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THE DEVELOPMENT OF SALES TAX IN THE STATE

PRE-VALUE ADDED TAX SYSTEM

1.1     Sales tax was first introduced in India in the province of Bombay, where a tax was imposed on sales of tobacco within certain very limited urban and suburban areas by the Bombay Tobacco (Amendment) Act, 1938, which came into force on the 24th March, 1938.

1.2    In the Central provinces & levy, again a selective one, on motor spirit and lubricants alone was introduced in January, 1939.  In the province of Bombay, Government took powers by the Bombay Sales Tax Act, 1939 to levy sales tax on motor spirit and manufactured cloth, at rates not exceeding six and a quarter per cent.  Eventually, however, only motor spirit was notified for taxation under that Act.

1.3   It was not until 1945, that an attempt to introduce a general sales tax was made in Bombay.  The Bombay Sales Tax Act of 1946 enacted on8th March, 1946, provided for the levy of a tax at the last stage of sale of any goods.  The rate of tax under the Bombay Sales Tax Act, 1946 was six paisa per rupee of the sale price.  The exemption list largely comprised articles of staple diet and other necessities of the common man and other items such as electrical energy, tobacco, foreign liquor and motor-spirits on which there was already same form of duty or tax. 

1.4  On the 1st April, 1948 a tax of one anna in the rupee was levied, for the first time, on 13 specially selected items which included motor cars, refrigerators wireless equipment, perfumery, firearms, silk and jewellery. 

1.5   A radical change in the basis of the sales tax was effected on 1st November, 1952 by the sales introduction of a system of multi-point taxation, that is to say, a uniform levy at each stage of the sale of any goods, supplemented by a special tax at one anna in the rupee on selected goods, in addition to the general levy.  The limit of turnover for registration in the case of persons dealing in general goods it was at Rs. 30,000 per year.

1.6   The Bombay State introduced from the 1st of April, 1954 the system on tax which has come to be commonly known as the ?two point? system.  Under this system of tax the turnover limits attracting liability to tax and registration are Rs. 10,000 per year in the case of manufacturers and importers and Rs. 25,000 in the case of all patterns of the lists under the earlier enactments, generally speaking.  The scheme of the Act is broadly that a sales tax is levied at the first stage of the sales of any goods and a General Sales Tax is levied in addition to the sales tax.   

1.7  The BST Act, 1959 was amended by  from 1.7.1981, which completely amended the scheme of taxation under the BST Act, 1959 from 1.7.1981.Prior to 1.7.1981, the BST Act, 1959 was a schedule oriented Act in as much as the tax liability of a sale or purchase of a commodity will depend on the schedule in which the goods fall.  Thus, prior to 1.7.1981 there were five schedules in which the specific goods in question lie ? schedule A Tax free goods   No Tax.

Schedule B Part I Declared goods  Tax at first stage only at a rate not more than 4%

Schedule B Part II Declared goods  Tax at last stage.  The last stage being the

stage at which goods pass from a licensed dealer to unlicensed dealer at a rate not more than 4%

Schedule C Tax at the first stage of sale.  The first stage being the stage at which the goods enter into the stream of sale in the State of Maharashtra.  Such first stage one can visualise as follows :-

a)   Where the goods are manufactured.

b)   Where the goods are imported from foreign country.

c)    Where goods are purchased from a dealer from outside the State of Maharashtra.

d)   Where goods purchased from an unregistered dealer are resold.

Schedule D Tax at the last stage of sale.  The last stage being the stage at which the goods pass from a licensed to an unlicensed dealer.

Schedule E Tax at first stage and tax at last stage.  The stages being stages (first and last) as explained above.  In addition to this in respect of Schedule E goods, additional retail S. T. at % is payable by a dealer who is not a licensed dealer both at the time of purchase and sale.

1.8     To review the present system of Sales Tax in the State, in the light of the system prevailing in Gujarat, Tamil Nadu, West Bengal and Karnataka and to examine the system of administration of Sales Tax Law and to suggest improvement therein so as to simplify the procedure for assessment ensuring avoidance of evasion of taxes, a Committee under the Chairmanship of Shri. M. R. Yardi was appointed by the Government in 1975.In view of the recommendation of the Committee on various issues, the BST Act, 1959 is suitably amended from 1.7.1981.

1.9     From 1.7.1981 however, the scheme entirely changed and now we have brought single point first stage levy in operation.  Under the new scheme now Government expects tax as all taxable sales or purchases of first stage only, the first stage being the stage of which the goods enter into the stream of sale in the State of Maharashtra.  The possible avenues by which the goods can for the first time enter the streams of sale can be visualised as follows :

1.    Where goods are manufactured.

2    where goods are imported from foreign country.

3.    Where goods are purchased from dealer outside the State of Maharashtra.

4.    Where goods are purchased from unregistered person.

          The first stage tax is called sales tax.  In view of this new scheme, the schedules have now been reduced from 5 in number to 3 viz..

