Introduction

India has a federal form of government and thus a federal financial system. The essence of the federal form of government is that the central and state governments are independent of each other within their constitutionally defined fields of activity. Once the foundations of the board have been established, it is equally important that each board has sufficient sources of income to carry out the tasks entrusted to it.

Sales taxes are an important source of revenue for the Government of India. Although the structure of taxes varies, they are usually collected at the first point of sale in the country.

The Constitutional Amendment of 1956 empowered the states to impose VAT under the Value Added Tax Act, 1956, which was enacted by the Sixth Amendment to the Constitution, which added entry 92A to List I of the Seventh Schedule, which empowered Parliament to tax goods. (except newspapers) in interstate commerce.

The income of that tax was assigned to the states by changing Article 269 of the Constitution. Thus intra-state sales fall under the jurisdiction of the state government, while sales outside the state (inter-state sales) fall under the jurisdiction of the central government. Thus, central sales tax (CST) is levied on sale or purchase of goods in inter-state trade. However, the CST is borne by the institution, and the country that transports the goods from one country to another (or the country of export) receives income from this tax.

Thus, an attempt has been made to study the devolution and federalism of taxes in India in relation to value added tax in India, in relation to the Central Sales Tax Act and individual state sales tax laws.

Fiscal Federalism under India Constitution:-

The federal nature of India’s public finances dates back to the 1970s. Although the state had a unified form of government at the time, it was considered administratively desirable to have some kind of division of tasks and financial powers between the center and the state. Since then, the arrangement has been revised and improved from time to time. Fiscal federalism involves the division of taxation and public expenditure between different levels of government, namely the centre, states and local governments. Fiscal federalism helps a government organization achieve cost efficiency with economies of scale in providing public services that best meet people’s preferences. From an economic perspective, it creates a single common market that promotes economic activity.

India has a federal form of government and thus a federal financial system. The essence of the federal form of government is that the central and state governments should be independent of each other and have sufficient revenues to carry out the tasks entrusted to them. The financial independence and adequacy of the federal government forms the backbone of successful operations.

The Seventh Schedule (Article 246) defines “subjects of laws passed by parliament and State legislatures” and provides for the Union List (List I), State List (List II) and Concurrent List (List III). . List I transfers all nationally important functions to the Union such as defence, foreign affairs, communications, constitution, organization of Supreme Court and Supreme Courts, elections etc., List II transfers several essential functions to the states. and human welfare such as public order, police, local government, public health, agriculture, land, etc. List III is a concurrent list which includes administration of justice, economic and social planning, trade and commerce etc.

According to Article 246 of the Seventh Schedule, Parliament has the exclusive power to make laws on matters enumerated in List I, notwithstanding the provisions of other clauses of that Article. On the other hand, the Parliament of any state has the exclusive right to make laws for the State on any of the matters enumerated in List II, subject to other clauses. Both the Parliament and the State Legislature can make laws relating to List III, but the law listed in List I or III belongs to the Union. Thus, the Union has superiority in many legislative areas.

These lists also include tax rights. The federal list includes non-agricultural income taxes, excise taxes, customs taxes, and corporate taxes, among others. The State List contains a concurrent list of Land Revenue, Liquor Excise, Agricultural Income Tax, Property Tax, Sales or Purchase Tax, Vehicle, Professional, Luxury, Entertainment, Stamp Duty etc. does not include major taxes. Thus, the constitution has both mandatory and permissive provisions that facilitate systematically organized large-scale resource transfers:

1. Levy of duties by the Centre but collected and retained by the States.
2. Taxes and duties levied and collected by the Centre but assigned in whole to the states.
3. Mandatory sharing of the proceeds of income tax.
4. Permissible participation in the proceeds of the Union excise duties.
5. Statutory grants –in-aid of the revenues of states.
6. Grants for any public purpose and,
7. Grants of loans for any public purpose

Thus, the constitution gives the states part of the funds at the disposal of the center because it provides for a certain distribution of tax power between the union and the states. All changes made to the lists of the Union and the States under their fiscal jurisdiction fall under the provisions of Article 368. This requires ratification by at least half of state legislatures. On the other hand, if the provisions of Part XII have to be amended, it can be done under Article 368(2), which requires only half of the members of each Parliament. This means that the parliament can change the part of the funds of the Union to which the states are entitled.

Fiscal Federalism under Indian Judicial Aspect

It is known that neither the Sale of Goods Act nor the Central Excise have attempted to fix sales suits so far. This is because the localization of sales is a complex issue in many cases when different stages of the sales transaction are reached in different places, for example when the sales contract is concluded in one country and the transfer of ownership of the goods takes place in another. country country, the price is paid in a third country and the delivery takes place in yet another country. In such cases, there may be a real risk that different countries will claim to tax the same transaction on the basis of a sufficient territorial connection. Between the state and what it sought to tax.

In CST v. Suresh Chand Jain[1] it was held that a sale can be said to be in the course of inter-state only if two conditions concur viz. (i)sale of goods and (ii) a transport of those goods from one State to another. If in case, Inter-state sales involve two or more states. It is necessary to determine the state in which the sale or purchase of goods takes place since that becomes the appropriate state for the purpose of levying and collecting central sales tax. Not all despatches of goods from one state to another result in interstate sales rather the movement must be on account of a covenant or incident of the contract of sales.

