SALES TAX IS TAX ON SALE OF GOODS- CANNOT BE BASED ON PRODUCTION CAPACITY?

[C.A. DEV KUMAR KOTHARI]

Sales tax – the general understanding:

Sales tax is a tax on sale of goods. Therefore, generally precondition to levy sales tax is event of sale of taxable goods. In absence of sale a levy in nature of sales tax, by whatever name called is not proper.

The base of assessment for levy of sales tax is amount of taxable turnover or total sale. However for quantification purposes there can be some methods of estimation where it is not feasible to maintain proper books of account for example in case of small traders dealing in large number of items  attracting different rates of sales tax and large number of customers to whom goods are sold in small quantities.

Mere production or manufacture does not attract sales tax:

In this regard it is worth to mention that mere production or manufacture of any goods will not attract sales tax. Goods might have been manufactured but not sold. So Sales tax will not be leviable based on manufacture. For simplification of estimation one can say that any tax on manufacture of goods can be levied on the basis of production capacity. However, that again will be proper because merely having production capacity  does not mean that goods have really been produced. When tax in on manufacture of goods, the precondition is ‘manufacture’ of goods. There can be under utilization of capacity, there can be manufacture of goods in multiple shifts etc. Therefore, even tax on manufacture of goods based on capacity to manufacture cannot truly be called tax on manufacture of goods.

 Therefore, fixing or estimating sales tax liability based on production capacity cannot be called  proper.

The constitutional power to levy sales tax:

The Article 246 of Indian Constitution prescribes powers to make laws . The article reads as follows (with highlights  for catch words added by author):

 Article.246. Subject-matter of laws made by Parliament and by the Legislatures of States.-

(1)    Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List").

(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List").

(3) Subject to clauses (1) and (2), the Legislature of any State   has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the "State List").

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.

Relevant entries in Schedules:

VII-SCHEDULE.- SEVENTH SCHEDULE  (Article 246)

List II - State List

54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.

List I - Union List

 

92. Taxes on the sale or purchase of newspapers and on advertisements published therein.

[92A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce.]

[92B. Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce.]

Case before Punjab and Haryana High Court:

In case titled  M/s Balaji Bricks Industries & Another v State of Punjab [VSTI 2012 P&H B-238] the Punjab & Haryana High Court has held that lump sum scheme for payment of sales tax on the basis of production capacity of Brick Klin owners is ultra vires of Article 246 read with Entry 54, List-II-State List of Seventh Schedule of Constitution.

Lump sum tax under section 5(4) of Punjab General sales tax Act, 1948 (PGST) is imposed on the brick klin owners.The grievence of the petitioners, was that they cannot be subjected to a lump sum tax which is determined on the basis of the capacity of brick klin rather than actual sales.

As earlier mentioned  State Government  is empowered  to levy sales tax from Entry 54 of State List of Seventh Schedule of the Constitution which  is reproduced earlier.:

On reading of the entry we find that  Entry 54 confers competence on the State Lagislature to frame laws concerning tax on sale or purchase of goods other than newspaper.

However,  section 5(4) of PGST provided for levy of lump sum tax on the basis of number of Ghoris in a brick klin i.e on the basis of production capacity of a brick klin.

The High court held that the element of sale is completely missing u/s 5(4) and virtually it is lump sum amount of tax being collected on the basis of capacity to produce brick klin by brick klin owners. Lump sum tax is sought to be collected from the brick klin owners whether there was sale of bricks or not.

Court further noted that it is trite to notice that the tax can be imposed as per Entry 54, list II State List of the Seventh Schedule, on the sale or purchase of goods, it is not possible to accept that the State Lagislature would be competent to impose tax on the capacity to produce brick klins by brick klin owners. The incidence of the tax is the sale and not the production. Therefore the provisions of sub-section 4 of section 5 are beyond the competence of the State Lagislature.

Thus the High Court declared said section 5(4) of Punjab General sales tax Act, 1948 as ultra vires of Article 246 read with Entry 54, List II-State list of Seventh Schedule.

Punjab VAT Act:

The notification No. S.O.28/P.A.8/2005/S.8/2008 issued under section 8-A of Punjab VAT Act, 2005 imposing a lump sum tax on brick klin owners on the basis of the number of Ghoris in a brick klin i.e on the basis of the capacity of production, is similar to section 5(4) of Punjab General Sales Tax Act, 1948.

This Judgement of Punjab & Haryana High Court has raised a question mark on the constitutional validity of the lump sum tax imposed on the  basis of production on the brick klin owners under Punjab VAT Act, 2005 as well.

Comments of author:

As noted earlier with reference to provisions of the Indian Constitution and also as per general commercial understanding, a tax on manufacture of goods like Excise Duty or tax on sale of goods has to be based on manufacture or sale as the case may be. Tax or duty imposed on basis of capacity to manufacture cannot be called proper tax on manufacture or tax on sale. There must be exact quantification and / or valuation of goods manufactured or sold. Otherwise assessment cannot be proper. This is however subject to estimation of manufacture or sale or for that estimation capacity to manufacture and working days etc. can be a relevant consideration. However, imposition of tax in nature of tax on manufacture or tax on sale cannot be on the basis of capacity to produce or manufacture.