Lovish Goyal & Vatsal Golyan
Introduction
The Central Goods and Services Tax Rules, 2017 (“CGST Rules”) were recently amended to introduce Rule 31D, which departs from the default transaction value framework under Section 15 of the Central Goods and Services Tax Act (“CGST Act”), 2017, for tobacco-based goods. Under the default framework, the taxable value of a supply is the price actually paid or payable between the supplier and the recipient of that supply. This framework does have exceptions for cases where it is not possible to determine value under the default framework.
Rule 31D also seeks to create an exception to the default framework by mandating that for notified goods, the value for the purposes of levy of Goods and Services Tax (“GST”) shall be the Retail Sale Price (“RSP”) declared on the package of such notified goods. This article argues that such a departure is not merely a technical adjustment in valuation, but a substantive shift that sits uneasily with both established constitutional principles and the internal logic of the GST regime. It is argued that an RSP-based measure, by divorcing taxable value from actual consideration, raises serious concerns of constitutional validity, exceeds the permissible limits of delegated legislation, and undermines the value-added character that GST is designed to preserve.
On The Constitutionality of The Levy
The Supreme Court, in the case of State of Rajasthan v. Rajasthan Chemists AIR 2006 SUPREME COURT 2699 (“Rajasthan Chemists”), held that a tax on the first point of sale (wholesaler to retailer) calculated on the Maximum Retail Price (used interchangeably with RSP below) of the goods sold is ultra vires and constitutionally impermissible. The Court traced the State’s power to tax from Entry 54, List II of the Seventh Schedule, which gave the state the power to levy a tax on ‘sale’.
Relying on the Sale of Goods Act, 1930, the Court defined ‘sale’ by its essential ingredients: competent parties, mutual assent, transfer of property, and a price in money. The Court emphasised that for a levy to be valid, the measure of the tax must have a direct nexus to the taxable event. The Court further observed that the Revenue’s contention supporting an RSP-based levy suffered from the fundamental fallacy of importing a component of a sale that had not yet come into existence to determine a tax that crystallises as soon as the taxable sale is completed.
While the current GST regime operates under the distinct authority of Article 246A, it maintains a similar structure. Article 366(12A) of the Indian Constitution defines Goods and Services Tax as a tax on the supply of goods and services. Furthermore, Section 7 of the CGST Act defines the term ‘supply’ to include all supplies of goods or services or both, such as sale, amongst other things. The amendment seeks to impose a levy upon the ‘sale’ component of the ‘supply’. The decision in Rajasthan Chemists also concerned a tax on the sale of goods. Therefore, despite the structural changes, the precedent remains squarely binding in the context of Rule 31 D as well.
Limits of an Excise Analogy
The Supreme Court in Union of India v. Bombay Tyre International Ltd. 1984 SCR (1) 347 (“Bombay Tyre”), upheld an excise valuation method that did not strictly correlate with manufacturing cost or profit. The Court reasoned that the mode or stage of collection may be fixed for administrative convenience, and such flexibility does not sever the levy’s nexus with the essential character of an excise duty.
Although the RSP-based mechanism under Section 4A of the Central Excise Act, 1944 (“Excise Act”), was not yet in force, the Court nevertheless relied on authorities that had affirmed the validity of such a method of valuation. In Rajasthan Chemists, the Court draws a distinction between RSP-based computation in excise and in sales tax, emphasising the differing relevance of value within each framework. This distinction can be further sharpened by examining it through the lens of the taxable event.
Manufacture is a singular, completed event, whereas goods may pass through multiple successive stages in cases of sale before reaching the final consumer. A tax on tax, therefore, must remain confined to a particular transaction without considering any hypothetical or subsequent sales, a limitation absent in the case of excise.
In the case of manufacture, value may be imputed to the goods themselves, even if realised only upon subsequent sale. This permits the use of a notional measure such as RSP under Section 4A of the Excise Act, since the taxable event is complete prior to any sale and the measure need not correspond to a particular transaction.
This paradigm, however, cannot be transposed to GST. A supply chain operates across multiple independent transactions, each of which constitutes a distinct supply (taxable event). Its measure must therefore bear a direct nexus to the consideration for that specific supply, without being influenced by prices that may emerge in subsequent sales. Unlike manufacture, where value may be abstracted from the goods, a supply under GST derives its value from the bargain between the parties at each stage of the chain. An RSP-based valuation, by anchoring the tax base to a notional future price, collapses these distinct transactions into a single goods-centric measure. In doing so, it disregards the separateness of successive supplies and undermines the structural logic of GST as a transaction-based tax.