In case of Inter- State Sale there are certain essential ingredients which includes that the transaction must be a completed sale, moreover, in Balabhgas Hulaschand v. State of Orissa[2] it was held that for interstate sale to be complete, there should be an agreement to sale which contains a stipulation (express or implied) regarding movement of goods from one State to another. In the case of CST, UP v. Bakhtawar Lal Kailash Chand Arhtiit[3] was held thatit is immaterial whether a completed sale precedes the movement of goods or follows the movement of goods or takes place while the goods are in transit. What is important is that movement of goods and the sale must be inseparably connected, moreover the movement shall be physical[4] and such movement must be inextricably connected with sale. This Sale need not precede the inter-State movement. Sale can be either before the movement or after the movement[5].

When the states power to tax sales on territorial nexus theory was challenged, it was decided by the Supreme Court in Poppatial Shah v. State of Bombayg[6]that it would be quite competent to enact a legislation imposing taxes on the transactions concluded outside the province provided that there was a sufficient and real territorial nexus between such transactions and the taxing province.

This principle, which is based on the decision in Wallace Broyhers and C. v. Commissioner of Income Tax, Bombay[7] has been held by the Supreme Court to be applicable in sales Tax Legislation.

It thus appears, that the state legislature has within its allotted field of legislation covered by the Entry 54 of list II by reason of Article 246 (3), exclusive power to make laws for the state with regard to taxes on sales or purchases of goods other than newspapers, subject of course, to restrictions placed by Article 286.

All that is necessary is that the taxing law must be for the purpose of the state. That being the case, in absence of any constitutional limitation it was not necessary. for levy of sales tax that all the component parts of the sale, such as the contract of sale, passing of title, payment of price, delivery of goods, must take place within the borders of the taxing state. The doctrine of nexus is applicable to sales tax legislation was further affirmed in United motors Case[8]on this point has not been, in any way shaken by the subsequent decision of the Supreme court in Bengal Immunity Company’s Case[9]. 

The Supreme Court in Tata Iron and Steel Company v.  State of Bihar[10] also recognized the Theory of territorial nexus. It is stated in the case “the presence of goods at the date of agreement for the sale in the taxing state or the production or manufacturing in the state of goods the property wherein eventually passed as a result of the sale wherever it might have taken place, constituted a sufficient nexus between” he taxing state and the sale.

In State trading corporation v. State of Mysore[11], the company made various sales of cement, which were supplied from the factories outside the state of Mysore to purchasers within the State. The State of Mysore levied tax on these sales under the two sales tax acts passed by the Mysore legislature. The company applied Art.32 of the Constitution to squash the assessment order on the ground that the State had no power to tax the sales they had taken place in the course of inter-state trade.

The Court held that the sale occasions the movement of goods from one state to another within Section 3(a) of the Central Sales tax Act when the movement is the resultant of the covenant or the incident of the contract of sale. In that case, the contract of sale was deemed to have contained a covenant that the goods would be supplied in Mysore from place  situated outside the borders and the sales were therefore, interstate sales within Section 3 (a) of the Central sales tax Act.

From the consideration of the decisions of the Supreme Court cited above one principle that has clearly emerged out is the theory of territorial nexus has not ceased to operate and facilitates the machinery of taxation and enables tax Federalism.

Conclusion

The essence of federal form of government is that the Centre and the State Governments should be independent of each other in their respective, constitutionally demarcated spheres of Action. Once the fundamentals of the government are spelt out, it becomes equally important that each of the government should be provided with sources of raising adequate revenues to discharge the functions entrusted to it. For the successful operation of the federal form of government financial independence and adequacy form the backbone. The constitution recognizes that the division of resources and functions between the unions was such that there would be an imbalance between them. The Finance Commission is envisaged in the Constitution as the key institution responsible for dealing with fiscal imbalances between the centre and states, as well as among the states

The power to make laws with respect to taxes on the sales and purchase of goods vests both in the Union as well as in the State legislatures. The union Parliament can make laws with respect to taxes on the sale and purchase of goods other than newspapers, except where such a sale or purchase takes place in the course of inter-state trade or commerce.The State Legislature, on the other hand, can impose sales tax on the sale or purchase of goods other than the newspapers, except where such a sale takes place in the course of interstate trade and commerce.

In the interest of the national economy, Article 246 and 286 place certain restrictions on the plenary power of the state legislatures to make laws with respect to sales tax. In India the distribution between the Centre and the state with respect to the sales tax clearly established the federal principles, which are existent in the country, and this is by the virtue of the provisions of the Central Sales Tax Act, 1956.

Herein, it can be clearly seen that the structure of sales taxation clearly fits in the bracket for a federal structure. The sales of a variety of goods of general use are more or less confined to the individual areas or states. Therefore, the allocation of general sales tax to the states is quite appropriate. There are, however, certain commodities, which enter inter-state trade. Different rates in different states on the sale of these goods, therefore, may adversely affect the trade. To avoid this difficulty, sometimes, Central co-ordination in the management and rates of these taxes is introduced.

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[1]   (1988) 70 STC 45 (SC),

[2]   AIR 1976 SC 1016

[3]  AIR 1992 SC 1952

[4]   Balabhgas Hulaschand v. State of Orissa , (1976 SC 1016).

[5]   Oil India Co. Ltd. v. Superintendent of Taxes  (1975) 35 STC 445 (SC)

[6]   AIR 1953 SC 274

[7]   AIR 1948 PC 118

[8]   AIR 1953 SC 252,

[9]   AIR 1955 Sc 661

[10]   AIR 1958 SC 452 ( 461)

[11]   AIR 1963 SC 548