The devastating impact of the proposed amendment to the Central Sales Tax Act, 1956

The Central Sales Tax Act, 1956 is derived out of Entry 92A of the Union List of Schedule VII of the Constitution of India. It was enacted with the purport of laying down principles for levy, collection and distribution of tax on the sale or purchase of goods in inter-state trade or commerce.

The Act of 1956 prescribes different declaration forms by virtue of which the tax rate of the inter-state purchase of goods is reduced to very nominal rate. The dealer has to apply for registration under the Act of 1956 to avail the benefit of the concessional tax rate.

The Act prescribes the mechanism for concessional tax rate under Section 8. As per Section 8, the dealer has to furnish a declaration form during the inter-state purchase of the goods and the said goods are used as per the prescribed manner under Section 8(3)(b) of the Act of 1956.

Section 8 of the Act

Section 8 provides for inter-state procurement of goods or class of goods as mentioned under the Registration Certificate of the dealer at reduced tax rate. The concessional tax rate provided is 2 per cent, and to avail the same, the registered dealer purchasing the goods is required to furnish a declaration form i.e Form C. The very purpose behind the filing of C Forms is that there should not be suppression of any inter-state sales by a selling dealer and evasion of tax to the State from where the actual sales are affected.

Secondly, the purchasing dealer also cannot suppress such purchases once he issues a C Form to the selling dealer. The dealer has to maintain a detailed account of such C Forms obtained from the department prescribed under the state's taxation law. The C Form is a declaration to be issued only by the Sales Tax authorities of the states concerned.

What is the status of the 1956 Act after the advent of the Goods and Services Act, 2017?

The Goods and Services Tax Act, 2017 (GST Act) was introduced on July 1, 2017 as a central legislation. Similarly, State GST Acts were introduced by legislatures of respective states. By virtue of the GST Act, indirect taxes like CST, VAT, Service Tax etc subsumed in the said Act and as such, the propaganda of 'One Nation One Tax' was achieved. Also, for sale or purchase of goods during inter-state trade and commerce, Integrated Goods and Service Tax Act, 2017 (IGST Act) was introduced.

Even after the dawn of the GST Act and the IGST Act, six goods: High Speed Diesel, Aviation Turbine Fuel, Liquor for Human Consumption, Natural Gas, Petroleum Crude, and Petrol have been kept away from the ambit of these Acts. The said six goods will now be brought within the taxing domain of the GST Act and IGST Act after the same was notified by the Central government on the recommendation of the GST Council.

The Act of 1956 defines “Goods” under Section 2(d). Prior to the introduction of the GST Act, Section 2(d) was amended vide The Taxation Laws (Amendment) Act, 2017. Following the amendment, the six goods were kept within the purview of the definition of “goods” as defined under Section 2(d) of the Act of 1956.

The cumulative effect of the aforementioned facts is that the Act of 1956 governs the purchase or sale of goods in the course of inter-state trade and commerce, but only to the extent of the goods prescribed under the definition of “Goods” under Section 8(3)(b).

Interestingly, the Commercial Taxes Department raised dispute on the issuance of C forms for inter-state transactions. It was contended that after the rolling out of the GST Act, C forms cannot be issued. This deprived assessees from availing concessional tax benefit. The said dispute persisted across the nation and the registered dealers situated in various states approached the respective High Courts for adjudication of the issue. The authors have also been counsels in such matters before the Rajasthan High Court and the Chhattisgarh High Court.

The High Courts as well as the Supreme Court held, vide various judgments, that even after the rolling out of GST, C forms are to be issued for inter-state purchases of goods used in the manufacture and processing of goods, re-sale, mining, telecommunication and electricity/power generation. It was also held by the courts that it shall make no difference if the goods being manufactured are covered under the definition of “Goods” as defined under the GST Act.

Hence, in the judgments rendered in the cases of Caparo Power, Hindustan Zinc Ltd and Shree Raipur Cement Plant it was held that despite of the introduction of the GST Act, the CST Act continued to remain in operation in respect of the purchase and sale of the six aforementioned goods, as they have been specifically kept out of the ambit of GST Act vide Section 9 of GST Act and Section 5 of IGST Act.

