GST in Union Territories

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Part I of the Constitution of India provides that “India, that is Bharat, shall be a Union of States”. It provides that territory of India shall comprise of the States and the Union Territoriesspecified in the First Schedule. First Schedule of the Constitution of India provides for twenty nine (29) States and seven (7) Union Territories.

Part VI of the Constitution of India provides that for every State there shall be a Legislature, while Part VIII provides that every Union Territory shall be administered by the President through an administrator appointed by him. However, the Union Territory of Delhi and Puducherry have been provided with legislatures with such powers and functions required for their administration.

To summarize, India is a summation of three categories of territories naming (i) the States; (ii) Union Territories with Legislature; and (iii) Union Territories without Legislature.

The Constitution (122nd) Bill 2014,whichis supposed to amend the Constitution of India for introduction of GST, provides that the Parliament in the Centre and Legislature of every Stateshall have power to make laws in respect of GST on intra–state supply within a State. For the purpose of aforesaid power, ‘State’ has been defined to include Union Territory with Legislature. Further, Parliament in the Centre has been given exclusive power to make laws in respect of GST on inter-state supply. Parliament has also been entrusted with the power to formulate principles to determine when a transaction shall qualify as inside a State or in the course of inter-state trade or commerce.

In pursuance of the above power, the Centre will legislate the Central Goods & Services Tax Act and the States (including Union Territory with Legislature) will legislate State Goods & Services Tax Act for levying CGST and SGST respectively on intra-state supplies. Further, Centre will legislate Integrated Goods & Services Tax Act for levying IGST for all supplies in the course of inter-state trade or commerce. Thus, supplies within a State (including Union Territories with Legislature) will be subject to combined levy of CGST and SGST. And supplies between two states (including Union Territory with Legislature) will be subject to IGST, rate of which will be approximately equivalent to summation of CGST and SGST rate.

Now the question remains regarding levy of GST on the following categories of transactions:

(i) supplies within Union Territories without Legislature;
(ii) supplies between two Union Territories without Legislature;
(iii) supplies between Union Territory without Legislature and State (including Union Territory with Legislature)

With respect to the supplies at serial no. (i) above, since SGST Act applies only on supplies within a State (including Union Territory with Legislature), no SGST will be applicable on supplies within Union Territories without Legislature. Whereas, since CGST is applicable on the whole of India including Union Territories with or without Legislature, supplies within Union Territory without Legislature will be subject to levy of CGST only. Thus, in order to bring parity between supplies within a State and supplies within Union Territory without Legislature, Centre in terms of powers under Article 246(4) of the Constitution of India may adopt SGST Act of any State to be made applicable to such Union Territories without Legislature.

With respect to supplies at serial no. (ii) and (iii), it may be noted that IGST Act applies on supplies between two states. ‘State’ has been defined under the IGST Act as “State to include Union Territory with Legislature”. Thus, by applying cardinal principle of law on inclusive clause, since ‘State’ specifically includes Union Territory with Legislature, it by necessary implication excludes Union Territory without Legislature. Meaning thereby, it can be safely concluded that supplies between two Union Territory without Legislature and between a State (including Union Territory with Legislature) and Union Territory with Legislature, will not come within the ambit of IGST Act and will go tax free.

In the above discussed legal position, reference may be made to the current practice under the Central Sales Tax/ VAT Law, for levy of CST/ VAT on supplies mentioned at serial no. (i), (ii) & (iii) above. On supplies of the nature covered at serial no. (i), Centre has adopted State VAT Laws of a neighboring State, and tax equivalent to State VAT rate is levied on such supplies. On supplies of the nature covered at serial no. (ii) & (iii), provisions of Central Sales Tax Act, 1956 are applicable and thus CST is leviable. This is for the reason that CST Act by itself does not define the term ‘State’, in which case definition of ‘State’ as defined in General Clauses Act. 1897 applies, which includes Union Territory with or without Legislature.

As a concluding remark, it can be said that definition of ‘State’ under the IGST Act is either required to be amended to include ‘all Union Territories with or without Legislature’, or the current definition be altogether removed from the IGST Act so that the definition of ‘State’ under the General Clauses Act may be borrowed. As responsible stakeholder to this radical indirect tax reform, suitable representation before the appropriate authorities must be made, to iron out such creases left out in the model law.

Source: https://www.taxmann.com/topstories/105010000000013607/gst-in-union-territories.aspx

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