GST and Deemed Sales: Needs Clarification

CA Lalit Munoyat

1. Before the amendment of the constitution by its (Forty-Sixth Amendment) by a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley’s case, held various other transactions which resemble, in substance, transactions by way of sales, to be not liable to sales tax. As a result of these decisions, a transaction, in order to be subject to the levy of sales tax under entry 92A of the Union List or entry 54 of the State List, should have the following ingredients, namely, parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party thereto for a price.

2. This position has resulted in scope for avoidance of tax in various ways as many transactions which resemble, in substance, transactions by way of sales, were held to be not liable to sales tax.. Examples are:

(i) transfer for consideration of controlled commodities;

(ii) the transfer of property in goods involved in the execution of a works contract;

(iii) delivery of goods on hire-purchase or any system of payment by instalments;

(iv) transfer of the right to use any goods for any purpose for cash, deferred payment or other valuable consideration;

(v) the supply of goods by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(vi) the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration.

3. The above problems connected with the power of the States to levy a tax on the sale of goods and with the Central Sales Tax Act, 1956 were referred to the Law Commission of India which, in their Sixty-first Report recommended certain amendments in the Constitution:

a) In article 269 the following clause was inserted, namely:-

“(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of,-

(a) 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; or

(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, 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.”.

b) In article 366 the following clause was inserted, namely:-

`(29A) “tax on the sale or purchase of goods” includes-

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration,

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;’.

4. By the above amendments, the Centre ceded its power to levy sales tax in favour of the States with the condition that the tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, were to 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.” Thus this provision enabled States Governments to charge sales tax on the transactions as described in clause 29A of the Article 366 of the Constitution. Thereafter almost every State included , in the definition of sales, the contents of clause 29A as it is and such transactions were thereafter known as Deemed Sales.

5. Later when the government mooted the idea of introduction of GST, it introduced Constitutional (115th Amendment Bill) 2011. Under this bill requisite amendments were made so as to levy dual GST on goods & services concurrently by the Centre and the State as well and all references to goods were changed to goods or services or both. and reference to sale or purchase of goods were altered to mean “supply of goods or of services or both’’ In particular the following amendments were noteworthy:

Amendment to Article 286:

Before the proposed amendment which provided for Restrictions on the imposition of tax on the sale or purchase of goods, Article 286 read as under.-

“(1) No law of a State shall impose, or authorise 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 the goods into, or export of the goods out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).

(3) Any law of a State shall, in so for as it imposes, or authorises the imposition of,-

(a) 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; or

(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub- clause (d) of clause (29A) of article 366, 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 aw specify.”

6. The 115^th amendment proposed to amend the above article as under:

“(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply of goods or of services or both, takes place-

(a) outside the State; or

(b) in the course of the import of the supply of goods or of services or both, into, or export of the supply of goods or of services or both, out of, the territory of India.

(2) Parliament may by law formulate principles for determining when supply of goods or of services or both takes place in any of the ways mentioned in clause (1).

(3) Any law of a State shall, in so far as it imposes, or authorises 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 tax as Parliament may by law specify.”

(4) Nothing in clause (3) shall apply to a law of a State insofar as it imposes or authorises the imposition of goods and services tax.”.

7. This amendment meant that reference to “ being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366” be deleted.. The idea was clear that after the proposed amendment every transaction of sale and/or purchase will be concurrently taxable by the States and the Centre. It was thus the exclusive power of the States to tax the transactions under Art. 366(29A) was removed. and with the removal of this condition the Art 366(29A) became meaningless and therefore the proposed amendment removed the clause 29A.of article 366. This amendment thus read as under:

“14. In article 366 of the Constitution,—

(ii) clause (29A) shall be omitted.”

Thus the concept of deemed sales was removed.

8. However, those amendments proposed by Constitution (115^th Amendment Bill) 2011 lapsed with dissolution of the 15^th Parliament and GST Law could not see the light of the day.

9. With the constitution of the 16^th Parliament the provisions of the lapsed Constitution (115^th Amendment Bill) 2011 were reintroduced by the Constitution (122^nd amendment Bill), 2014 by retaining almost the same amendments as of the 115^th amendment bill with certain amendments.

Article. 286. Restrictions as to imposition of tax on the sale or purchase of goods.-was amended as under:

(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place (a) outside the State; or

(b) in the course of the import of the goods or services or both into, or export of the goods or of services or both, out of, the territory of India.

(2) Parliament may by law formulate principles for determining when supply of goods or of services or both, takes place in any of the ways mentioned in clause (1).

(3) Any law of a State shall, in so for as it imposes, or authorises the imposition of,- (a) 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; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, 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.]

The above clause (3) was omitted.

With the removal of the provision of “Declared Goods” the condition (3)(a) became redundant and therefore rightly removed.

10. However, as against 115^th amendment the 122^nd amendment does not propose to remove clause 29A of the article 366. This may lead to many questions like:

1) In order to avoid litigation on the nature of transaction which may not be treated either as sales or service, except by deeming provision, these special transactions have been kept on the Constitution deliberately;

2) If yes, then reference to phrase “tax on the sale or purchase of goods” should not have been changed to mean tax on the supply of goods or services or both as has been done in other clauses;

3) In order to keep flexibility in framing GST Laws, whether these special transactions could not have been included in the definition of “Supply” in the GST laws to be formulated by the States and the Centre;

4) Whether it is an inadvertent error which remained to be addressed while framing 122^nd amendment bill particularly when the 115^th amendment dropped this clause or;

5) Whether there are any other reasons which , to the best of my ability,I could not comprehend.

The readers are requested to enlighten me on the above provision.

Disclaimer

The above write up is the absolute personal opinion of the writer and does not amount to an expert legal opinion. It may or may not depict the legal position sought to be conveyed by the statute. Readers are cautioned to evaluate the actual legal position before acting on this write up. Further, this write up is meant only for an academic interest and not for any other purpose.