In section 7 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act), in respect of certain supplies of goods or services or both, provision has been made that such supplies shall be treated as supply of goods or services or both in the course of inter-State trade or commerce and in respect of certain other supplies of goods or services or both, provision has been made that those supplies shall be treated to be supplies of goods or services or both in the course of inter-State trade or commerce. Difference in both categories of supplies lies in use of expressions “shall be treated as” and “shall be treated to be” along with expression “supplies of goods or services or both in the course of inter-State trade or commerce. In my personal opinion, words “shall be treated to be” have been used to create legal fiction. A legal fiction is always created for some specified purpose. In section 7 of the IGST Act, legal fiction has been created without specifying the purpose. Therefore, it cannot be said that legal fiction has validly been created.
If the expression “all inter-State supplies of goods or services or both, used in section 5(1) of the IGST Act, refers to all supplies of goods or services or both in respect of which, in section 7 of the said Act, provision has been made to treat them ‘as’ supply of goods or services or both in the course of inter-State trade or commerce, or in respect of which, in the said section, provision has been made to treat them ‘to be’ supply of goods or services or both in the course of inter-State trade or commerce, provisions of section 17 of the IGST Act become applicable to tax collected in respect of all supplies of goods or services or both, referred to in all provisions of section 7 of the said Act. In such circumstances, provisions of section 17 will be rendered unconstitutional. If it is thought that expression “inter-State supply of goods or services or both” refers to only those supplies of goods or services or both which take place either in the course of inter-State trade or commerce, or in the course of import into the territory of India, then certain supplies of goods or services or both will escape levy of GST.
India is wider than territory of India. Territory of India represents area covered by all (i) States, (ii) Union Territories, and (iii) any other area that may be acquired whereas India, apart from territory of India also includes territorial waters of India. Therefore, import into the territory of India and import into India cannot be understood to have same meanings. Similar is the case with export out of the territory of India and export out of India.
In this article, I will express my views on various supplies of goods or services or both dealt with in the IGST Act, levy and collection of integrated goods and services tax (integrated tax) and the law relating to apportionment of integrated tax in between the Union and the States.
Article 246A of the Constitution, which gives powers, to the Parliament and the Legislatures of the States, to make law for providing levy and collection of goods and services tax (hereinafter referred to as the GST), runs as follows:–
‘Special provision with respect to goods and services tax.
“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.”‘
Clause (2) of Article 246A and Article 269A of the Constitution, give powers to the Parliament to make law to-
(a) provide levy and collection of integrated tax on supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce or in the course of import into the territory of India; and
(b) provide the manner in which integrated tax, collected on supplies referred to in clause (a) above, shall be apportioned in between the Union and the States.
Clauses (1) and (2) of Article 269A of the Constitution run 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.
(2) The amount apportioned to a State under clause (1) shall not form part of the Consolidated Fund of India.”
Article 270 of the Constitution provides that a certain percentage of tax collected by the Union under laws made under certain specified Articles of the Constitution shall be assigned to States. The Article also provide that certain percentage of amount, of goods and services tax apportioned to the Union out of the integrated tax collected by the Union in a State, shall also be assigned to States in the manner provided in Article 270. The said Article 270 runs as follows:–
“270. (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.”
A conjoint reading of above quoted Articles 246A, 269A and 270 reveals that-
- Goods and services tax, on supply of goods or services or both where such supply takes place in the course of inter-State trade or commerce or in the course of import into the territory of India, can be levied under clause (2) of article 246A and article 269A. Tax collected on such supplies is first to be apportioned in between the Union and the States, in accordance with the manner provided by the Parliament in the law made in exercise of its powers under clause (1) of article 269A, and thereafter, amount apportioned to the Union shall be shared with States in the manner provided in Article 270(1B) read with clause (2) of the said Article.
- Except supplies of goods or services or both which take place in the course of inter-State trade or commerce or in the course of import into the territory of India, GST can be levied on all other supplies of goods or services or both under the laws made by the Parliament in exercise of its powers under clause (1) of Article 246A. GST collected by the Central Government on all such other supplies of goods or services or both is to be shared, by the Union with States, in the manner provided in Article 270(1A) read with clause (2) of the said Article.
A reading of long title of the Integrated Goods and Services Tax Act, 2017 (the IGST Act) reveals that the said Act has been enacted to provide levy and collection of tax on “inter-State supply of goods or services or both”. The long title of the said Act runs as follows:–
“An Act to make a provision for levy and collection of tax on inter-State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto.”
