A close reading of Article 246A of the Constitution of India reveals that the Legislature of each State can make law for imposing goods and services tax on a supply of goods or services or both, except a supply of goods or services or both which takes place in the course of inter-State trade or commerce, where such State has real territorial nexus (connection) with such supply. Where more than one State has real territorial nexus with a single transaction of supply of goods or services or both, all States, having real territorial nexus with the supply, can levy tax on such supply. Even goods and services tax law making power, of the States, under clause (1) of Article 246A of the Constitution includes goods and services tax law making power in respect of a supply of goods or services or both where such supply takes place in the course of export of the goods or services or both out of, or import of the goods or services or both into, the territory of India. However, power of levy of tax of the States, provided in clause (1) of Article 246A, is subject to restrictions provided in clause (1) of Article 286 of the Constitution. Clauses (1) & (2) of Article 286 of the Constitution run as follows:–
“(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 services or both out of, the territory of India.
(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).”
In my personal opinion, sub-clause (a) of clause (1) of Article 286 cannot be interpreted to mean that a State can impose, or authorise imposition of a tax on supply of goods or services or both where such supply of goods or services or both is a supply inside the State. Power of imposition of goods and services tax by States has already been provided in clause (1) of Article 246A of the Constitution. Clause (1) of Article 286 puts restriction on such power of imposition of tax of the States. In my personal opinion, where a supply of goods or services or both, except a supply of goods or services or both which takes in the course of the import of the goods or services or both into, export of the goods or services or both out of the territory of India, has real territorial nexus with more than one State, purpose of sub-clause (a) of clause (1) of Article 286 of the Constitution is to prohibit all States, except one, from imposing tax on the supply. Clause (2) of Article 286 gives power to the Parliament to formulate, by law, principles for determining when a supply of goods or services or both takes place outside the State.
So far as it is related to formulation of principles, as required in clause (2) of Article 286 of the Constitution, for reasons unknown, no such principles have been formulated by the Parliament. The Goods and Services Tax Council of India has made its recommendation to States for imposing State Goods and Services Tax on intra-State supply of goods or services or both where expression “intra-State supply” has the meaning assigned to it in section 8 of the Integrated Goods and Services Tax Act, 2017. In the process, in my personal opinion, States have been deprived of their constitutional power of imposing tax on certain supplies of goods or services or both.
In one sense, power of States for making goods and services tax law is incomplete until the Parliament makes law to formulate principles for determining when a supply of goods or services or both takes place (a) outside the State, or (b) in the course of the import of the goods or services or both into, export of the goods or services or both out of the territory of India.
Article 246A of the Constitution of India (hereinafter referred to as the Constitution) gives powers to Parliament and the Legislature of each State to make laws with respect to goods and services tax imposed by the Union or by such State. The said Article 246A runs as follows:–
“Special provision with respect to GST
246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.”
Article 245 of the Constitution provides that Subject to the provisions of the Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.
Careful reading of the Constitution reveals that in addition to restriction provided in clause (2) of Article 246A of the Constitution, clause (1) of Article 286 of the Constitution also puts restrictions on goods and services tax (hereinafter referred to as GST) law making powers of the States. Article 286 of the Constitution, before it was amended by the Constitutional (One Hundred and First Amendment) Act, 2016, had run as follows:–
“286. Restrictions as to imposition of tax on the sale or purchase of goods
(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 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 29 A 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.”
Section 13 of the Constitution (One Hundred and First Amendment) Act, 2016, relates to amendments made in Article 286 of the Constitution. The said section 13 runs as follows:–
“13. In article 286 of the Constitution,—
(i) in clause (1),—
(A) for the words “the sale or purchase of goods where such sale or purchase takes place”, the words “the supply of goods or of services or both, where such supply takes place” shall be substituted;
(B) in sub-clause (b), for the word “goods”, at both the places where it occurs, the words “goods or services or both” shall be substituted;
(ii) in clause (2), for the words “sale or purchase of goods takes place”, the words “supply of goods or of services or both” shall be substituted;
(iii) clause (3) shall be omitted.”
The above text of section 13 of the Constitution (One Hundred and First Amendment) Act, 2016 has been quoted from the Gazette Notification of the said Act. After incorporation of said amendments, made by the Constitution (One Hundred and First Amendment) Act, 2016, Article 286 of the Constitution runs as follows:–
“286. Restrictions as to imposition of tax on the sale or purchase of goods.─ (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 services or both out of, the territory of India.
