Have the GST Law Drafters Lost Sight of Article 286 of the Constitution?

Prior to One Hundred and First Amendment of the Constitution, Article 286 of the Constitution had stood as follows:

“286. (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 (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.”

In Article 286 of the Constitution, vide the Constitution (One Hundred and First Amendment) Act, 2016, following amendments were made, namely:–

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.”

     After amendments made by the said Constitution Amendment Act, Article 286 stands as follows:

286. (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).”

However, there is a grammatical mistake in clause (2). Verb “takes place” is missing in the clause. In the amendment either for words “sale or purchase of goods”, words “supply of goods or services or both” should have been substituted or in place of words “sale or purchase of goods takes place”, words “supply of goods or services or both takes place” should have been substituted.

Here, two things are important. First is that the Constitution nowhere provides that Legislatures of the States can make law for imposing goods and services tax on intra-State supply of goods or services or both. Second is that the Constitution does not give powers to the Parliament for formulating principles for the purpose of determining which supplies shall be  an intra-State supply of goods or services or both. Powers of Legislatures of States can be derived from Article 246A (1) read with Article 246A (2) and Article 286. There is no other provision in the Constitution which either gives GST Law making powers or curtails such law making powers of the Legislatures of the States. However, unless Clause (1) of Article 246A takes effect in relation to petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, the Parliament and the Legislatures of the States, both, cannot make law providing levy of goods and services tax (GST) on supply of these goods. Article 246A of the Constitution runs as follows:

“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.”.

Goods referred to in the Article 279A (5) are petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel. No services have been referred to in the said clause of Article 279A. Here, I will also like to point out that definition of expression “goods and services tax” (in short GST) does not include tax on supply of alcoholic liquor for human consumption.

In view of the foregoing discussion, Constitutional powers of Legislatures of the States for making law to provide levy of goods and services tax emerges as follows:

     Each supply of goods or services or both except▬

(a) a supply which takes place▬

(i) outside the State; or

(ii) in the course of inter-State trade or commerce; or

(iii)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; and

(b) any supply of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas or aviation turbine fuel.

In one of the judgments, given by the Honorable Supreme Court, the Honorable Court has, in reference to Article 286(1) (a), made the observation that State shall not levy tax on a sale or purchase of goods where such sale or purchase takes place outside the State does not mean that State can levy tax on a sale or purchase which takes place inside the State.

Word “inter-State” stands for “in between the States; among the States”. In clause (58) of section 3 of the General Clauses Act, 1897, the definition of word “State” has been provided as follows:

“(58) “State”–

(a) as respects any period before the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean a  Part A State, a Part B State or a Part C State; and

(b) as respects any period after such commencement, shall mean a State specified in the First Schedule to the Constitution and shall include a Union territory;”

     Therefore, inter-State trade or commerce may be understood as trade or commerce▬

(i) in between two States; or

(ii) in between two Union Territories; or

(iii) in between one State and a Union Territory.

Article 269A of the Constitution runs as follows:

“269A. (1) Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.”

Because of explanation appended to clause (1) of Article 269A, supply of goods or services or both which takes place in the course of import into the territory of India is also to be deemed a supply of goods or services or both in the course of inter-State trade or commerce for the following purposes, namely:–

(i) levy and collection of tax; and

(ii) for apportionment of such tax in between the Union and the States.

Section 7 of the Integrated Goods and Services Tax Act, 2017, it its various sub-sections, mentions the supplies of goods or services or both which are to be treated supply of goods or services or both in the course of inter-State trade or commerce. In sub-section (5) of the said section 7, provision has been made to treat export supplies of goods or services or both as supplies of goods or services or both in the course of inter-State trade or commerce. Again in the same sub-section, provision has been made in respect of certain supplies of goods or services or both, which take place completely within a State or a Union Territory, to treat them as supply of goods or services or both in the course of inter-State trade or commerce.  Here, provision has been made to treat something untrue to be true. No purpose has been given for creating such fiction. Tax on such supplies has also been levied. Law provided for apportionment of tax collected on supplies which take place in the course of inter-State trade or commerce also includes tax collected of such supplies. Fiction can be created but within the Constitutional powers. Also fiction can be created only for limited purpose. Tax collected by the Union Government in any State on such supplies can be distributed only in accordance with provisions of Article 270 of the Constitution.

So far as it is related to levy of goods and services tax (GST) by the States, they have not exceeded their limits. Therefore, GST Laws, enacted by the States which have, on the recommendation of the Goods and Services Tax Council, levied tax on intra-State supplies of goods or services or both, cannot be disputed. However, it can be said that they have not exercised their legitimate powers in respect of certain supplies.

My question is that whether the GST Law Model Drafters have Lost Sight of Article 286 of the Constitution. This I have said because on visiting CBIC GST website, I found there an e-book with title “GOODS AND SERVICES TAX (GST) CONCEPT & STATUS”. Link to file is “http://www.cbic.gov.in/resources//htdocs-cbec/gst/GST-Concept%20and%20Status01072019.pdf ” under head My GST.  Para 8 of the booklet is related to Constitutional Amendments.  Para 8.4 relates to the important changes introduced in the Constitution by the 101st Amendment Act.  This gives brief details of amendments made in various Articles of the Constitution. To my surprise, the said Para 8.4 has no mention of Article 286. The said Para 8.4 of the said document runs as follows:

“8.4 The important changes introduced in the Constitution by the 101st Amendment Act are the following:

a) Insertion of new article 246A which makes enabling provisions for the Union and States with respect to the GST legislation. It further specifies that Parliament has exclusive power to make laws with respect to GST on inter-State supplies.

b) Article 268A of the Constitution has been omitted. The said article empowered the Government of India to levy taxes on services. As tax on services has been brought under GST, such a provision was no longer required.

c) Article 269A has been inserted which provides for goods and services tax on supplies in the course of inter-State trade or commerce which shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council. It also provides that Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

d) Article 270 has been amended to provide for distribution of goods and services tax collected by the Union between the Union and the States.

e) Article 271 has been amended which restricts power of the Parliament to levy surcharge under GST. In effect, surcharge cannot be imposed on goods and services which are subject to tax under Article 246A.

f) Article 279A has been inserted to provide for the constitution and mandate of GST Council.

g) Article 366 has been amended to exclude alcoholic liquor for human consumption from the ambit of GST, and services have been defined.

h) Article 368 has been amended to provide for a special procedure which requires the ratification of the Bill by the legislatures of not less than one half of the States in addition to the method of voting provided for amendment of the Constitution. Thus, any modification in GST Council shall also require the ratification by the legislatures of one half of the States.

i) Entries in List I and List II have been either substituted or omitted to restrict power to tax goods or services specified in these Lists or to take away powers to tax goods and services which have been subsumed in GST.

j) Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for five years.

k) In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council.”

Disclaimer: Except the quoted versions, all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to obey 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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I am retired Government Servant. Prior to my retirement I had been working as Member Tribunal, Uttar Pradesh Commercial Taxes. Presently, residing in Noida, U.P. & enjoying fully my retired life. View Full Profile

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