GST Bill: The Devil’s in the Details



7 Things You Need To Know About GST Bill

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ARUN JAITLEY

The Goods and Services Tax (GST) Bill was tabled in the Lok Sabha today. This bill has faced stringent opposition from states in the past, the main reason why the bill couldn’t be passed by the previous Congress government.

The bill seeks to rationalise state and central indirect taxes into a harmonised tax structure. Currently, companies pay multiple taxes at the state and central levels, which raises the prices of their products, making them less competitive compared with imports from China and other low-cost locations. The hassle and time wasted in filing myriad taxes also deters entrepreneurs and foreign companies from investing in India.

The Narendra Modi government made passage of this bill a top priority. Finance Minister Arun Jaitley reached out to states early, so that the government could table this major legislation in time for the winter session.

Here are seven things you should know about the bill:

1. Passing the bill includes an amendment to the constitution. That means it needs to be cleared by two-third majority in both houses of parliament. The BJP’s overwhelming majority in the Lok Sabha means that hurdle is easy to clear, but it might run into opposition in the Rajya Sabha where the BJP is in a minority. Modi will need to reach out to opposition members to get their vote else he won’t have the numbers. In addition, at least half of the state governments need to pass the bill. That is why the states’ support is crucial.

2. If the bill clears the Rajya Sabha, it will be the country’s biggest tax reform in years and also indicate that the Modi government has the ability to get difficult legislation passed. That might also stem the waning confidence among businesses that feel Modi has been unexpectedly slow on reforms.

3. To make sure the GST is implemented across India, state and central governments will need to build necessary infrastructure, such as fully computerised commercial tax departments, and a nationwide IT network, to monitor and collect the new tax. If the bill passes both houses, it will still take another year if not more for the required infrastructure – such as a unified nationwide IT system and computerised commercial tax departments – to be in place. That’s why Jaitley has set a target of 2016 for it to come into effect.

4. Work on the infrastructure upgrades began two years ago, but not all states were on board fearing revenue losses and loss of discretionary fiscal authority. For example, Maharashtra, earns more than 13,000 crore annually from octroi, and Haryana earns more than 2,000 crore from purchase tax. These and other states will lose revenue from such levies under GST and have demanded compensation from the central government.

5. Finance Minister Jaitley reached out to all states to get their support before the bill was cleared. He offered to compensate the states for any loss of revenues for first five years following the implementation of GST. States will receive Rs.11,000 crore this fiscal towards partial compensation of the losses suffered by them.

6. The existing, heavily bureaucratic structure of taxes levied by the central and state governments such as excise duty, octroi, central sales tax, and value-added tax will be replaced by a single GST structure. Businesses will find it much easier to operate and expand. Implementation of GST could boost economic growth by 1 to 2 percentage points, according to estimates by the Confederation of Indian Industry.

7. E-commerce firms have run into issues with regulatory authorities, such as Amazon’s case in Karnataka. The GST is expected to plug gaps in tax laws and resolve such problems.


  • Sid Harth

    CHAPTER – I – Introduction – (Report of Task Force on Implementation of GST)

    CHAPTER – I – Introduction – (Report of Task Force on Implementation of GST)
    Date – 12/30/2009

    CHAPTER – I

    Introduction
    1.1 In 2004, analysing the structure of the prevailing indirect tax system both at the Central and State level, the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 observed that “high import tariffs, excises and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. This problem can be effectively addressed by shifting the tax burden from production and trade to final consumption, and from savings to consumption. The existing tax system introduces innumerable distortions resulti See More

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    With heterogeneous State laws on VAT, the debate on the necessity for a GST has been reignited. The best GST systems across the world use a single GST while India has opted for a dual-GST model. Critics claim that CGST, SGST and IGST are nothing but new names for Central Excise/Service Tax, VAT and CST and hence GST brings nothing new to the table. The concept of value-add has never been utilised in the levy of service as the Delhi High Court is attempting to prove in the case of Home Solution Retail while under Central Excise the focus is on defining and refining the definition of manufacture instead of focusing on value additions. The Revenue can be very stubborn when it comes to refunds as the Maharashtra Government proves and software entities that applied for refunds on excess service tax paid on inputs discovered.

    The all See More

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    2.2 With a view to attaining the objectives set out above, we recommend a VAT type Goods and Services Tax (GST). In the context of the design of the GST, some of the important issues are discussed in the following paragraphs.

    a. Single GST versus Dual GST

    2.3 In a federal country like India where the power to tax domestic trade is divided between the Central Government and the State Government, the designing of a destination based GST becomes extremely complicated. A conventional national GST8 cannot be implemented without the States losing their fiscal autonomy. However, this is not feasible since revenues from State VAT account for substantial proportion of State’s revenues. Therefore, the solution has to be found within the existing federal framework where both levels of Governments have the concurrent powers to tax domestic trade in goods and services.
    8 This refers to a single National level GST to be levied and collected by the Central Government.
    2.4 In view of the above, we recommend the following:-

    (a) The GST will be a dual levy imposed concurrently by the Centre and the States, but independently. It will have two components: one levied by the Centre (hereinafter referred to as CGST), and the other levied by the States and Union Territories (UTs) [hereinafter referred to as SGST].
    (b) Both the CGST and SGST will operate over a common base. That is, the base will be identical.

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    CHAPTER – II – Goods and Services Tax: The Model – (Report of Task Force on Implement

    CHAPTER – II – Goods and Services Tax: The Model – (Report of Task Force on Implementation of GST)
    Date – 12/30/2009
    CHAPTER-II

    Goods and Services Tax: The Model
    2.1 In the absence of a firm Model of the GST, it is necessary for us to construct a comprehensive Model in the light of the roadmap prepared by EC, the views expressed by the Central Government, the ongoing discussion on unresolved issues and best international practice. Therefore, the Group seeks to design the Model in such manner as would foster the achievement of the following objectives:

    (a) The incidence of tax falls only on domestic consumption;
    (b) The efficiency and equity of the system is optimized;
    (c) There should be no export of taxes across taxing jurisdictions;
    (d) The Indian market should be integrated into a single common market;
    (e) It enhances the cause of cooperative federalism.

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    b. Type of GST – Consumption, income or production

Govt tables GST Bill in Lok Sabha

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The GST proposes a national sales tax that will replace a range of overlapping state duties that deter investment.
NEW DELHI: The government on Friday initiated legislation for the much awaited reform of the indirect tax system by tabling the Goods and Services Tax (GST) Bill in the Lok Sabha.Finance minister Arun Jaitley introduced the constitutional amendment bill for implementing GST contending that the object of the legislation is “the seamless transfer of goods and services across the country”.The GST proposes a national sales tax that will replace a range of overlapping state duties that deter investment.

Emphasizing that he wanted the bill to be debated so that suggestions can be taken into account, the finance minister said he had achieved a “near consensus” with the empowered committee (EC) of state finance ministers on GST in a meeting here.

“This is not a partisan legislation. We will ensure that the interest of every state is taken care of, that no state will lose a rupee of revenue,” Jaitley said.

The previous United Progressive Alliance (UPA) government had in 2011 introduced a Constitution Amendment Bill in the Lok Sabha towards the introduction of the GST. States sought a five-year compensation package and asked for its inclusion in the bill.

Jaitley told the house that the states will receive Rs 11,000 crore this fiscal towards partial compensation of the losses suffered by them for reduction in central sales tax (CST).

While the CST is levied by the Centre on interstate movement of goods and collected by states, the issue of compensation arose because the central government cut the CST from 4 per cent to 2 per cent in phases, after state-level VAT was introduced from April 1, 2005.

The Cabinet committee on economic affairs Wednesday approved the Goods and Services Tax (GST) Bill paving the way for its tabling.

Earlier, finance ministers of seven states in a meeting here Thursday rejected the draft Goods and Services Tax (GST) Bill, saying that it does not address their concerns on the issues of compensation, entry tax, and the tax on petroleum products.

States also want petroleum, alcohol and tobacco to be kept out of the purview of the GST.

Seen as a key to facilitating industrial growth and improving the business climate in the country, the GST bill needs to be passed by a two-thirds majority in both houses of parliament and by the legislatures of half of the 29 states to become law.

By subsuming most indirect taxes levied by the central and state governments such as excise duty, service tax, VAT and sales tax, GST proposes to facilitate a common market across the country, leading to economies of scale and reducing inflation through an efficient supply chain.

Full implementation of GST could lift India’s gross domestic product (GDP) growth by 0.9-1.7 percentage points, according to a study by the National Council of Applied Economic Research (NCAER).

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Sid Harth

Narendra Modi’s GST U-turn set to make India single market for first time After opposing GST during his 12 years running Gujarat, Modi now plans to enact the idea within eight months मोदिमामा करून करून भागले अन देव पूजेला लागले Self-serving person may show change in various ways. One being, righteous-appearing rogue. …and I am Sid Harth

Sid Harth

GST Bill: The Devil’s in the Details December 19, 2014 / elcidharth sidileakdorcomma/ ?p=8278 …and I am Sid Harth

Sid Harth

About us and Contact Details The Pre-Legislative Briefing Service (PLBS); Aims and Objectives : – To provide rigorous, independent and non-partisan leg al and policy analysis of Bills introduced in Parliament – To suggest appropriate legal reform to enable bills t o pass tests of constitutionality if challenged – To suggest appropriate policy reform if the legislativ e policy is to be sound in principle and efficacious in practice Project Members: 1. V. Niranjan , Advocate; B.A.LL.B. (Hons.), National Law School o f India University, Bangalore (2010), Rhodes Scholar (2010) Current Status: Advocate, Madras High Court and BCL Candidate in Law, Magdalen College, University of Oxford Contact: ; Phone: +91 97909 25765/+44 77590 95342 2. Shantanu Naravane, B.A.LL.B (Hons.), National Law School of India Uni versity, Bangalore Current Status: BCL Candidate in Law, Corpus Christi College, University of Oxford Contact: ; Phone: +91 97663 31013 3. Krishnaprasad KV , B.A. LL.B. (Hons.), National Law School of India Uni versity Bangalore (2012) Current Status: Fourth Year, NLSIU Contact: ; Phone: +91 99165 89670 4. Tanmaya Mehta , B.A. LL.B (Hons.), National Law School of India Univ ersity Bangalore (2008), BCL (Candidate), University of Oxford (2011-’12) Current Status: Advocate, Supreme Court of India Contact : ; Phone: +91 99992 55931 Disclaimer: We have no financial or personal interest in this matter. All views contained herein reflect those held by the authors and not by the institutio ns they are associated with. …and I am Sid Harth

Sid Harth

44 … (i) for entry 52, the following entry shall be subs tituted, namely:— “52. Taxes on the entry of goods into a local area for consumption, use or sale therein, provided these are levied and collected by a Pancha yat or a Municipality .”; … “62. Taxes on entertainments and amusements, provided these are levied and collected by a Panchayat or a Municipality or a Regional Council o r a District Council. ’’. • Clause 14 For the reasons set out in ¶¶ 77-90, the Hon’ble Co mmittee may consider an addition to the Notes on Clauses clarifying that the object of Clause 14(i) is not t o expand the range of taxable entities but merely to consolidate indirect taxes. Transactions that are neither a supply of goods nor a supply of services should fall outside Clause 14, under a narrow construction of “ supply of goods ”, and changes if necessary may be dealt with under Entry 97, List I. The Hon’ble committee may also consider replacing the phrase “ any tax ” with the word “ taxes ”. Redrafted Clause 14 ‘(12A) “goods and services tax’’ means taxes on supply of goods or services or both except taxes on the supply of the following go ods, namely:—