(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).”
Text of Article 286 of the Constitution, quoted above, has been taken from the updated version of the Constitution of India, available on official website of the Government of India, Ministry of Law and Justice, Legislative Department. [web link: legislative.gov.in/constitution-of-India] Latest updated version is of April 01, 2019. After April 01, 2019, according to the website, three Constitutional Amendment Acts have been enacted. None of these three Amendment Acts relates to GST.
A close reading of amended Article 286 reveals that there are following mistakes in the said Article, namely:-
- Although, contents of Article 286 relates to restrictions on levy of tax by the States on supply of goods or services or both, yet heading of Article 286 runs as “Restrictions as to imposition of tax on the sale or purchase of goods“;
- In clause (2) of Article 286, after word “both”, words “takes place” are missing.
Marginal notes, titles and headings of an Article of the Constitution are understood as parts of the Articles. If we look at clause (1) of Article 286 of the Constitution, we find that the Article 286 provides that no law of a State shall impose, or authorize imposition of tax on 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 services or both out of, the territory of India.
In my opinion, it cannot be said that the persons preparing of Model GST Laws have not been aware of provisions of Article 286 of the Constitution. This I can say because of the reason that said persons have taken note of the sub-clause (b) of clause (1) of Article 286 of the Constitution, and on the basis of this, such persons have not provided levy of GST where such supply of goods or services or both takes place in the course of, export of the goods or services or both out of, or import of the goods or services or both into, the territory of India. However, they have not given importance to provisions of clause (2) of Article 286 of the Constitution. In my opinion, principles for determining when a supply of goods or services or both takes place in the course of inter-State trade or commerce were also not included in the Model GST Law drafts. I do not know whether or not, the Union Government was apprised of the errors in section 13 of the Constitution (One Hundred and First Amendment) Act, 2016.
Important question is that whether by overlooking provisions of Article 286 of the Constitution, States can make law for levy of GST? Whether clause (1) (a) of Article 286 gives powers to Legislatures of the States to make law to provide levy of tax on “intra-State supply of goods or of services or both”, as defined in section 8 of the Integrated GST Act, 2017 (hereinafter referred to as the IGST Act)?
We see that States derive their GST law making powers from clause (1) of Article 245, and clause (1) of Article 246A, of the Constitution. Article 245 of the Constitution runs as follows:–
“245. Extent of laws made by Parliament and by the Legislatures of States.—(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.
(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”
In clause (1), expression “subject to the provisions of this Constitution” makes clear that law making powers of the Parliament and the States shall be exercised by the Parliament and the States subject to other provisions of the Constitution. In respect of use of expression “for the whole or any part of the State”, the Honorable Supreme Court, in one of its judgments, has clarified that the said expression has been used to clarify that States can make laws for the purpose of whole State or any part of the State. That is to say that law cannot be made for a purpose other than the purpose of the whole State, or any part of the State.
If we look at clause (1) of Article 246A of the Constitution, we find that GST law making power of the Legislature of every State is subject to provision of clause (2) of the said Article. Clause (2) of the said Article provides that Parliament shall have exclusive power for making GST law where supply of goods or services or both takes place in the course of inter-State trade or commerce. Therefore, in view of clause (2) of Article 246A, States cannot make GST law to provide levy and collection of tax on a supply of goods or services or both where such supply tales place in the course of inter-State trade or commerce.
So far as it is related to Article 269A of the Constitution, the said Article gives powers to the Parliament to make law to –
(a) provide levy and collection of tax on following supplies of goods or services or both, namely:-
(i) supply of goods or services or both which takes place in the course of inter-State trade or commerce; and
(ii) supply of goods or services or both which takes place in the course of import into the territory of India;
(b) provide the manner in which tax collected, on supplies of goods or services or both, referred to in clause (a) above, shall be apportioned in between the Union and the States; and
(c) formulate principles for determining place of supply, and when a supply of goods or services or both takes place in the course of inter-State trade or commerce.
So far as it is related to Article 286 of the Constitution, clause (1) of the said Article prohibits States from imposing, or authorising imposition of tax on a supply of goods or 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 services or both out of, the territory of India.
