E-Commerce and Sales Tax

Summary

N. C. Mehta — a chartered accountant and sales-tax specialist writing for the Forum of Free Enterprise — distils, in twelve dense pages, the constitutional and case-law framework that governs how Indian states may tax transactions completed over the internet. The booklet is a faithful piece of practitioner literature: it begins from the Supreme Court’s Titaghur Paper Mills doctrine that no state may treat as a taxable ‘sale’ anything that is not a sale of goods under the Sale of Goods Act, 1930, and then traces how the Forty-sixth Amendment to the Constitution and article 366(29A) extended the states’ reach to a list of ‘deemed sales’ (works contracts, hire-purchase, leases, lottery participation, transfer of right to use goods, and so on).

Mehta then surveys the Supreme Court’s progressive enlargement of what counts as ‘goods’ — from electricity (Madhya Pradesh Electricity Board), through lottery tickets (Anraj), to REP licences, exim scrips, patents, trademarks, software packages, DEPB credits, copyrights and know-how. Because most e-commerce traffic involves these incorporeal or intangible items, the booklet’s analytical centre of gravity is the question of situs: where, in law, does a sale of an intangible take place? Section 4(2) of the Central Sales Tax Act, 1956 fixes situs for tangible goods, but for intangibles Mehta leans on Salmond on Jurisprudence and an English line of authority (Smelting Co. of Australia, Muller & Co.’s Margarine) to argue that incorporeal property is situated where the right is exercised and enjoyed.

The practical pay-off comes in eleven worked illustrations — A in country X delivering Indian stock to B, exports against purchase orders routed through the internet, software downloaded by a Mumbai user from a US-hosted server, machinery imported on lease, internet auctions concluded by bid acceptance. Mehta’s headline conclusion is that a Mumbai customer who downloads software installed on a foreign ‘Webnet’ is making a taxable acquisition of the right to use intangible goods in Maharashtra, and is therefore exigible to that state’s sales tax. He closes by reading indivisible works contracts and hire-purchase / installment sales back into the same framework. The pamphlet, originally a 26 April 2000 presentation in Mumbai, is published with the Forum’s standard disclaimer and bracketed by the Forum’s signature inspirational quotes from A. D. Shroff and Eugene Black.

Key points

• Anchors the analysis in Titaghur Paper Mills (1985): a state may not tax by legislation, rule or notification anything that is not a sale of goods under the Sale of Goods Act, 1930.

• Explains how the Forty-sixth Constitutional Amendment and article 366(29A) created a category of ‘deemed sales’ — works contracts, hire-purchase, leases, transfer of right to use goods, lottery tickets — to plug the gaps the Supreme Court had opened.

• Maps the Supreme Court’s enlargement of ‘goods’ to include electricity, lottery participation rights (Anraj), REP and exim licences, DEPB credits, patents, trademarks, copyright, technical know-how and software.

• Distinguishes situs of sale for tangible goods (section 4(2) of the Central Sales Tax Act, 1956) from situs for incorporeal property, which Mehta — following Salmond on Jurisprudence — locates where the right is exercised and enjoyed.

• Concludes that software downloaded in Mumbai from a server installed in the United States is a transfer of the right to use intangible goods exigible to Maharashtra sales tax.

• Works through eleven worked e-commerce illustrations covering cross-border stock delivery, equity-participation imports, lease-and-purchase chains, internet auctions and exports against online orders.

• Notes that Parliament has not exercised its article 246(1) power to tax inter-State ‘deemed sales’, so such transactions remain immune from both state and central sales tax.

• Originated as a 26 April 2000 Forum of Free Enterprise presentation in Mumbai and is published by M. R. Pai with the Forum’s standard non-attribution disclaimer.