Sid Harth

43 different matters enumerated in the Concurrent List , or with respect to matters enumerated in the Union List and State List respectively.” O PTION 2 Adding explanatory words to Art. 254 so that it re ads: “If any provision of a law made by the Legislature of a State which the State Legislature is competent to enact under Article 246 or Article 246 A is repugnant to any provision of a law made by Parliament which Parliament is competent to enact under Article 246 or Article 246A , or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law mad e by the Legislature of the State shall, to the extent of the repugnancy, be void.” • Clause 3 On the basis of the recommendations above in paragr aphs 55-56, the Hon’ble Committee may consider introducing the phrase “ other than goods and services tax ” after “ imposing a tax ” in Article 248(2). • Clause 9 On the basis of the recommendations in Paragraphs 5 8-59, the Hon’ble Committee may consider introducing a (,) <comma> separating “supply of goo ds or of services or both” i.e. “ supply of goods, or of services, or both ”. In addition, the committee may consider clarifyi ng use of the word “ both ” in Explanation I. • Clause 17 For the reasons outlined in Paragraphs 61-70, the H on’ble Committee may consider substituting the expression “ to the extent levied and collected by ” with the “ provided that such taxes are levied and collected by a Panchayat or Mu nicipality ” in both Clause 17(b)(i) and 17(b)(iv). Redrafted Clause 17 17. In the Seventh Schedule to the Constitution,— (a) in List I — Union List,—

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42 Summary of Recommendations • Clause 2 For the reasons stated above in paragraphs 16-40, t he Hon’ble Committee may consider: O PTION 1 Omitting the non-obstante clause in Clause 2 altoge ther. O PTION 2 Introducing a new conflict-resolution mechanism for conflicting Parliamentary and State laws. O PTION 3 Removing the reference to Art. 254 in Clause 2. and Adding the words “to be” before the phrase “imposed by” in Clause 2. The Hon’ble Committee may also consider omitting th e phrase “unless the context otherwise requires” from Clause 2. In sum, the Hon’ble Committee may consider amending the proposed Art. 246A to read as follows- “246A. Notwithstanding anything contained in articl e 246, Parliament and the Legislature of every State, have power to make laws with respect t o goods and services tax to be imposed by the Union or by that State respectively: Provided that Parliament has exclusive power to mak e laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce. Explanation.— For the purpose of this article, “Sta te’’ includes a Union territory with Legislature.” • Suggested changes to Art. 254 The Hon’ble committee may consider: O PTION 1 Removing the comma in Article 254(1) after the phra se “Parliament is competent to enact” and further, adding an additional proviso to Article 25 4(2) to the effect that- “Nothing in this clause shall be taken to affect th e application of Article 254(1) to inconsistencies between laws passed by Parliament and the State leg islatures, when those laws are with respect to

Sid Harth

41 of goods or services…” This may also guard against the danger the previous paragraph highlighted, of construing Clause 14 as a warrant t o expand taxable entities that do not exhibit the requisite categories. Secondly , Schedule VII presently uses this formulation consistently – for example, terminal tax is defined as “terminal taxes on goods or passengers…”, consignment tax as “taxes on consignment of goods”. In the absence of a compelling reason to do otherwise, we believe it pr omotes coherence to follow this pattern of drafting. III. Recommendations a. An addition to the Notes on Clauses clarifying that the object of Clause 14(i) is not to expand the range of taxable entities but mer ely to consolidate indirect taxes. Transactions that are neither a supply of goods nor a supply of services should fall outside Clause 14, “supply of goods” narrowly defin ed, and if necessary may be dealt with under Entry 97, List I. b. Replace the words “any tax” with “taxes”. 91. Redrafted portions of clause 14 : a. ‘(12A) “goods and services tax’’ means taxes on supply of goods or services or both except taxes on the supply of the following go ods, namely:—

Sid Harth

40 circumstances require taxation of such transactions , Entry 97, List I presents the more appropriate route. 88. Secondly , it should be noted that the deletion of Art. 366( 29A) has no effect on the meaning of “sale” or “tax on sale of goods” in Indi an law, and Gannon Dunkerley will now govern every transaction that falls within Entry 54, List II. Th at result is as it is intended, and no change is recommended. 89. Finally , the expression in Clause 14 is presently “goods a nd services tax” means “ any tax on supply of goods or services… ” It is our submission, for two reasons, that it is appropriate to replace the word “any” with a plural form of the word “tax”. First , although this is highly contextual, the word “any” has on occasion been thought to expand the scope of the provision in which it appea rs. For example, in Balaganesan Metals v. Shanmugham Chetty , 62 the Supreme Court made the follow observations on the scope of this word: 18. 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 t o 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 indicat e ‘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 ‘eit her’, ‘every’ or ‘all’. Its generality may be restricted by the context;” (Black’s Law Dicti onary, 5th 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 ac commodation, 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 90. It is, of course, unlikely that a court will take t he view that “any tax on supply of goods or services” has expands the scope of the provision, b ecause it is still the case that the tax must be on supply . In contrast, the expression used in Art. 304(a) i s “tax on goods”, without qualification, and Mr. Seervai was of the v iew that this includes a tax on every aspect of goods as to which the State legislature has comp etence. 63 By way of abundant caution, the Hon’ble Committee may consider replaci ng “any tax” with “taxes on supply 62 Balaganesan Metals v Shanmugham Chetty, (1987) 2 S CC 707. 63 H.M. S EERVAI , C ONSTITUTIONAL L AW OF I NDIA : A C RITICAL C OMMENTARY III 2606 (4 th edn., 1996).

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39 that aspect. In addition, there is significant supp ort for the view that such transactions in fact constitute a licence in some American courts, and in the decision of Lord Penrose in Adobe v. Beta Computers . 61 If such a transaction is characterised as a licenc e, it would not have been taxable under any State sales tax or VAT legislation, and yet, may at first sight be appear to be captured by the term “ supply ” in Clause 14. 87. We believe that Clause 14 of the GST Bill should no t give rise to the belief that it is now constitutionally appropriate to levy taxes on these transactions. We recognise, however, that the use of an existing term, such as “excise” or “sale” in place of “supply” is likely to be under inclusive. In the circumstances, we believ e that it may be appropriate to clarify in the Notes on Clauses that the object of Clause 14 is not to expand taxab le events but merely to consolidate indirect taxes levied on good s and services. It may be thought that there are transactions with the advance of technolo gy that may not constitute “supply” in a narrow sense but which it is neverthe less desirable to tax. A licence is again a prime example. We believe that this concern, whil e undoubtedly an important one, may be addressed by defining “supply” narrowly in Claus e 14, leaving Entry 97, List I as the appropriate gateway. With respect, it is our submis sion that it would be inappropriate to allow a consolidating measure to bring to tax trans actions that are presently not taxed at all, unless they independently constitute a supply of services, especially becaus e the consequence will be that both CGST and SGST can be levied on the transaction. To that extent, transactions involving the use of items tha t may not be goods as part of a service contract may not pose any difficulty. But there is a substantial number of transactions involving goods, falling short of a service contrac t (because of an inadequate personal element, or ability to specifically enforce etc.) a nd yet outside the purview of sales tax because no interest is transferred. The classic cas e is a licence of goods not involving a service – for example of software in American juris dictions that reject the sale theory. Another is the instance Ruma Pal J. gave about a do ctor prescribing medicines – while it is correct to classify that transaction as a servic e, it will be difficult in principle to demonstrate that it is not a supply of goods unless the limited scope of Claus e 14 is made abundantly clear in the Notes on Clauses. Once agai n, if changing economic or social 61 Beta Computers Ltd v Adobe Systems Ltd, 1996 SLT 6 04 CS.

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38 it falls outside the scope of Art. 366, and if it d oes, it may be charged to tax only if the Gannon Dunkerley test is satisfied, which it is not, since neither t he doctor nor the patient intends to transfer title to the goods. 56 Yet, in Great Eastern Shipping v. State of Karnataka , 57 the Karnataka High Court reached a conclusion that , with respect, may be contrary to this principle. There the owner of a tu g entered into a charter with the Mangalore Port Trust under which the latter acquire d the right to use the tug for six months. Although this transaction does in any way r esemble a sale, the Karnataka High Court held that it is a “ transfer of right to use ”. It is submitted, with respect, that not only is this result contrary to the intention of the dra fters of the 46 th amendment, who only intended to catch transactions that avoid sales tax , but also illustrates the possibility of a similar result under Clause 14 of the GST Bill. Ushakiran Movies v. State of A.P. 58 affords another example. There Ushakiran Movies ent ered into a contract under which a State run television company agreed to broadcast it s movies on usual terms. The High Court came to the conclusion that this transaction is subject to sales tax, because the right to use the “movie” had been transferred. 86. While other High Courts have rejected this broad co nstruction of “ transfer of right to use ”, 59 the controversy demonstrates that any dominion or control test to identify the taxable event is likely to be over inclusive. Anoth er example is the “purchase” of software such as Windows 7 (off-the-shelf branded s oftware). While the Supreme Court held in Tata Consultancy Services v State of Andhra Pradesh 60 that these contracts constitute a sale, the point was not taken in that case that the more appropriate classification is a “licence” and there is a possib ility that the decision is sub silentio as to 56 This transaction is, of course, presently subject to service tax and will in that sense be appropriat ely covered by the GST Bill, but it is illustrative of the difficulty in the concept of supply of goods . 57 Great Eastern Shipping Co. Ltd. v. State of Karnat aka, [2004] 1 36 STC 519. 58 Ushakiran Movies v. State of AP, [2006] 1 48 STC 4 53. 59 Saumnya Mining v. Commissioner of Taxes, [2006] 1 46 STC 343; Mohd. Wasim Khan v. Commissioner, Trade Tax, MANU/UP/0659/2006; Commiss ioner, Trade Tax v. Chabra Tourist Service, MANU/UP/1355/2006. 60 Tata Consultancy Services v State of AP, AIR 2005 SC 371.

