It may be noted
that though the tax is levied as the Central Sales Tax, it is
administered by respective State Governments.
(a)
Rules Framed by the Central Government:
Section 13 (1) authorizes the Central Government to make rules
for different purposes. Some of these rules have already been
discussed in the preceding paras.
(b)
Rules Framed by the State Governments:
with Section 13(3), the State Governments are authorized to make
rules for different purposes. These rules should not be
inconsistent with the CST Act or rules made by the Central
Government under the CST Act. The State Governments can make these
rules for the following purposes. In view to the aforesaid power,
all the State Governments have framed their rules and prescribe
their forms.
(c)
Rules Prescribed in the State Sales Tax Laws:
Section 9(2) provides that all provisions of the local sales tax
law of each state (other than those provided in the Central Sales
Tax and rules made there in) in respect of the following shall be
applicable to any person under the CST Act in that state. If in
any state there is no general sales tax law in force, the Central
Government may take necessary provision for all or any matters
specified in the CST Act.
It is pointed
out that the tax on the interstates-State sales had originally
been included in Art. 269 , the power to administer the tax and
retain the revenue was delegated to the originating state. It was
pointed out that original provision of the Constitution was based
on the ‘ destination’ principle whereas after the Constitutional
Amendment under the Central Sales Tax Act, 1956, the origin rule,
paving the way for tax exportation, displaced this, somewhat
inadvertently.
Herein, it can be clearly seen that the structure
of sales taxation clearly fits in the bracket for a federal
structure. The sales of a variety of goods of general use are more
or less confined to the individual areas or states. Therefore, the
allocation of general sales tax to the states is quite
appropriate. There are, however, certain commodities, which enter
inter-state trade. Different rates in different states on the sale
of these goods, therefore, may adversely affect the trade. To
avoid this difficulty, sometimes, Central co-ordination in the
management and rates of these taxes is introduced.
Sometimes sales taxes on certain commodities are
substituted by special excise duties imposed by the Centre, the
proceeds of which are distributed to the States on some
well-defined basis.
Determination Of Imposition And Collection Of Sales
Tax
"Another View to the Federal Scheme of Distribution"
A sale or purchase of goods, which is not within
the state as per the above provisions, will be treated as taking
place outside the state. The purpose of determining whether the
sales have taken place within the state or outside the state is
very important for levying central sales tax since under the CST
Act, tax is leviable only on sales in the course of inter-state
trade or commerce, while the state sales tax laws apply on the
sales that are made within the state.
Vide section 9(1), tax under the CST Act shall be
levied by the Central Government but can be collected and retained
by the State Government where the movement of the goods have been
commenced.
I. Inter-state
trade or commerce
Section 3 of Central Sales Tax Act defines Inter-State sale or
purchase as
a sale or purchase of goods shall be deemed to take
place in the course of interstate trade or commerce if the sale or
purchase—
a) Occasions the movement of goods from one state
to another.
b) Is effected by a transfer of documents of title to the goods
during their movement from one state to another
In
CST
v. Suresh Chand Jain
it
was held that a sale can be said to be in the course of
inter-state only if two conditions concur viz. (i)
sale of goods and
(ii)
a transport of those goods from one State to another.
If in case, Inter-state sales involve two or more
states. It is necessary to determine the state in which the sale
or purchase of goods takes place since that becomes the
appropriate state for the purpose of levying and collecting
central sales tax. Not all despatches of goods from one state to
another result in inter state sales rather the movement must be on
account of a covenant or incident of the contract of sales.
In case of Inter- State Sale there are
certain essential ingredients which includes that the transaction
must be a completed sale, moreover,
in Balabhgas Hulaschand
v. State of Orissa
it was held that for inter state sale to be complete, there
should be an agreement to sale which contains a stipulation
(express or implied) regarding movement of goods from one State to
another. In the case of
CST, UP
v.
Bakhtawar Lal Kailash Chand
Arhtiit
was held that
it is immaterial
whether a completed sale precedes the movement of goods or follows
the movement of goods or takes place while the goods are in
transit. What is important is that movement of goods and the sale
must be inseparably connected, moreover the movement shall be
physical
and such
movement must be inextricably connected with
sale.
