Analysis of Central Sales Tax Act, 1956

TABLE OF CONTENTS
1. Table of cases 2. Table of statutes Page No 2 2 3 4 5

3. Research methodology 4. Introduction 5. Chapter I -

a. A background history b. Art.286 of the constitution c. The sales tax validating act d. Taxation enquiry commission e. The law commission recommendations 6. Chapter II 12

a. The sixth amendment to the constitution b. Purpose behind the legislation c. Validity of the act d. CHELLIAH committee report 7. Conclusion 15

Bibliography

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TABLE OF CASES
1. 2. 3. 4. Ashok Leyland v. State of Madras, [1961] 12 STC 379 (SC). Gannon Dunkerly and Co. Ltd v. State of Madras, [1954] 5 STC 216 (Mad). Larson and Toubro Ltd. v. Joint Commercial Tax Officer, [1967] 20 STC 150. M/s. Ram Narain and Sons Ltd. v. Assistant Commissioner of Sales Tax, (1955) 2 SCR 483. 5. Popatlal Shah v. The State of Madras, [1953] 4 STC 188 (SC). 6. State of Bombay v. The United Motor (India) Ltd., (1953) SCR 1069. 7. State of Madras v. N. K. Nataraja Mudaliar, [1968] 22 STC 376 (SC). 8. Sunderaramier and Co. v. State of Andhra Pradesh, [1958] 9 STC 298 (SC). 9. Tata Iron and Steel Co. Ltd. v. State of Bihar, [1958] 9 STC 267 (SC). 10. The Bengal Immunity Co. Ltd. v. State of Bihar, (1952) 2 SCR 603.

TABLE OF STATUTES

The Constitution of India. The Central Sales Tax Act, 1956. The Government of India Act, 1935.

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RESEARCH METHODOLOGY
SCOPE, FOCUS AND LIMITATION The scope of the paper is very vast. The constitutional aspects of a tax statute, especially the Central Sales Tax Act, would naturally be a very broad area of study. For the purposes of this research paper, the researcher has confined her study to the history behind the enactment, how it came about. The case law dealing with this aspect has also been analysed. The various reports analyzing the imposition of sales tax on inter-State trade have also been studied. RESEARCH QUESTIONS AND HYPOTHESIS What is the history behind the enactment of the Central Sales Tax Act, 1956? What are the reasons behind the enactment? Does the enactment still have significance or should it be abolished? Have there been any problems with the imposition of tax under the Act? Hypothesis- The genesis of the Central Sales Tax Act, 1956, was a highly controversial one. Doubts have been raised regarding its utility. However, in a country like India, it is necessary to have a certain level of uniformity in tax laws for different parts of the country. Hence the Act is necessary. METHOD OF ANALYSIS Descriptive- the facts of cases, the arguments advanced etc have been described. Analytical- the ratio of the cases, the development of the law etc have been analysed. CHAPTERISATION The paper has been divided into 2 chapters for the sake of convenience. SOURCES The sources used are books, articles, statutes, cases etc. MODE OF CITATION A uniform mode of citation has been followed.

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INTRODUCTION
Each State in India is separate for administrative and constitutional purposes. However, with the developments in the Indian economy, it is not possible for the States to remain separate in an economic sense. The disparities in different regions of the country has ensured that trade flows from one region to another. It is necessary to have knowledge of the tax laws of the nation, especially if one is making a study of the economy. In this context the sales tax laws are of great significance. The importance of sales tax as a source of revenue has increased greatly over the years. Sales tax for transactions which are wholly within a State are governed by the State law. Inter-State transactions of sale and purchase a1re, at least in theory, governed by the Central law. The imposition of this tax is interesting because it affects different States in different ways. It is also a controversial area because of the history behind the enactment. The state of confusion in the country with respect to sales tax on inter-State trade and commerce resulted in an Amendment to the Constitution and the enactment of the Central Sales Tax Act. The policy about taxes on the sale or purchase of goods which was laid down in the Constitution was reversed with the enactment of the Central Sales Tax Act, 1956. This change in policy was not welcomed by all. There was a radical change in the tax laws of several States. This led to widespread protests. In this context, the study of the enactment gains significance. In the case of inter-State transactions of sale and purchase, both the selling State and the purchasing State may want to assert their right to impose tax. Previously, there was confusion regarding which of the States may be allowed to impose tax. That has been cleared with the enactment.