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37 are all covered as all of these taxes constitute a tax on the supply of either goods or services. However, there are transactions which are , technically, neither a sale of goods nor supply of services and there is a risk that the use of the word “supp ly” in relation to goods may catch these transactions and thus expand taxable events, instead of merely consolidating them. An excellent illustration in a different context is Art. 5(1) of the Brussels I Regulation, 54 which divides contracts, for jurisdictional purpos es, into contracts for the sale of goods (art. 5(1)(b) first indent), contracts for the provision of services (art. 5(1)(b) second indent) and other contracts. As Professor Briggs has noted, while the first two categories are likely to cover a large number of commercial transactions, there are contracts that involve neit her the sale of goods nor the supply of services (such as intellectual property licensing, arguably distribution), and it would be unfortunate if such contracts fall within the term “ supply ” of goods in the GST Bill. 55 84. One way to illustrate this point is to consider the jurisprudence of the Supreme Court and the High Courts on Art. 366(29A)(d) of the Constitu tion as an analogy. It is a close analogy because it provides that tax on sale of goo ds includes a tax on the “ transfer of a right to use goods ”, and it has been held that “transfer” in this con text, may extend beyond a transfer under the Transfer of Property Ac t, 1882, and cover cases where there is a shift in dominion over goods from one party to another. In other words, it is a close analogue to the word “supply”. The extremely wide c onstruction the High Courts have placed on this provision demonstrates that a simila r construction of Clause 14 of the GST Bill cannot be ruled out. 85. We now turn to a few concrete examples under Art. 3 66(29A)(d) to amplify this point. Art. 366(29A)(d) provides that tax on sale of goods includes a tax on the “ transfer of the right to use goods .” Suppose a consultant doctor, after diagnosing a patient, writes out a prescription and charges the usual fee, is it right to say that he has “transferred the right to use” the “prescription”, which indubitably constitu tes goods? Ruma Pal J. held that it is not, and in our respectful submission, that conclus ion is clearly correct. The reason is that 54 Regulation 44/2001, Jurisdiction and the Recogniti on and Enforcement of Judgments in Civil and Commercial Matters. 55 A B RIGGS AND P R EES , C IVIL J URISDICTION AND J UDGMENTS ¶2.147 (2 nd edn., 2008).

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36 Caters (India) Ltd. v. Lt. Governor of Delhi and Sta te of H.P. v. Associated Hotels of India Ltd. 29 STC 474 [emphasis ours]. 53 82. In a classic and widely cited passage, Ruma Pal J., delivering the leading judgment of the Supreme Court in BSNL , correctly noted that Art. 366(29A) therefore did not have the effect of nullifying Gannon Dunkerley . It merely provided that the six enumerated transactions could be subjected to sales tax, although the Gannon Dunkerley test is not satisfied. The significance of this conclusion is t hat any transaction that falls outside the express terms of Art. 366(29A) cannot be charged to sales tax unless the Gannon Dunkerley test is satisfied, and outside the tax context, wil l not attract the application of the Sale of Goods Act, 1930. Ruma Pal J. held that: Gannon Dunkerley survived the 46th Constitutional Ame ndment in two respects. First with regard to the definition of ‘sale’ for the purp oses of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Article 366(29A) operate. By introducing separate ca tegories of ‘deemed sales’, the meaning of the word ‘goods’ was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, g oods, delivery etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must mov e with the times. See Attorney General v. Edison telephone Company 1886 QBD 244. Bu t the 46th Amendment does not give a licence for example to assume that a transa ction is a sale and then to look around for what could be the goods. The word “goods” has not been altered by the 46th Amendment. That ingredient of a sale continues to hav e the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite tr ansaction not covered by Article 366(29A). Transactions which are mutant sales are limit ed to the clauses of Article 366(29A). All other transactions would have to quali fy as sales within the meaning of Sales of Goods Act 1930 for the purpose of levy of sal es tax [emphasis ours] . 83. We believe that it may be argued that the term “sup ply” in Clause 14 of the GST Bill obliterates this distinction, and (theoretically) a llows the Centre and the State to levy GST on any transfer of goods, regardless of the nature of the transfer. Without doubt, the term “ supply ” is appropriately used to cover the gamut of taxes that it is intended to subsume for GST purposes, with the result that excise duty, customs duty, entertainment tax etc. 53 BSNL v Union of India, (2006) 3 SCC 1.

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35 transactions, 49 food consumed at a hotel, 50 involuntary sales under a statutory obligation, 51 etc. failed. The Law Commission criticised the res ult in Gannon Dunkerley and its progeny as unduly narrow, in the following terms: In our view… the Supreme Court, with respect, appear s to have adopted an unduly restricted interpretation of the expression ‘sale’. It is true that the expression ‘sale’ is not defined in the Constitution- but it is a well-rec ognised canon of construction that words used in the three Legislative Lists should recei ve the widest possible interpretation, and, it was, we venture to suggest, so mewhat inappropriate to have taken recourse to the narrow definition of the word ‘sale’ contained in the Sale of Goods Act for the purpose of interpreting that expression o ccurring in the State List, Entry 54… 52 81. In an attempt to widen the competence of State legi slatures, the Forty Sixth amendment to the Constitution inserted Art. 366(29A), which t he GST Bill now proposes to delete. The effect of Art. 366(29A) is that the expression “ tax on the sale of goods ” includes specific transactions that the Supreme Court held f ell outside the Gannon Dunkerley test. In BSNL v Union of India , Lakshmanan J., concurring, noted that each clause of Art. 366(29A) sought to overturn a specific judgment of the Supreme Court: The Amendment introduced fiction by which six instan ces of transactions were treated as deemed sale of goods and that the said definition as to deemed sales will have to be read in every provision of the Constitution whereve r the phrase ‘tax on sale or purchase of goods’ occurs. This definition changed the law decl ared in the ruling in Gannon Dunkerley & Co. only with regard to those transaction s of deemed sales. In other respects, law declared by this Court is not neutralize d. Each one of the sub- clauses of Article 366(29A) introduced by the 46th Amendment w as a result of ruling of this Court which was sought to be neutralized or modified. Sub c lause (a) is the outcome of New India Sugar Mills v. Commnr. of Sales Tax and Vishnu Agencies v. Commissioner of Sales Tax. Sub clause (b) is the result of Gannon Dunkerley & Co. 1959 SCR 379. Sub clause (c) is the result of K.L. Johar and Company v. C.T.O.. Su b clause (d) is consequent to A.V. Meiyyappan v. CIT 20 STC 115 (Madras High Court). P age 1128 Sub clause (e) is the result of Jt. Commercial Tax Officer v. YMIA. Sub cl ause (f) is the result of Northern India 49 Johar v. Commercial Tax Officer, MANU/SC/0270/1964 . 50 State of Himachal Pradesh v. Associated Hotels of India Ltd., (1972) 1 SCC 472. 51 New India Sugar Mills v. Commissioner of Sales Tax , 14 STC 316. 52 L AW C OMMISSION OF I NDIA , Sixty First Report.

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34 on supply of goods or services ”, it will follow that those terms will be limited to the understanding that presently prevails. It should, h owever, be noted Gannon Dunkerley applied this principle to the meaning of “tax on th e sale of goods” in Entry 54, List II, and it is not certain that “tax on supply of goods and services” is a term of art in the sense in which “sale” was a term of art. It was beyond doubt that “sale” had a legal meaning because the word had appeared in the Sale of Goods Act, 1948, and was the subject of a body of jurisprudence in English law as well. II. Reasons to Reformulate Clause 14 79. Nevertheless, it may be useful to consider what con struction the courts are likely to place on the expression “ tax on supply of goods or services ”. The key word here is “ supply ” and has been used with the intention of amalgamatin g the variety of indirect taxes that are presently levied on a diverse set of taxable events , such as manufacture, sale, import etc. We believe that the choice of expression is appropr iate, but highlight one adverse consequence that may follow. The object of Clause 1 4 is to amalgamate the indirect taxes presently levied under the heads highlighted above, but it is not to expand the category of taxable events. It is, however, possible that the u se of the word “supply” has this effect. 80. To illustrate why this is the case, one may contras t “ supply of goods ” with one of the most significant categories of indirect tax it will replace – sales tax. Since the power to levy sales tax was committed to the States under En try 54, List II, and since it constituted a significant item of revenue, it was expansively i nterpreted in the initial stages of the Constitution. As one of us has set out in greater d etail elsewhere, 47 these attempts 48 included the levy of sales tax on the value of raw materials in a works contract. The Supreme Court eventually decided in Gannon Dunkerley that a “ sale ” for the purpose of Entry 54 is confined to those transactions where th e parties intend to transfer title, and do so. As a result, further attempts of State Governme nts to levy sales tax on hire purchase 47 V. Niranjan, A Software Transfer Agreement and its Implications for Contract, Sale of Goods and Taxation 8 J OURNAL OF B USINESS L AW 799, 808-14 (2009). 48 For example Khasim v State of Mysore, AIR 1955 Mys 41.

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33 “62. Taxes on entertainments and amusements, provided these are levied and collected by a Panchayat or a Municipality or a Regional Counci l or a District Council.’’. ___________________________________________________ rest of the comment censored

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32 73. However, it is important to notice that Art. 304(a) is still available for entry tax legislation that is not discriminatory in its effec t on inter-State transactions. The series of High Court decisions adverted to above struck down the legislation in question because Art. 304(a) was unavailable in those cases – the le gislation, by providing that only goods not subjected to local sales tax will be subject to octroi, clearly had an adverse effect on inter-state transactions. Indeed, the Statement of Objects and Reasons did not deny that this was the intention, and the justification offer ed was that dealers were taking advantage of lower sales tax rates in a neighbouring State by purchasing goods in those States and transporting them into the taxing State. Needless t o say, this concern of the State Governments will be of far less significance once t he GST is operational, because there will be a common scheme of taxation, and the gradua l elimination of arbitrage opportunities arising out of indirect taxation. We, therefore, submit that it is not appropriate to add any non-obstante clause or in an y other way weaken the provisions of Part XIII. 74. For similar reasons, we believe that Clause 17(b)(i v) – “taxes on entertainments and amusements” must use the language “provided these a re levied and collected by…” 75. Recommendations : a. Substitute “ to the extent levied and collected by …” with “ provided these are levied and collected by …” in clause 17(b)(i) b. Substitute “ to the extent levied and collected by …” with “ provided these are levied and collected by …” in clause 17(b)(iv) 76. Redrafted portions of clause 17 17. In the Seventh Schedule to the Constitution,— (a) in List I — Union List,— … (i) for entry 52, the following entry shall be subs tituted, namely:— “52. Taxes on the entry of goods into a local area for consumption, use or sale therein, provided these are levied and collected by a Panchayat or a Municipality.”;

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31 although that Act was discriminatory to the extent that it exempted goods from entry tax if Bihar sales tax had been levied. That decision w as overruled by a Constitution Bench in Jindal Stainless v State of Haryana , 42 on the basis that such legislations are not “compensatory”. Subsequently, more than five High C ourts have declared amended versions of entry tax legislation unconstitutional. 43 72. In light of this, it is likely to be suggested that the Hon’ble Commi ttee insert a non- obstante clause immunising entry tax legislation fr om a challenge under Art. 301. We submit, with respect, that such a course is neither necessary, nor consistent with the object of Art. 301. The rationale of Art. 301, acco rding to the masterly analysis of a seven-judge Constitution Bench of the Supreme Court in Automobile Transport Corporation v State of Rajasthan , is the prevention of competition within States by the use of fiscal and other devices. 44 For example, if the State of Karnataka enacts a la w that taxes goods imported from other States at higher ra tes than similar goods produced in its own State, it is likely to be unconstitutional as ultra vires Art. 301. A prominent criticism of Art. 301 is that it excessively fetters the auto nomy of State legislatures, and even the Supreme Court in Video Electronics v State of Punjab commented that Art. 301 cannot stand in the way of equitable regional development: Part XIII of the Constitution cannot be read in isol ation. … Hence, the economic development of States to bring these into equality w ith all other States and thereby develop the economic unity of India is one of the ma jor commitments or goals of the constitutional aspirations of this land. For working of an orderly society economic equality of all the States is as much vital as economic unity. Economic unity can only be achieved if all parts of whole of Union of India dev elop equally, economically … incentives and exemptions … were suggested to be absolu tely necessary for economic viability and survival for these industries in these Sta tes. 45 42 Jindal Stainless v. State of Haryana, (2006) 7 SCC 241. 43 For example ITC v State of TN, (2007) 2 CTC 577; T ata Steel Ltd. v State of Jharkhand, (2008) 3 JCR 365; Dinesh Pouches v State of Rajasthan, (2008) 16 VST 387; IOC v State of Haryana, (2009) 21 VST 10; Bharat Earth Movers v. State of Karnataka, (200 7) 3 MPHT 69; Thressiamma Chirayil v. State of Kerala, (2007) 1 KLT 303. 44 Automobile Transport Corporation v State of Rajast han, AIR 1962 SC 1406. 45 Video Electronics v. State of Punjab, AIR 1990 SC 820.

