Introduction
In a significant tax law ruling, the Supreme Court of India on April 17, 2025, upheld the primacy of Central legislation over state rules by striking down a Rajasthan-specific provision that allowed cancellation of Form C under the Central Sales Tax (CST) regime. The decision in State of Rajasthan & Ors. v. Combined Traders reinforces the constitutional principle that state rules cannot conflict with central laws, particularly when the central statute does not delegate such powers.
The ruling came from a bench comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan, who dismissed Rajasthan’s appeal challenging the Rajasthan High Court’s decision to invalidate Rule 17(20) of the Central Sales Tax (Rajasthan) Rules, 1957.
Background of the Case
Under the Central Sales Tax Act, 1956, interstate sales between registered dealers can attract a concessional tax rate if the purchasing dealer provides Form C. These declaration forms are governed by the Central Sales Tax (Registration and Turnover) Rules, 1957, formulated by the Central Government.
In 2014, the State of Rajasthan introduced sub-rule (20) to Rule 17 of the Rajasthan CST Rules. This provision allowed state tax authorities to cancel Form C if it was obtained through fraud, misrepresentation, or legal violations. The rationale was to prevent misuse of Form C for illegitimate tax benefits.
However, the Central Rules do not provide any mechanism for the cancellation of Form C, raising questions about the legality and consistency of the Rajasthan rule.
Facts of the Dispute
The case arose when the respondent, Combined Traders, sold goods to two firms using Form C, thereby claiming a reduced CST rate under Section 8(1) of the Act. Later investigations revealed that the purchasing firms were non-existent or bogus, prompting the Rajasthan tax authorities to cancel the Form C declarations and impose a higher tax liability.
Combined Traders challenged the cancellation, and the Rajasthan High Court ruled in their favour, declaring Rule 17(20) ultra vires the CST Act for being inconsistent with the central legislation. The State of Rajasthan then approached the Supreme Court in appeal.
Supreme Court’s Ruling
The Supreme Court dismissed Rajasthan’s appeal, affirming the High Court’s decision and holding that Rule 17(20) was ultra vires the CST Act, 1956. Writing the judgment, Justice Abhay S. Oka observed:
“The Central Registration Rules do not vest power in any authority to cancel the declaration in Form C. Therefore, if the State Government exercises the rule-making power under Section 13(3) by making rules providing for cancellation of a declaration in Form C, the State Rules will be inconsistent with the Central Registration Rules framed by the Central Government under Section 13(1).”
The Court made it clear that the Central Government alone has the exclusive power to frame rules regarding the form, contents, and procedures involving Form C declarations.
Key Legal Takeaways
- Doctrine of Repugnancy and Supremacy of Central Law
The judgment underscores that state rules made under delegated authority must not contradict the parent central legislation. If the central law does not provide for an action (like cancellation of Form C), the state cannot unilaterally insert such a provision. - Limits of Delegated Legislation
The Court reiterated that delegated powers must be exercised within the scope provided by the parent statute. States may have rulemaking power under Section 13(3) of the CST Act, but it must conform to the framework established under Section 13(1), which empowers the Central Government. - Uniformity in Tax Administration
Taxation laws, especially in interstate commerce, require consistency and uniform application. Allowing states to independently cancel Form C would have led to confusion and possible misuse, undermining the CST regime.
Impact of the Judgment
This ruling will have pan-India ramifications, particularly for state tax authorities attempting to fill perceived gaps in the CST framework through state-specific rules. The decision also provides clarity to businesses operating in multiple states regarding the non-cancelable nature of Form C under the current legal regime.
Importantly, the judgment balances federalism with constitutional supremacy, ensuring that states act within their delegated boundaries and that central laws maintain uniformity across India.
What This Means for Taxpayers
For businesses and traders:
- Form C remains valid once issued, unless the central rules are amended to allow for its cancellation.
- If a dealer fraudulently obtains Form C, penal consequences can be pursued under other provisions of the law, but cancellation of Form C is not a remedy unless explicitly provided by central rules.
- The decision provides relief to legitimate dealers from retrospective tax liabilities arising from state-imposed cancellations of Form C.
Conclusion
The Supreme Court’s verdict in State of Rajasthan v. Combined Traders is a firm reaffirmation of the principle that delegated legislation cannot override parent statutes. The ruling not only upholds the integrity of the Central Sales Tax framework but also sets a precedent restraining overreach by states in tax rulemaking.
In a time when tax compliance and interstate commerce are becoming increasingly digital and streamlined, such clarity from the apex court ensures that both businesses and tax authorities operate within a stable and constitutionally sound framework.
