Concept

Objects and Basic Schemes of CST:-

The objects of the Act, as stated in preamble of the CST Act are -

To formulate principles for determining (a) when a sale or

purchase takes place in the course of inter-state trade or
commerce (b) When a sale or purchase takes place outside a State
(c) When a sale or purchase takes place in the course of imports
into or export from India.
To provide for levy, collection and distribution of taxes on sales
of goods in the course of inter-state trade or commerce.
To declare certain goods to be of special importance in inter-State
trade or commerce and specify the restrictions and conditions to
which State laws imposing taxes on sale or purchase of such
goods of special importance (called as declared goods) shall be
subject.

CST Act imposes the tax on inter state sales and states the
principles and restrictions as per the powers conferred by
Constitution.

Basic scheme of the CST Act - The basic scheme of the CST Act
is as follows.

Sales tax revenue to states:- The CST Act provides for levy on
Inter-State sales and also defines what is ‘Inter-State Sale’.
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However, the concept that revenue from sales tax should be
collected by States has been retained. Thus, though it is called
Central Sales Tax Act, the tax collected under the Act in each State
is kept by that State only. This is provided in Article 269(1)(g) of
Constitution of India. CST in each State is administered by local
sales tax authorities of each State.

Tax collected in the state where movement of goods commences :-

The scheme of CST Act is that Central Sales Tax is payable in the
State from which movement of goods commences (i.e. from which
goods are sold). The tax collected is retained by the State in which
it is collected. CST Act is administered by Sales Tax authorities of
each State. Thus, the State Government Sales Tax officer who
collects and assesses local (State) sales tax also collects and
assesses Central Sales Tax.

Tax on interstate sale of goods:- CST is tax on inter State sale of

goods. Sale is Inter-State when (a) sale occasions movement of
goods from one State to another or (b) is effected by transfer of
documents during their movement from one State to another.

State sales tax law applicable in many aspects:- CST Act makes
provisions for very few procedures and rules. In respect of
provisions like return, assessment, appeals etc., provisions of
general Sales Tax law of the State applies.

CST act defines some concepts :- Under the authority of

Constitution, the CST Act defines concepts of ‘Sale Outside the
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State’ and ‘sale during the course of import/import’.

Declared goods:- Some goods are declared as goods of special

importance and restrictions are placed on power of State
Governments to levy tax on such goods.

Inter-State and Intra-State Sale - Entry 92A of List I - Union List

reads : ‘Taxes on the sale and purchase of goods other than
newspapers, where such sale or purchase takes place in the course
of Inter-state trade or commerce’. Entry 54 of list II - State List -
reads : ‘Tax on sale or purchase of goods other than newspapers
except tax on Inter State sale or purchase’. Thus, sale within the
State (Intra-State sale) is within the authority of State Government,
while sale outside State (Inter-State sale) is within the authority of
Central Government.

Sale where both buyer and seller are from same State is Intra-State
sale e.g. from * Mumbai to Pune or * Ahmedabad to Surat *
Howrah to Kolkata * Mysore to Bangalore etc. These are Intra-
State sales. However, when buyer and seller are in different States,
it is Inter-state sales. e.g. : Chennai (Tamil Nadu) to Trivandrum
(Kerala) * Allahabad (UP) to Hyderabad (Andhra Pradesh) *
Bhubaneshwar (Orissa) to Daman (Union Territory) etc.

Newspaper specifically excluded:- It can be seen that ‘newspapers’

are specifically excluded from purview of both Union as well as

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State list. The obvious reason is that newspapers have a very vital
role to play in a democratic society. Freedom of speech and free
flow of information is the backbone of democracy and hence
newspapers have been excluded from tax. [Otherwise, ‘newspaper’
are ‘goods’, but for the exclusion].

Taxable event in sales tax:- In Customs Act - AIR 1963 STC 437=
(1964) 3 SCR 827 (SC 9 member bench), it was held that in case of
sales tax, taxable event is the act of sale. It is not a tax directly on
goods.

Categories of Sales - Sales can be broadly classified in three

categories. (a) Inter-State Sale (b) Sale during import/export (c)
Intra-State (i.e. within the State) sale. - Murli Manohar and Co. v.
State of Haryana (1990) 4 CLA 304 (SC) = (1991) 80 STC 79 =
1990(2) SCALE 821 = (1991) 1 SCC 377 (SC 3 member bench). In
this case, it was observed that they cannot conceive fourth category
of sale.

If sale or purchase to Marketing Agency is in same State, it will be

an Intra-State sale even if goods are despatched outside the state as
per instructions of the marketing agency. - ACC v. CST - AIR 1991
SC 1122.

Tax on Inter-State sale is levied by Union (i.e. Central)

Government while tax on Intra-State sale is levied by State
Government of the State in which sale takes place. No tax is levied

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on sales during import or export.

Sale within the state is ‘residuary sale: – As we will see later, ‘sale
within State’ is residuary sale. Thus, first we have to decide if sale
is ‘Inter State’. If not, we have to find if it is ‘Sale during export or
import’. If not, then the sale is ‘Intra State’. Thus, if a sale is Inter
State of during export or import, it cannot be ‘Sale within the
State’.

