SC clarifies sales tax implication after bifurcation of a state

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Published: July 11, 2019 12:43:03 AM

The Supreme Court has held that the inter-state sales between two successor states cannot be treated as intra-sales for the purpose of sales tax exemption granted to industries prior to bifurcation.

The time period provided for such adaptations and modifications is generally two years from the appointed day, it stated.The time period provided for such adaptations and modifications is generally two years from the appointed day, it stated.

The Supreme Court has held that the inter-state sales between two successor states cannot be treated as intra-sales for the purpose of sales tax exemption granted to industries prior to bifurcation.

Holding that creation of the new political state must be given full legal effect in the case, Madhya Pradesh v Lafarge Dealers Association, a bench comprising Chief Justice of Ranjan Gogoi and justices SA Nazeer and Sanjiv Khanna held that though the creation of a new state is an unforeseen event and could give rise to unusual situations, this cannot be a ground and reason to treat inter-state sales between the two successor states as intra-state sales.

The apex court was dealing with the issue whether the industries in the new state of Chhattisgarh would continue to avail the benefit of exemption or deferment of sales tax granted under the MP Commercial Tax Act of 1994 even after bifurcation.

Holding that disorderly and chaotic situation would erupt if the new state was to be created without any laws as on the date of its creation, the top court overruled its 2004 judgment that had held that notwithstanding the creation of two states, exemption or deferment of tax notifications issued before the bifurcation would continue to apply in the new state as for the purposes of sales tax the two states were deemed to be one because of the legal fiction envisaged under the Reorganisation Act which created Bihar and Jharkhand.

However, justice Khanna, writing the judgment for the Bench, clarified that the judgment is subject to another rule that the existing laws as earlier applicable to the territories would be applicable to the new state until the new state provides for adaptation or modification of the law by way of repeal or amendment. The time period provided for such adaptations and modifications is generally two years from the appointed day, it stated. It upheld that the Madhya Pradesh HC order that held that benefit of the exemption or deferment of sales tax would be restricted and confined to the boundaries/limits of the state in which the unit was located and would not operate beyond the limits of the state boundary, the other bench held a contrary view.

The HC had further said any trade and movement of goods between the two states would be inter-state trade and not intra-state trade and the provisions of the Reorganisation Act had not removed and eclipsed this legal position but had a limited effect to treat the laws in operation in MP as equally applicable to Chhattisgarh.

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