M. Subbaraya Aiyar and V. Sethuraman, The Law of Sales Tax in India, (Madras; Southern Law House, 1953) at, xiii.

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CHAPTER I
A BACKGROUND HISTORY The right to levy tax on sale of goods cannot be levied merely because of manufacture or production of the goods. Nor can it be levied merely because the goods have been consumed or used in a particular State. The right to levy the duty would not come into existence before the time of their sale.2 Sales tax was practically unknown in the Indian fiscal system prior to 1939. The Government of India Act, 1935, provided for taxes on the sale of goods under Entry 48, List II. Taxes on sales or purchases were being levied since the end of World War I in several countries which had proved successful in several countries. Further, in the United States, several State Legislatures had been imposing a tax on the retail sales of goods. In Germany, prior to World War II, a turnover tax was being levied and it included nearly every type of transaction in the line of goods and services.3 Sec.100 of the Government of India Act, 1935, gave the power to the Provincial Legislature to make laws in respect of matters enlisted in List II. Entry 48, List II in the Seventh Schedule of the Government of India Act, 1935, vested the power to levy taxes on the sale of goods and on advertisements in the Provincial Legislature to the exclusion of the Central Legislature. (The Constitution Act, 1950, in Entry 54, List II sustained the power to levy tax on the sale of goods in the State Legislature, subject to the provisions of Entry 92A, List I.) This lead to the enactment of tax laws by several provinces like Madras, Bengal, Punjab, Bihar, Bombay etc. The provinces derived their power to tax based on the theory of territorial nexus. In India, Madras was the pioneer in the matter of levy of sales tax. The State Legislature chose to adopt the multi-point tax, that is, the tax is levied on all dealers whose turnover exceeded Rs.10,000. The Madras Act was a combination of single-point and multipoint taxation. This was further adopted by other State Legislatures. In 1950, the Constitution of India was adopted with provisions dealing with tax on sale and purchase. Art.246(1) read with Entry 92A, List I, vests the power to impose taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce, with the Union Parliament. The State Legislatures have, under Art.246(3) read with Entry 54, List II, the exclusive power to make laws for the respective States with respect to taxes on sale or purchase of goods other than newspapers, subject to Entry 92A, List I. It is not necessary that the sale take place within the territory of that State. Nexus TheoryIn the case of sales tax it is not necessary that the sale or purchase should take place within the territory of the State, that is, all the ingredients of the sale or purchase need not have a territorial link with the State. It is sufficient if there is a broad link between the
2

K. Chaturvedi and Manoj K. Chaturvedi, Chaturvedis Central Sales Tax Laws, Vol.I, 8th ed (Nagpur; Wadhwa and Co., 1995) at 20 3 Supra note 1

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activities of sale or purchase and the State. The theory of nexus is used to support tax legislations. The tax statute should select some fact or circumstance which provides some relation or connection with the concerned State. This theory would apply to sales tax as well. In a sale of goods, the goods play an important part. The presence of the goods on the date of agreement of sale in the taxing State, or the production or manufacture of goods in that State would be sufficient nexus for taxation. Territorial nexus was considered to give an absolute right to levy tax and the legislature was free to choose one or more of the ingredients of a sale and make it the basis of taxation. This has led to the recognition of an extra-territorial jurisdiction for States to impose tax. This, in turn, led to States trying to spread the reach of their taxing power far and wide. So there was multiple taxation of the same transaction by different Provinces and the burden ultimately fell on the public. So the drafters of the Constitution had the problem of restricting taxation on sales or purchases involving inter-State elements. On the other hand, they wanted to maintain the State power of imposing non-discriminatory tax on goods imported from other States while upholding the economic unity of India by providing for the freedom of inter-State trade and commerce.4 In Tata Iron and Steel Co. Ltd. v. State of Bihar5, the Supreme Court denounced the concept of nexus theory as the cause of different laws running amok in governing a single transaction. The doctrine of nexus was applied in determining the validity of sales tax legislation. The doctrine of nexus does not impose the tax. It only indicates the circumstances in which a tax imposed by an Act of the legislature may be enforced in a particular case and unless eventually there is a concluded sale in the sense of passing of the property in the goods no tax liability attaches under the Act. One or more of the several ingredients constituting a sale only finishes the connection between the taxing State and the sale. Art.286(2), as it was earlier, was a complete safeguard against an eventuality of the same transaction being taxed by different States by applying the nexus theory, and after amendment of the Article and the relevant entries in the Lists, such contingencies will not arise. Art.286 OF THE CONSTITUTION Art.286 as it was originally enacted was the cause of much confusion. Art.286 imposed 4 bans upon the legislative powers of the State with respect to sales. Art.286 read as follows: (1) No law of a State shall impose or authorize the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place: (a) outside the State; or (b) in the course of the import of goods in to or export of goods out of the territory of India. Explanation- For the purpose of sub-clause (a) a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact

