In my personal opinion, provisions as recommended by the Goods and Services Tax Council of India (hereinafter referred to as the GST Council) for levy and collection of goods and services tax (hereinafter referred to as the GST) by the States are not in conformity with the relevant provisions of the Constitution of India (hereinafter referred to as the Constitution).

In my opinion, power of States for levy and collection of GST can be derived from following Articles of the Constitution, namely:-

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.”

246A. Special provision with respect to goods and services tax.—(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.”

“269A. Levy and collection of goods and services tax in course of inter-State trade or commerce.(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.

(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.

(3) Where an amount collected as tax levied under clause (1) has been used for payment of the tax levied by a State under article 246A, such amount shall not form part of the Consolidated Fund of India.

(4) Where an amount collected as tax levied by a State under article 246A has been used for payment of the tax levied under clause (1), such amount shall not form part of the Consolidated Fund of the State.

(5) 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.”

“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).”

A careful reading of these Articles reveals that-

(i) Article 245 of the Constitution, inter-alia, provides that subject to other provisions of the Constitution, Legislature of a State can make law for whole or any part of such State;

(ii) Clause (1) of Article 246A provides that Legislature of a State has power to make law with respect to goods and services tax imposed by such State, subject to the condition that the State cannot make law where supply of goods or services or both takes place in the course of inter-State trade or commerce;

(iii) clause (5) of Article 269A provides that the Parliament may by law formulate principles for determining 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;

(iv) clause (1) of Article 286 provides that 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.

(v) clause (2) of Article 286 provides that the Parliament may by law 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 import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

A conjoint reading of Articles 245, 246A, 269A and 286 of the Constitution, reveals that Legislature of a State can make law to provide levy and collection of GST on any supply of goods or services or both where such supply does not take place, ─

(i) outside the State; or

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

(iii) in the course of import of the goods or services or both into the territory of India; or

(iv) in the course of export of the goods or services or both out of the territory of India.

When a supply of any goods or services or both takes place in any of the ways referred to in clauses (i) to (iv) of preceding paragraph shall be determined in accordance with principles as may be formulated by law by the Parliament.

Here it is essential to point out that definition of expression “goods and services tax”, as provided in the Constitution, does not include any tax on supply of alcoholic liquor for human consumption, and provisions of Article 246A are yet to come into force in respect of any supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

Had there not been any restriction on GST law making powers of the Legislatures of a State, the Legislature of a State would have been competent for making GST law with respect to supply of goods or services or both except supply of alcoholic liquor including supply of goods with respect to which Article 246A of the Constitution is not in effect. Important question is that had there not been restrictions on GST Law making powers of the States, had Legislatures of States been competent to make GST law with respect to any supply of goods or services or both. Answer to this question would have been in negative. With respect to a supply of goods or services or both, only that State would have been competent which would have real territorial nexus with that supply. Each transaction of supply of any goods or services has several ingredients, or elements, like, contract, or agreement of supply, location of goods or services which are to be supplied under the contract, payment, place where supply is made available, etc. The principle of territorial nexus (connection) states that each State, which has any real territorial nexus with the supply, can levy tax on the supply. What is essential is that territorial nexus should be real, i.e. territorial nexus should not be unreal or illusory.

So far as it is related to restrictions on GST law making powers of a State on 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 the territory of India; or

(iii) export of the goods or services or both out of the territory of India,

such supplies may also have territorial nexus with the State(s). But these supplies have specifically been excluded from scope of supplies on which a State can levy goods and services tax. So far as it is related to ban on supply of goods or services or both where such supply takes place outside the State, we have to go into the legislative history and background of sub-clause (a) of clause (1) of Article 286 of the Constitution. History and background of prohibition provided in Article 286 (1)(a) of the Constitution reveal that the provision has been included in the Constitution to insure that tax on a single transaction of sale or supply of goods or services or both should not be levied by more than one State. Where in respect of any supply of goods or services or both, more than one State can claim their power of levy of tax on the basis of territorial nexus with the supply, purpose of clause (1) (a) of Article 286 is to prohibit all States, except one, from levying tax.