Reading of the IGST Act also reveals that the said Act has also been enacted to make laws on the following:–
(i) formulation of the principles for determining the place of supply, as required in clause (5) of Article 269A of the Constitution;
(ii) the manner in which goods and services tax collected on inter-State supply of goods or services or both and supply of goods or services or both in the course of import into the territory of India shall be apportioned in between the Union and the States, as required in clause (1) of Article 269A of the Constitution.
For the purpose of clause (i) above, sections 10, 11, 12, and 13 of the IGST Act have been enacted and for the purpose of clause (ii) above, section 17 in the IGST Act has been enacted. Clause (5) of Article 269A of the Constitution also provides that the Parliament may, by law, also formulate the principles for determining when a supply of goods or services or both takes place in the course of inter-State trade or commerce. In my personal opinion, no such law has been made in the IGST Act or elsewhere.
However, Title of chapter IV of the IGST Act runs as “Determination of Nature of Supply”. Under this chapter, marginal note of section 7 runs as “Inter-State supply”. The said section 7 runs as follows:–
“Inter-State supply.
7. (1) Subject to the provisions of section 10, supply of goods, where the location of the supplier and the place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of goods in the course of inter-State trade or commerce.
(2) Supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce.
(3) Subject to the provisions of section 12, supply of services, where the location of the supplier and the place of supply are in—
(a) two different States;
(b) two different Union territories; or
(c) a State and a Union territory,
shall be treated as a supply of services in the course of inter-State trade or commerce.
(4) Supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce.
(5) Supply of goods or services or both,—
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(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.”
We see that in section 7, five sub-sections have been enacted. In each sub-section certain supplies have been referred to. In respect of supply of goods referred to in sub-section (1), provision has been made that such supply of goods shall be treated as supply of goods in the course of inter-State trade or commerce. In respect of supply of services referred to in sub-section (3), provision has been made that such supply of services shall be treated as supply of services in the course of inter-State trade or commerce. Here emphasis is on words “shall be treated as”. In respect of supplies of goods or services or both referred to in other sub-sections, provision has been made that such supplies of goods or services or both shall be treated to be supplies of goods or services or both in the course of inter-State trade or commerce. Here emphasis is on words “shall be treated to be”. Sub-section (2) relates to supply of goods imported into the territory of India and sub-section (4) relates to supply of services imported into the territory of India.In respect of these supplies, provision has been made that such supplies shall be treated to be in the course of inter-State trade or commerce. Explanation of clause (1) of Article 269A makes provision that for the purpose of the said clause, supply of goods or services or both in the course of import into the territory of India shall be deemed supply of goods or services or both in the course of inter-State trade or commerce. Thus we see that the said explanation creates legal fiction. It seems that sub-sections (2) and (4)of section 7 of the IGST Act have been enacted to create legal fiction to give effect to explanation of clause (1) of Article 269A but in the said sub-sections of section 7 of the IGST Act, instead of using words “shall be deemed”, words “shall be treated to be” have been used. Words “shall be treated to be” have also been used in sub-section (5) of section 7 of the IGST Act. In reference to supplies of goods or services referred to in all three clauses (a), (b) and (c) of sub-section (5) of section 7 of the IGST Act, provision has been made that such supplies shall be treated to be supplies in the course of inter-State trade or commerce. Therefore, it can be said that sub-section (5) also creates legal fiction. But in law fictions are created for some specific purpose. Here we see that in sub-sections (2), (4) and (5) of section 7, legal fiction has been created without specifying the purpose.
Here, it is also important to note that marginal note or title of section 7 of the IGST Act runs as “Inter-State supply” but inside the section, expression “inter-State supply” has not been used anywhere. In reference to supplies referred to in various sub-sections of section 7, provision has been made to treat them “as”, or “to be” in the course of inter-State trade or commerce. In sub-section (1) of section 5 of the IGST Act, which is charging section of the Act, integrated tax has been levied on “all inter-State supplies of goods or services or both”, except inter-State supply of certain specified goods. In my personal opinion, use of expression “inter-State supplies of goods or services or both” in section 5(1) of the IGST Act is not proper and valid.