4 5

Supra note 1, at.xxi [1958] 9 STC 267 (SC)

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that under the general law relating to sale of goods the property in the goods has to by reason of such sale or purchase passed in another State. (2) Except insofar as Parliament may by law otherwise provide, no law of a State shall impose, or authorize the imposition of tax on the sale or purchase of any goods where such sale or purchase takes place in the course of inter-State trade or commerce; Provided that the President may by order direct that any tax on the sale or purchase of goods which was being lawfully levied by the Government of any State immediately before the commencement of the Constitution shall, notwithstanding that the imposition of such tax is contrary to the provisions of this clause, continue to be levied until the 31st day of March 1951. (3) No law made by the Legislature of a State imposing or authorizing the imposing of a tax on the sale or purchase of any such goods as have been declared by Parliament by law to be essential for the life of the community shall have effect unless it has been reserved for the consideration of the President and received his assent. In Popatlal Shah v. The State of Madras6, the Supreme Court held that the State Legislature had no power to levy tax on a sale or purchase wherein all the ingredients took place outside its territory. The effect of Art.286 on inter-State sales and purchase of goods was considered by the Supreme Court in State of Bombay v. The United Motor (India) Ltd7. It was held that under the Bombay Sales Tax Act, sales effected in Bombay in respect of goods exported from the State were not taxable by the State of Bombay, but the importing State was competent to levy tax on transactions of sale in the course of inter-State trade or commerce on persons who were resident outside its territory, provided that the goods were delivered in the importing State for the purpose of consumption therein. It was held that Art.286(1)(a) of the Constitution read with the Explanation and construed in the light of Art.301 and Art.304 of the Constitution prohibited the taxation of sales or purchases involving inter-State elements by all States except the State in which the goods were delivered for the purpose of consumption. That is, in the case of inter-State sales, the importing State alone was competent to levy tax on transaction of sale under its sales tax law on persons who were resident outside the territory of the State provided the goods were delivered in the importing State for the purpose of consumption. Therefore, a dealer carrying on business in the exporting State became amenable to the sales tax law of the importing State in which the goods were consumed. The result of such a ruling was that distant dispatching States had to rush to the territory of the consuming State in order to realize tax on their respective sales. A larger bench had to reconsider the above decision in The Bengal Immunity Co. Ltd. v. State of Bihar8. In this case the appellant company was registered in West Bengal and it dispatched manufactured goods to several parts of the country. The appellant company had no office, agent, manager etc in Bihar. However, the Bihar tax authorities wanted to impose tax under the Bihar Sales Tax Act on the appellant. The appellants filed a petition in the Patna High Court which was dismissed on the ground that the tax had not been imposed yet and proper procedure of appeal under the Act had to be followed before approaching the High Court.
6 7

