Article 269A, as proposed, empowers the Government of India to levy and collect GST on supplies in the course of Inter-state trade or commerce and to ' apportion' the same between the Union and the States in the manner as may be provided by the Parliament on the recommendations of the GST Council.
The Explanation to Clause (1) of Article 269A provides that supply of goods, or of services, or of both, in the course of import into the territory of India shall be deemed to be the supply of goods, or of services, or of both, in the course of Inter-state trade or commerce.
Article 269A is one of the most crucial provisions of the GST Bill and will play a pivotal role in the GST regime. Presently, under the CST Act, the tax is levied by the Centre on the Inter-state sale or purchases, even though it is collected and assessed by the originating States. However, Central Sales Tax ('CST') being levied under the CST Act is restricted only to Inter-state sales or purchases and does not extend to stock transfers or consignment sales. It is pertinent to note here that Entry No. 92B of the Union List of the Schedule VII of the Constitution empowering the Centre to charge the tax on stock transfers or consignment sales has not been made effective till date. This is presumably for the reason that tax paid on Inter-state sale or purchase is not available by way of Input tax credit, notwithstanding the introduction of VAT in 2005.
It is an undeniable fact that the CST Act has been a fertile ground for huge number of litigation. Besides creating vested interest for the producing/exporting States,the compliance costs for the tax-payers in collecting and managing the various Forms like C Form, E-I and E-II Forms, F-Form, etc. are huge. The transactions involving the issue of such Forms also are perennial source of litigation. VAT authorities have always disputed the 'Stock Transfers' and have always been demanding full rate of tax on the Inter-state stock transfers on the ground that the sale is 'predetermined' and therefore, the transactions tantamount to 'Inter-state sale'. [See, the recent ruling of the Andhra Pradesh High Court in Larsen & Toubro's case ] .
The proposed Article 269A is expected to eliminate the complexities involved in determining as to whether the Inter-state movement of goods is occasioned by way of stock transfer or sale. This is for the reason that the word 'supply' is much wider in scope than 'sale or purchase' and therefore, the former word would cover even the stock transfers and consignment sales within its scope so as to attract the levy of GST. It is also expected to remove, at one stroke, the necessity of the diverse kinds of declaration forms which lie at the root of major litigation at present. Since GST, in the form of IGST, paid on the Inter-state transactions would be available by way of Input Tax Credit, the cascading effect of tax will be avoided, though, it may result into significant increase in the working capital needs of the tax-payers in as much as the tax paid on the purchases would remain blocked as 'unutilized credit' till the output tax liability arises.
The only 'dampener of spirit' is the proposed levy of 1% additional tax on Inter-state supply of goods! (Refer the discussion infra).
However, the use of the word 'apportioned' in Clause (1) of Article 269A may not be entirely appropriate. A better term could be 'distribution' in sync with existing jurisprudence in the Indian context. The doctrine of apportionment has specific connotations in Constitutional laws of other countries. The use of the term 'apportion' in the proposed Article 269A, while retaining the term 'distribution' in Article 270, may also be incongruous and lead to potential conflicts.
Secondly, the use of the word 'both' in Explanation to Clause (1) and elsewhere in the Bill is rather confusing and needs greater clarification. The word is proneto conflicting interpretations - does it refer to transactions where both goods and services are involved, but as separate elements, or does it also include or refer to composite transactions. It is to be noted here that the term 'services' is being defined vide a new Clause (26A) being inserted in Article 366, in an extremely wide manner so as to mean 'anything other than goods' . Viewed against the definition of the term ' services' as proposed, the very use of the term 'both' in Explanation to Clause (1) and elsewhere appears to be superfluous.
Clause 14 of the GST Bill is the arterial provision of the Bill, for it, inter alia, defines two important terms viz. ' goods and services tax' and 'services'.
(a) Insertion of Clause 12A - 'goods and services tax' defined:
Vide Clause (14) of the Bill, a new Clause (12A) is proposed to be inserted in Article 366 defining the term ' goods and services tax' so as to mean 'any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.'