Reading of Article 246A and Article 269A of the Constitution reveals that the Parliament can make laws on following matters, namely:-
(a) levy and collection of tax on 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 into the territory of India;
(b)manner in which integrated tax collected on supplies referred to in clause (a) above shall be apportioned in between the Union and the States; and
(c) formulation of principles for determining the place of supply, and when a supply of goods or services takes place in the course of inter-State trade or commerce.
Thus we see that the Parliament cannot make law for apportionment of goods and services tax, in between the Union and the States, collected on any supply of goods or services or both except the two supplies of goods or services or both referred to in clause (a) above.
We know that term “International trade or commerce” refers to trade or commerce which involves export or import of goods or services in between the countries. Similarly, expression “inter-State trade or commerce” involves movement of goods or services from one State to another, or from one Union Territory to another, or from a State to a Union Territory or vice-versa.
Sub-section (5) of section 7 of the IGST Act runs as follows:–
(5) Supply of goods or services or both,—
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(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.”
Here we see that supply of goods or services or both, referred to in-
(i) clause (a) of sub-section (5) quoted above, is an export supply;
(ii) clause (b) of sub-section (5) quoted above, may include an export supply, an import supply into the territory of India, a supply which takes place in between two States or two Union Territories or in between a State and a Union Territory, or a supply which in all respects takes place within a State or a Union Territory;
(iii) clause (c) of sub-section (5) quoted above, is an unknown supply.
The Constitution does not give powers to the Parliament for making law to provide the manner for apportionment of any tax collected on following supplies, namely:-
(i) export supplies;
(ii) supplies which take place in all respects within a State or a Union Territory; and
(iii) any unknown supply which cannot be said a supply in the course of inter-State trade or commerce or in the course of import into the territory of India.
If expression “inter-State supplies of goods or services or both”, used in sub-section (1) of section 5 of the IGST Act, refers to all supplies of goods or services or both referred to in all sub-sections of section 7 of the IGST Act, then it is noteworthy that accounts of taxes collected on-
(i) supplies of goods or services or both which take place either in between two States or two Union Territories or a State and a Union Territory; or in the course of import into the territory of India; and
(ii) all other supplies, except supplies referred to in clause (i) above,
shall have to be maintained separately so that law of apportionment of tax can be applied to tax collected on supply of goods or services or both in the course of inter-State trade or commerce, and supply of goods or services or both in the course of import into the territory of India.
Section 17 of the IGST Act provides the manner in which apportionment of GST collected shall be made in between the Union and the States. Sub-section (1) and sub-section (2) of the said section run as follows:–
“Apportionment of tax and settlement of funds.
17. (1) Out of the integrated tax paid to the Central Government,—
(a) in respect of inter-State supply of goods or services or both to an unregistered person or to a registered person paying tax under section 10 of the Central Goods and Services Tax Act;
(b) in respect of inter-State supply of goods or services or both where the registered person is not eligible for input tax credit;
(c) in respect of inter-State supply of goods or services or both made in a financial year to a registered person, where he does not avail of the input tax credit within the specified period and thus remains in the integrated tax account after expiry of the due date for furnishing of annual return for such year in which the supply was made;
(d) in respect of import of goods or services or both by an unregistered person or by a registered person paying tax under section 10 of the Central Goods and Services Tax Act;
(e) in respect of import of goods or services or both where the registered person is not eligible for input tax credit;
(f) in respect of import of goods or services or both made in a financial year by a registered person, where he does not avail of the said credit within the specified period and thus remains in the integrated tax account after expiry of the due date for furnishing of annual return for such year in which the supply was received, the amount of tax calculated at the rate equivalent to the central tax on similar intra-State supply shall be apportioned to the Central Government.
(2) The balance amount of integrated tax remaining in the integrated tax account in respect of the supply for which an apportionment to the Central Government has been done under sub-section (1) shall be apportioned to the,—
(a) State where such supply takes place; and
(b) Central Government where such supply takes place in a Union territory:
Provided that where the place of such supply made by any taxable person cannot be determined separately, the said balance amount shall be apportioned to,—
(a) each of the States; and
(b) Central Government in relation to Union territories,
in proportion to the total supplies made by such taxable person to each of such States or Union territories, as the case may be, in a financial year:
Provided further that where the taxable person making such supplies is not identifiable, the said balance amount shall be apportioned to all States and the Central Government in proportion to the amount collected as State tax or, as the case may be, Union territory tax, by the respective State or, as the case may be, by the Central Government during the immediately preceding financial year.”