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30 3. Levy of tax.- (1) There shall be levied and colle cted an entry tax on the entry of goods specified in the Schedule into any local area for c onsumption, use or sale therein at such rate, not exceeding twenty percentum, as the State G overnment may, by notification, fix in this behalf and different rates may be fixed for d ifferent class or classes of specified goods and such tax shall be paid by every importer of such goods, whether he imports such goods on his own account or on account of his pr incipal or any other person or takes delivery or is entitled to take delivery of suc h goods on such entry II. Reasons to Reformulate Clause 17(b) 70. We believe, for four reasons, that it is appropriat e to reformulate Clause 17(b) with the use of the expression “ provided that such taxes are levied and collected b y a Panchayat or Municipality ”. For one, it makes it clear that the essential na ture of the tax remains unchanged. Secondly , the use of “provided that” in preference to “to t he extent that” makes it more difficult to suggest that what is not covered by Entry 52 falls within the residuary entry (Entry 97, List I). Such a question is unlikely to arise in any case because it is the intention of the GST Bill that what falls outside Entry 52 will fall within the new entry for GST. Nevertheless, we believe that it is appropriate to so revise it by way of abundant caution. Thirdly , it more accurately reflects the fact that compete nce can properly be conferred by the Constitution only on t he State Legislature and not directly on the local authorities, atleast under Art. 246(3) . Finally , it is necessary to comply with Art. 304(a) of the Constitution to sustain such a l evy from a constitutional challenge (considered in more detail below), and Art. 304(a) uses the language “ the Legislature of a State ”. Making it clear that the entity on which legisla tive competence is conferred, and the entity levying the tax , continues to be the State Legislature (albeit for the benefit of local authorities) will put paid to the argument th at Art. 304(a) is not available to sustain the validity of such a law. 71. The second problem that arises in this context is t he constitutional validity of entry tax legislation, principally on account of Arts. 301-30 5 of the Constitution. Art. 301 provides that trade and commerce shall be free throughout th e territory of India, subject to the restrictions permitted by Arts. 302-5. In State of Bihar v. Bihar Chamber of Commerce , 41 the Supreme Court rejected an Art. 301 challenge to the constitutionality of the Bihar (Tax on Entry of Goods into Local Areas for Consump tion, Use or Sale Therein), 1993, 41 State of Bihar v. Bihar Chamber of Commerce, (1996) 9 SCC 138.

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29 …the requirement peculiar to octroi that, for this t ax to become leviable, the goods must not only enter the area, but must be “for the purpose of consumption, use or sale therein.” Usually, this requirement is sought to be sat isfied by (a) the ab initio exemption of the goods which merely pass through the area, whether the exit is immediate or after an interval, or (b) by the subsequ ent refund of the tax collected on such goods. Exemptions and refunds, therefore, are the distinguishing features of the octroi system.37 68. In short, octroi is a tax on the entry of goods and is without doubt an indirect tax, wher eas terminal taxes, although indirect, 38 are a tax on the transfer of goods. In addition, octroi cannot be levied unless the entry of goods is for consumption, use or sale in the local area – there is no such requirement so far as terminal t axes are concerned. 39 It was imposed directly by the municipalities, and an example is s . 73 of the Bombay Municipal Boroughs Act, 1925, which the Supreme Court conside red in Burmah . In time, octroi was criticised as an unnecessary and cumbersome economi c barrier, and the decision was taken to replace it with “entry tax”. As the Allaha bad High Court noted, Octroi used to be the most important source of reve nue for ULBs in U.P. However, the collection of this tax was full of deficiencies, malpr actices and caused harassment. It also imposed negative economic costs due to impediments on m ovement of goods carriers leading to wastage of fuel and substantial time delays . A decision was taken at the national level to abolish octroi and compensate LBs t hrough appropriate mechanisms for loss of revenue caused. The U.P. Taxation Enquiry Committee, 1980 also recommended abolition of octroi. In the alternate, it suggested levy of entry tax on selected commodities. 40 69. As a result, most States passed entry tax legislati on. There is no substantive difference between an octroi and entry tax except that the latter is levied and collected by the State Government instead of the Municipalities. S. 3 of the Assam En try Tax Act, 2001 is an example: 37 Government of India, T AXATION E NQUIRY C OMMISSION III (1954). 38 At one time the Government of India took the view that it was a direct tax, a view it subsequently resiled from. 39 Burmah Shell (n 5 above). 40 IOC v. State of Uttar Pradesh, (2007) 10 VST 282.

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28 eliminate State legislative competence in respect o f “entry tax not in lieu of octroi .” 34 It is therefore important to consider precisely what octr oi means and whether the proposed formulation achieves the intended result. Moreover, the Supreme Court recently struck down as unconstitutional several State legislations passed purportedly under this entry, 35 and its reasoning has significant implications for the proposed amendment. We believe that this clause may benefit from revision, for the reasons that follow. 66. Entry 52 provides that the State Legislature may le vy taxes on “ the entry of goods into a local area for consumption, use or sale therein .” This levy is popularly referred to as octroi, and must be read in conjunction with Entry 89, List I, which provides for “ terminal taxes on goods or passengers, carried by R ailway, sea or air .” The two provisions have come about in a somewhat complex pa ttern, which is traceable to the Government of India Act, 1919. Under s. 80A(3)(a) o f that Act, the Governor General framed what came to be known as the “Schedule Tax R ules”, intended for local areas, and Entries 7 and 8 of that Schedule were respectiv ely octroi and “ a terminal tax imposed on goods imported into, or exported from a local ar ea… ” The Supreme Court, in Burmah Shell Oil Storage and Distributing Co. v. Belgaum Municipality , 36 traced this history and observed that the Government of India Act, 1935, ma de one change, transferring terminal taxes to the Federal List . In addition, octroi was renamed as “ cesses on the entry of goods into a local area for consumption, use or sale ” and placed in the Provincial List (Entry 49). When the Constitution was enacted, the word “c ess” was replaced with “tax”, and the word “therein” was added to Entry 52. The remai nder was incorporated without alterations. 67. As the Supreme Court noted in Burmah Shell (above), the reason for the omission of the word “octroi” was that terminal taxes are also a type of octroi. The Taxation Enquiry Commission, 1954, explained that the most differenc e was: 34 Empowered Group (n 32 above). 35 Jindal Stainless v. State of Haryana, (2006) 7 SCC 241. 36 Burmah Shell Oil Storage and Distributing Co. v. B elgaum Municipality, AIR 1963 SC 906.

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27 sales tax (or VAT), entertainment tax, luxury tax a nd taxes on betting and gambling, 32 and thirdly the use of a separate regime for a set of exempted goods. Clause 17 of the Bill (along with Clause 14) seeks to accomplish these ob jectives. 63. The first entry that it is proposed to amend is Ent ry 84, List I, which is presently the source (read with Art. 246(1)) of the competence of the Centre to levy excise duty. The amendment has the effect that this competence is no w confined to those goods that are now outside the purview of the GST regime – petrole um crude, diesel etc. We believe that this clause requires no changes, but highlight that the consequence of a closed list is that a constitutional amendment will be necessary i f at a subsequent date it is felt that other goods must be outside the GST framework as we ll. This will apply even to goods that are closely connected with or substitutes of t hose enumerated in the list, for the Central Government will automatically cease to have competence to levy any tax on the manufacture of goods except those listed in the (no w amended) Entry 84. That this is the consequence is clear from the use of the word “name ly” in the amending clause, as to which the Supreme Court said: Ordinarily the word “namely” imports enumeration of what is comprised in the preceding clause. In other words it ordinarily serves t he purpose of equating what follows with the clause described before. There is good deal of force, therefore, in the argument that the order restricts admission only to A nglo-Indians and citizens of non- Asiatic descent whose language is English.33 64. Clause 17(a)(ii) provides that entries 92 and 92C s hall be omitted. This carries the above structure to its logical conclusion, since these en tries, respectively, confer legislative competence on the Centre to levy sales tax on newsp apers and service tax, both of which will now be subsumed within GST. 65. The amendments to List II are more complex. To begi n with, clause 17(b)(i) proposes to add the words “ to the extent levied and collected by a Panchayat o r Municipality ” to Entry 52, List II. The Empowered Group of Ministers has stated that the object is to 32 Empowered Committee of Ministers, F IRST D ISCUSSION P APER ON G OODS AND S ERVICES T AX 19 (2009). 33 State of Bombay v. Bombay Education Society, [1955 ] 1 SCR 568

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26 [“ the GST Bill ” ] makes several amendments to the Seventh Schedule. I t is important to ascertain the implications these amendments will ha ve, and those in turn will affect the construction of Clause 14 of the GST Bill. This sec tion is devoted to Clause 17, and the next considers Clause 14. I. Outline of the Present Law 61. Clause 17 reads as follows: 17. In the Seventh Schedule to the Constitution,— (a) in List I — Union List,— (i) for entry 84, the following entry shall be substi tuted, namely:— “84. Duties of excise on the following goods manufact ured or produced in India, namely:— (a) petroleum crude; (b) high speed diesel; (c) motor spirit (commonly known as petrol); (d) natural gas; (e) aviation turbine fuel; and (f) tobacco and tobacco products.”; (ii) entries 92 and 92C shall be omitted; (b) in List II — State List,— (i) for entry 52, the following entry shall be substi tuted, namely:— “52. Taxes on the entry of goods into a local area f or consumption, use or sale therein to the extent levied and collected by a Panchayat or a Municipality.”; (ii) for entry 54, the following entry shall be substi tuted, namely:— “54. Taxes on the sale, other than sale in the course of inter-State trade or commerce or sale in the course of international trade and commer ce of, petroleum crude, high speed diesel, natural gas, motor spirit (commonly known as p etrol), aviation turbine fuel and alcoholic liquor for human consumption.’’; (iii) entry 55 shall be omitted; (iv) for entry 62, the following entry shall be substi tuted, namely:— “62. Taxes on entertainments and amusements to the exte nt levied and collected by a Panchayat or a Municipality or a Regional Council o r a District Council.’’. 62. It is useful to briefly set out the context for the amendments to the legislative entries. It consists principally in three features of the struc ture envisaged for the GST – first , the conferral of concurrent legislative competence on the Centre and the States to tax the supply of goods or the supply of services, secondly , the elimination of the exclusive competence of the States to levy the indirect taxes it currently imposes – in the main,

