CIRCUMSTANCES LEADING TO THE ENACTMENT OF THE CENTRAL SALES TAX ACT, 1956

[Mr. M. GOVINDARAJAN]

The Central Sales Tax Act, 1956 (Act No. LXXIV of 1956) was enacted to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce or outside a State or in the course of import into or export from India, to provide for the levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce and to declare certain goods to be of special importance in inter-state trade or commerce and specify the restrictions and conditions to which State laws imposing taxes on the sale or purchase of such goods of special importance shall be subject.  The Act came into effect from 01.01.1957.

In ‘State of Madras V. N.K. Nataraja Mudaliar’ – 1968 (4) TMI 61 - SUPREME COURT OF INDIA indicated the circumstances leading to the enactment of Central Sales Tax Act, 1956.  The Supreme Court noticed that prior to the framing of the Constitution, Entry 48 of List II of the Seventh Schedule to the Government of India Act, 1935 empowered the provinces to legislate on the subject of ‘tax on sale of goods and on advertisement’; that in the exercise of the said power, principal legislatures enacted sales tax laws for their respective provinces acting on the principle of ‘territorial nexus’ and picked out one or more ingredients constituting a sale and made it for them the basis of imposing liability for tax.

The exercise of taxing power by the provinces led to multiple taxation of the same transaction by many provinces and the burden of tax fell ultimately on the consuming public, that the taxation enquiry Commission examined the matter of tax on inter-state sales.  The Enquiry Commission’s recommendations led to enactment of the Constitution (6^th Amendment) Act, 1956.  By that amendment Entry 92-A was added in Union List in the Seventh Schedule to the Constitution conferring power upon the Union to legislate in respect of ‘taxes on the sale or purchase of goods other than newspapers, where each sale or purchase takes place in the course of inter-state trade or commerce’.

For the Entry 54 in the State List, the following entry was substituted i.e., ‘taxes on sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List – I.’  The Explanation to Article 286 (1) was omitted and clauses (2) and (3) were substituted by fresh clauses by the newly enacted clause (2) and Parliament was authorized by law to formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) and by clause (3) it was enacted that any law of a State shall, insofar as it imposes or authorizes 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 systems of levy, rates and other incidents of the tax as Parliament may by law specify.

In Article 269(1) clause (g) was added authorizing the Government of India to collect tax on the sale or purchase of goods other than newspapers, where such sale of purchase takes place in the course of inter-State trade of commerce and making it obligatory upon the Government of India to assign the tax to the States in the manner provided in clause (2).   In clause (3) it was enacted that ‘Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce.  In the exercise of the authority conferred by the Constitution (6^th Amendment) Act, 1956, Parliament enacted on 21.12.1956 the Central Sales Tax, 1956 with a view to formulate principles-

• For determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import into or export from India;
• Providing for the levy, collection and distribution of taxes on sales of goods in the course of inter-State trade or commerce; and
• Declaring certain goods to be of special importance in inter-State trade or commerce and specifying the restrictions and conditions to which State Laws imposing taxes on the sale or purchase of such goods of special importance shall be subject.

The Central Sales Tax Act and the Constitutional provisions were intended to restrict the imposition of multiple taxation on a single inter-State transaction by different States, each State relying upon some territorial nexus between the State and the sale.  The tax though collected by the State under the Central Sales Tax Act was an agent of the Central Government, it was by Section 9(4) in the implementation of the principle of assignment of tax set out in Article 269(2) of the Constitution assigned to the State which collected it.   The Central Sales Tax was enacted under the authority of the Union Parliament but the tax is collected through the agency of the State and is levied ultimately for the benefit of the State and is statutorily assigned to the States.