[1953] 4 STC 188 (SC) (1953) SCR 1069 8 (1952) 2 SCR 603

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This was set aside by the Supreme Court. It was argued by the appellants that the Act itself was void. The arguments used were firstly, that the sales sought to be taxed having taken place in the course of inter-State trade or commerce and Parliament not having by law provided otherwise, all States are debarred from imposing tax on such sales by reason of article 286(2); Secondly, that even if the ban under article 286(2) did not apply, the State of Bihar is not competent to impose tax on such sales on a correct reading of article 246(3) read with Entry 54 of List II in the Seventh Schedule and article 286(1);Thirdly, that the Bihar Sales Tax Act can have no extra-territorial operation and cannot, therefore, impose tax on such sales by a non-resident seller. It was held that in cases involving inter-State sales or purchases, referring to Art.286, the different clauses dealt with different matters and could not be read together. The Explanation to clause 1 could not be extended to clause 2. Therefore, the State of Bihar was not allowed to levy sales tax on goods which were subject matter of inter-State sales even though they had been consumed in that State in the absence of a law made by Parliament as provided under Art.286(2). It was held that the ban imposed against taxation under each of the clauses in Art.286 was a separate and independent limitation and each of them had to be got over before the State could impose tax on inter-State sale or purchase of goods. The Supreme Court considered each of the bans to have been imposed from a difference view point. For example, the Explanation looked at the matter from the view point of what was an outside sale, clause (2) looked at the character of the transaction as an inter-State one and clause (3) considered the essentiality of certain goods to the country. If it was an outside sale to the State, it could not tax it. If a sale resulted in delivery of goods for consumption in the taxing State, the tax would be attracted by the Explanation. If that transaction were of an inter-State character, the ban under clause (2) would apply. The court also looked at the issue of relevance of the situs of sale or purchase in determining the inter-State character and it was held that the situs was irrelevant in this regard. The above decision was reiterated in M/s. Ram Narain and Sons Ltd. v. Assistant Commissioner of Sales Tax9. The case debated on the bans imposed under the provisions of Article 286 and whether such ban could be removed by the President of India. It was held that the bans imposed by Art.286 of the Constitution on taxing powers of the State were independent and separate and each one of them should be removed before a State Legislature could impose tax on transactions of sale or purchase of goods. Further, the ban imposed by Art.286(1)(a) of the Constitution and its Explanation could not be removed by the order of the President under Art.286(2). The only relevant enquiry for the purposes of Art.286(1)(a), therefore, is whether a transaction is outside the State and once it is determined by the application of the Explanation that it is outside the State it follows as a matter of course that the State with reference to which the transaction can thus be predicated to be outside it can never tax the transaction. This ban is effective independently of the fact that the transaction may also have taken place in the course of inter-State trade or commerce or with reference to goods as have been declared by Parliament by law to be essential for the life of the community. The ban imposed under Art.286(2) is an independent and separate one and looks at the transactions entirely from the point of view of their having taken place in the course of inter-State trade or commerce. Even if such transactions may also fall within the category of transactions covered by Art.286(1)(a) and the Explanation or Art.286(3), the moment Art.286(2) is attracted by reason of the transactions being in the course of inter-State trade or
9

(1955) 2 SCR 483

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commerce, the ban under Art.286(2) operates and such transactions can never be subject to tax at the instance of a State Legislature except where Parliament by law may otherwise provide or such power of taxation is saved by the Presidents order contemplated in the proviso. The ban under Art.286(2) may be saved by the Presidents order but that does not affect or lift the ban under Art.286(1)(a) read with the Explanation. THE SALES TAX VALIDATING ACT It was found that as a result of the Constitutional provisions and their interpretation in the previous cases, no State could levy sales tax on inter-State sales as there was no central legislation authorizing it. This caused serious problems in the budgets of the States which had collected sales tax in accordance with the previous decision in the United Motors case and had to refund the money collected. The situation was remedied by the President promulgating an ordinance in 1956 which was later replaced by the Sales Tax Laws Validation Act, 1956 whereby all collections of sales tax on inter-State sales by the State upto September 1955 were validated and proceedings in respect of the levy on inter-State sales of assessment were also protected. The constitutionality of the ordinance and the Validating Act was questioned in several cases before High Courts. Finally the Supreme Court dealt with the matter in Sunderaramier and Co. v. State of Andhra Pradesh10. In this case the petitioners were dealers in Madras who sold goods to merchants who were residing in or carrying on business in Andhra Pradesh. The Andhra Pradesh tax authorities sought to impose sales tax on the petitioners. The petitioners argued that the sale was an inter-State transaction and that the State was prohibited from imposing tax under Art.286(2). In most of the transactions the goods were delivered and the price was paid in Madras. The main issue before the Court was with respect to sales of the character mentioned in the Explanation to Art. 286(1)(a), that is to say, sales in which the property in the goods sold passed outside the State of A.P. but the goods themselves were actually delivered as a result of the sale for consumption within that State. It was clear the according to the Bengal Immunity case, the State did not have the power to impose the tax. In the meantime, the Sales Tax Validation Act had been enacted. On this basis, the State contended that it had the right to levy tax on sales which had taken place during a certain time period. The petitioners challenged the validity of the Sales Tax Validation Act on the ground that it was not authorized under Art.286(2). The Court was of the opinion that the Act, despite its title, was not exactly a validating Act. It only provided that no law of a State imposing tax on sales shall be deemed to be invalid merely because such sales are in the course of inter-State trade or commerce. The effect of this provision was merely to liberate the State laws from the fetter placed on them by Art. 286(2) and to enable such laws to operate on their own terms. Therefore, it was not seen to be ultra vires or unconstitutional and the petition was dismissed. In Ashok Leyland v. State of Madras11, the validity of the assessment of inter-State sales after the enactment of the Sales Tax Laws Validation Act was debated upon. Before the enactment such sales were taxed on the footing of sales inside the State of Madras. It was held that the said transactions were liable to tax under the provisions of the Madras General

