Taxation of Automobiles - A Discourse On The Eternal Tug For Taxes Between States

February 17,2020
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Dharnendra Kumar Rana (Partner, NITYA Tax)
Sneha Ghosh (Associate)

Background

Humankind moved towards civilization when men ceased to produce all the goods to meet their requirements and instead looked towards others to provide items of need in exchange of other items. With the emergence of one commonly recognized valuable currency, the barter system gave way to the concept of ‘sale’. Today, sale of goods forms the backbone of a highly complex economy and nations have implemented taxation systems to efficiently tax these transactions.

In India, the taxation system is based on fiscal federalism i.e. the Centre and State have independent taxing powers. Further, some taxes are levied by the Centre but collected and assigned to States. One such example is that of sales tax. Sales tax is unchallengedly, the greatest source of revenue for States. Therefore, States attempt to envelop most sales transactions within their taxing jurisdiction, which at times conflict and compete with other States’ taxing powers. This article seeks to discuss these conflicts from the perspective of sale of automobiles.

Legal framework

The Union was empowered to levy tax on inter-state sale of goods under Entry 92 of List I of Schedule VIII to the Constitution of India (‘Constitution’). Accordingly, States levied tax on intra-state sale of goods under Entry 54 of List II. The Central Sales Tax Act, 1956 (‘CST Act’) governed the scope of taxes on inter-state sale of goods and the State Value Added Tax Acts (‘VAT Acts’) regulated tax imposed on intra-state sales of goods.

The CST Act considered two situations as inter-state sales, viz., where sale occasions movement of goods; and where the sale is affected by transfer of title in goods during their movement from one State to another.

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