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25 D. Article 286(3) and clauses 4-8 and 13 57. Article 286(3) seeks to ensure that States do not h ave a free hand in taxing goods which are of national importance. Section 14 of the Centr al Sales Tax, 1956 lists out these goods and Section 15 thereof states the restriction s and conditions on State laws which seek to tax the transactions involving declared goo ds. The new provision omits existing Art. 286(3)(b) and consolidates the remaining provi sion. Article 286(4) states that the 286(3) would not apply to State laws which impose a goods and services tax. Given proposed Article 286(4) and in view of the fact tha t the existing mechanism of taxation of sale and purchase of goods is being replaced by the goods and services tax, the retention of Article 286(3) may appear to be superfluous. How ever, one would have to await the introduction of an appropriate goods and services t ax legislation since certain areas may be carved out where ‘taxation of sale and purchase of goods’ is permissible outside the new scheme. E. Is the new Art. 269A appropriately drafted (clause 9)? 58. The use of the word ‘apportioned’ may not be entire ly appropriate. A better course is to use the term ‘distribution’ and ‘appropriation’ in sync with existing jurisprudence in the Indian context. The doctrine of apportionment has s pecific connotations in Constitutional Law of other countries, and the use of the term ‘ap portion’ Article 269A, while retaining ‘distribution’ in Articles 270 and 272 may be incon gruous and lead to potential conflicts. 59. In Explanation I, there needs to be a (,) <comma> s eparating “ supply of goods or of services or both ” i.e. “supply of goods, or of services, or both”. In addition, it is our submission that the use of the word “both” in Expla nation I needs greater clarification – it is capable of conflicting interpretations – does it refer to transactions where both goods and services are involved but are separable element s, or does it also include composite transactions. One course is to omit the word ‘both’ and use a more appropriate phrase. F. Clause 17 – The Amendments to Schedule VII 60. As is well known, the legislative competence of the Centre and the State is set out in Arts. 245 and 246 of the Constitution, read with th e legislative entries in the Seventh Schedule. Clause 17 of the Constitution (One Hundre d and Fifteenth Amendment) Bill

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24 IV. Recommendation 54. On the basis of this discussion, the Hon’ble Commit tee may consider omitting the expression “unless the context requires otherwise” from Clause 2. In sum, the Hon’ble Committee may consider amending the proposed Art. 246A to read as follows- 246A. Notwithstanding anything contained in article 246, Parliament and the Legislature of every State , have power to make laws with respect to goods and s ervices tax to be imposed by the Union or by that State respectively: Provided that Parliament has exclusive power to mak e laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerc e. Explanation.— For the purpose of this article, “Sta te’’ includes a Union territory with Legislature. In addition, we would recommend the amendment of Ar ticle 254(1) in one of the ways outlined above. C. Clause 3 – Relationship with Article 246A 55. Article 248 deals with the residuary power of Parli ament to make laws with respect to any matter not enumerated in the State List or the Concurrent List. Since the power to impose goods and services tax is not being introduc ed in the legislative lists, subjecting Article 248 to Article 246A is essential. Hence, th e introduction of the ‘subject to’ clause in Article 248 is essential. However, the power to impose taxes which are not enumerated in the State List or the Concurrent List is dealt w ith separately by Article 248(2). Admittedly, the use of ‘such power shall include’ i n Article 248(2) suggests that any limitation on the power in Article 248(1) will also narrow the scope of the power in Article 248(2). 56. However, by way of abundant caution, it may be advi sable to introduce ‘other than goods and services tax’ after ‘imposing a tax’ in Article 248(2). The other alternative would be to remove the ‘subject to’ clause proposed to be ad ded to Article 248(1), and instead add Article 248(3) to the effect that nothing in Articl e 248(1) or (2) shall affect the power of the State legislature under Article 246A. This woul d have the benefit of clarifying any remaining confusion over the relationship between A rticle 246A and Article 248.

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23 legislative competence of States will in fact be in creased, with specific provisions of State laws being rendered void in cases of irreconc ilable conflict with provisions of Union laws. II. Clause 2 – ‘Imposed by’ 52. Apart from the problems with the non-obstante claus e, discussed above, there is another small anomaly is Article 246A as presently drafted. This is the use of the words ‘imposed by’. The purpose of this phrase is not clear, and i t is susceptible to the patently wrong interpretation that the power extends only to such GST laws that the Union and the States are imposing as on the date of the Constitutional a mendment. Hence, we would suggest that ‘to be’ be added before ‘imposed by’. The pros pective nature of the provision will not affect the GST laws already in force, which are saved by Clause 18 of the Bill. III. Clause 2 and Inter-State Trade and Commerce (Azad Coach) 53. The judgment in Azad Coach 30 would not apply to the phrase “inter-state trade o r commerce”. Though the language of Section 3 and Sec tion 5 of the Central Sales Tax Act, 1956 appears to be pari materia , Azad Coach is specifically based on the interpretation of Section 5(3). The said provision was introduced as a consequence of the view of the law taken in Mohd. Serajuddin 31 i.e. Section 5(3) brought about an alteration in the law. The amendment was not clarificatory. Th erefore, the principles contained in Section 5(3) cannot be said to flow from the langua ge of Section 5(1), and consequently from Section 3(1). In view of the absence in Sectio n 3, of a clause similar clause to Section 5(3), the judgment in Azad Coach cannot be extended to the interpretation of Section 3. The judgment in Azad Coach, thus cannot be said to bring about a change as far as trade and commerce within the territory of I ndia is concerned. 30 State of Karnataka v. Azad Coach Builders, (2006) 3 SCC 338; State of Karnataka v Azad Coach Builders, (2010) 9 SCALE 364. 31 Md. Serajuddin & Others v. State of Orissa (1975) 2 SCC 47.

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22 48. This addition to Article 254(2) will affirm the leg islative intent behind the deletion of the comma, and will address the one of the major argume nts in favour of reading down Article 254(1). (ii) Adding an explanatory phrase 49. The clearer way of amending Article 254(1) would be to add the required phrases to Article 254(1). The proposed Article 254(1) would t hen read- If any provision of a law made by the Legislature o f a State which the State Legislature is competent to enact under Article 246 or Article 246 A is repugnant to any provision of a law made by Parliament which Parliament is competent to enact under Article 246 or Article 246A, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after th e law made by the Legislature of such State, or, as the case may be, the existing law , shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void. 50. This amendment shall have the clear effect of expan ding the scope of Article 254(1) to cases of irreconcilable conflict outside of the Con current List, and lead to an integration of the GST into the current Constitutional scheme. Unlike the previous option, there will be no need to add a proviso to Article 254(2), since the amendment to Article 2 54(1) will be self-explanatory. However, adding that proviso by way of abundant caution is nevertheless an option. 51. By extending Article 254(1) to conflicts between la ws not passed with respect to the same matter un the Concurrent List, the conceptual inelegance of the earlier Constitutional scheme will be addressed, and GST wi ll be seamlessly integrated into it. Even from the point of view of the federal scheme, far from diluting the legislative powers of the States, it would have the effect of e nhancing it. As seen earlier from the decisions in Kesoram Industries and J.B. Educational Society , when a State law and a Central law, not relating to the same matter in the Concurrent List conflict, the fact that the conflict is not addressed by Article 254 does n ot mean that the State law remains unscathed. The Court goes on to Article 246, which has the effect of nullifying the law in its entirety. This is unlike Article 254(1), which only voids the law to the extent of the repugnancy. Thus, if the concept of repugnancy in A rticle 254(1) is extended to include conflicts between any laws which the Parliament and State are competent to enact, the

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21 or after the Provincial law, or, as the case may be, the existing Indian law, shall prevail and the Provincial law shall, to the extent of the r epugnancy, be void. 46. On this reading, it appears that ‘with respect to o ne of the matters enumerated in the Concurrent Legislative List’ qualifies only existin g law, and not ‘Provincial law’ and ‘Federal law with the Federal Legislature is compet ent to enact’. Thus, the absence of the comma makes the interpretation of Vijay Kumar Sharma more improbable, albeit not impossible. In fact, the Federal Court in Lakhi Narayan Das v. The Province of Bihar 28 and the Calcutta High Court in Bir Bikram Kishore Manikya Bahadur v. Tafazzal Hossain 29 interpreted Section 107 in the same way as Vijay Kumar Sharma interpreted Article 254. Having said that, a specific mention o f the reason for deleting the comma in the Statement of Objects and Reasons should dilute the effect of this authority (which is persuasive at best), and allow Article 254 to be ap plied to all cases of repugnance. 47. Further, an amendment to Article 254(2) could furth er ensure that the legislative intent is given effect to. Article 254(2) deals with cases wh ere State laws with Presidential assent are permitted to override Union laws with which the y conflict. In that context, the provision states that only conflicts between laws w ith respect to the same matter in the Concurrent List are covered. In both Taffazal Hossain and Vijay Kumar Sharma , the scope of Article 254(2) was used to interpret Artic le 254(1), leading the Calcutta High Court and the Supreme Court, respectively, to the c onclusion that Article 254(1) addresses only conflicts between Union and State la ws with respect to the same matter in the Concurrent List. Hence, in addition to removing the comma in Article 254(1), it would be advisable to add an additional proviso to Article 254(2) to the effect that- Nothing in this clause shall be taken to affect the a pplication of Article 254(1) to inconsistencies between laws passed by Parliament and th e State legislatures, when those laws are with respect to different matters enume rated in the Concurrent List, or with respect to matters enumerated in the Union List a nd State List respectively. 28 Lakhi Narayan Das v The Province of Bihar, [1949] FCR 693. 29 Bir Bikram Kishore Manikya Bahadur v. Tafazzal Hos sain, AIR 1942 Cal 587.

