No Crossing Boundaries: LoC Trade with PoK is Intra-State Supply Under GST

Introduction:

The honorable High Court of Jammu & Kashmir and Ladakh delivered a legally and constitutionally significant judgment in M/s. New Gee Enn & Sons and Ors vs. UOI & Ors, ruling that trade conducted across the Line of Control (LoC) with Pakistan-Occupied Kashmir (PoK) constitutes intra-state supply under the Goods and Services Tax (GST) regime. This decision, pronounced on November 27, 2025, has profound implications, clarifying the territorial scope of India’s tax laws and upholding the constitutional status of PoK as an integral part of India. The judgment dismissed a batch of writ petitions filed by cross-LoC traders which had challenged show-cause notices (SCNs) issued by the GST authorities demanding tax for the financial years 2017-18 and 2018-19. The standpoint from GST too has been explicitly made clear.

(B): The Background: From Barter to Tax Liability

The Cross-LoC trade began in 2008 as a major Confidence-Building Measure (CBM) between India and Pakistan. It operated on a barter system along two routes: (i) Salamabad (Uri) – Muzaffarabad and (ii) Poonch – Rawalakot. Crucially, the trade involved the exchange of 21 mutually agreed items (mostly agricultural and local produce like fruits, spices, and herbs) without the use of currency. The trade was a significant economic lifeline for the communities near the LoC, providing employment for thousands of traders, drivers, labourers, and ancillary workers in the transport and logistics sectors. It facilitated commerce in regions. The trade continued until its suspension by India in April 2019, primarily due to reports of its misuse, citing serious security concerns that highlighted the mechanism’s inherent regulatory flaws.

(C): The Tax Landscape Shift

1. Under VAT Regime (Pre-2017): Under the erstwhile Jammu & Kashmir Value Added Tax (VAT) Act, 2005, this cross-LoC trade was explicitly classified as a zero-Taxed sale (exempted from tax). This encouraged traders to engage in the CBM without worrying about tax incidence.

2. Post GST Regime (Post-July 2017): With the implementation of the CGST Act and J&K SGST Act in 2017, the legal framework changed. The new GST law did not contain a provision akin to the J&K VAT Act 2005, which had granted the exemption. Despite the legislative change, many traders continued to treat the transactions as tax-free and failed to disclose these outward and inward supplies in their GST returns (GSTR-1 & GSTR-3B).

This non-disclosure prompted the tax authorities to initiate investigations, which led to the issuance of show-cause notices under Section 74(1) of the CGST Act, 2017, alleging suppression of facts with the intent to evade tax.

(D): The Constitutional Supremacy in Tax Law

The center of legal debate before the honorable J&K High Court revolved around one question:

How should the territory under Pakistan’s de facto control (PoK) be classified for the purpose of defining ‘place of supply’ and ‘location of supplier’ under the GST Act?

The traders argued that the trade was either international (import/export) or was otherwise exempt. The GST department contended that based on India’s constitutional and territorial law, the trade was wholly domestic only as the transaction from the taxable territory is not to a Non-Taxable territory.

(E): The Honorable Court’s Rationale:

In order to decide the case, the honorable High Court undertook a conjoint reading of the relevant statutory and constitutional provisions:

1. Definition of India: The Court referred to Section 2(56) of the CGST Act, 2017, which defines “India” by referencing Article 1 of the Constitution of India. According to the Act, “India” includes, The territory of India as defined in Article 1 of the Constitution, Territorial waters, including the seabed and sub-soil beneath them, Specific maritime zones, such as the continental shelf and exclusive economic zone, as defined by the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, airspace above its territory and territorial waters.

2. Territorial Status of PoK: The Court held that for all legal purposes, including tax levy, the area presently under the de-facto control of Pakistan is India and remains part of the territories of the erstwhile State of Jammu & Kashmir (now Union Territory of J&K). To be clearer, the area of the State presently under de-facto control of Pakistan is part of territories of the State of Jammu & Kashmir (now UT). This ruling legally classified trade with PoK as intra-state supply under the GST Act, not international trade, thereby reinforcing India’s constitutional and territorial claim in fiscal law.

3. Intra-State Supply Test: The conditions for an Intra-State Supply under Section 2(64) of the CGST Act 2017 are that both the location of the supplier and the place of supply must be in the same State or Union Territory. In the situation on hand,

• • Location of Supplier: Indian-administered J&K/UT.
  • Place of Supply ( & location of Recipient): PoK.

Since the supplier (J&K) and the place of supply (PoK) are legally part of the same State/Union Territory as per the Constitution, the transaction is Intra-State Supply. This classification mandates the levy of CGST and SGST/UTGST, rejecting the traders’ argument for zero-rating (which is applicable to exports or inter-state supplies, where IGST is levied). The court firmly established that constitutional definitions take precedence over geopolitical boundaries for determining tax liability.

(F) Validity of Show-Cause Notices and Statutory Remedy

Beyond the classification of supply, the petitioners challenged the validity of the show-cause notices (SCNs) issued under the stricter Section 74(1) of the CGST Act, which is reserved for cases involving fraud, wilful misstatement, or suppression of facts. The court upheld the issue of Notice under Section 74(1) of the GST Act 2017, thus:

1. Suppression of Facts: The Court found prima facie evidence of suppression of material facts. The traders, being registered under GST, were aware that the special zero-rating provision from the VAT era had not been carried over into the GST law. By deliberately failing to declare the huge volume of outward and inward cross-LoC supplies in their GST returns, they suppressed taxable information. This attracted the provisions of Section 74(1).

2. Limitation Period: The SCNs were also held to be within the extended limitation period (five years) prescribed under Section 74(10), which applies when suppression is involved, unlike the shorter period (three years) under Section 73 (for non-fraudulent cases). The Court noted that the notices were issued well within the statutory time limit.

3. Bunching of Periods: The SCNs covered both FY 2017-18 and 2018-19 in a composite manner. The Court affirmed that this “bunching” was valid as the quantification of liability was year-wise and detailed, ensuring the assesses had a fair opportunity to respond.

(G) Relegation to Statutory Remedy

Despite addressing the jurisdictional and classification challenges, the High Court ultimately dismissed the writ petitions as premature. The Court reiterated the well-settled principle that a Constitutional Court should generally decline to entertain petitions when an equally efficacious alternative remedy is available under the statute. The traders were directed to utilize the statutory adjudication and appellate framework available under Sections 74(9) and 107 of the CGST Act.

Before bidding adieu…..

This judgment carries Far-Reaching Implications significant weight across legal, tax, and political domains:

1. Constitutional Assertion: The ruling is arguably one of the most direct judicial affirmations of the legal and constitutional status of PoK as an integral part of India in a non-political, commercial matter, setting a clear precedent.

2. GST Jurisprudence: It solidifies the interpretation of ‘location of supplier’ and ‘place of supply’ under the GST Act in ambiguous territorial contexts, emphasizing that legal definitions, not de facto control, determine taxability.

3. Retrospective Liability: The immediate impact is on the traders involved, who now face potential retrospective tax liabilities (CGST and SGST/UTGST), interest, and penalties for the period between 2017 and 2019.

4. Compliance Warning: The dismissal of the challenge to the Section 74 SCNs serves as a strong warning to all taxpayers regarding the necessity of accurate self-assessment and the serious consequences of suppressing taxable supply information under the GST regime.

The J&K High Court’s ruling unequivocally marks the cross-LoC trade as an internal, Intra-State supply, subjecting it to the full scope of India’s domestic tax laws and firmly closing the window of tax exemption that existed under the previous VAT system.

Jai Hind !!!!