Mode of a sales transaction:- Initially, buyer places an order on

seller for supply of goods, called ‘Purchase Order’. After the goods
ordered are ready, the buyer may come to the business place
(godown, factory or warehouse) of seller and obtain delivery of
goods. This will be ‘Sale within the State’. Alternatively, buyer
may ask seller to send the goods by transport. In such cases, the
seller will book the consignment by rail, road, ship or air as per
requirement of buyer to the destination where buyer requires the
goods. In such a case, generally, (a) if buyer and seller are in the
same State, it is Intra-State sale (b) if they are in different States, it
is Inter-State sale (c) if buyer is outside India, it is sale during
export (d) if seller is outside India, it is sale during import.

Background of CST

Sales Tax is one of the most important Indirect Tax for purpose of
taxation by State Governments. Revenue from CST goes to State
from which movement of goods commences. Total CST revenue in
98-99 was Rs 8,538 Crores. Revenue of some major States was -
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Maharashtra - Rs 1,442 Crores. Tamilnadu - Rs 934 Crores. West
Bengal - Rs 799 Crores. Gujarat - Rs 787 Crores, Haryana - Rs 739
Crores. [ET, Bom 21.7.2000].

CST is proving to be a hindrance in introducing VAT. CST has

been reduced to 3% (from 4%) w.e.f. 1-4-2007. It is announced that
it will be reduced by 1% every year and made Nil by 1-4-2010.

Recent Changes in the CST law:-

1-3-2006 – Appeal to CST Appellate Authority will lie only against

highest Appellate Authority of the State [During 17-3-2005 to 28-
2-2006, appeal was to be filed with CST Appellate Authority
directly against order of assessing authority].

18-4-2006 – LPG (liquid petroleum gas) for domestic use is added

to list of ‘declared goods’ u/s 14 of CST Act to maintain tax rates at
reasonable level.

1-4-2007 - CST rate reduced to 3%. 'D' form abolished. Tobacco

products removed from list of declared goods.

1-6-2008 - CST rate reduced to 2%.

Constitutional Background

India is union of states: - Our Constitution generally follows British

pattern, though concepts of federal structure are borrowed from
American and other Constitutions. India is a Union of States. The

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structure of Government is federal in nature. Government of India
(Central Government) has certain powers in respect of whole
country. India is divided into various States and Union Territories
and each State and Union Territory has certain powers in respect of
that particular State. Thus, there are States like Gujarat,
Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and
Union Territories like Pondicherry, Chandigarh etc.

Taxation under Constitution - In the basic scheme of taxation in

India, it is envisaged that (a) Central Government will get tax
revenue from Income Tax (except on Agricultural Income), Excise
(except on alcoholic drinks) and Customs (b) State Government
will get tax revenue from sales tax, excise on liquor and tax on
Agricultural Income (c) Municipalities will get tax revenue from
octroi and house property tax.

Income Tax, Central Excise and Customs are administered by

Central Government. As regards sales tax, Central Sales Tax is
levied by Central Government while State Sales Tax is levied by
individual State Governments. Though Central Sales Tax is levied
by Central Government, it is administered by State Governments
and tax collected in each State is retained by that State Government
itself.

Article 246 of our Constitution indicates bifurcation of powers to

make laws, between Union Government and State Governments.
Parliament has exclusive powers to make laws in respect of matters

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given in list I of the Seventh Schedule of the Constitution (called
‘Union List’’). List II (State List) contains entries under jurisdiction
of States. List III (concurrent list) contains entries where both
Union and State Governments can exercise power. [In case of
Union Territories, Union Government can make laws in respect of
all the entries in all three lists].

Union List relevant to taxation - List I, called “Union List”,

contains entries like Defence of India, Foreign affairs, War and
Peace, Banking etc. Entries in this list relevant to taxation
provisions are as follows :

Entry no. 82 - Tax on income other than agricultural income.

Entry no. 83 - Duties of customs including export duties.

Entry no. 84 - Duties of excise on tobacco and other goods

manufactured or produced in India except alcoholic liquors for
human consumption, opium, narcotics, but including medical and
toilet preparations containing alcohol, opium or narcotics.

Entry no. 85 - Corporation Tax.

Entry no. 92A - Taxes on the Sale or purchase of goods other than
newspapers, where such sale or purchase takes place in the course
of Interstate trade or commerce.

Entry no. 92B - Taxes on consignment of goods where such

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consignment takes place during Interstate trade or commerce.

Entry no. 97 - Any other matter not included in List II, list III and
any tax not mentioned in list II or list III. (These are called
‘Residual Powers’.)

State list pertaining to taxation - State Government has exclusive

powers to make laws in respect of matters in list II of Seventh
Schedule to our Constitution. These entries include Police, Public
Health, Agriculture, Land etc. Entries in this list relevant to
taxation provisions are as follows:

Entry no. 46 - Taxes on agricultural income.

Entry no. 51 - Excise duty on alcoholic liquors, opium and

narcotics.

Entry no. 52 - Tax on entry of goods into a local area for

consumption, use or sale therein (usually called Octroi or Entry
Tax).

