All legislation in India is subject to certain limitations imposed by the constitution of

India. No law can violate the fundamental rights. 1 Moreover in terms of jurisdiction,
the Union legislation cannot be enacted in the field reserved for the states and state
legislation cannot be enacted in fields reserved for the Union. 2 This is especially true
in the case of the taxation power where there are limitations imposed on the power
of the states to levy sales tax and also in the context of interstate sales.
The chequered history of the provisions of the Constitution relating to the levy of
sales tax has led to confusion in regard to levying of tax in the interest of the state.
Courts have held that sales tax could only be imposed on what could be regarded as
a sale of goods under the Sale of Goods Act 1930. This was created problems for the
states power to levy sales tax on transactions in the tangible property was good but
not under the definition of the Sale of Goods Act 1930. Later on the Constitution was
amended and a range of transactions which were deemed to be deemed to be
sales included works contracts, hire purchase contracts.3
20th century Finance Corp Ltd v. State of Maharastra.

Although sales tax has been largely been replaced by VAT (Value Added Tax), this
makes vey little difference as the levy of VAT on the sale or purchase of goods as it
would be a tax on the sale or purchase of goods, and its levy would be subject to
the provisions of the Constitution.

Relevant constitutional provisions

Art 245
Article 245 is headed Extent of laws made by the Parliament and the Legislatures of
states. Article 245 (1) provides inter alia that the legislature of a state may make
laws for the whole or any part of the State. Article (2) contains a provision that no
law made by Parliament shall be deemed to be invalid on the ground that it would

1 Art. 13-25
2
3

have extraterritorial operation. However the state laws do not have extraterritorial
jurisdiction and thus cannot impose sales tax on sales outside the state.

Art 269
This article provides will be levied and collected by the Union but assigned to the
states. This includes sales tax levied on the sale and purchase of goods other than
newspapers where such sale or purchase takes place in the course of interstate
trade and commerce. 4 The tax so collected is assigned to the states within which
the tax is leviable and distributed in such manner as Parliament may by law
determine. Article 269(3) which was inserted by the (6 th Amendment) Act 1956
provides that Parliament may, by law formulate principles to determine when a sale
or purchase of goods takes place in the course of inter-state trade or commerce.

This article which has been significantly amended both by the 1956 amendment
and the 1982 amendment provides that no law of a state can impose, or authorize
the imposition of, a tax on the sale or purchase of goods where the sale or purchase
takes place outside the state or in the course of the import of the goods into, or in
the course of export of goods out of, the territory of India; and Parliament is
authorized by law to formulate the principles to determine when the sale takes
place outside the stte or in the course of import or export. 5
Also Article 286 (3) provides that any law of a state imposing sales tax on goods
declared by parliament to be of special importance

4 Entry 92A in List I of the Seventh Schedule to the Constitution; Section 9 of the
Central Sales Tax Act 1956
5 This power has been exercised by the Central Sales Tax Act 1956