Nexus with The Essential Nature of The Levy
The constitutional validity of a tax measure also depends on its nexus with the essential nature of the levy. The Supreme Court in the case of Bombay Tyre established that while the legislature has freedom in adopting a measure of tax, that measure cannot be divorced from the nature of the tax itself.
Furthermore, the CBIC categorically defines GST in its concept notes as a Value Added Tax. Its core design ensures that only value addition will be taxed, with the ultimate tax burden intended solely for the final consumer. The proposed mechanism in the amended CGST Rules threatens this essential nature. By forcing manufacturers or wholesalers to pay tax on a retail price they never realised, the amendment creates a liability that exceeds their actual value addition. Such a measure lacks a constitutional nexus to the subject of the tax and contradicts the fundamental value-added character of the GST regime.
Limits of Rule-Making Power Under The CGST Act
It is an established principle of administrative law that the rule-making powers of a delegated authority cannot exceed the powers conferred by the statute itself. The Supreme Court in Union of India v. S Srinivasan AIR 2012 SUPREME COURT 3791 has held that ‘if a rule supplants any provision for which power has not been conferred, it becomes ultra vires.’
The amendment to the CGST rules is an exercise of the same administrative rule-making power, and hence, it must abide by this principle. Although Rule 31D was issued under Section 164 of the CGST Act without express reference to Section 15, the Supreme Court has held in Union Of India And Another vs Tulsiram Patel And Others on 11 July, 1985 1985 AIR 1416 that mere non-reference to the source of power does not invalidate its exercise, and the power may therefore be understood as traced from Section 15.
However, Rule 31D fails the enquiry on the valid exercise of the power so conferred. Section 15(3) expressly excludes genuine trade discounts from the taxable value. This is a substantive right that is conferred by the statute. While sub-sections (4) and (5) permit the Central Government to prescribe alternative valuation methods notwithstanding sub-section (1), that latitude does not extend to overriding sub-section (3). Any prescribed valuation method must remain consistent with it. Rule 31D, by anchoring taxable value to the RSP, renders actual transaction consideration, and consequently any trade discount, wholly irrelevant to the computation of tax liability.
This has the effect of supplanting an express provision of the parent statute in the absence of any delegation of power to that effect. Hence, the insertion of rule 31D is ultra vires the CGST Act. Given this fundamental incompatibility, it may also be said that an RSP-based levy was never envisaged within the GST framework and cannot lawfully be introduced by delegated legislation alone, regardless of its constitutionality.
Commercial Implications
The RSP-based valuation mechanism also creates practical distortions in trade, particularly regarding purchase returns and trade discounts. Under an RSP-based regime, the taxable value remains tied to the printed retail sale price rather than the actual consideration.
Even where goods are returned as defective, or in their value is renegotiated downward while returning them, the original RSP, and consequently the tax computed on it, remains unchanged. A similar distortion arises with trade discounts. While Section 15(3) explicitly excludes the value of discounts from the computation of taxable value under this adjustment, RSP based taxation imposes tax irrespective of any discount accorded to the buyer. These instances lead to results where the tax is arbitrarily being levied to a fictional value and not on the value actually realised from a sale.
Furthermore, payment of taxes on RSP also artificially inflates the cost of the inventory. The value of the inventory for a wholesaler will also include the tax that is paid by the wholesaler during the purchase. RSP based taxation requires the wholesaler to pay more tax than what it used to pay before. This necessitates higher working capital requirements without any change in their business model or profit margins. The additional costs of the increased working capital would also be then passed onto the final consumers in the form of increased prices.
Conclusion
Rule 31D risks hollowing out the very supply-based foundation on which the GST framework was built. While this provision is currently restricted to tobacco-based products, this amendment sets a precarious precedent, one that could easily open the floodgates for further entries to be shifted to this kind of valuation.
If the intent was to capture the specific tax potential of sectors like tobacco through notional values, it could also have been achieved while resorting to the Central Excise Act. As already mentioned, RSP-based taxation is a constitutionally permissible and effective tool under Excise precisely because manufacture is a singular, completed event. This could have advanced the legislature’s intention while also preserving the structure of GST.
Ultimately, protecting the integrity of the GST regime requires a return to the actual bargain between parties, ensuring that the tax remains a true reflection of the value added at each stage rather than a speculative levy on a future retail price.
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