(a)  Schedule A Tax free goods on which no tax is payable under section 5 of the Act.text_style

(b)  Schedule B Declared goods  on which tax is leviable at the first stage at a rate not more than 4%.

(c)  Schedule C First stage levy at the rates specified against the entry.  This Part  I schedule is covered by items of raw materials which are generally Part  II   used for manufacture, liable to 4% S. T.

       Thus, under the new amended Act since tax is leviable in the first stage i. e. the stage at which goods enter the manufacturers, the tax liability of transaction of a sale will depend upon the character of purchase i. e. whether from R. D. or O. M. S. import or U. R. D.

1.10     Thereafter on important change in the State indirect tax reforms took place from  April 1st, 2005 by introduction of VALUE ADDED TAX system. 

The Bombay Sales of Motor Spirit Taxation Act, 1958

          The act remained in operation from 1958 till 31/03/2005.  The act provided a levy of tax on the sales of Motor Spirits within the State.  The following commodities were covered under the Act

       High Speed Diesel Oil

      Aviation Gasoline (Duty paid)

      Aviation Gasoline (Banded)

      Aviation Turbine Fuel (Duty paid)

      Aviation Turbine Fuel (Banded)

      Any other kind of Motor Spirit 

1st April, 2005 the tax on Motor Spirit is being levied under Value Added Tax Act, 2002. 

Maharashtra Sales Tax on the transfer of property in goods

 involved in the executions of Works Contract Act, 1985. 

Historical Background :-

          Prior to the enactment of Constitution of India, the provincial Legislatures derived power to levy taxes on the sale of goods and advertisement by virtue of Entry 48 of List II in the Seventh Schedule to the Government of India Act, 1935.  The power exercised by the States was not subject to any restrictions or conditions.  The then province of Madras was the first State which attempted to bring within its tax net the transactions of Works Contract by amending the term 'goods', 'sale' and 'turnover' in the Madras General Sales Tax Act, 1939.  The expression 'sale' was amended so as to bring within its ambit transfer of property in goods involved in the execution of works contract.  The term 'goods' was also amended so as to include materials used in construction, fitting out, improvements etc.  Assessment of taxable turnover arrived at by the authorities in pursuance of the said Amendment was challenged in the Madras High Court in the Case of Gannon Dunkerley and Co. (Madras) Ltd. V/s. State of Madras.  Similar question about the liability of contractors who had undertaken to carry on works contract to pay sales tax on transfer property in goods involved in works contract came up for consideration in different High Courts.         

Conflicting views of various High Courts :-

         Gannon Dunkerley and Co. (Madras) Ltd. V/s. State of Madaras,      A. I. R. 1954 Mad. 1130, the assesses were carrying on business as engineers and contractors.  Their business consisted mainly of execution of contracts for construction of buildings, bridges, dams, roads and structural contracts of all kinds.  During the assessment year the return made by the assesses showed as many as 47 contracts, most of which were building contracts, which were executed by the assesses.  From the total of the amount which assesses received in respect of sanitary contracts and other contracts 20% and 30% respectively were deducted for labour and the balance was taken as the turnover of the assesses for the assessment year in question.  Sales tax was levied on the said balance treating it as taxable turnover on the ground that there was no sale of goods as understood in India and, therefore, no sales tax could be levied on any portion of the amount which was received by the assesses from the persons for whose benefit they had constructed buildings.  It was urged on behalf of the assesses that there was no element of sale of the materials in a building contract and that such a contract was one entire and indivisible.  Unless the contract was completed, the builder was not entitled to the price fixed under the contract or ascertainable under the terms of the contract.  The property in the materials passed to the owner of the land not by virtue of the delivery of the materials as goods under and in pursuance of an agreement of sale which stipulated a price for the materials.  The property in the materials passed to the owner of the land because they were fixed in pursuance of the contract to building and along with the corpus, which ultimately resulted by the erection of the super-structure, the materials also passed to the owner of the land.  It was urged that a contract to build was not a contract to sell goods used in the construction of a building.  The High Court of Madras on a consideration of the submission made before it came to the conclusion that the transaction in question were not contracts for sale of goods as defined under the provisions of the Sale of Goods Act, 1030 which was in force on the date on which the Constitution came into force and therefore the assesses were not liable to pay sales tax on the amounts received by them from the persons for whom they had constructed buildings etc. during the year of assessment.  But a petition filled by the very same assesses for similar relief in Gannon Dunkerley and Co., Madras Pvt. Ltd., V/s. Sales Tax Officer, Mattancheri, A. I. R. 1957 Kerala 146 was dismissed by the Kerala High Court affirming the imposition of sales tax on the turnover relating to construction works and upholding the rules providing for apportionment of the determination of the taxable turnover on a percentage basis.  In Mohammed Khasim V/s. State of Mysore, (1955) 6 S. T. C. 211, the Mysore High Court held that the provisions of the Mysore Sales Tax Act imposing sales tax on construction of buildings under works contract were valid and further upheld the determination of the taxable turnover on percentage basis.         

