Export tax: Understanding penultimate sales

By Udayan Choksi and Rahul Jain, Economic Laws Practice

What constitutes a penultimate sale, so as to be exempt from sales tax under section 5(3) of the Central Sales Tax Act, 1956 (CST Act)?

Ruling in State of Karnataka v Azad Coach Builders Pvt Ltd & Anr, a constitution bench of the Supreme Court held that the test to be applied is whether an “in-severable link” exists between the local sale and the export and if so, the local sale would be exempt from sales tax.

Basis for this exemption

Article 286 of the constitution exempts goods that are exported from being taxed. Section 5(3) of the CST Act, introduced in furtherance of this principle, reads: “… the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.”

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Economic Laws Practice is a full-service law firm headquartered in Mumbai and has offices in New Delhi, Pune and Ahmedabad. Udayan Choksi is an associate partner and Rahul Jain is an associate at the firm.


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