In a significant ruling with implications for state taxation powers, the Supreme Court of India on Thursday upheld the constitutional validity of Section 5A of the Kerala General Sales Tax Act, 1963, and Section 7A of the Tamil Nadu General Sales Tax Act, 1959. The judgment was delivered by a Bench led by Chief Justice Sanjiv Khanna in a long-standing batch of appeals questioning the legislative competence and constitutional consistency of these provisions.
The Court affirmed that both provisions, which empower state governments to levy purchase tax under specific conditions, are within the legislative competence of the respective state legislatures and do not infringe upon constitutional provisions.
Section 5A of the Kerala Act and Section 7A of the Tamil Nadu Act enable the states to impose purchase tax where goods, though exempt from sales tax at the point of sale or purchased from exempt dealers, are subsequently consumed in manufacturing, used otherwise, or dispatched outside the state, except in the course of inter-state commerce.
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The challenge arose from dealers who argued that the purchase tax amounted to an unconstitutional levy on use or consumption, akin to an excise duty or use tax, which the states are not empowered to impose under the Constitution. However, the Supreme Court, relying on its earlier precedents, decisively rejected this contention.
The Court observed that the provisions in question are charging sections themselves, intended to plug loopholes in the tax system where goods, though taxable in nature, might escape tax due to the circumstances of the sale being exempt or outside the tax net. “Section 7A and its pari materia Section 5A in Kerala are self-contained charging provisions designed to ensure that taxable goods do not evade the state’s tax network by being diverted from the normal supply chain,” the Court noted.
It emphasized that the power to levy a tax on the purchase of goods remains within the ambit of Entry 54 of List II of the Seventh Schedule of the Constitution, which allows states to tax the sale or purchase of goods. The Court further clarified that the taxable event remains the purchase itself, even if the actual liability arises later upon consumption, use, or dispatch outside the state.
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It was noted that, “we must reject the argument on behalf of the assessee that Section 7A of the Tamil Nadu Act and Section 5A of the Kerala Act will have no application when tax is exempt at the hands of the seller, or for that matter, the tax under Section 3 or Section 5 of the aforesaid Act at the hands of the seller is payable at the point of first sale. Sections 5A or 7A, as the case may be, impose purchase tax specifically in situations where the seller is granted exemption from payment of tax. The legal position is that exemption from payment of tax at the time of sale is a precondition for attracting Sections 5A and 7A respectively.”
It was also noted that, “the fact that in case the goods were not exempt from payment of tax at the time of sale and the goods would have attracted tax at the first point of sale, is immaterial and inconsequential. Levy of purchase tax is governed by the provisions and stipulations of Sections 5A or 7A. They are independent and in a way constitute charging sections. Purchase tax is leviable on and payable by the purchaser. However, the legislations do not levy the purchase tax to tax the transaction of the sale and purchase twice.”
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On the contrary, it was pointed out that, “Instead, it levies purchase tax only where no sales tax was payable on the sale. Further, purchase tax has not been made leviable in all situations, except in three situations, namely, (a) where the goods on which no tax is paid were used in manufacture; or (b) where the goods were despatched out of the State other than by way of inter State trade or commerce; or (c) where the goods are disposed of in a manner other than sale within the State. However, the need to satisfy the conditions do not change the nature of the charge, which is, tax on purchase.”
The bench, in rejection of challenge to constitutionality, observed that, “The decision whether or not to levy purchase tax is a prerogative and power of the State Legislature. As noticed above, the liability to pay is distinct from levy of tax.”
Addressing concerns about potential overreach, the Court underlined that the tax is not imposed on the manufactured product or on the act of dispatch, but strictly on the purchase of raw materials that have not been subjected to tax under standard sales channels.
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