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20 Option 3: Remove the reference to Article 254 in th e non-obstante clause 43. The third, and it is submitted, most advisable alte rnative is to remove the reference to Article 254 from the non-obstante clause in Article 246A. This would mean that while the Centre and the State legislatures retain the co mpetence to pass GST laws on any supply of goods or services, in cases of irreconcil able conflict between the provisions of any such laws, or between the provision of one such law and a non-GST law, the scheme contained in Article 254 shall resolve the conflict . This seems the most attractive solution to the problem identified, but cannot be achieved w ithout an amendment to Article 254. This is because of the interpretation of Article 25 4(1) in Vijay Kumar Sharma , discussed above. As a result of the narrow scope of applicati on of Article 254, reliance on Article 246 is necessitated in cases where there is a real conflict between a Central and a State law, which are not with respect to the same matter in the Concurrent List. This will be the case for GST legislation, meaning that the limitati on on the applicability of Article 254, combined with the non-applicability of Article 246 will leave the problem identified above unaddressed. Thus, amending Article 254 to in crease its scope beyond that identified by Vijay Kumar Sharma is essential. 44. There are two possible ways in which Article 254 ma y be amended to achieve the desired result. First , by deleting the comma after ‘Parliament is compet ent to enact’; or secondly , by adding the phrase ‘under Article 246 or Article 246A’ after ‘Parliament is competent to enact’ and ‘which the State Legislature is compe tent to enact under Article 246 or Article 246A’ after ‘Legislature of a State’. (i) Deleting the comma 45. Section 107 of the Government of India Act 1935 , on which Article 254 is based, was nearly identical to the current provision. The only notable difference is the absence of the comma after ‘Parliament is competent to enact’ in S ection 107(1). Thus, Section 107(1) read- If any provision of a Provincial law is repugnant t o any provision of a Federal law which the Federal Legislature is competent to enact or to any provision of an existing Indian law with respect to one of the matters enumerated in the Concurrent Legislative List, then, subject to the provisions- of this section, the Federal law, whether passed before

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19 Option 1: Removal of the non-obstante clause in ent irety 41. This would be the simplest solution to the anomaly, and would mean that the scheme outlined in the section above would apply even to C entral and State GST laws. However, though simple, this option is at odds with the enti re model of GST sought to be introduced. Retaining Article 246 would mean additi onal limitations on the State and Centre’s power to tax with respect to matters which may fall under List I and List II respectively. While amendments to the legislative l ists, and the decision of the Supreme Court in State of West Bengal v. Kesoram Industries Ltd. 27 may mean that such a limitation is more hypothetical than real, retainin g Article 246 would nevertheless be a marked departure in principle from the overall sche me proposed. Especially since the problem identified with the current draft is not on e of competence but repugnance, making such a wholesale change to the scheme of the GST appears unadvisable. Option 2: Introduce a mechanism to resolve the conf lict in Article 246A 42. The second alternative is to introduce a conflict-r econciliation mechanism similar to Article 254 in Article 246A. This mechanism could b e to provide that the law passed by Parliament shall override the law passed by the Sta te legislature to the extent of the conflict, adopting the language currently used in A rticle 254. However, that would leave unaddressed the possibility of a conflict between a GST law and another law passed by the Centre or the State, with respect to a matter e numerated in any of the legislative lists. Given the breadth of the meaning of ‘with respect t o’ in Article 246A, that is real possibility. Another mechanism will have to be put in place for resolving such a conflict, possibly providing that a Union law which the Parli ament was competent to enact shall override the State GST law, and that a Union GST la w shall override a State law which it was competent to enact. As is clear from this discu ssion, this solution is complicated and unclear, and would also involve a reassessment of t he extent of legislative power to the be granted to the States with respect to the GST le gislations. The existence of two conflict-reconciliation mechanisms is thus complica ted and hence undesirable. 27 State of West Bengal v Kesoram Industries Ltd., MA NU/SC/0038/2004.

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18 (ii) The Proposed Scheme under Clause 2 38. Under the proposed Clause 2 of the Amendment Bill, the applicability of Article 246 and Article 254 has been done away with to the power of the Centre and the State to make laws with respect to goods and services tax. Furthe r, in their place, no alternative mechanism has been introduced. Now, given the schem e proposed in the Empowered Committee’s First Discussion Paper , it appears that an irreconcilable conflict betwee n Centre and State laws is unlikely. However, the hyp othetical possibility of such a conflict cannot be ruled out and needs to be provided for. T he primary reason is the use of the phrase ‘with respect to’ in Article 246A. This phra se, also used in Article 246, has been interpreted by the Supreme Court in Ujagar Prints 26 to mean that the law must, in pith and substance, deal with the matter mentioned. In t he words of the Court, The expression ‘with respect to’ in Article 246 bri ngs in the doctrine of “Pith and Substance” in the understanding of the exertion of t he legislative power and wherever the question of legislative competence is raised the t est is whether the legislation, looked at as a whole, is substantially `with respect to’ the particular topic of legislation. If the legislation has a substantial and not merely a remote connection with the entry, the matter may well be taken to be legislation on th e topic. 39. On this interpretation, laws other than purely good s and services taxes could be passed by the Parliament and the States under Article 246A. W hile the charging provisions themselves may not conflict with one another, there is a very real possibility of the machinery provisions conflicting, for which there n eeds to a mechanism in place. Further, the use of ‘exclusive’ in the proviso does not address this issue either, since it only m eans that the State legislature does not have the power to pass laws with respect to inter-State trade and commerce; but does not provide a mechanis m for a State law that incidentally but irreconcilably encroaches on that field. 40. There are potentially three ways in which the propo sed amendment can be modified in order to address this anomaly: (i) make the propose d Article 246A subject to both Articles 246 and 254; (ii) introduce a mechanism fo r resolving conflicts within Article 246A; and (iii) make the proposed Article 246A subj ect only to Article 254, suitably amended. We shall now consider each of these in tur n. 26 Ujagar Prints v Union of India, (1989) 3 SCC 488.

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17 improved by reading in ‘to the extent of repugnancy ’ into Article 246. However, that still does not solve the conceptual inelegance of shuttli ng from competence (Article 246) to repugnance (Article 254) and back to competence (Ar ticle 246), which would be necessary in every case where there is a factual re pugnance between laws which do not deal with the same matter in the Concurrent List. 35. Inelegant though that may be, it is the position of law settled in India today, and has been affirmed repeatedly by the Supreme Court, with all its decisions expressly or impliedly accepting this reading of Article 254. 25 36. In sum, the current scheme relating to conflicts be tween Central and State laws is as follows- • The Court must first look to determine whether both the Centre and the State had the competence to pass the respective laws. This inquir y is to be carried out using Article 246 read with the legislative lists, which are to be re ad harmoniously, and by using the doctrine of pith and substance. • If there is a factual conflict between the two laws , the Court must assess whether the laws deal with the same matter in the Concurrent List. I f they do, then the Court must resolve the repugnance in accordance with Article 254. If the laws do not deal with the same matter in the Concurrent List, then the Court cannot use Article 254. Then reliance must be placed on Ar ticle 246, and the hierarchy provided therein must be used to either reconcile the confli ct, or give priority to the Central law over the State law. 37. It is against this backdrop that Clause 2 of the Am endment Bill needs to be examined. 25 Zaverbhai Amaidas v Bombay, MANU/SC/0040/1954; M. Karunanidhi v Union of India, MANU/SC/0159/1979; Tika Ramji v Uttar Pradesh, MANU /SC/0008/1956; Prem Nath Kaul v Jammu & Kashmir, MANU/SC/0017/1959; A.S. Krishna v Madras, MANU/SC/0035/1956; M/s. Hoechst Pharmaceuticals Ltd. v Bihar, MANU/SC/0392/1983.

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16 32. The solution to this conundrum flows from the openi ng words of clauses (1)-(3) of the Article 246. Using the hierarchy provided there, fa ctual repugnance between Central and State laws could be resolved. This was the position adopted by the Supreme Court in J.B. Educational Society 23 where the Court observed that conflicts between Cen tral laws and State laws are possible in two contexts: First, where the legislations, though enacted with re spect to matters in their allotted sphere, overlap and conflict. Second, where the two legislations are with respect to matters in the Concurrent List and there is a conflict . In both the situations, parliamentary legislation will predominate, in the first, by virtue of the non obstante clause in Article 246(1), in the second, by reason of Article 254(1). Clause (2) of Article 254 deals with a situation where the State l egislation having been reserved and having obtained President’s assent, prevails in that S tate; this again is subject to the proviso that Parliament can again bring a legislatio n to override even such State legislation. 33. The same approach is adopted earlier by the Court i n State of West Bengal v. Kesoram Industries Ltd ., 24 While reading the three lists, List I has priority ove r Lists III and II and List III has priority over List II. However, still, the predominance of the Union List would not prevent the State Legislature from dealing with any matter with in List II though it may incidentally affect any item in List I. In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliamen t and a law made by the State Legislature may arise only in cases when both the legi slations occupy the same field with respect to one of the matters enumerated in List III a nd a direct conflict is seen. If there is a repugnancy due to overlapping found between Lis t II on the one hand and List I and List III on the other, the State law will be ultra v ires and shall have to give way to the Union law. 34. However, the solution, though handy, is far from sa tisfactory. This is because, as mentioned earlier, Article 246 deals with the power to pass a law, not the conflict between such a law and another law which another le gislative body had the power to enact. The result of relying on Article 246 to reso lve factual repugnance would ideally be that the State does not have the power to pass the law, in which case it will have to held void in entirety. This is different from the conseq uences of repugnance under Article 254 which merely renders the law void only to the exten t of the repugnancy. Matters can be 23 Andhra Pradesh v J.B. Educational Society, (2005) 3 SCC 212. 24 State of West Bengal v. Kesoram Industries Ltd., M ANU/SC/0038/2004.

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15 the question of repugnancy arises only in connection w ith subjects enumerated in Concurrent List. 30. It is difficult to take issue (apart from the stric tly literal argument mentioned earlier) with the Court’s interpretation of the scope of Article 254(1). However, what this interpretation does is to narrow the scope of the c oncept of repugnance such that no mechanism is available for conflicts between provis ions of laws which need resolution have no mechanism to look to. The Court suggests th at the doctrine of pith and substance may be used. This is a line adopted even very recen tly by the Court in Girnar Traders , 22 where it observed, The schemes of the MRTP Act and the Land Acquisition Act do not admit any conflict or repugnancy in their implementation. The slight over lapping would not take the colour of repugnancy. In such cases, the doctrine of pith and sub stance would squarely be applicable and rigours of Article 254(1) would not be attracted. 31. However, with respect, it is submitted that the abo ve observations, if read literally, blur the concepts of competence and repugnance. Pith and substance is a concept employed to determine the competence of a legislature to pass a law, not to resolve a conflict between two laws which both legislatures had the competence to enact. When a legislative body passes a law which relates to several entries, some of which do not fall within its sphere of competence, the concept of pith and substance di ctates that if the law deals in pith and substance with entries within its legislative compe tence, it shall not be struck down for incidental incursions into other entries. This is f undamentally different from the case of repugnance, which often deals with factual conflict s between laws. Hence, the Court in Vijay Kumar Sharma , like the Court in Girnar Traders , should be understood as saying only that when there are factual conflicts, the fir st step is to ask whether either of the two legislative bodies was incompetent to pass the law in question. However, if, after applying the doctrine of pith and substance, one co ncludes that both bodies were competent, there needs to be some other mechanism f or resolving the conflict. Asking the Court to again look at pith and substance does not solve the problem. 22 Girnar Traders v Maharashtra, (2011) 3 SCC 1.