Similar to clause (5) of Article 269A of the Constitution, clause (2) of Article 286 of the Constitution gives powers to the Parliament to make law to formulate principles for determining when a supply of goods or services or both 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 services or both out of, the territory of India.
Unfortunately, principles have not been formulated for the purpose of determining when a supply of goods or services or both takes place, ─
(i) in the course of inter-State trade or commerce; or
(ii) outside the State; or
(iii) in the course of the import of the goods or services or both into the territory of India; or
(iv) in the course of the export of the goods or services or both out of, the territory of India.
It is noteworthy that title of section 7 of the Integrated GST Act, 2017 runs as “inter-State supply”. The said section 7 contains sub-sections (1) to (5). Sub-section (5) of the said section 7 refers to certain supplies of goods or services or both which do not take place in between two States, or two Union Territories, or in between a State and a Union Territory or vice-versa. For example, clause (a) of sub-section (5) of section 7 of the IGST Act refers to a supply of goods or services or both when supplier is located in India and place of supply is located outside India. Clause (b) of sub-section (5) of said section 7 refers to supply of goods or services or both made to or by a Special Economic Zone developer or Special Economic Zone unit. Such supply may also be a supply, all ingredients of which may be located in the same State, same Union Territory, in which Special Economic Zone(s) is located. Clause (c) of sub-section (5) of said section 7 refers to any supply of goods or services or both which takes place in India but is not included in section 8 of the IGST Act or in any other provision of section 7 of the said Act. For these reasons, it is evident that section 7 of the IGST Act does not lay down the principles for determining when a supply of goods or services or both takes place in the course of inter-State trade or commerce.
Generally speaking, a supply of goods or services or both in the course of international trade or commerce is understood as a supply of goods or services or both which involves movement of goods or services or both from one country to another, i.e., a supply which involves export or import of goods. Similarly, a supply of goods or services or both in the course of inter-State trade or commerce is understood as a supply of goods or services or both which involves movement of goods from one State to another, or one Union Territory to another, or one State to a Union Territory or vice-versa.
Entry 54 of Second List (State List) of Seventh Schedule of the Constitution relates to levy of tax by the States on sales of goods, specified in the said entry. The said entry 54 runs as follows:–
“54. Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.”;
The Law Commission of India, in its Second Report (Parliamentary Legislation Relating to Sales Tax), has, inter-alia, made following observations, namely:-
“11. In considering the principles for determining when a sale or purchase takes place in the course of inter-State trade or commerce, two important aspects have to be borne in mind. First, such a sale or purchase is not to be exempt from tax as in the case of a sale or purchase in the course of import or export. It is to be taxed by the Union. Secondly, the proceeds of such a tax are under the amended article 269 to be assigned to the States. These sales have to bear the burden of the sales-tax but the burden is to be strictly limited by the Union in the interest of trade and commerce throughout the territory of India which has, according to the policy underlying the Constitution, to be free and unrestricted.
12. No doubt the expression “in the course of inter-State trade or commerce” has a very wide connotation. In India we are, however, not concerned with the regulation of commerce generally among several States as under the commerce clause in the American Constitution. What we have to determine is what is a sale or purchase in the course of inter-State trade or commerce. The problem, therefore, is to ascertain what transactions of sale or purchase can fairly be said to arise in the course of inter-State trade or commerce. For this purpose we have to fix upon some characteristics of these transactions which can well be said to stamp them with an inter-State character. In the large mass of American decisions under the commerce clause the one element which is stated to be an indispensable incident of commerce between the States is the movement of the goods which are the subject-matter of the sale or purchase from one State into another. We may refer in this connection to the definition of “inter-State commerce” given by Rottschafer in his “Constitutional Law” (1939 Ed. p. 299):—-
“The activities of buying and selling constitute inter-State commerce if the contracts therefor contemplate the movement of goods in inter-State commerce”.
Later he adds (p. 235):
“The decisive factor that renders making a contract an act of inter-State commerce is that it contemplates or necessarily involves the movement of goods in inter-State commerce, and this test applies whether it be a contract to buy or one to sell”.
