Reaffirming Central Supremacy in CST Rule‑Making: State Governments Cannot Cancel Form‑C Declarations

Introduction

Civil Appeal No. 1208 of 2025 (State of Rajasthan & Ors. v. Combined Traders, 2025 INSC 496) presented the Supreme Court of India with a critical question concerning the limits of State rule‑making under the Central Sales Tax Act, 1956 (CST Act).

Combined Traders, a Delhi‑based dealer, had effected interstate sales during FY 2017‑18 against Form‑C certificates issued online to two Rajasthan‑registered entities—M/s H.G. International and M/s Saraswati Enterprises. Subsequent investigation revealed that these purchasers were “bogus.” Exercising power under newly inserted Rule 17(20) of the Central Sales Tax (Rajasthan) Rules, 1957, the State authorities cancelled the Form‑C declarations and the buyers’ registration certificates. The High Court of Rajasthan struck down Rule 17(20) as ultra vires the CST Act; hence, the State appealed.

At stake was not only the fate of ₹12 crore worth of transactions, but also a larger doctrinal issue: Can a State Government, acting under Section 13(3) & (4) CST Act, empower itself to cancel a Form‑C that was validly issued under Rules framed by the Central Government?

Summary of the Judgment

• The Supreme Court (Justice Abhay S. Oka, Justice Ujjal Bhuyan) dismissed the State’s appeal, thereby affirming the High Court’s declaration that Rule 17(20) of the Rajasthan Rules is ultra vires.
• Key holding: Section 13(3) CST Act allows States to make rules only insofar as they are not inconsistent with the Act or with rules made by the Central Government under Section 13(1). Because the Central Government’s Central Sales Tax (Registration & Turnover) Rules, 1957 (Central Registration Rules) do not provide for cancellation of Form‑C, the State cannot, by its own rules, introduce such a mechanism.
• Result: The cancellation orders dated 7 Dec 2017 against Combined Traders were void; the Form‑C declarations remain valid. No costs were imposed.

Detailed Analysis

Precedents Cited

1. R. Nand Lal & Co. (1967) 20 STC 374 (SC)
   • Held that a State rule mandating one declaration per transaction was invalid because only the Central Government has power under Section 13(1)(d) to specify form and particulars of declarations.
   • The present Court heavily relied on this ratio to conclude that a State likewise cannot legislate on cancellation of declarations.
2. Sales Tax Officer, Ponkunnam v. K.I. Abraham (1967) 20 STC 367 (SC)
   • Not directly on Form‑C, but cited for the interpretative approach that fiscal statutes must be construed strictly, especially when they impose obligations on dealers.
3. Jain Manufacturing (India) Pvt. Ltd. v. Commissioner of VAT (Delhi HC, 2016)
   • Delhi High Court held there is no statutory provision allowing cancellation of Form‑C; SLP dismissed by the Supreme Court (low tax effect), providing persuasive but not binding value.

Legal Reasoning

1. Textual Interpretation of Section 8 and Section 13 CST Act
   • Section 8(4) stipulates that concessional tax rate applies only if the selling dealer furnishes a Form‑C “in prescribed manner.” The word “prescribed” is linked to rules framed under Section 13(1)(d).
   • Section 13(1)(d) empowers only the Central Government to frame rules about “the form and particulars” of declarations or certificates under the Act.
   • Conversely, Section 13(3) allows States to make rules “to carry out the purposes” of the Act, yet subject to a non‑inconsistency caveat vis‑à‑vis the Act and Central Rules.
   • Section 13(4) lists specific matters on which States may legislate; none mention cancellation of declarations.
2. No Central Rule on Cancellation
   • Central Registration Rules (Rule 12) prescribe the format, issuance, and submission of Form‑C but are silent on cancellation.
   • The absence is deliberate—where the statute intended cancellation power (e.g., Section 7(5) regarding registration certificates) it made express provision.
3. Conflict and Inconsistency
   • Rule 17(20) empowers State authorities to cancel a form that the Central Rules treat as valid once issued. This direct conflict renders the State rule void under the doctrine of repugnancy via delegated legislation.
4. Purpose of Preventing Evasion Not Enough
   • The State argued that cancellation combats tax fraud; the Court accepted the goal but emphasized that “the end cannot justify means contrary to the statute.” Legislative competence is a threshold requirement.

Impact of the Judgment

• Uniformity: Ensures all States follow a single nationwide regime regarding Form‑C validity, essential for seamless interstate commerce.
• Administrative Adjustments: States must now explore alternative fraud‑mitigation strategies—e.g., stricter registration scrutiny, real‑time verification—without unilaterally annulling Central forms.
• Potential Legislative Response: Parliament or the Central Government might consider amending the CST Act or Central Rules to expressly provide a cancellation mechanism, with adequate safeguards, if found necessary.
• Litigation Guidance: Provides a clear precedent that State‑level attempts to tinker with Form‑C—whether limiting quantity, imposing additional conditions, or providing for cancellation—are vulnerable to being struck down.

Complex Concepts Simplified

Interstate Sale & Form‑C

An interstate sale (Section 3 CST) attracts a concessional 2% tax if the buyer is a registered dealer and issues Form‑C to the seller. The form proves entitlement to the reduced rate.

Ultra Vires

Latin for “beyond the powers.” A rule or action is ultra vires when the authority creating it lacks legal competence.

Rule‑Making Hierarchy under CST Act

• Section 13(1): Central Government rules on critical areas such as Form‑C specifics.
• Section 13(3): State Government may make rules consistent with Central rules to carry out the Act’s purposes.
• Section 13(4): Enumerates specific additional heads (e.g., publication of dealer lists, inspection powers) on which States can legislate.

If a State rule collides with a Central rule (e.g., by adding a cancellation power the Central rules do not contemplate), the State rule fails.

Doctrine of Repugnancy in Delegated Legislation

Even within the same statute, subordinate legislation at different levels (Central vs. State) must be harmonious. Where conflict is irreconcilable, the superior delegate’s rule (here, the Central Government) prevails.

Conclusion

The Supreme Court’s decision in State of Rajasthan v. Combined Traders fortifies the scheme of the CST Act by underscoring that form‑related prerogatives, including issuance and potential cancellation of Form‑C, lie exclusively with the Central Government. Any State‑level incursion—however well‑intentioned—contravenes the constitutional and statutory mandate of uniform interstate taxation. The judgment thereby promotes legal certainty, preserves the integrity of interstate trade, and delineates clear boundaries for delegated legislative authority. Future policymaking in this area must heed these jurisdictional limits or seek appropriate amendments at the Central level.