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14 for why only existing laws are treated differently from State laws and Central laws. Secondly , as discussed earlier, it has the effect of render ing parts of Article 246 otiose. 28. The other interpretation, which reads ‘with respect to one of the matters enumerated in the Concurrent List’ as qualifying the entire subse ction preceding it stands on firmer ground, not least by virtue of enjoying the support of the Supreme Court’s decision in Vijay Kumar Sharma . 20 In the locus classicus on this issue, the Court held, … whenever repugnancy between the State and Centr al Legislation is alleged, what has to be first examined is whether the two legislations c over or relate to the same subject matter. The test for determining the same is the usual one, namely, to find out the dominant intention of the. two legislations. If the dominant intention, i.e. the pith and substance of the legislations is different, they cover different subject matters. If the subject matters covered by the legislations are thus d ifferent, then merely because the two legislations refer to some allied or cognate subj ects they do not cover the same field. The legislation, to be on the same subject mat ter must further cover the entire field covered by the other. A provision in one legi slation to give effect to its dominant purpose may incidentally be on the same subject as cov ered by the provision of the other legislation. But such partial coverage of the same area in a different context and to achieve a different purpose does not bring about the repugnancy which is intended to be covered by Article 254(2). Both the legislations must be substantially on the same subject to attract the Article. 29. There are three aspects to the Court’s approach tha t merit mention. First , the Court unequivocally adopts the view that laws which relat e to entries in different legislative lists or even to different matters in the Concurren t List cannot conflict. Secondly , only conflicts relating to the same matter in the Concur rent List are to be resolved by the scheme in Article 254. Finally , other conflicts, if any, can be resolved by the a pplication of the doctrine of pith and substance. This interpr etation of Article 254(1) has been affirmed by the Court recently in Bharat Shantilal Shah , 21 where it observed, Article 254 of the Constitution succinctly deals with the law relating to inconsistency between the laws made by the Parliament and the Stat e Legislature. The question of repugnancy under Article 254 will arise when a law m ade by Parliament and a law made by State Legislature occupies the same field with resp ect to one of the matters enumerated in Concurrent List and there is a direct conflict in two laws. In other words, 20 Vijay Kumar Sharma v State of Karnataka (1990) 2 S CC 562. 21 Maharashtra v Bharat Shantilal Shah, 2008 (12) SCA LE 167.

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13 • Whether the law made by Parliament and the law made by the State Legislature occupy the same field. 25. It may be argued that the second of these is addres sed through the opening words of clauses (1)-(3) of Article 246. The third is addres sed through clauses in some of the entries in the legislative lists, which make the po wer of the State expressly subject to the overriding power of the Parliament. However, it is the first of these which is the most important in the context of Clause 2 of the Amendme nt Bill. 26. The case of a direct conflict is addressed primaril y through Article 254, which reads: 254. Inconsistency between laws made by Parliament an d laws made by the Legislatures of States (1) If any provision of a law made by the Legislatu re of a State is repugnant to any provision of a law made by Parliament which Par liament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to t he provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the S tate shall, to the extent of the repugnancy, be void. (2) Where a law made by the Legislature of a State specified in Part A or Part B of the First Schedule with respect to one of the matt ers enumerated in the Concurrent List contains any provision repugnant to t he provisions of an earlier law made by Parliament or an existing law with respe ct to that matter, then, the law so made by the Legislature of such State shall , if it has been reserved for the consideration of the President and has receiv ed his assent, prevail in that State: Provided that nothing in this clause shall prevent Pa rliament from enacting at any time any law with respect to the same matter inc luding a law adding to, amending, varying or repealing the law so made by th e Legislature of the State. 27. The highlighted phrase in Article 254(1) can be int erpreted in two ways- it may either qualify the entire subsection preceding it, i.e., l aws passed by the State, the Parliament and existing laws, or it may qualify only existing law. The absence of a comma after ‘existing law’ suggests, on a strictly literal read ing of the provision, that it qualifies only existing law. Hence, on this reading, it would appe ar that a repugnance between any State law and Central law, which both were competent to e nact would be dealt with by section 254(1). However, this interpretation leads to two a nomalies. First , it gives no explanation

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12 matters in a said legislative list. It is this powe r which is either subject to some other power (in the case of the power of State legislatur es in (3)) or exists notwithstanding any other power (in the case of the power of the Parlia ment in (1)). In other words, Article 246 deals only with the scope of the power to legis late of the Centre and the State with respect to the matters in the legislative lists. If these powers conflict, then they will be ordered and reconciled in accordance with the hiera rchy laid down. 23. The principle of harmonious construction of the leg islative lists is one of the cardinal principles of Indian Constitutional interpretation, most succinctly summarised in the decision of the Supreme Court in Tika Ramji . 18 Following that principle, in most cases, the entries in which this power is to be exercised will be clearly separated from another, either on the text of the entries, or by means of j udicial construction. It is only when inspite of dealing with discrete entries, there is a conflict between the laws passed by the Centre and the State that problems arise. This, as mentioned earlier, is the problem of repugnance, which should be dealt with by Article 2 54. What then is the function of the hierarchy laid down by Article 246? If Article 254 dealt with the entire area of repugnance, then the initial words of clauses (1) t o (3) in Article 246 would appear to be otiose. However, the interpretation of Article 254 by the Supreme Court means that certain instances of repugnance are left unaddresse d, which makes falling back on Article 246, though conceptually unsound, practically essen tial. (b) Article 254 – The Question of Repugnance 24. The three tests of repugnance employed in India wer e laid down by the Supreme Court in Tika Ramji and affirmed in Deep Chand . 19 They are: • Whether there is direct conflict between the two pr ovisions; • Whether Parliament intended to lay down an exhausti ve code in respect of the subject matter replacing the Act of the State Legis lature; and 18 Tika Ramji v Uttar Pradesh, AIR 1956 SC 676. 19 Deep Chand v Uttar Pradesh, AIR 1959 SC 648.

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11 (i) The Present Constitutional Scheme 19. This section shall provide a brief overview of Arti cle 246 and Article 254 and the discrete roles that they play in the Indian Constitutional s cheme. (a) Article 246 – The Question of Competence 20. Article 246 of the Indian Constitution reads- 246. Subject matter of laws made by Parliament and b y 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 t o as the Union List). (2) Notwithstanding anything in clause ( 3 ), Parliam ent, and, subject to clause ( 1 ), the Legislature of any State also, have power t o make laws with respect to any of the matters enumerated in List III in the Sev enth Schedule (in this Constitution referred to as the Concurrent List). (3) Subject to clauses (1) and (2), the Legislature o f any State specified in Part A or Part B of the First Schedule has exclusive power t o make laws for such State or any part thereof with respect to any of the matte rs enumerated in List II in the Seventh Schedule (in this Constitution referred t o 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. 21. This provision serves two functions. First, it gran ts the Centre and the States competence to legislate with respect to the Lists in Schedule VII. It is settled law that the entries in the legislative lists are merely fields of legislation, and that the competence of the Centre and State to pass laws in those fields emanates from Ar ticle 246. 17 22. The second purpose which Article 246 serves is layi ng down the hierarchy between the laws passed by the Centre and the State relating to the areas of their competence. This is achieved by the opening words of clauses (1), (2) a nd (3). However, while the creation of the hierarchy is clear, it is important to note wha t this hierarchy relates to. Each of the clauses deals with the ‘power to make laws’ which a legislative body has relating to 17 Hoechst Pharmaceuticals Ltd. v Bihar MANU/SC/0392/ 1983; Union of India v. Harbhajan Singh Dhillon, (1971) 2 SCC 779.

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10 I. The non-obstante clause 16. One of the primary purposes of the Constitution (11 5 th Amendment) Bill, 2011 [“ GST Bill ”] is to grant legislative powers to the State in r elation to service tax and the Centre in relation to sales tax. This purpose is sought to be achieved through Clause 2 of the Bill. 17. Clause 2 of the Bill currently reads- 2 . After article 246 of the Constitution, the followi ng article shall be inserted, namely:— ‘246A. Notwithstanding anything contained in article s 246 and 254 , Parliament and the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by that State respectively: Provided that Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerc e . Explanation.— For the purpose of this article, “State ’’ includes a Union territory with Legislature.’. [emphasis supplied] 18. The first major change effected by this provision i s the non-obstante clause that prevents the application of Articles 246 and 254 to the prop osed power of the Parliament and the State Legislatures to make laws with respect to goo ds and service tax. These two provisions can broadly be said to represent the con cepts of competence and repugnance respectively. Competence refers to the power of a l egislature to pass laws with respect to certain matters; while repugnance refers to conflic ts between laws passed by two legislatures, both of which were competent to pass those two laws. Thus, in the case of a conflict between a Central law and a State law, ens uring that the legislative bodies were competent to pass the laws is the first step, and i s governed by Article 246. If both legislative bodies are competent to pass the laws, then the issue of repugnance between them falls to be considered. This is addressed by A rticle 254. Although Clause 2 prevents both these provisions from applying, it does not ap pear to replace them with any other conflict-resolution mechanism. Against this backdro p, two issues fall to be examined- first , what is the Constitutional scheme contained in Ar ticle 246 and Article 254 which the Clause does away with; and secondly , what mechanism does the Clause provide in its stead?

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9 and services and away from the taxation of income ”, 14 leading to the abolition of the Wholesale Sales Tax (WST). 14. The mechanism of the Australian GST was modelled on the Canadian tax regime and closely mirrors the proposed GST in India, being a wide based tax extending to all stages of production expending up to retail sales. 15 In terms of the structure of administration as well, the Australian system is similar to the Canad ian model with the central government collecting the whole amount and then distributing a certain quantum of the proceeds to provincial governments. The Australian GST categori ses goods under three heads namely, taxable, zero-rated and exempt. V. Singapore 15. The Goods and Services Tax in Singapore was introdu ced in 1994 and is modelled on the VAT system followed in the UK. 16 The prime reason for the introduction of GST in Singapore was, as in Australia, the necessity to sh ift focus from direct to indirect tax so as to encourage flow of highly skilled human resource to the country. Singapore’s GST follows the model of central administration the ass essment, collection and enforcement of the GST being carried out by the Inland Revenue Aut hority of Singapore (IRAS). In contradistinction to the three tier classification under the UK system however, the Singapore GST only taxes goods and services under t wo heads – standard-rated (7%) and zero-rated. B. Clause 2 – Provisions on Legislative Competence 14 Kathryn James, “We of the Never Ever: The History of the Introduction of a Goods and Service Tax in Australia” B RITISH T AX R EVIEW 320 (2007). 15 Abe I. Greenbaum, “A goods and Service Tax for Aus tralia” 3(2) R EVENUE L AW J OURNAL 152 (1993). 16 Nand Singh Gandhi et al ., “Singapore: Public Consultation on draft GST (Am endment) Bill, 2006”, 4(11) T AX P LANNING I NTERNATIONAL I NDIRECT T AXES 11 (2006).