13. It will be noticed that in the American view even a contemplated movement of goods which in fact may not have taken place would invest the transaction of sale or purchase with an inter-State character. Such a wide view based on the intention of the parties to the contract may, we think, well lead to uncertainty and difficulties in administration and conflicting legal views. We would, therefore. recommend a simpler and a more certain test to examine whether a transaction of sale or purchase is an inter-State transaction. Only a transaction which has in fact occasioned the movement of goods from one State into another should be regarded as an inter-State transaction. Such a test would be easy to apply by the authorities administering the law as what will have to be ascertained will be the physical movement of the goods from one State into another in consequence of the transaction. Such a test has the added advantage of being similar to and parallel with the test which we have proposed for determining when transactions take place in the course of import into or export out the territory of India. As a sale or purchase which has occasioned import or export is one in the course of import or export so is sale which has occasioned movement of the goods from one State to another a sale in the course of inter-State trade or commerce.
14. Such a test will avoid the necessity of entering into the difficult question as to when inter-State trade or commerce begins and when it ends, a subject on which there is a mass of decisions of American courts.
15. A sale or purchase should itself have occasioned the movement of the goods from one State into another in order that it may have an inter-State character. If a purchaser in State A completes purchase of goods in that State the transaction will be an intra-State transaction even though he may have the intention after the purchase of sending the goods to State B and does in fact do so. The sale made to him or the purchase made by him has not occasioned the movement of the goods from one State into another. Similarly if a purchaser from State A goes to State B and purchases goods in State B the transaction again will be of an intra-State character though the purchaser may have purchased the goods with a view to send them to State A and does in fact do so. Sale to him or purchase by him has again not occasioned the movement of the goods from State B into State A. When, however, in consequence of a sale or purchase goods are delivered to a carrier or other bailee for transmission to another State the transaction would clearly be of an inter-State nature.”
On the basis of the said report of the Law Commission, section 3, 4 and 5 of the Central Sales Tax Act, 1956 were enacted. Section 3 provides when a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce, section 4 provides that when a sale or purchase of goods shall be deemed to take place outside the State, and section 5 provides that when a sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of, or in the course of the import of the goods into, the territory of India. It is noticeable that sale of any goods is also a supply of such goods. My purpose of mentioning these views is not to say that an inter-State supply, or export supply, or import supply should be understood in the sense in which sale of goods is understood for the purpose of the Central Sales Tax Act, 1956.
So far as it is related to restriction provided in sub-clause (a) of clause (1) of Article 286 of the Constitution, Article 286 had been there in the Constitution since the date of adoption of the constitution. Before, enactment of the Constitution (One Hundred and First Amendment) Act, 2016, the said sub-clause (a) had put restriction on levy of tax by the States on a sale or purchase of goods where such sale or purchase used to take place outside the State. Therefore, it will be useful to go into the history of sub-clause (a) of clause (1) of Article 286 of the Constitution. Earlier to commencement of the Constitution, there was no such prohibition in the Government of India Act, 1935. States were free to levy tax on any sale of goods if they had territorial nexus (connection) with such sale. A sale of goods has several ingredients, like, contract of sale, location of goods to be sold, payment of price, or promise of payment of price, place of delivery of goods, place where sale takes place, etc., Territorial nexus theory of tax levy provides that in case of levy of tax on a sale of goods by a State, it is not necessary that all ingredients of sale should be located within the same State. The State can levy tax on a sale of goods even if has a slight real connection with the sale. For imposing tax on a sale of goods by a State, what is essential, is that there should be a completed sale, the State has some real territorial nexus with the sale, and law provides levy of tax on sale. In respect of a sale of any goods, it is possible that all ingredients of single transaction of the sale may not be located in a single State. Instead, all ingredients of sale may be located in more than one State. In such a case, unless there is prohibition on tax levy powers of the States, all such States, in which at least one ingredient of sale is located, shall be competent for imposing tax on the said sale. This will result in levy of tax on the single transaction of sale by more than one State. Such practice will increase price of goods in the hands of the consumer. Such levy shall also be bad for economic unity of the country. To get over such situation, prohibition in clause (1) (a) of Article 286 of the Constitution was provided. This matter was discussed and debated in the Constituent Assembly, and thereafter, clause (1) (a) of Article 286 was included in the Constitution. The provision puts restriction on tax levy powers of all States, except one, where a sale has real territorial nexus with more than one State.
