Tax deduction at source on gross contract payments struck down where it captured turnover beyond State taxing competence.

Compulsory deduction of tax at source from the entire contract amount was invalid to the extent it applied to turnover relating to inter-State sales, outside sales, and sales in the course of import. The Kerala HC held that the State's taxing power under the KGST Act is confined to taxable turnover within its competence, and a deduction mechanism cannot operate on amounts it has no power to tax, even provisionally. Because the amended provision did not permit effective segregation of non-taxable turnover at the deduction stage, section 7(7B) and rule 22A(2) were held ultra vires insofar as they authorised deduction from non-taxable turnover.

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Issues: Whether sub-section (7B) of section 7 of the Kerala General Sales Tax Act, 1963 and rule 22A(2) of the Kerala General Sales Tax Rules, 1963 were constitutionally valid insofar as they required compulsory deduction of tax at source from the entire contract amount, including turnover relating to inter-State sales, outside sales and sales in the course of import.

Analysis: The charging scheme under the KGST Act is confined to taxable turnover within the State's taxing power. The impugned provision compelled deduction from payments made to contractors at a fixed percentage of the contract amount, and the deduction operated even where part of the contract consideration related to transactions beyond the State's legislative competence. Unlike the earlier optional scheme, the amended provision did not permit exclusion of turnover not amenable to State tax and did not provide an effective mechanism to segregate non-taxable turnover at the stage of deduction. The Court applied the principle that the State cannot, even provisionally, collect tax on turnover which it has no power to tax.

Conclusion: The impugned sub-section and rule were held to be ultra vires to the extent they authorised compulsory deduction from turnover inclusive of transactions outside the State's taxing jurisdiction.

Final Conclusion: The challenge succeeded and the writ appeal was allowed, with the impugned tax deduction mechanism struck down insofar as it authorised collection from non-taxable turnover.

Ratio Decidendi: A State cannot mandate deduction of tax at source on the gross contract amount when the provision necessarily includes turnover over which the State lacks taxing competence.

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