Formulation of principles to determine when a supply takes place outside the State requires declaration of unique type of territorial nexus with supply, which is possessed by one State and is not possessed by other States For those States which do not possess such unique type of territorial nexus, supply can be declared a supply outside the State. For States, which do not have any type of territorial nexus with the supply, will also not have unique type of territorial nexus with the supply. Therefore, only one State which will have the declared unique type of territorial nexus shall remain competent for levying tax on the supply, and for all other States, the supply will a supply which will take place outside the State. The inclusion of the said provision of Article 286(1) (a) was debated in the Constituent Assembly. It was found desirable to curb the price increase on account of multi tax levies by several States on a single transaction of sale of goods. It was also found desirable in view of the economic unity of the nation. Before enactment of the Constitution (One Hundred and First Amendment) Act, 2016, the said provision had been applicable to sale or purchase of goods. By the said Constitution Amendment, the provision has been made applicable to supply of goods or services or both.

Section 4 of the Central Sales Tax Act, 1956, which relates sale or purchase of goods outside the State runs as follows:–

“4. When is a sale or purchase of goods said to take place outside a State._

(1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State-

(a) in the case of specific or ascertained goods, at the time the contract of sale is made; and

(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

Explanation.- Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places.”

Similar provision is also required for the purpose of levy of GST by the States. However, in absence of any recommendation by the GST Council, no such principles have been formulated by the Parliament. Instead of making recommendation with respect to principles, the GST Council has made recommendation for levying GST by the States on “intra-State supply”, as defined in section 8 of the draft of the Model IGST Act.

Recommendation by the GST Council. –

The GST Council, in the draft of Model GST Law prepared for the States, had recommended levy of State GST on “intra-State supply”, where expression “intra-State supply” has meanings assigned to it in section 8 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act). Section 8 of the said Act 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.”

About above quoted definition of expression “Intra-State supply”, following things are noteworthy, namely:-

(i) definition of “location of supplier” has not been provided in any of the GST Laws enacted by the Parliament;

(ii) Even if supplier is located within the State, it is not necessary that goods or services are supplied from within the same State, supplier may provide goods or services or both from any other State, or a Union Territory, or any other place outside the State.

(iii) supplies of goods or services made to or by Special Economic Zone developer or Special Economic Zone unit have been excluded even where all ingredients or elements of supply are located within the same State;

(iv) Under same restrictions under the Constitution, Coastal States have been levying sales tax or VAT on sale of stores by a person located in any coastal State to a foreign going ship located in territorial waters of India.

(v) Where any goods are supplied to a foreign tourist at the counter, supply takes place in all respects within the same State or Union Territory.

(vi) Supplies excluded from the definition of expression “intra-State supply” have been included in section 7 of the IGST Act in the definition of “inter-State supply”.

The Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act), and the IGST Act, both have been made by the Parliament. Parliament can make GST Law to provide levy and collection of GST on all supplies of goods or services or both except a supply of non-GST Goods. For its own purpose, the Parliament has classified all supplies of goods or services or both in two categories, viz. (i) inter-State supply, and (ii) intra-State supply. Section 7 of the IGST Act relates to inter-State supply. Sub-section (5) of section 7 of the IGST Act, read with section 5 of the said Act, provides levy of tax on supplies excluded from the expression “intra-State supply”. Without going into validity of such inclusion, one can say that it is not bad to make law under two different provisions of the Constitution in a single statute book. The only thing is that while doing so, the Legislature cannot go beyond the scope of its powers under the Constitution.

It is also noteworthy that the Constitution does not give power to make law to provide principles for determining an “intra-State supply” for the purpose of levy of GST by the States. Clause (5) of Article 269A, and clause (2) of Article 286, of the Constitution give power to the Parliament for formulating principles for 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 import of the goods or services or both into the territory of India; or

(iv) in the course of export of the goods or services or both out of the territory of India.

For any reason, the GST Council has not recommended any such law. Article 270 of the Constitution, inter-alia, provides for sharing of goods and services tax collected by Union with the State in which it was (i) collected by, or (ii) collected by, and apportioned to, the Union. The said 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 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.”

Here we find that clause (1A), and clause (1B) of above quoted Article 270 of the Constitution refer to two type of taxes, viz.-

(i) tax collected by the Union under clause (1) of article 246A of the Constitution; and

(ii) amount of tax apportioned to the Union out of the tax collected by the Union under clause (2) of Article 246A and article 269A of the Constitution.