Originally enacted Article 286 in the Constitution was amended vide the Constitution (Sixth Amendment) Act, 1956 and again by the Constitution (Forty Sixth Amendment) Act, 1982. Just before the Constitution (One Hundred and First Amendment) Act, 2016 was enacted, the said Article had run as follows:–
” 286. Restrictions as to imposition of tax on the sale or purchase of goods
(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 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 29 A 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.”
Purpose of Clause (1) (a) of Article 286 of the Constitution.─
Clause (1) (a) of Article 286 provides that no State shall levy tax on supply of goods or services or both, which takes place outside the State. The provision puts restriction on tax levy powers of States on a supply of goods or services or both which takes place outside the State. The said provision does not apply to a supply of goods or services or both where such supply takes place in the course of, ─
(i) inter-State trade or commerce; or
(ii) the export of the goods or services or both out of the territory of India; or
(iii) the import of the goods or services or both into the territory of India.
A supply of goods or services or both, other than a supply of goods or services or both referred to in any of the clauses (i) to (iii) of the foregoing paragraph, may have real territorial nexus with more than one States. Purpose of clause (1) (a) of Article 286 is to restrict all States, except one, from levy of GST where supply of goods or services or both has real territorial nexus with more than one States. Purpose of clause (1)(a) of Article 286 is not to take away power of levy of tax of all States, where a supply of goods or services or both can be said to have real territorial nexus with one or more States. Principles required, to be formulated under clause (2) of Article 286 of the Constitution, with respect to a supply of goods or services or both which takes place outside the State, may be of the following nature, namely:-
Principles for determining when a supply of goods or services or both takes place outside a State.-
(1) Every supply of goods or services or both shall be treated a supply of goods or services or both taking place outside a State, if such supply does not have — [nature of relationship with that State to be specified here ].
Explanation.─ For the purpose of this sub-section, a supply of goods or services or both does not include a supply of goods, or services, or both where such supply takes place in the course of ─
(i) inter-State trade or commerce; or
(ii) import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.
(2) Where any goods or services or both are supplied into the territory of a India from any place located in the territorial waters of India, or in the international waters, then such supply shall be treated a supply taking place outside a State, if such State does not have — [nature of territorial relationship with that State to be specified here].
In clauses (1) and (2 above, words “nature of territorial relationship with that State to be specified here” refer to description of territorial nexus, which may be thought proper by the Parliament”. Separate provisions may be made for supply of goods, and for supply of services.
Whether Article 286(1) (a) gives power to States for levy of tax on supply inside the State, or intra-State supply.─
No, Legislatures of the States derive their GST law making powers from clause (1) of Article 246A of the Constitution. Clause (2) of Article 246A and Article 286(1) (a) puts restrictions on law making powers of the States.
GST Law making powers of Parliament and Legislatures of States under Article 246A (1) of the Constitution.-
Clause (2) of Article 246A of the Constitution provides that Parliament has exclusive power to make laws with respect to GST, where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. Article 269A gives powers to the Parliament to make law to provide, ─
(i) levy and collection of GST on a supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce; and
(ii) the manner in which tax collected, on a supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce, shall be apportioned in between the Union and the States.
Explanation of clause (1) of Article 269A provides that for the purpose of levy and collection of tax, and for apportionment of tax collected in between the Union and the States, supply of goods or services or both in the course of import into the territory of India shall be deemed a supply of goods or services or both in the course of inter-State trade or commerce. Thus the Parliament, under clause (2) of Article 246A, and clause (1) of Article 269A, of the Constitution, can make GST law to provide levy and collection of such tax, and to provide the manner in which tax collected on two supplies of goods or services or both shall be apportioned in between the Union and the States.
In respect of supplies of goods or services or both, except supplies of goods or services or both referred to in the foregoing paragraph (import supply and inter-State supply), Parliament can make GST law under clause (1) of Article 246A of the Constitution. Prohibition provided in Article 286 of the Constitution does not apply to law made by the Parliament.
So far as it is related to GST law making powers of the Legislatures of States, such powers of the States are contained in clause (1) of Article 246A of the Constitution, but such powers of legislatures of the States are subjected to provisions of clause (2) of Article 246A, and Article 286, of the Constitution. Thus Legislature of each State can make law to provide levy and collection of GST on supply of goods or services or both, except a supply of goods or services or both which takes place, ─
(i) in the course of inter-State trade or commerce; or
(ii) outside the State; or
(iii) in the course of export of the goods or services or both out of the territory of India; or
(iv) in the course of the import of the goods or services or both into the territory of India.
