Works contract tax deduction scheme struck down for exceeding state taxing power and allowing arbitrary deductions.

Section 12-A of the Himachal Pradesh General Sales Tax Act and rule 31-A were invalid because they required deduction from payments to works contractors even where the underlying transaction might not attract sales tax or fall within the State's taxing power. As no mechanism existed to confine deduction to cases where tax was actually exigible, the payer was left with arbitrary and uncanalised authority to deduct a prescribed percentage regardless of ultimate liability. Applying the earlier decision on an identical scheme, the Supreme Court held the deduction mechanism exceeded permissible legislative competence and struck down the provision and rule.

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Issues: Whether section 12-A of the Himachal Pradesh General Sales Tax Act, 1968 and rule 31-A of the Himachal Pradesh General Sales Tax Rules, which require deduction from payments to works contractors, were valid and within the legislative competence of the State.

Analysis: The provision and the rule required deduction from payments made on account of works contracts, even where the underlying transaction might not be liable to sales tax at all, including transactions outside the State's taxing power. No mechanism was provided to certify or limit the deduction to cases where tax was actually exigible. The result was that the person making payment was left with arbitrary and uncanalised authority to deduct up to the prescribed percentage irrespective of the ultimate tax liability of the transaction. Following the earlier decision on an identical statutory scheme, the deduction mechanism was held to operate beyond the permissible limits of the State's taxing power.

Conclusion: The impugned section and rule were held invalid and beyond the competence of the State Legislature, and the challenge succeeded.

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