Supreme Court Judgment in Gannon Dunkerley's Case :-

         Ultimately the question whether the cost of the goods supplied by a building contractor in the course of the construction of building could be subjected to payment of sales tax was finally resolved by the Supreme Court in State of Madras V/s. Gannon Dunkerley and Co. (Madras) Ltd. (1959)     S. C. R. 379 : 9 S. T. C. 353, which was an appeal filed against the decision of the High Court of Madras in Gannon Dunkerley and Co. Ltd. V/s. The State of Madras (supra).  In this case Supreme Court held that on a true interpretation the expression ?sale of goods? meant an agreement between the parties was that the contractor should construct the building according to the specifications contained in the agreement and in consideration therefore received payment as provided therein, there was neither a contract to sell the materials used in the construction nor the property passed therein as movable.  The Supreme Court further held that the expression Sale of goods was at the time when the Government of India Act, 1935 was enacted, a term of well recognised legal import in the general law relating to sale of goods and in the legislative practice relating to that topic and should be interpreted in Entry 48 in List II in Schedule VII of the Government of India Act, 1935 as having the same meaning as in the Sale of Goods Act, 1030.  It was further held that in a building contract which was one, entire and indivisible, there was no sale of goods and it was not within the competence of the provincial Legislature under Entry 48 in List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it as a sale.  The above decision though it was rendered on the basis of the provisions in the Government of India Act, 1935 was equally applicable to the provisions found in Entry 54 of List II of Schedule VII of the Constitution.   As a result of the above decision, the decision of the Nagpur High Court, the Rajasthan High Court, the Mysore High Court and the Kerala High Court referred to above were over-ruled and the decision of the Hyderabad High Court and the decision of the Madras High Court against which the above appeal had been filed were affirmed.  By virtue of the above decision of the Supreme Court no sales tax could be levied for 25 years on the amounts received under a works contract by a building contractor even though he had supplied goods for the construction of the buildings. 

Recommendations of Law Commission :-

          The various problems which arose on account of the above decision were referred to the Law Commission of India and its advice was sought as to the manner in which the types of transactions involved in the above decisions could be made eligible to sales tax.  The Law Commission considered these matters in its 61st Report and recommended inter alia certain amendments to the Constitution, if as a matter of administrative policy it was decided to levy sales tax on transactions of the nature mentioned above.  There were also complaints from the States that there was a large scale leakage of sales tax revenue by the adoption of devices such as hire purchase system.  In the year 1982 Parliament passed the 46th Amendment amending the Constitution in several respects in order to bring many of the transactions, in which property in goods passed but were not considered as sales for the purpose of levy of sales tax, within the scope of the powers of the states to levy sales tax. 

Forty ? sixth Amendment Act :-

          By the 46th Amendment a new clause, namely clause (29 A) was introduced in Article 366 of the Constitution.  Clause (29 A) of Article 366 of the Constitution reads thus -  

?366. Definitions  In this Constitution, unless the context otherwise requires, the following expressions have the meaning hereby respectively assigned to them, that is to say ............ 

(29 A) 'tax on the sale or purchase of goods' includes --

(a)   a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration.

(b)   a tax on the transfer of property of goods (whether as goods or in some other form) involved in the execution of a works contract;

(c)    a tax on the delivery of goods on hire-purchase or any system of payment by installments;

(d)   a tax on the transfer of the right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e)   a tax on the supply of goods by any unincorporated association or body of persons to member thereof for cash, deferred payment or other valuable consideration.

(f)    a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration. 

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made?. 

 In the year 1982 Parliament passed the 46th Amendment amending the Constitution in several respect in order to bring many of the transactions, in which property in goods passed but where not considered as sales for the purpose of levy of sales tax, within the scope of the powers of the states to levy sales tax.  Accordingly, tax was levied on the indivisible works contract on the value of transfer of property in goods involved in the execution of Works Contract Act. In pursuance of the amendment the state enacted an act on 1st October 1986.

From 1st April, 2005 tax on such Works Contract is being levied under Value Added Tax Act, 2002. 

Maharashtra tax on transfer of the right to use any goods

for any purpose Act, 1985

Devices by way of leases of films had been resulting in avoidance of sales tax. The main right in regard to a film related to its exploitation and after that for a certain period of time ,in most cases, the ceases to have any value. In the year 1982 Parliament passed the 46th Amendment amending the Constitution in several respect in order to bring many of the transactions, in which property in goods passed but where not considered as sales for the purpose of levy of sales tax, within the scope of the powers of the states to levy sales tax. In pursuance of the amendment to the constitution and in order to cover such and similar transactions the act was enacted on 1st October 1986 which operated during the period from 1st October, 1986 till 31st March, 2005.  Accordingly, tax was levied on the leasing transaction at the rate of 4%. 

From 1st April, 2005 tax on such lease transaction is being levied under Value Added Tax Act, 2002.

 

 
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