Parliament has been given power to formulate principles, by law, for determining when a supply of goods or services or both takes place in any of the ways referred to in clauses (i) to (iv) above. Unfortunately, so far, no law has been made to formulate such principles.
Since, definition of expression “goods and services tax”, provided in clause (12A) of Article 366 of the Constitution, does not include tax on supply of alcoholic liquor for human consumption, and Article 246A, for the time being, is not in force in respect of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, therefore, the Parliament and Legislatures of the States cannot make GST law to provide levy of GST on any supply of such goods.
Constitutional validity of “Intra-State supply” for the purpose of GST levy by the States.─
The Constitution does not give powers to Parliament for defining an intra-State supply. For the purpose of the GST Laws enacted by it, the Parliament has, in section 8 of the said Act, given details of supplies of goods, and services, which shall be treated as intra-State supply. Section 8 of the Integrated GST Act, 2017 runs as follows:–
“Intra-State supply.
8. (1) Subject to the provisions of section 10, supply of goods where the location of the supplier and the place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply:
Provided that the following supply of goods shall not be treated as intra-State supply, namely:—
(i) supply of goods to or by a Special Economic Zone developer or a Special Economic Zone unit;
(ii) goods imported into the territory of India till they cross the customs frontiers of India; or
(iii) supplies made to a tourist referred to in section 15.
(2) Subject to the provisions of section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:
Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.
Explanation 1.—For the purposes of this Act, where a person has,—
(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.
Explanation 2.—A person carrying on a business through a branch or an agency or a representational office in any territory shall be treated as having an establishment in that territory.”
In case of a supply of goods, or of services, or both made by or to a Special Economic Zone developer or Special Economic Zone unit, where all ingredients of such supply are located within the same State, supply will not have territorial nexus with any other State. If, in respect of such supply of goods or services or both, power of levy of tax, of the State in which all ingredient of the supply are located, is denied then the supply will escape levy of tax by all States, because no other State or Union Territory will have territorial nexus with the supply. For other States or Union Territories, supply will be a supply outside the State, or the Union Territory. The GST Council, in its recommendation to States, has recommended levy of State GST on “intra-State supply” as detailed in section 8 of the IGST Act. In respect of such supply, in sub-section (5) of section 7 of the IGST Act, provision has been made that such supply shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Fiction created in sub-section (5) of section 7 of the IGST Act, is not legally valid in view of provisions of Article 246A, 269A and 270 of the Constitution.
There are also certain other supplies of goods or services or both, in respect of which States have been denied their constitutional powers of levy of GST. Let us consider a case of procurement of stores by captain of a foreign going ship, while the ship is located in coastal waters of India. The captain of the ship places order for supply of certain stores with a trader located in nearby coastal State. The trader, after receiving supply order, makes supply of stores to the captain of the ship from its godown located in his own State and delivers such goods on board of the ship. Goods are meant for use of the ship. In this case, supply of goods does not take place in the course of─
(a) inter-State trade or commerce; or
(b) the import of the goods into the territory of India; or
(c) the export of the goods out of the territory of India.
In the case referred to in the foregoing paragraph, only one State, exclusively, has territorial nexus with the supply. There is no other State, or Union Territory which can be said to have real territorial nexus with the supply. But, in view of provisions of section 8 of the IGST Act, such supply is not an intra-State supply. Any illusory (imaginary or deemed) place of supply cannot be used for determining territorial nexus. If the coastal State, which has real territorial nexus with the supply, is denied its power of levy of tax, then supply will escape levy of tax. Such supply also does not take place in between two States, or two Union Territories, or in between a State and a Union Territory. Such supply has been included in clause (c) of sub-section (5) of section 7 of the IGST Act. The said clause (c) runs as follows:–
“(5) Supply of goods or services or both,─
(a) —
(b) —
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.”
