Article 286: Restrictions on State Taxation of Interstate Trade

In 1955, seven Supreme Court judges split 4-3 over a simple question. Can two States tax the very same sale? Their answer in Bengal Immunity v. State of Bihar gave Article 286 its teeth. One inter-State sale is taxed once, not twice. And never by a State acting on its own.

1Chapter 1: What Article 286 Bars Today

Must Know

Clause (1) and clause (2)

• Article 286 sits in Part XII of the Constitution, not Part XIII.
• Clause (1): no State law may tax the supply of goods or services in two cases.
• The first is a supply that takes place outside the State.
• The second is a supply made in the course of import into, or export out of, India.
• Clause (2): Parliament may make a law that sets the rules for when a supply falls in these cases.

Why the bar exists

• Without it, two or more States could each tax the same single transaction. That would choke inter-State trade.
• A supply truly outside a State has no link with it. Taxing it would overreach.
• Goods in international trade must not be taxed by a single State. That would distort home and foreign trade.
• Parliament defines the boundaries centrally. That keeps the internal market unified.
• Intra-State sales are not barred. States do tax them.

2Chapter 2: The 2016 GST Rewrite

Must Know

What the 101st Amendment changed

• The 101st Constitutional Amendment Act, 2016 received assent on 8 September 2016.
• It replaced “sale or purchase of goods” with “supply of goods or services or both”.
• GST taxes supply, so the wording had to match.
• It also omitted the old clause (3), which dealt with declared goods.

3Chapter 3: The Road to Bengal Immunity

Good to Know

Before 1950 and the original text

• Before 1950, provinces often taxed transactions that happened partly or wholly outside their territory.
• That caused double taxation and choked inter-State trade.
• The original 1950 Article 286(1)(a) had an Explanation. It decided when a sale counted as “outside” a State.
• It turned on where the goods were delivered for consumption.

1953 to 1955

• In State of Bombay v. United Motors (1953), the Court read the Explanation narrowly.
• It let the State where goods were delivered for consumption tax the sale, on a “territorial nexus” theory.
• In Bengal Immunity Co. v. State of Bihar, a seven-judge Bench heard the question again.
• It ruled on 6 September 1955, by 4-3.
• The majority overruled the 1953 view.
• Until Parliament made a law, no State could tax a sale in the course of inter-State trade.
• Short memory: 1953 = States can tax. 1955 = they cannot until Parliament acts.

Parliament replies

• Parliament passed the Central Sales Tax Act, 1956.
• It laid down when a sale counts as inter-State and authorised its taxation.
• This is the legislative result of Bengal Immunity.
• The lasting idea is “one sale, one tax”. A State cannot tax an inter-State sale on its own.

4Chapter 4: Declared Goods

Good to Know

A power now in history

• The Sixth Amendment (1956) added the old clause (3).
• It let Parliament name goods of special importance in inter-State trade.
• Under it, the Central Sales Tax Act named goods like cereals, cotton, coal, and iron and steel.
• States had to cap their tax rates on these declared goods, so they could move freely.
• The 101st Amendment omitted the clause. GST absorbed the scheme.
• It explains how Article 286 once protected essential commodities.

5Chapter 5: How GST Fits with Article 286

Good to Know

One tax, shared revenue

• GST began on 1 July 2017.
• Inter-State and import-export supplies are taxed by IGST under the IGST Act, 2017.
• The Centre collects IGST and apportions it to the destination State.
• GST is destination-based. Supply is taxed at the point of consumption.
• So the old double-taxation risk is gone.
• The supply is taxed once, but the revenue is shared. That is exactly what Article 286’s purpose demands.

Three articles, one design

• Read Article 269A: IGST Levy and Apportionment and Article 246A: Special Provision for GST Law-Making Power.
• Also GST Council and Rate Rationalisation, Article 301: Freedom of Trade, Commerce and Intercourse and Article 285: Exemption of Union Property from State Taxation.

6In the News: GST Disputes and Digital Trade

Current Affairs

Where Article 286 still bites

• In the GST era, disputes over whether a supply is inter-State or intra-State keep Article 286 relevant.
• The tax treatment, IGST or SGST plus CGST, depends on where the supply occurs.
• E-commerce and online services cross State lines constantly. Deciding “where” a digital supply happens has become harder.
• The old rule is now applied to digital supply through GST place-of-supply rules.
• See Article 269A for the place-of-supply mechanics.

7Previous Year Questions

Exam angle: one real question, and the traps around it.

Quick Q&A

• Which Part? Part XII.
• Bengal Immunity year? 1955, by 4-3.
• CST Act year? 1956.
• Amendment for GST? 101st, 2016.
• GST launched? 1 July 2017.