Tax deduction at source for works contracts upheld as a valid collection mechanism with adequate safeguards.

Section 7B of the Kerala General Sales Tax Act, 1963, which required deduction of tax at source from payments to contractors for works contracts, was upheld as a valid collection mechanism. The court read the provision with the Act and rules and found that safeguards such as certification by the assessing authority and adjustment at assessment prevented arbitrariness. It held that the legislature could adopt a percentage-based deduction system to secure prompt tax collection, and the constitutional challenge failed.

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Issues: Whether section 7B of the Kerala General Sales Tax Act, 1963, providing for deduction of tax at source from payments to contractors in respect of works contracts, was unconstitutional or otherwise liable to be struck down.

Analysis: The challenged provision was read with the scheme of section 5(1)(iv), section 2(xxv), and rule 22A of the Kerala General Sales Tax Rules, 1963. The deduction mechanism was intended to secure prompt collection of tax due on works contracts, while preserving safeguards where no tax was payable or where the contractor could establish entitlement to exemption, deduction, or regular payment. The availability of a certificate from the assessing authority and the provision for adjustment at assessment showed that the measure was not arbitrary. The provision was also consistent with the approach approved by binding precedent upholding similar deduction-at-source mechanisms in fiscal legislation, and the legislature was entitled to adopt a percentage-based method to ensure effective tax collection.

Conclusion: Section 7B was upheld and the constitutional challenge failed.

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