This Sale need not precede the inter-State
movement. Sale can be either before the movement or after the
movement.
There are some instances wherein the goods are moved
out of the selling state and yet they are not considered inter
state sales: -
-
Intra-state sales
-
Stock transfer from head office
to branch & vice versa
-
Import and Export sales or
purchases
-
Sale through commission agent /
on account sales
-
Delivery of Goods for
executing works contract
II.
Intra State Trade or commerce
A sale or purchase of goods shall be deemed to take place inside
the state if the goods are within the state.
·
In case of specific or ascertained goods, at the
time the contract of sale is made (Specific or ascertained goods
means goods which are identified and agreed upon at the time when
contract of (sale is made) and
·
In case of unascertained or future goods, at the
time of appropriation of contract of sale by the seller or by the
buyer, whether the ascent of the other party is prior or
subsequent to such appropriation (eg agreement to buy mangoes
which are still growing on the trees at a future date)
III.
Sale or purchase of goods in the course of import or export
The Constitution of India prohibits imposition of sales tax on
import and exports and authorizes Parliament to formulate
principles for determining when sale is in the course of
import/export. Under these powers, section 5 of CST Act has been
enacted.
A sale or purchase of goods
shall be deemed to take place in the course of exports of goods
out of the territory of India only if: - 1. The sale or purchase
results in such exports; or
2. Is effected by the transfer of documents of title after the
goods have crossed the customs of India.
In other words, location of goods when contract of sales is made
is very important for determining where the sale took place.
Procedure For Imposition Of Sales Tax
Section 6 of the Central Sales Tax is the charging
section i.e. it creates a liability for a dealer to pay Sales Tax
on all sales of goods other than sale of electrical energy
affected by him in the course of inter-state trade or commerce
during any financial year.
A sale or purchase of goods is
said to take place when the transfer of property in the existing
goods or future goods takes place for consideration of money. The
goods have been divided into different categories and different
rates of sales tax are charged for different categories of goods.
In most of the cases related to the sales tax, the tax
on the sale or purchase of goods is at single point. Under the
provisions of some state laws the assesses are divided into
several categories such as manufacturer, dealer, selling agent
etc. and such as assess is required to obtain a registration
certificate to that effect. The sales tax or the purchase tax is
levied on that assesses on the basis of his category such as
dealer, manufacturer etc. on production of certain forms or
certificates (and differential rates of sales tax are levied).
Generally, a quarter return of sales or purchases is insisted upon
and the assesses is required to furnish the return in the
prescribed form.
At the time of assessment, the
assesses has to furnish all the documentary evidence and satisfy
the concerned sales tax / commercial tax officer. The sales tax
laws of the states prescribe the procedure to be followed in case
an assessee prefers to make an appeal. Every dealer should apply
for registration and obtain a registration certificate to that
effect. The registration certificate number should be quoted in
the entire bill / cash memos.
The Theory Of
Territorial Nexus
It is a well known that neither the sale of goods Act nor the
Central sales tax has so far tried to fix the situs of sale. This
is because the localization of a sale in many cases is a difficult
problem when different stages of the transaction of sale are
reached in different places, as when the contract of sale is made
in one state while the transfer of ownership of goods takes place
in another, the payment of price in the third state and the
delivery in yet another state .in such cases, there might be a
real danger of different states claiming to tax the same
transaction on the basis of sufficient territorial nexus. Between
the state and what it sought to tax. The purpose of Article286 of
the Constitution of India was to avert such danger.The
power of provincial legislature to make a law imposing sales tax
was granted by section 100 (3) of the Government of India Act read
with entry 48 of the List II of the seventh schedule and such a
law could be made for the province or for any part thereof: basing
themselves on the doctrine of territorial nexus, the legislature
of different provinces enacted sales tax laws adopting one or more
of the nexi as the basis of taxation.
When the states
power to tax sales on territorial nexus theory was challenged, it
was decided by the Supreme Court in Poppatial Shah v. State
of Bombaythat
it would be quite competent to enact a legislation imposing taxes
on the transactions concluded outside the province provided that
there was a sufficient and real territorial nexus between such
transactions and the taxing province. This principle, which is
based on the decision in
Wallace Broyhers and C. v. Commissioner
of Income Tax,
Bombay
has been held by the Supreme Court to be applicable
in sales Tax Legislation.