We see here that sub-sections (1) and (2) of section 17 of the IGST Act provide manner for apportionment of tax collected in respect of-
(a) inter-State supply of goods or services or both; and
(b)import of goods or services or both.
Sub-section (1) of section 5 of the IGST Act provides levy of integrated goods and services tax on all inter-State supplies of goods or services or both except inter-State supplies of certain specified goods. The said provision runs as follows:–
“5.(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:
Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 (51 of 1975) on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 (52 of 1962).
(2) The integrated tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.”
In sub-section (1), in the main provision, tax levied has been referred to by the expression “integrated goods and services tax” but in the proviso of the section, tax to be levied has been referred to as the “integrated tax”. This is because clause (12) of section 2 of the IGST Act, defines the expression “integrated tax” as follows:–
“(12) “integrated tax” means the integrated goods and services tax levied under this Act;”
The proviso indicates that integrated goods and services tax includes such tax on goods imported into India. Here it is noteworthy that explanation of clause (1) of Article 269A provides that supply of goods, or of services, or both in the course of import into the territory of India shall, for the purpose of clause (1) of Article 269A i.e. for the purpose levy and collection of tax and for apportionment of such collected tax in between the Union and the States, be deemed a supply of goods or services or both in the course of inter-State trade or commerce. Again expression “goods imported into India” is not the same as “Supply of goods imported into the territory of India, till they cross the customs frontiers of India”. Also “import into the territory of India” is different from “import into India”. Expression “goods imported into India” refers to goods brought in India. Expression “goods imported into India” does not refer to supply of goods which results in import of goods into India. Secondly, India is bigger than the territory of India. Language used in both expressions is different from the language used in explanation of clause (1) of Article 269A.
In fiscal statutes, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what the substance of the matter was. In this regard, the Constitution Bench of the Honorable Supreme Court, in M/s A. V. Fernandez vs. State of Kerala, Judgment Dated: 02/04/1957, has made following observations:
“It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.”
Section 12 of the Customs Act, 1962 runs as follows:–
“SECTION 12. Dutiable goods. – (1) Except as otherwise provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, on goods imported into, or exported from, India.”
Sub-section (7) of section 3 of the Customs Tariff Act, 1975, referred to in proviso of section 5(1) of the IGST Act, runs as follows:
“(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent. as is leviable under section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8) or sub-section (8A), as the case may be.”
Here, one can notice that concept of supply of goods in the course of import into the territory of India is missing. The tax levy also applies where goods are not imported as a result of supply of such goods. But levy of GST is applicable only on supply of goods or services or both.
If the IGST Act provides for levy of tax on any supply of goods or services or both which is different from a supply in the course of inter-State trade or commerce or a supply in the course of import into the territory of India, it cannot be said that law is beyond the powers given by the Constitution to the Parliament. The Parliament can make law in respect of all other supplies in exercise of its powers under clause (1) of Article 246A. Such law can be made as part of statute book of IGST Act, but the Parliament while doing so cannot exceed its powers under clause (1) of Article 246A of the Constitution. The Parliament can, for purpose of levy of tax on all other supplies of goods or services or both, create legal fiction to include such other supplies in the supplies of goods or services or both in the course of inter-State trade or commerce but such legal fiction will need purpose of creating it. Second limitation is that for apportionment of tax collected on such other supplies of goods or services or both, the Parliament cannot make law. Therefore, tax collected on both types of supplies shall have to be dealt separately.
Sub-sections (2), (4) and (5) of section 7 of the IGST Act, to the extent they do not relate to supply of goods or services or both in the course of inter-State trade or commerce, or supply of goods or services or both in the course of import into the territory of India, create legal fiction to treat them supply of goods or services or both in the course of inter-State trade or commerce. But while doing so purpose of legal fiction has not been specified. In my opinion, legal fiction created cannot be said valid. One can say that in absence of providing purpose of creation of legal fiction, fiction should be considered for all purposes under the Act, then fiction will also apply to section 17 which relates to apportionment of integrated tax collected in respect of inter-State supply of goods or services or both. Inter-State supply of goods or services or both on which integrated goods and services tax (integrated tax) has been levied in section 5(1) of the IGST Act will also cover the supplies in respect of which legal fiction has been created. If it is true, then provisions of section 17 of the IGST Act become invalid.
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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 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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