Report No. 30

21. Report of the Taxation Enquiry Commission.-

The matter was considered by the Taxation Enquiry Commission1. Dealing with Inter-State sales, the Commission observed, that the dichotomy adopted by Article 286 (as then in force) amounted to a division of the sale of goods in India int.-

(a) sale of goods delivered for consumption in a particular State; and

(b) other sales.

This dichotomy was imperfect from the point of view of tax administration. The Taxation Enquiry Commission, therefore, suggested, that all sales of goods should be divided into-

(a) those in the course of inter-State trade and commerce, and

(b) those not in the course of inter-State trade and commerce.

The former should, broadly speaking, be the sphere of the Union and the latter, the sphere of the States. But the responsibilities pertaining to the Union could be exercised through the State Governments, and the revenue in any case be devolved appropriately on them. This would ensure both co-ordination and adaptation to changing needs more effectively, than rigid constitutional provisions supplemented by occasional judicial interpretations.2

Taxation Enquiry Commission, further, suggested3 that the Central legislation which would give effect to this recommendation should also deal with one important aspect, namely, the definition of the locale of sales for the purpose of defining in detail the relative jurisdictions, first, of the Union and the States, and secondly, of the States inter se.

The Commission stated, that entirely irrespective of constitutional restrictions and the Central Government's powers of levy, it was obviously necessary that there should be a body of law which defines, with specific reference to the sales tax, the circumstances in which the sale becomes taxable by a particular State and by no other.

The relevant principles could only be formulated after expert examination, and the Commission recommended that it should be done and the principles adopted in the Central legislation. The Commission took care to emphasise, that it would not suffice only to define the jurisdiction inter se of individual States, but the Central legislation should also contain the definition in adequate detail of what the constitutes a sale or purchase in the course of inter-State trade or commerce.

1 Report of the Taxation Enquiry Commission, (1953-54), Vol. 3, pp. 48-62, paras. 8 to 22.

2. Taxation Enquiry Commission, (1953-54), Report, Vol. 3, p. 54, para. 14(iii).

3. Taxation Enquiry Commission, (1953-54), Report, Vol. 3, pp. 58-59, para. 20.

22. In support of the advantages of Parliamentary legislation the Taxation Enquiry Commission made these observations.1 "We realise, of course, that the legislation itself may have to be modified from time to time in the light of new circumstances not fully provided for, or of judicial interpretation of the original provisions. Parliamentary legislation, as distinguished from constitutional provision, will have the obvious advantage that these modifications can be made as required without undue delay or difficulty. It will not, of course, suffice to define the jurisdiction inter se of individual States.

The other important aspect of Central legislation would be the definition in adequate detail of what constitutes a sale or purchase in the course of inter-State trade or commerce. In this matter too, the embodiment of the principles in an enactment of Parliament, and not in the Constitution itself, would have the advantage that the details of the law can, without undue rigidity, be modified to suit new facts or unforeseen circumstances. As we have stated, the Constitution itself would of course lay down the broad division of tax power between the Union and the States. The important fact would remain that all sales would fall under one or the other of these categories.

The "Union, which under the scheme would, of course, derive no revenue from the taxation of inter-State sales or purchases, would be solely interested, in the legislation which it promotes, in securing, from a practical angle, the maximum possible co-ordination between different States in regard to the operation of the inter-State sales tax and the maximum possible equity in the appointment of the relevant proceeds to the States in which the goods have been physically delivered and those from which the physical despatch has taken place.

In the actual provisions of law, it will no doubt avoid the many pitfalls which have been a feature of the present constitutional provisions as they have been interpreted and implemented, and even if it does not fully succeed in doing so at the outset, the relevant legislation, as we have emphasised, can be modified at subsequent stages in conformity with the administrative and other requirements as they arise from time to time."

1. Taxation Enquiry Commission, (1953-54), Report, Vol. 3, pp. 58-59, para. 20.

23. Having, thus, recommended that sales in the course of inter-State trade or commerce should be regulated by Central legislation, and that principles for determining when sales took place in the course of inter-State trade or commerce should be laid down by Parliamentary legislation, the Taxation Enquiry Commission recommended an amendment of the Constitution for conferring the necessary legislative powers on Parliament.

24. Along with this recommendation, relating to inter-State trade or commerce, the Taxation Enquiry Commission recommended an amendment of Article 286 so that Parliament may, by law, formulate principles for determining when a sale or purchase of goods takes place in the course of import or export1-2.

1. Taxation Enquiry Commission Report, (1953-54), Vol. 3, p. 56, para. 15, sub-para. C.

2. The Taxation Enquiry Commission made certain other recommendations relating to essential goods and other matters, which are not relevant.

25. Thus, the Taxation Enquiry Commission's Report contemplated that the Central legislation should embody principles for determining when a sale or purchase of good takes place (i) outside the State; (ii) in the course of import into, or export outside, the territory of India and (iii) in the course of inter-State trade and commerce1 .

1. Taxation Enquiry Commission Report, (1953-54), Vol. 3, p. 61, para. 22(5), read with p. 56, para. 15C.

26. Earlier Report of the Law Commission.-In pursuance of this recommendation of the Taxation Enquiry Commission1, the Central Government initiated proposals2 for amendment of the Constitution. The Central Government also took up examination of the form and contents of the proposed Central legislation3 recommended by the Taxation Enquiry Commission. The question of formulating the principles for determining when the sale of goods takes plac.-

(i) outside a State;

(ii) in the course of the import of the goods into, or export of the goods out of, the territory of India;

(iii) in the course of inter-State trade or commerce.

was referred to the Law Commission by the Central Government in 1956, and the Law Commission gave its Report on the subject in the same year4-5.

1. Paras. 23 to 25, supra.

2. The Constitution (Tenth Amendment) Bill, 1956 (introduced in the Lok Sabha on 3rd May, 1956).

3. Paras. 21-22, supra.

4. Second Report of the Law Commission, (Parliamentary Legislation relating to Sales Tax).

5. See paras. 34-36, infra, for details.

27. It may be noted, that so far as foreign trade (sale constituting import and export in terms of the country as a whole) was concerned, the Taxation Enquiry Commission1 regarded the position under the Constitution as interpreted by the Supreme Court (in the two Travancore-Cochin cases) as satisfactory; it also noted, that hardly any State had any complaint about the particular provision of the Constitution which concerned this aspect 2.

However, the Taxation Enquiry Commission did suggest that the Constitution should empower Parliament to determine the principles for determining, inter alia, when a sale takes place in the course of import or export.

1. Report of the Taxation Enquiry Commission (1953-54), Vol. 3, p. 48, paras. 6 and 7.

2. See para. 144, infra.

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