It thus appears, that the state legislature has
within its allotted field of legislation covered by the Entry 54
of list II by reason of Article 246 (3), exclusive power to
make laws for the state with regard to taxes on sales or purchases
of goods other than newspapers, subject of course, to restrictions
placed by Article 286.
All that is necessary is that the taxing law must
be for the purpose of the state. That being the case, in absence
of any constitutional limitation it was not necessary. for levy of
sales tax that all the component parts of the sale, such as the
contract of sale, passing of title, payment of price, delivery of
goods, must take place within the borders of the taxing state.The
doctrine of nexus is applicable to sales tax legislation was
further affirmed in United
motors Case
on
this point has not been, in any way shaken by the subsequent
decision of the Supreme court in
Bengal Immunity Company’s
Case
The Supreme
Court in Tata Iron and Steel Company v. State of Bihar
also recognized the Theory of territorial nexus. It is stated in
the case “the presence of goods at the date of agreement for the
sale in the taxing state or the production or manufacturing in the
state of goods the property wherein eventually passed as a result
of the sale wherever it might have taken place, constituted a
sufficient nexus between`` he taxing state and the sale.
In State trading corporation v. State of
Mysore
,
the company made various sales of cement, which were supplied from
the factories outside the state of Mysore to purchasers within the
State. The State of Mysore levied tax on these sales under the two
sales tax acts passed by the Mysore legislature. The company
applied Art.32 of the Constitution to squash the assessment oeder
on the ground that the State had no power to tax the sales they
had taken place in the course of inter-state trade.
The Court held that the sale occasions the movement
of goods from one state to another within Section 3(a) of the
Central Sales tax Act when the movement is the resultant of the
covenant or the incident of the contract of sale. In that case,
the contract of sale was deemed to have contained a covenant that
the goods would be supplied in Mysore from place situated outside
the borders and the sales were therefore, interstate sales within
Section 3 (a) of the Central sales tax Act.
From
the consideration of the decisions of the Supreme Court cited
above one principle that has clearly emerged out is the theory of
territorial nexus has not ceased to operate and facilitates the
machinery of taxation and enables tax Federalism.
Conclusion
The essence of federal form of
government is that the Centre and the State Governments should be
independent of each other in their respective, constitutionally
demarcated spheres of Action. Once the fundamentals of the
government are spelt out, it becomes equally important that each
of the government should be provided with sources of raising
adequate revenues to discharge the functions entrusted to it. For
the successful operation of the federal form of government
financial independence and adequacy form the backbone.The
constitution recognizes that the division of resources and
functions between the unions was such that there would be an
imbalance between them. The Finance Commission is envisaged in the
Constitution as the key institution responsible for dealing with
fiscal imbalances between the center and states, as well as among
the states
The power to make laws with respect to taxes on the
sales and purchase of goods vests both in the Union as well as in
the State legislatures. The union Parliament can make laws with
respect to taxes on the sale and purchase of goods other than
newspapers, except where such a sale or purchase takes place in
the course of inter-state trade or commerce.The State Legislature,
on the other hand, can impose sales tax on the sale or purchase of
goods other than the newspapers, except where such a sale takes
place in the course of interstate trade and commerce.
In the interest of the national economy, Article
246 and 286 place certain restrictions on the plenary power of the
state legislatures to make laws with respect to sales tax. In
India the distribution between the Centre and the state with
respect to the sales tax clearly established the federal
principles, which are existent in the country, and this is by the
virtue of the provisions of the Central Sales Tax Act, 1956.
Herein, it can be clearly seen that the structure of sales
taxation clearly fits in the bracket for a federal structure. The
sales of a variety of goods of general use are more or less
confined to the individual areas or states. Therefore, the
allocation of general sales tax to the states is quite
appropriate. There are, however, certain commodities, which enter
inter-state trade. Different rates in different states on the sale
of these goods, therefore, may adversely affect the trade. To
avoid this difficulty, sometimes, Central co-ordination in the
management and rates of these taxes is introduced.
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Authored by Jaya Pandey and can be reached at
: jaya_12@hotmail.com
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