10 11

[1958] 9 STC 298 (SC) [1961] 12 STC 379 (SC)

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Sales Tax Act and it was not necessary to provide in that Act in express terms that it was taxing sales in the course of the inter state trade. TAXATION ENQUIRY COMMISSION The government of India appointed a Taxation Enquiry Commission in 1953. The terms of reference to the Commission included the examination of incidence of Central, State and local taxation in different States and to make recommendations in particular, with regard to modifications required in the present system of taxation and fresh avenues of taxation. The Commission in its recommendations, opined that sales tax must continue to be a State tax and as a source of revenue, it must benefit States. However, the ambit of the States power to impose tax would end when the sales tax of one State impinged administratively and fiscally into that of another State. At this stage, the Unions power to tax begins. Thus, it was recommended that inter-State sales should be the concern of the Union. It was recognized by the Commission that the Constitution divided the sale of goods in India into two: goods delivered for the consumption of a particular State and other sales. For the purpose of administration of tax, it would be better to divide these into those in the course of inter-State trade and commerce and those not in the course of such trade and commerce. The former were to be under the Union and the latter under the States. But the responsibilities pertaining to the Union could be exercised through the State Governments. The Unions power to levy and control in respect of inter-State sales was to be exercised so that there was no avoidable duplication in the actual administration of the tax and there was as much incentive for coordination as possible between the States from which the goods are dispatched and those in which they are delivered for consumption.12 The Commission envisaged a Central legislation for this purpose. It was expected that this legislation would be concerned with the definition of the locale of sales for the purpose of defining in detail the relative jurisdiction of the Union and the States. At that time, there was no specific legislation dealing with this aspect. As a result there was much confusion. Irrespective of Constitutional restrictions and Central Governments powers of levy, it was thought necessary that there should be a body of law which defined, with specific reference to sales tax, the circumstances in which a sale becomes taxable by a particular State to the exclusion of others. The Commission felt that the State of origin should get a part of the total sales tax burden that could be imposed on a commodity. They recommended that inter-State sales tax be levied by the Central Government at the rate of one per cent of value on sales between registered dealers in any two States. THE LAW COMMISSION RECOMMENDATIONS Subsequent to the submission of the report of the Tax Enquiry Commission, the Central Government referred the question of what principles should be formulated for determining whether a sale or purchase of goods takes place in the course of inter-State trade and commerce to the Law Commission. The Law Commission suggested that only a transaction which had in fact occasioned the movement of goods from one State into another
12

Anil Sachdeva and M. G. Merchant, Cases and Materials on the Central Sales Tax Act, 1956, 1st ed., (Jodhpur; STL Publishing Co.,1989) at 1

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should be regarded as inter-State transaction. Such a test would be easy to administer and would also be similar to the test applied with respect to transactions in the course of import and export. The American test, which was based on the intention of the parties, was very wide and even a contemplated movement of goods without actual movement would make the transaction inter-State. This was rejected by the Law Commission for the simpler test given above.