Entry no. 54 - Tax on sale or purchase of goods other than

newspapers except tax on interstate sale or purchase.

Restrictions on powers of taxation

Restrictions on power of State Government on imposition of tax on

sale or purchase of goods are provided in Article 286 of
Constitution of India, as follows :

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 State Government cannot impose tax on sale or purchase during
imports or exports; or tax on sale outside the State. [Art 286(1)]
Parliament is authorised to formulate principles for determining
when a sale or purchase takes place (a) outside the State (b) in
the course of import and export. [Article 286(2)]
Parliament can place restrictions on tax on sale or purchase of
goods declared as goods of special importance and State
Government can tax such declared goods only subject to these
restrictions [Article 286(3)].

Under these powers, CST Act has defined the terms ‘sale outside a
State’ and ‘sale during export/import’. Provisions for ‘declared
goods’ have also been made in the CST Act.

No restriction on Inter-State Trade and Commerce - Each State

and Union Territory has certain autonomy. However, the trade and
commerce has to be free all over India, without which India cannot
be ‘One Nation’. As we saw above, tax on Inter-State sale/purchase
can be imposed only by Central Government. Provisions in respect
of inter-State Trade and Commerce in Constitution of India are
summarised below :

Trade, commerce and intercourse throughout the territory of

India shall be free, subject to provisions of Articles 302 to 304 of
Constitution. (as stated below) [Article 301]
Restrictions on trade or commerce can be placed by Parliament in
the public interest. (Article 302)
No discrimination can be made between one State and another or
give preference to one State over another [Article 303(1)]. Such
discrimination or preference can be made only by Parliament by
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 law to deal with the situation arising from scarcity of goods
[Article 303(2)]
State can impose tax on goods imported from other States or
Union Territories, but a State cannot discriminate between goods
manufactured in the State and goods brought from other States
[Art. 304(1)].
State Legislature can impose reasonable restrictions on freedom
of trade and commerce within the state in public interest.
However, such bill cannot be introduced in State Legislature
without previous sanction of the President (proviso to Article
304).

Tax on local goods and goods from other States must be same

Local Sales Tax rate (i.e. Sales tax payable under State sales tax
laws) must be same both for local goods and goods brought from
other States. e.g. assume that if a product is manufactured in M.P.
the sales tax rate is 6%. In that case, same rate will apply in case of
goods brought from other State on stock transfer and sold within
the State of M.P.

Charging section of CST

As per the Constitution, tax on Inter State sale/purchase can be

levied only by Union Government. CST Act has been enacted for
this purpose. Section 6(1) of CST Act provides that subject to other
provisions of the CST Act, every dealer shall be liable to pay tax
under this Act on all sale of goods (other than electrical energy)
effected by him in the course of Inter-State trade or Commerce.

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Section 6(1) is called as ‘Charging Section’ as it imposes levy on
sale of goods on Inter-State sale.

Important words in charging section: - (a) Levy is on sale of goods

(i.e. levy is not on purchases) (b) it is on sale as defined under
section 2(g) (c) sale should be of goods as defined in section 2(d)
(d) there is no levy on electrical energy, though electrical energy is
‘goods’. [section 6(1)] (e) sale should be in course of inter-state
Trade or commerce as defined in section 3.

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 Conclusion

CST is the Central Sales Tax for interstate sales of goods applicable through out
India. The rate at which the sales tax is collected for interstate sales of goods is
called as CST rate. It has been agreed by the Central Government and Empowered
Committee of States to phase out the Central Sales Tax in stages. Now the Central
Sales Tax is replaced by the VAT. The law on sales tax is provided in the Central
Sales Tax Act. This act applies to the whole of India. Each state also has its own
Sales Tax Act for sales made in that particular state. For example in Maharashtra
the Bombay Sales Tax Act is in effect since 1959.

The reduction in the CST rate will be notified by the Central Government and will
not be automatic. The Central Government will issue notifications for such
reduction in Central Sales Tax under provision of Central Sales Tax Act. The
changes have been made by the Taxation Laws Act. When we reduce the Central
Sales Tax then many changes must also be made in the Central Sales Tax Act.

The CST rate was reduced from 4% to 3% with effect from 1st, April 2007. The
rate was reduced by 1% in the year 2008. In 2008 the Central Sales Tax rate was
2%. The Ministry of Finance notified it on 30th May, 2008. The rate came into
effect from 1st June, 2008. The inter state sales of goods in the year 2008 was done
at 2% CST rate. The reduction is made to phase out Central Sales Tax by 31st
March, 2010. So that Goods and Service Tax (GST) can be introduced. Thus the
Central Government has proposed to reduce the Central Sales Tax by 1% every
year and to make it nil by 31st March, 2010.

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 Bibliography

All the above information regarding the central sales tax has been obtained from
various books of different authors. Other than that some information has also been
derived from internet, the website links of which are as follows:-

1) finance.indiamart.com/taxation/salestax.html.

2) indiabudget.nic.in/ub2010-11.

3) www.salestaxindia.com/htms/product.htm.

4) www.delhi.gov.in/DoIT/TradeAndTaxes/CST_Act_1956.

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