This all-important definition needs serious deliberations.
(i) 'Supply' - Does it need to be defined?
The term ' supply' used in the definition is quite significant. The term has not been defined in the Bill. In the context of GST, the term would refer to 'supply of goods', 'supply of services' or 'supply of both' . At present, the taxable events are broadly speaking, 'manufacture' (for levy of excise duty); 'provision of service' (for levy of service tax); ' transfer of ownership in goods' (for levy of VAT or Sales Tax) and ' import of goods in India' (for levy of customs duty). However, these present-day ' taxable events' would become irrelevant once the GST regime is ushered in as the ' taxable event' in GST regime would shift to 'supply of goods, or of services, or of both'.
The absence of definition of this fundamental term constituting the very taxable event for the purpose of levy of GST, has therefore been justifiably frowned upon. Representations had been made before the Committee for prescribing a specific definition of the term 'supply' in the GST Bill itself. However, the Committee has not accepted the suggestion and instead, has recommended that the term 'supply' would be defined in the various GST laws relating to CGST and SGST.
Considering the wide meaning of the term 'supply' (which is not defined), it appears that even transactions involving job-work, repairs, testing, movement of goods for exhibition or demonstration or 'sale or return basis', etc. are likely to come within the purview of GST.
Moreover, the requirement of 'consideration' to constitute a 'taxable supply' is conspicuous by its absence in the proposed provisions. Consequently, even the transactions involving branch/stock transfer, free supplies, gifts, free samples, free products or services in lieu of loyalty/reward points, etc. may be subjected to levy of CST.
Interestingly, a view was expressed by the Ministry of Finance, Dept. of Revenue before the Committee that while 'sale' is for consideration, 'consignments' are in the nature of branch transfers. According to the Ministry, 'supplies' would constitute both 'sale' as well as 'consignment' transactions. Since input tax credit of GST charged on both sales as well as consignments in the course of Inter-state trade would be available, there would not be any cascading effect of tax, the Ministry contended. These views expressed by the Ministry before the Committee on Clause 9 (supplies of goods and services in the course of Inter-state trade) of the GST Bill were accepted by the Committee which recommended no change in the Clause.
Another issue that arises here is whether the legislature is empowered to define a taxable event artificially, without having an express authority flowing from the Constitution ? The answer to this question appears to be in affirmative considering the judicial pronouncements on the issue.
See, 1. S. N. College vs. State of Kerala (2010) 1 KLT 691.
2. CIT vs. Venkateswara Hatcheries - 2002-TIOL-709-SC-IT-LB,
3. Kerala Public Service Commission vs. State Information Commission, Kerala - (2011) 272 ELT 18 (Ker.HC);
4. Saifuddin vs. Assistant Commissioner of Sales Tax (1976) 38 STC 463 (Cal.HC).
While the powers of the legislature to define a word even artificially has been well recognized judicially, one will have to wait for the actual definition of the term ' supply' that may be provided by the CGST and SGST laws.
But, a word of caution here! No doubt, the use of the word 'supply' is intended to consolidate Indirect Taxes that are presently levied on a diverse set of taxable events. However, the object of Clause 14 of the Bill is not and shall not be to expand the category of taxable events. An example is the 'purchase' of software such as Windows 7 (off-the-shelf branded software). The Supreme Court, in the case of Tata Consultancy Services vs. State of A. P. - 2004-TIOL-87-SC-CT-LB, held that such contracts constitute a 'sale'. However, it was not argued before the Court that the more appropriate classification is a ' Licence ' and there is a possibility that the decision is sub silentio as to that aspect. Significantly, such transactions have been held as constituting 'Licence' in some American Courts [See, Beta Computers Ltd. vs. Abode Systems Ltd. - 1996 SLT 604 CS]. If such a transaction is characterised as 'Licence', it would not have been taxable under any State Sales Tax/VAT legislation and yet, may, at first sight, appeared to be captured by the term 'supply' in clause 14 of the GST Bill.
It is, therefore, essential that sufficient inbuilt safeguards are provided in CGST and SGST laws so as to not bring to tax transactions that are presently not taxed at all, unless they independently constitute a supply of services.
