Short essay on Taxes on Inter-State Sales and Purchases (Art. 286)

Constitutional provisions dealing with taxes on purchase and sale of goods were not in the original draft of the Constitution. They were introduced by Ambedkar in the form of amendments almost towards the end of the deliberations of the Constituent Assembly. Speaking on the necessity of those provisions.

He said that although “the financial system which has been laid down in the scheme of the Draft Constitution is better than any other financial system that I know of, I think it must be said that it suffers from one defect.

That defect is that the Provinces (States) are very largely dependent for their resources upon the grants made to them by the Centre. I think, therefore, that while a large number of resources on which the Provinces depend have been concentrated in the Centre, from the point of view of constitutional government, it is desirable at least to leave one important source of revenue with the Provinces.”

While it was felt that an important source of income should be left to the States by allowing them to tax the purchase or sale of goods, it was also keenly felt that the use of such tax power by the States should not be allowed to affect prejudicially the freedom of Inter-State trade and commerce.

Hence Article 286(1) provided that no State could impose a tax on the sale or purchase of goods if such sale or purchase took 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.

There was, however, an explanation to sub-clause (a) above which provided that “a sale or purchase shall be deemed to have taken place in the State which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.”

Section (2) of Article 286 provided that except as permitted by Parliament, “no State shall impose a tax on the sale or purchase of any goods where such sale or purchase takes place in the course of Inter-State trade or commerce.”

Finally, under Section (3) of the same Article, a State Legislature was prohibited from imposing a tax on the sale or purchase of any goods declared by Parliament as essential to the life of the community, unless assent to such law was given by the President.

The operation of sales tax laws made by the States under these provisions, however, soon creates practical difficulties; controversies which resulted from them reached the Supreme Court in appeals from the High Courts.

But even the Supreme Court could not give an altogether satisfactory interpretation. The Court was sharply divided in its pronouncements. On one occasion the Court by a narrow majority reversed one of its own previous decisions on the subject.

The Court’s divided decision as well as its reversal of its own earlier position put the whole question of taxes on Inter-State sales by the States in a new perspective. The decision, as it stood, prohibited the States from imposing sales tax on any inter-State transaction until Parliament by law provided otherwise.

The upshot of the divergent opinions of the Judges was the Sixth Amendment of the Constitution in 1956. The Amendment retained clause (1) of Article 286 in the original form, but, for the rest, the following provisions were substituted:–

“286 (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).

“286 (3). Any law of State shall, in so far as it imposes, or authorises the imposition of, 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, be subject to such restrictions and conditions in regard to the subject of levy of rates and other incidents of the tax as Parliament may by law specify.”

In accordance with these provisions, Parliament passed the Central Sales Tax Act, 1956, embodying the above mentioned principles and that law governs the different aspects of this rather complicated subject.