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8 recommendations of the ‘Center for Freedom and Pros perity Foundation (CF&PF)’ which warned against the imposition of a centralise d federal VAT scheme. III. Canada 11. The background behind the introduction of Goods and Services Tax in Canada closely mirrors the present situation in India. GST was int roduced in Canada in 1991 following widespread criticism relating to the inefficiency o f the pre-existing Manufacturers’ Sales Tax. However, the most popular argument in Canada i n favour of the GST was that it would make Canadian exports competitive in the worl d market since the proposed GST regime exempted export oriented industries. Yet ano ther factor that motivated the implementation of a GST regime in Canada was the re cession that began in 1990 forcing the government to resort to immediate measures to r aise revenue. 12 12. Implementation of the GST in Canada however, follow s a nationalised model as opposed to the model of dual implementation proposed in Ind ia. The GST is administered by the Canada Revenue Agency and the proceeds are then div ided among the provinces in accordance with the pre-determined formula. 13 The GST in Canada is however, not an exhaustive levy. There are additional taxes, at bot h the federal and provincial levels, assessed at different rates. Even the administratio n of these levies is not always vested with the Canada Revenue Agency and is vested with d ifferent bodies. IV. Australia 13. A value added tax in the form of a harmonised Goods and Services Tax was introduced in Australia with the enactment of the A New Tax Syste m (Goods and Services Tax) Act, 1999. The enactment followed the recommendations of the Asprey Report which recommended that “ the weight of taxation should be shifted towards th e taxation of goods 12 Brandon A. Ketterman, “VAT? A Look Inside Canada’s Experience with the Goods and Service Tax” 8 S AN D IEGO I NTERNATIONAL L AW J OURNAL 259 (2006). 13 Brandon A. Ketterman, “VAT? A Look Inside Canada’s Experience with the Goods and Service Tax” 8 S AN D IEGO I NTERNATIONAL L AW J OURNAL 259 (2006).

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7 constitute ‘supply of goods’. 10 The directive also provides for the creation of a three tier rate system, namely, standard (not less than 15%) a nd reduced (not less than 55%) rate. The directive leaves open the internal administrati on of the indirect tax system to the discretion of member states. 8. In pursuance of United Kingdom’s entry into the Eur opean Economic Community, a uniform VAT system imposing indirect taxes on goods and services was introduced in the UK in 1973. Indirect tax is imposed at three di fferent rates under this scheme depending on the goods or services provided, namely , 20% (standard), 5% (reduced) and 0%. Since the EU directive leaves open matters of i nternal administration of tax, the UK has chosen to adopt a nationalised GST system as op posed to the Dual Scheme proposed to be introduced in India (where both States and th e Union Government collect taxes). The centralised indirect tax regime in UK is admini stered by the HM Revenue and Customs. II. The United States 9. The United States is among the few economically dev eloped countries without a nationalised VAT system. Indirect tax in the USA is restricted to sales tax imposed both by States as well as local authorities. The quantum of indirect tax payable is thus a sum of the tax payable under the State rate and the rate p ayable as per the regulations of the local authority to which the transaction bears a nexus. I n contradistinction to other VAT systems, the sales tax in the US is a tax on retail sales i.e. a tax on the end purchase of a good. 11 Though the sales tax imposed was initially confine d to goods alone, recently, they have been expanded to include services as well, esp ecially when they are bundled with sales of goods. 10. Though the introduction of a goods and services tax as a value added tax was debated by the Obama administration, this proposal was however , rejected in 2009 following 10 Art. 14, EC directive 2006/112/EC. 11 Harley Duncan, “Administrative Mechanisms to Aid i n the Coordination of State and Local Retail Sales Tax with a Federal Value-Added Tax”, 63 T AX L AW R EVIEW 713 (2010).

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6 were not covered by the VAT scheme and finally , since credit for CENVAT payment was not allowed under the State VAT schemes. 6. Simplification of the Tax Regime : A plethora of distinct levies collected by both the centre and the state, a variety of adminis trative institutions involved in their collected and varied multiplier and exemption rates applicable to them, all contribute to the complexity of the present indirect tax regime i n India. It has also been noted that the complexity of the administrative regime involved in tax collection is among the prime reasons for the substantial compliance gaps. 7 The difference in the applicable rates across the country also imposes a considerable trade barri er for inter-state trade and commerce. Though the White Paper on VAT issued by the Finance Minister, five years ago had promised the removal of these trade barriers, they still remain a considerable impediment to inter-state movement of business commodities. Th e comprehensive overhaul of the taxation regime sought to be effected by the GST is expected to put in a place a simple and uniform system of taxation across various parts of the country. A. A Comparative Overview of GST I. The European Union 7. The European Union mandated the creation of a syste m similar to the GST through its directive 2006/112/EC issued on 28 November 2006. T he directive intended to create a common system of VAT applicable to all goods and se rvices unless specifically exempted levying an amount proportional to the pric e of the goods and services. 8 In pursuance of providing for a large tax base, the VA T scheme was to be applied up to and including the retail trade stage. The directive tre ats supply of goods and services as exhaustive categories by defining ‘supply of servic es’ as “ any transaction which does not constitute a supply of goods ” 9 and by specifically listing transactions that woul d 7 Poddar and Ahmed, “GST Reforms and Intergovernment al Considerations in India”, Working Paper No.1/2009-DEA, p. 7(2009). 8 Subject Matter and Scope, Paragraph 2, EC directiv e 2006/112/EC. 9 Art. 24, EC directive 2006/112/EC.

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5 on a narrow tax base and higher rates of tax. 4 GST thus seeks to replace the single-point levy of tax, focussed only at the stage of manufact ure with a system that seeks to levy tax extending from the pre-manufacture stage till the r etail stage thus resulting in a wider tax base. 4. Overlap between Goods and Services : Some of the most controversial issues in day taxation law in India today concern the clas sification of taxable commodities as ‘goods’ or ‘services’ or ‘a combination of both’. 5 With the advent of technology, especially in the context of software products, cla ssification into watertight compartments has become extremely difficult, and often impossibl e. As a result, courts have recognised that taxable commodities are often partly ‘goods’ a nd partly, a ‘services’. Applicability of entirely different regimes of taxation to ‘goods’ a nd ‘services’, as under the present system, adds to complications related to classifica tion. In addition, it has been noted that the proportion of contribution by ‘service tax ’ to the total collection of indirect taxes has been steadily increasing. 6 Under the pre-GST constitutional scheme, exclusive power with respect to service taxes was c onferred on the Centre by virtue of Entry 92C of List I. This deprived states of a s ignificant avenue of revenue collection also, heavily constraining their tax bas es to ‘goods’ alone. 5. Non-Comprehensiveness of the VAT system : While the central and state VAT schemes alleviated the problem of double taxati on to a great extent, as alluded to before, the solution remained incomplete under the VAT system. The inefficiency resulting from imposition of a “tax on tax” – a pro blem that the VAT intended to resolve, remained problematic at least in three respects; first , with respect a variety of goods and services that did not fall within the ambit of the VAT scheme, second , as regards a number of levies such as additional customs duty, l uxury tax, entertainment tax which 4 Poddar and Ahmed, “GST Reforms and Intergovernment al Considerations in India”, Working Paper No.1/2009-DEA, p. 5 (2009). 5 See , Tata Consultancy Services v. State of Andhra Prad esh, AIR 2005 SC 371. 6 Poddar and Ahmed, “GST Reforms and Intergovernment al Considerations in India”, Working Paper No.1/2009-DEA, p. 6(2009).

Sid Harth

4 Introduction 1. The importance of a just and efficient indirect tax regime in India is perhaps best vindicated by the fact that very few countries in t he world have a higher ratio of indirect tax collection to direct tax than India. 1 Indirect tax reforms in India received a major breakthrough with the introduction of VAT, which co ntributed immensely towards removing inefficiency resulting from the earlier ca scading effect that forced assesses to often pay a ‘tax on tax’. The VAT system achieved t his result by taxing only the ‘value addition’ at each level as opposed to the entire va lue of the commodity itself. However, after about half of decade of implementation of VAT in India, several of its shortcomings came to light, most notable among them being the fa ct that several levies (for instance, additional customs duty, levied under s. 3(1) of th e Customs Tariff Act) were left out of the VAT scheme, and the inability of the VAT scheme to capture value-addition before the stage of manufacture. The GST was thus proposed as “the next logical step” to VAT. 2 2. The economic rationale underlying introduction of t he Goods and Services Tax in India broadly falls under the following heads: 3. Broadening the Tax Base: It is a settled proposition of law in India present ly that the taxable event that attracts a charge of central excise is the process of ‘manufacture’. The term ‘manufacture’ has been narrowly construed by the Apex Court in its landmark decision in Delhi Cloth and General Mills 3 and affirmed consistently be later rulings as, the process of “ bringing into existence a new substance… and not me rely to produce some change in a substance ”. Evidently, this results in an extremely narrow t ax base. It is accepted all over the world today that a wide ta x base with a ‘multiple-point-taxation system’ is certain to result in a more efficient re alisation of taxes than a tax regime based 1 National Council of Applied Economic Research, M OVING TO G OODS AND S ERVICE T AX IN I NDIA (2009) available at 2 The Empowered Committee of State Finance Ministers , “First Discussion Paper on Goods and Services Tax in India”, p. 8 (2009). 3 Union of India v. Delhi Cloth and General Mills, A IR 1963 SC 791

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Pre-Legislative Briefing Service (PLBS) A Report on The Constitution (115th Amendment) Bill: GST Submitted to the Standing Committee, Finance of the Lok Sabha on 23 May, 2011 3 Executive Summary The Goods and Service Tax regime proposed to be introduced in India is without question the most widespread restructuring of India’s taxation regime attempted in recent times, but in a sense just seeks to take the pre-existing VAT scheme to its logical conclusion. The Constitution (One Hundred and Fifteenth) Amendment Bill, 2011 [“the GST Bill”], as a first step in this regard, confers concurrent legislative competence on Parliament and State legislatures to impose taxes on goods and services. However, changes sought to be affected by the GST Bill to the pre- existing scheme of legislative competence under the Constitution, and in particular, how it fits with well-established rules of constitutional interpretation such the doctrine of repugnance, the jurisprudence on deemed sale, and the rule of harmonious construction of legislative entries throw up several important questions of interpretation. In this report, we discuss some of these and propose changes that we believe may contribute towards creating a more coherent indirect tax structure in India. In the first section, after briefly outlining the economic rationale that supports the introduction of a comprehensive goods and service tax regime in India, we undertake a brief survey of the goods and service regimes operating in other jurisdictions. The second section examines the impact of the non-obstante clause in Clause two of the bill suggesting that it leaves unaddressed the possibility of a conflict between Central and State laws, and discusses three options that are now available to rectify this defect. The report then examines the impact of the recent decision of the Supreme Court in Azad Coach on Clause 3 of the Bill, suggesting that the decision may be inapplicable to the interpretation of the phrase “ inter-state trade and commerce” in Clause 3. Finally, the report considers the impact of amendments sought to be made to entry 84 (List I) of the Seventh Schedule as well as the legal consequences of the definition of the phrase “goods and services” in Art. 366(29A) of the Constitution. The scope of the expression “goods and services” is of considerable importance because it identifies the range of transactions to which GST legislation to be enacted may be extended. The Report identifies concerns that emerge from the elaborate rules that have come to occupy centrestage in India’s goods and services jurisprudence, especially in the context of intersection of tax legislation, such as service and sales tax.

Source: TOI

…and I am Sid Harth