The said sub-section (5) of section 7 of the IGST Act uses words “shall be treated to be a”. Thus the said provision creates fiction. However, in view of Articles 246A, 269A and 270 of the Constitution, fiction is not legally valid. Supplies of goods or services or both referred to in clause (1) of Article 269A and its explanation have already included in sub-sections (1) to (4) of section 7 of the IGST Act. The IGST Act not only provides levy and collection of tax on supplies referred to in sub-section (5) of section 7 of the IGST Act but section 17 of the said Act also provides apportionment of tax collected on supplies referred to in sub-section (5) of section 7 of the IGST Act, in between the Union and the States. According to clause (1) of Article 269A of the Constitution, and its explanation, the Parliament can make law for apportionment of tax collected on following supplies of goods or services or both, namely:–
(i) Supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce; and
(ii) Supply of goods or services or both where such supply takes place in the course of import into the territory of India.
Fiction created in sub-section (2) and (4) of section 7 is supported by the explanation of clause (1) of Article 269A of the Constitution. Another aspect is that section 9 of the IGST Act runs as follows:–
“Supplies in territorial waters.
9. Notwithstanding anything contained in this Act,—
(a) where the location of the supplier is in the territorial waters, the location of such supplier; or
(b) where the place of supply is in the territorial waters, the place of supply,
shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.”
In above quoted section 9 of the IGST Act, provision has been made to treat unreal as real for all provisions of the IGST Act. Territorial nexus of a supply of goods or services or both with a State or a Union Territory cannot be determined on the basis unreal place of supply, or on the basis of unreal location of the supplier, because, for levy of tax on supply of goods or services or both territorial nexus of the supply has to be real.
In my personal opinion, a supply of goods or services or both cannot be said supply of goods or services or both in the course of inter-State trade or commerce unless the supply involves movement of goods or services or both from one State to another, or from one Union Territory to another, or from one State to a Union Territory or vice-versa. Law commission, while examining sale of goods which can be said to be in the course of inter-State trade or commerce, has found that movement of goods from one State to another, or from one Union Territory to another, or from one State to a Union Territory or vice-versa, (Union Territory is included because, definition of word “State” provided in the General Clauses Act, 1897 includes “Union Territory”) is indispensable feature of inter-State trade or commerce. Sections 3 the Central Sales Tax Act, 1956 has been enacted on the basis of this report. A transaction of sale of any goods is also a transaction of supply of goods.
My suggestion is that GST Law drafters and the GST Council should re-examine when a supply of goods or services or both can be said to take place, ─
(i) in the course of inter-State trade or commerce; or
(ii) outside the State; or
(iii) in the course of export of the goods or services or both out of the territory of India; or
(iv) in the course of the import of the goods or services or both into the territory of India.
In my opinion, total amount of GST collected under the law made by the Parliament under clause (2) of Article 246A and Article 269A is to be apportioned in between the Union and the States in accordance with manner provided by the Parliament by law, and thereafter, amount apportioned to the Union is to be shared, with the State in which it was collected, in accordance with provisions of Article 270 of the Constitution. On the other, total amount of GST collected under the GST laws made by the Parliament under clause (1) of Article 246A is to be shared with the State, in which it was collected, in accordance with provisions of Article 270 of the Constitution. Article 270 of the Constitution runs as follows:–
“270. Taxes levied and distributed between the Union and the States.— (1) All taxes and duties referred to in the Union list, except the duties and taxes referred to in articles 268, 269 and article 269A, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2).
(1A) The tax collected by the Union under clause (1) of article 246A shall also be distributed between the Union and the States in the manner provided in clause (2).
(1B) The tax levied and collected by the Union under clause (2) of article 246A and article 269A, which has been used for payment of the tax levied by the Union under clause (1) of article 246A, and the amount apportioned to the Union under clause (1) of article 269A, shall also be distributed between the Union and the States in the manner provided in clause (2).
(2) Such percentage, as may be prescribed, of the net proceeds of any such tax or duty in any financial year shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax or duty is leviable in that year, and shall be distributed among those States in such manner and from such time as may be prescribed in the manner provided in clause (3).
(3) In this article, “prescribed” means, — (i) until a Finance Commission has been constituted, prescribed by the President by order, and (ii) after a Finance Commission has been constituted, prescribed by the President by order after considering the recommendations of the Finance Commission.”
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Disclaimer: Except the quoted versions, interpretations made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to follow the provisions of the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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