(ii) Clause (29A) of Article 366 - "A Curious Case of Retention….!"
The above discussion inevitably brings us to Clause (29A) of Article 366 pertaining to ' Deemed Sale'. It is interesting to note here that this clause has been retained vide the present GST Bill, though it was sought to be omitted by the 115 th Bill presented in 2011.
The retention of Clause (29A) of Article 366 in the GST Bill is rather curious. It is difficult to fathom the reason for retaining the provision considering the widest possible manner in which the term 'services' is being defined vide Clause (12A). The proposed definition is wide enough to cover the six transactions enumerated in Clause (29A). The deletion of Clause (29A) had been suggested to the Committee, but the Committee has remained non-committal on this aspect in its final recommendations.
It may be pointed out here that in case of 'Works Contracts', one of the enumerated transactions in terms of Article 366 (29A), the levy of VAT is attracted on the 'transfer of property in goods involved in execution of the contract' as a 'deemed sale'. However, under the proposed GST regime, the very concept of 'transfer of property in goods in execution of the works contract by way of accretion, addition or inclusion' would become irrelevant. Moreover, in almost all countries, such 'works contracts' have been categorized as 'supply of services' only, thereby eliminating any need to segregate the transaction between 'supply of goods' and 'supply of service' for the purpose of payment of tax. In all likelihood, a similar approach will be adopted for the tax treatment of such 'works contracts' under GST regime in the country. One therefore fails to comprehend the reasons for retention of Article 366 (29A). The only educated guess that can be ventured into is that the retention of the Article is to ensure that the pending assessments and/or demands raised or that may have to be raised in future in respect of works contracts executed or under execution are not rendered invalid or void.
(iii) "Any tax" - Incoherent and Incongruous …..!
Clause (12A), as is presently worded, defines 'goods and services tax' means 'any tax on supply of goods, or services, or both….'. The use of the word 'any' is rather improper and incongruous. Though, highly contextual, the word 'any' has, on occasion, been construed to expand the scope of the provision in which it appears.
In Balaganesan Metals v. Shanmugham Chetty , the Supreme Court made the following observations on the scope of this word:
"8. In construing Section 10(3)(c) it is pertinent to note that the words used are "any tenant" and not "a tenant" who can be called upon to vacate the portion in his occupation. The word "any" has the following meaning: "some; one of many; an indefinite number. One indiscriminately or whatever kind or quantity. Word 'any' has a diversity of meaning and may be employed to indicate 'all' or 'every' as well as 'some' or 'one' and its meaning in a given statute depends upon the context and the subject-matter of the statute. It is often synonymous with 'either', 'every' or 'all'. Its generality may be restricted by the context;" (Black's Law Dictionary, 5 th Edn.). 19. Unless the legislature had intended that both classes of tenants can be asked to vacate by the Rent Controller for providing the landlord additional accommodation, be it for residential or non-residential purposes, it would not have used the word "any" instead of using the letter "a" to denote a tenant."
No doubt, it is unlikely that a Court will take the view that 'any tax on supply of goods or services' expands the scope of the provision, because it is still the case that the tax must be on supply. Nevertheless, the possibility of dispute, entirely avoidable, lies here.
For instance, will the States be empowered to levy GST - akin to prevalent 'Entry Tax'- on 'the entry of the specified goods in local area for consumption, use or sale as transactions undisputedly involves 'Supply of goods'?
The proper expression to be used is, perhaps, the plural form of the word 'tax' i.e. 'taxes' in place of the word 'any'. The definition would then read as 'taxes on supply of goods, or services……'. This would bring it in harmony with similar expressions used in various entries of the Legislative Lists of Schedule VII (e.g. Entry 82, Entry 83, Entry 86 of Union List or Entry 46, Entry 49 of State List). This would also promote coherence and consistency in the pattern of drafting. Secondly, it may also provide a buffer against the danger of construing Clause 14 as an 'Open General Licence' to expand the scope of taxable transactions.
