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
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
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
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
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
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
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
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 :-
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 ............
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
(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
(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
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.