Proposed amendment to the Act of 1956 vide Finance Bill, 2021

After the Union Budget 2021 was presented by Finance Minister Nirmala Sitharaman, the Finance Bill, 2021 was tabled in Parliament. It proposes 80 plus amendments to different statues, including the Act of 1956.

Now, it has been proposed that the existing Section 8(3)(b) of the CST Act be substituted with Clause 141 of the Finance Bill. The proposed amendment states:

"141. In the Central Sales Tax Act, 1956, in section 8, in subsection (3), for clause (b), the following clause shall be substituted, namely:–– “(b) are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing for sale of goods specified under clause (d) of section 2."

Devastating impact of the proposed amendment

The effect of the amended Section 8(3)(b) shall be that the six goods mentioned in Section 2(d) of the CST can be bought against the C form at concessional tax rate, if the said six goods are used in the manufacturing or processing of the goods as mentioned in Section 2(d) or resale of the said goods. Further, industries involved in mining, telecommunication and electricity generation have been clearly ousted from availing benefit of the reduced tax rate on procuring inter-state goods against the C form.

On an analysis of the proposed amendment, it is clearly derived that registered dealers apart from those involved in manufacture of High Speed Diesel, Aviation Turbine Fuel, Liquor for Human Consumption, Natural Gas, Petroleum Crude, Petrol have been ousted. Also the three industries viz. mining, telecommunication and power generation, cannot avail concessional tax rates.

The said amendment will have a huge impact as the ousted manufacturers and industries will be exposed to high taxability, in the event the goods are purchased inter-state. After the proposed amendment is passed, the excluded registered dealers will be exposed to the tax rate as is prescribed under the VAT Act of the buying state.

Also, the exposure to the excluded manufacturers and industries will ultimately burden the end consumer, since the imposition of high tax rate will lead to escalation of the cost of the final product.

Moreover, the Act of 1956 does not stipulate any mechanism by virtue of which the registered dealer paying the tax can obtain any tax credit. Also, while introducing the proposed amendment to Sec 8(3)(b), there has been no amendment under the IGST Act so as to bring the ousted registered dealers and the three aforementioned industries under the IGST Act so that parity is maintained.

It is pertinent to mention here that due to the COVID-19 lockdown imposed by the Government of India in exercise of powers under the Disaster Management Act, 2005, one cannot deny that most businesses were adversely affected. For several months, a large number of industries were not allowed to function and exemptions were granted only to few of the industries to run and carry on their activities,

If, in such tough times, the tax levy is escalated, then it may lead to more destruction to the industry as well as to the public. Industries like that of mining, telecommunication and power generation play a big role in the economy of the nation. Bringing in this unsympathetic and negative law against these industries will certainly pull down the economical and financial growth of the nation.

Litmus test of constitutional principles

The proposed amendment appears to be in contravention to Articles 14, 16 and 19(1)(g) of the Constitution of India as it clearly makes an illegal distinction between manufacturers of the six goods and the three industries and those of other industries, without any basis and intelligible differentia. The authors are of the view that the proposed amendment infuses discrimination amongst the industries as there is no foundation for debarring the manufacturers of the mining, telecommunication and power generation industries from procuring goods interstate against C forms.

The proposed amendment is also in contravention to Articles 301-304 of the Constitution of India. By virtue of the proposed amendment, inter-state purchase of goods for purpose of manufacturing, mining, telecommunication and power generation will certainly be taxed at much higher rate and shall be deprived from the benefit of the concessional tax rate without any justification and reasonability. Such restriction is unreasonable and also does not involve any element of public interest.

In these circumstances, it would be effective if the Union Finance Ministry is given appropriate representations urging it to not implement the proposed amendment and continue with the existing provisions of the law. In the event the amendment to the Act of 1956 is made, it may be assailed before the courts for considering the vires of the amended provision on the touchstone of the Constitution of India, so that proper justice may prevail.

The authors are advocates practicing at the Rajasthan High Court and part of Mehta Chambers.