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CHAPTER II
THE 6th AMENDMENT TO THE CONSTITUTION In 1956, the 6th Amendment to the Constitution was enacted. Entry 92A was introduced in the Union List. It provides for taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade or commerce. Entry 54 of the State List was also amended to be subject to the provisions of Entry 92A of List I. Art.269 was also amended and Parliament was empowered to formulate principles for determining when a sale of goods takes place in the course of inter-State trade or commerce. The Article also provides for the assignment of the taxes levied on inter-State sales and purchases by the Central Government to the States. Art.286 was amended. The Explanation to clause 1 was omitted and clauses 2 and 3 were also substituted.13 The Central Sales Tax Act, 1956, was enacted by exercise of the powers conferred on Parliament by the Sixth Amendment. Meanwhile, in order to raise revenue for the purpose of implementation of the Five Year Plans, the State authorities picked one of the elements of sale and started taxing sales under Entry 48, List II, Government of India Act, 1935.14 The question of the connotation of sales came up in several cases. (For example in Gannon Dunkerly and Co. Ltd v. State of Madras15, it was held that in building contracts there is no element of sale because the goods are not movable goods. PURPOSE BEHIND THE LEGISLATION The purposes behind the Central Sales Tax Act, 1956, were16 : (i) to formulate principles for determining when a sale or purchase of goods take place in the course of inter-State trade or commerce, outside a State or in the course of import or export from India,

13

Art.286 (1) No law of a State shall impose, or authorize the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place:(a) outside the State; or (b) in the course of the import of goods into or export of goods out of the territory of India.

(2) Parliament may by law formulate primarily determining when a sale or purchase of goods take place in any of the ways mentioned in clause (1). (3) Any law of a State shall insofar as it imposes or authorizes the imposition of a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. 14 Supra note 12 15 [1954] 5 STC 216 (Mad) 16 Supra note 12, at 4

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(ii) to provide for levy of tax and exemption, collection of tax, penal provisions, distribution of tax etc on sale of goods in the course of inter-State trade or commerce, (iii) to declare certain goods to be of special importance in inter-State trade or commerce, (iv) to specify the restrictions and conditions to which the State laws imposing taxes on the sale and purchase of such goods of special importance shall be subject, (v) to fix liabilities of sales tax dues in special cases namely company in liquidation and directors special liability. VALIDITY OF THE ACT In State of Madras v. N. K. Nataraja Mudaliar17, the validity of certain provisions of the Central Sales Tax Act which allowed for levying of varying rates of tax in different States was questioned. The High Court had arrived at the conclusion that these provisions offended Art.301 and Art.303(1) of the Constitution. Article 301 declares freedom of trade, commerce and intercourse. It directs that trades, commerce and intercourse throughout the territory of India shall be free. But the freedom so declared is not an absolute one. It is subject to the other provisions of Part XIII. Article 302 is one of such provisions which permits Parliament to impose restrictions on the freedom of trade, commerce and intercourse between one State and another or any portion of the territory of India but only such restrictions as may be required in the public interest. But this concession to Parliament is hedged in by the conditions mentioned in Art. 303(1). On appeal, the Supreme Court studied the history behind the enactment of the Central Sales Tax Act. Tax under the Act is payable by the seller. The State from which the movement of goods commences in the course of inter-State sale collects the tax as agent of the Central Government, and proceeds in any financial year of any tax, including any penalty, levied and collected under the Act in any State on behalf of the Government of India are to be assigned to that State and are to be retained by it. The Act and the constitutional provisions were intended to restrict the imposition of multiple taxation on a single inter-State transaction by different States, each State relying upon some territorial nexus between the State and the sale. It was held that differential rates of taxes did not affect the flow of trade and therefore there was no violation of any Constitutional provision. In Larson and Toubro Ltd. v. Joint Commercial Tax Officer18, the events leading to the enactment of the Central Sales Tax Act have been enumerated by Justice Veeraswami. The case also looked at the aspect of validity of the Act. CHELLIAH COMMITTEE REPORT The government of India constituted the Chelliah Committee in 1991 in order to examine the structure of direct and indirect taxes. The Committee studied the Central taxes including the tax on sales effected in the course of inter-State trade or commerce. It was found that there was not much progress in the reform of the cascading type of sales tax being levied by the States. For example, some States levy a multi-stage tax on a few commodities in addition to a cascading type of single-stage, first-point tax. The Central Sales Tax Act empowers States to impose tax on inter-State sales emanating from within their respective
17 18