Under clause (2) of Article 246A and article 269A, the Parliament can make law for levy and collection of tax only on following two 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.

GST collected in any State by the Union on two supplies of goods or services or both is to be apportioned in between the Union and the States in the manner as may be provided in the law made by the Parliament. Subsequently, amount of tax apportioned to the Union is to be shared with that State in accordance with clause (1B), read with clause (2), of Article 270 of the Constitution. Barring these two supplies of goods or services or both, in respect of all other supplies of goods or services or both, the Parliament can make law in exercise of its powers under clause (1) of Article 246A of the Constitution. The Parliament has no power to make law to provide the manner for apportionment of GST collected by the Union in any State under clause (1) of Article 246A of the Constitution, in between the Union and such State. Total amount of GST collected by the Union under clause (1) of Article 246A in any State, is to be shared with such State in accordance with clause (1A), read with clause (2), of Article 270 of the Constitution.

For reasons stated above, a supply of goods or services or both, in respect of which law can be made by the Parliament in exercise of its powers under clause (1) of Article 246A, although, for levy and collection of GST in any State, the Parliament can make law in the IGST Act, yet the manner, provided by the Parliament in exercise of its powers under clause (1) of Article 269A, cannot be used for apportionment of tax collected in between the Union and the States. The amount collected on such supply shall be treated an amount of GST collected under clause (1) of Article 246A of the Constitution. For the purpose of levy and collection of GST on supplies which take place inside the States, the Parliament has made the CGST Act. Tax leviable on such supplies has been called “central goods and services tax (in short “cgst”). Therefore, tax collected under the IGST Act, which lawfully cannot be apportioned in between the Union and the State, will need transfer of the same to the cgst account of that State in which it has been collected. I do not know if there is any such provision in the IGST Act.

There are some sales or supplies of goods or services or both, in respect of which States have been denied their constitutional powers of levy of GST. Few of them are being listed hereunder.

Supply in coastal waters.─

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 (or any other 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.

It is also not a case of levy of tax by more than one State on a single transaction of sale or supply. Under Sales Tax, and VAT regimes, States have been imposing tax on such sale or purchase of goods. Coastal States have been collecting significant revenue on such sales of goods. In the GST regime, nothing has changed for the States under the Constitution, still they have been denied there power of imposing tax on such supplies of goods or services.

Supplies to or by SEZ developer or SEZ unit.─

Supplies of goods or services or both made to, or by the Special Economic Zone developer or Special Economic Zone unit, where all ingredients or elements of the supply are located within the same State or Union Territory, have also been excluded from definition of expression “Intra-State supply”. These supplies have been included in sub-section (5) of section 7 of the IGST Act. The said section 7 relates to “Inter-State supply”. Inclusion and exclusion, both are against the provisions of the Constitution.

Sales to foreign tourists.─

Where counter sales or supplies are made to foreign tourists, they take place within the same State or Union Territory. Their exclusion from “intra-State supply” and inclusion in “inter-State supply” is also against the provisions of the Constitution.

It is important to be noted that tax on supplies of goods or services or both referred to above can be levied under the law made by the Parliament in exercise of its powers under clause (1) of Article 246A of the Constitution. Tax collected on such supplies cannot be apportioned in between the Union and the States in the manner provided in the IGST Act. Where such tax is collected in any State, only a certain percentage amount of such collected tax, as may be determined by the Finance Commission under Article 270 of the Constitution, can be assigned to such State.

What is required, is that the Parliament should, on recommendation of the GST Council, enact law to provide principles for determining when a supply of goods or services or both takes place ─

(i) outside the State; or

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

(iii) in the course of import of the goods or services or both into the territory of India; or

(iv) in the course of export of the goods or services or both out of the territory of India.

Thereafter, GST Laws should be amended accordingly. I am also of the opinion that a supply of goods or services or both made from coastal waters which results in receipt of goods or services into a State, or Union Territory, can also be taxed on Reverse Charge Mechanism basis. The only requirement is to make law under Article 286 of the Constitution.

*****

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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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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