The amendment proposed in the Union Budget 2021 in Section 8(3)(b) of the Central Sales Tax Act, 1956 (CST Act) has been a relatively less talked about indirect tax proposal of the Union Budget for FY 2021-22 (Budget). However, this is a significant change and can drive up the input tax costs of many businesses. 

In this article, we have tried to analyse the amendment at length and decode the implications thereof.

The amendment

Section 8 of the CST Act provides for ‘Rates of tax on sales in the course of inter-State trade or commerce’. Section 8(1) and 8(2) provide for a concessional CST rate of 2% on inter-state sales of goods as described in sub-section 8(3), subject to submission of Form C (as per Section 8(4) and the CST Rules)]. For goods not falling under sub-section 8(3), simply put, CST is leviable at a rate equal to the VAT rate applicable to the sale/purchase of the goods in question under the VAT laws of the seller’s State (which is usually much higher than 2%).

The amendment proposed in the Budget 2021 in sub-clause (b) of Section 8(3), in essence, significantly curtails the scope of this concessional rate of 2% with effect from 1 July 2021. We have tried to highlight the proposed changes in the excerpt of Section 8(3) (b) below, for ease of reference:

“The goods referred to in sub-section (1) -

(b) are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or in the tele-communications network or in mining or in the generation or distribution of electricity or any other form of power for sale of goods specified under clause (d) of section 2"

Impact of the amendment

As is evident, pre-amendment, the benefit of concessional CST rate of 2% would be available in a larger number of scenarios as demonstrated in the table below: 

The definition of ‘goods’ under Section 2(d) of the CST Act is restricted to goods which have been kept out of the GST net, listed below:

“(d) "goods" means--

(i) petroleum crude;

(ii) high speed diesel;

(iii) motor spirit (commonly known as petrol);

(iv) natural gas;

(v) aviation turbine fuel; and

(vi) alcoholic liquor for human consumption”

Several favourable judgments were issued post introduction of GST regarding the continued eligibility of Form C and the consequent concessional CST rate. In most of these cases, the High Courts relied upon the pre-amendment wordings of section 8(3)(b) of the CST Act to hold that issuance of Form C is not restricted only to the goods as defined in Section 2(d). The rationale adopted by the Courts, inter alia, was that Section 8(3)(b) has to be read independent of the definition of ‘goods’ under Section 2(d) of the CST Act, since the context of Section 8(3)(b) so requires (in light of the activities specifically mentioned therein).

The proposed amendment seeks to overturn this argument and disallow the benefit of the concessional CST rate in scenarios (iii), (iv) and (v) in the left column in the table above and under scenario (ii), restrict the benefit only to a scenario where the purchaser intends to use the purchased goods for manufacture or processing for sale of (i) petroleum crude; (ii) high speed diesel; (iii) motor spirit (commonly known as petrol); (iv) natural gas; (v) aviation turbine fuel; and (vi) alcoholic liquor for human consumption. 

Possible interpretations

Admittedly, the post-amendment language “….for use by him in the manufacture or processing of goods for sale of goods specified under clause (d) of section 2” is a little ambiguous.

It is possible that the draftsmen intended to say “….for use by him in the manufacture or processing of goods specified under clause (d) of section 2 for sale” and thus restrict Form C benefit only where non-GST goods are being purchased for manufacture or processing of non-GST goods for further sale. However, it is a settled position of law that there is no room for intendment in tax law and the law has to be read as is. In any case, no such restrictive intent emerges from the ‘Notes on Clauses’ accompanying the Finance Bill which reads as under:

“Clause 141 of the Bill seeks to amend sub-section (3) of section 8 of the Central Sales Tax Act, 1956 by substituting clause (b) thereof, so as to exclude therefrom the goods used in the telecommunication network or in mining or in generation or distribution of electricity or any other form of power.”

Thus, if one literally interprets the post-amendment language “….for use by him in the manufacture or processing for sale of goods specified under clause (d) of section 2”, the following point emerges:

Form C should be available for purchase of non-GST goods if such non-GST goods are used in a manufacturing/processing activity aimed at selling non-GST goods (as listed in clause (d) of section 2 – see above) by the purchaser. The words “specified under clause (d) of section 2", it can be argued, only qualifies the immediately preceding word ‘goods’ and not the words before that. 

Scenarios where benefit of Form C (and concessional CST rate) should continue to be available post-amendment

• Thus, the benefit of Form C should be available in the following scenarios post-amendment: 

• Where A sells crude oil to B who in turn refines the same into petrol / high speed diesel 

• Where B purchases diesel for generation (i.e., manufacture) of electricity in their factory (may be as a backup) with the ultimate goal of selling petrol / high speed diesel. Or, where A purchases diesel for generation (i.e., manufacture) of back-up electricity in their oil field with the ultimate goal of selling crude oil. 

Scenarios like mining companies procuring diesel for mining purposes or manufacturers procuring diesel for usage in manufacture of products liable to GST, will no longer be entitled to avail the concessional rate of CST on the basis of Form C. Thus, the ‘change in law’ clauses in relevant contracts of these companies and costing of their final products post 1 July 2021 may need to be re-examined in light of this proposed amendment.