[1968] 22 STC 376 (SC) [1967] 20 STC 150

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territories. The exporting State levies the tax and keeps the proceeds. The maximum rate of tax, uniform for all commodities, is prescribed by the Central Government. The power to levy the tax has, in effect, been delegated to the States along with the power to fix the rates subject to the ceiling and to grant exemptions.19 The Committee also referred to the Taxation Enquiry Commissions report. The Committee was against the concept of a central sales tax. It was felt that a tax on inter-regional trade within a national market was not a reasonable way to raise revenue. The Central Government had raised the ceiling rate of tax to 4%. This has had an adverse effect on costs and relative prices of factors. It was felt that it acted as a barrier to trade and was against the concept of a common market. Also, inter-State sales tax was biased in favour of a few States which are industrially advanced and which export more goods to other States.20 When the rate of Central sales tax was increased, it became profitable for manufacturers to establish stock depots and warehouses in centres in various States to whom they could consign their products; the sales to wholesalers or users were then effected in the consuming States on which the local sales tax was paid. Besides this, tax evaders camouflaged sales as consignment transfers and escaped taxation. There was a huge loss of revenue due to avoidance and evasion of Central sales tax. The more advanced, industrialized States were more affected than other States. In response to demands from the States, the Constitution (46th Amendment) Act, 1982, was enacted through which the Central Government was empowered to levy a tax on consignments in the course of inter-State trade. The main argument for imposing an inter-State sales tax is that its absence would open up a loophole for evasion of local sales tax. But it has been observed that inter-State sales tax does not enable States as a whole to collect more revenue than what they could have done without it. Hence, the tax is not significant except for the re-distribution of revenues between net exporting and net importing States.

19 20

Supra note 2, at 24 Supra note 2, at 20

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CONCLUSION
Certainty and uniformity are essential in a revenue law. This could be ensured only by having a single Sales Tax Act for the whole of India with respect to inter-State trade, the proceeds being distributed to the States in proportion to the collection in each State. This had to be balanced with the power of a State to impose taxes. The Constitution has assigned the subject of inter-State trade and commerce to the Central Government precisely because such trade is to be safeguarded and regulated in the national interest. It would be detrimental to inter-State trade if all the States concerned were allowed to tax an inter-State transaction. It would result in multiple taxation of a single transaction. It would discourage traders from indulging in inter-State trade. It would also have an adverse effect on the consumers because ultimately the burden of taxation falls on them. The prices of goods would increase because of multiple taxation. In order to combat this problem, the Central Sales Tax Act was enacted in 1956. The history of the enactment is an interesting study. As has been seen in the research paper, the Constitution had to be amended before the Act came into being. Several cases had also come up before the Courts on the issue of imposition of sales tax on inter-State transactions of sale and purchase. The Supreme Court gave conflicting decisions. It was necessary to clarify the law in this regard. It was done by the Parliament through this Act. The enactment does not provide for any absolute fetters on the States imposing the rate of tax. It balances the interests of the State with the interests of the consumer by placing a ceiling on the rate which can be imposed. The validity of the Act as been challenged before the Courts and has been upheld consistently. There have been criticisms levied against the Act. For example, the Chelliah Committee Report was clearly against the continuation of the legislation. However, the alternatives to the legislation are not viable. There is a need for a clear law on which State imposes sales tax on an inter-State transaction and the Act lays down the law in this respect. To abolish it in the absence of a clear law in the alternative would not be advisable.

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BIBLIOGRAPHY
BOOKS Anil Sachdeva and M. G. Merchant, Cases and Materials on the Central Sales Tax Act, 1956, 1st ed (Jodhpur; STL Publishing Co., 1989). K. Chaturvedi and Manoj K. Chaturvedi, Chaturvedis Central Sales Tax Laws, Vol.I, 8th ed (Nagpur; Wadhwa and Co.,1995). M. R. Mallick, Handbook of Central Sales Tax, (Calcutta; Kamal Law House, 1994). M. Subbaraya Aiyar and V. Sethuraman, The Law of Sales Tax in India, (Madras; Southern Law House, 1953). Mahendra P. Singh, V. N. Shuklas Constitution of India, 9th ed (Lucknow; Eastern Book Co., 1994).

INTERNET ARTICLES Anonymous, Constitutional Validity of <http://law.indiainfo.com/tax-fin/index.html> the Central Sales Tax, at

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