State Rules Cannot Override Central Tax Framework — Rajasthan Rule Cancelling C-Forms Declared Ultra Vires: Supreme Court Quashes Rule 17(20) of Rajasthan CST Rules

“Power to Cancel Central Sales Tax Declarations Lies Only With Centre — State Cannot Frame Contradictory Rules” - In a constitutionally significant ruling Supreme Court upheld the striking down of Rule 17(20) of the Central Sales Tax (Rajasthan) Rules, 1957, declaring it ultra vires the Central Sales Tax Act, 1956 (CST Act). The impugned rule empowered state tax authorities to cancel C-Forms issued for concessional interstate purchases. The Court ruled that this provision was beyond the rule-making powers of the State under Section 13 of the CST Act and was inconsistent with the Central Government’s exclusive domain.

“The State Government cannot frame rules inconsistent with those made by the Central Government under Section 13(1)(d) of the CST Act. Cancellation of declarations like Form C falls within the exclusive rule-making power of the Centre.”

The dispute arose when Combined Traders, the respondent, sold goods worth nearly ₹12 crore to two entities—M/s H.G. International and M/s Saraswati Enterprises—in 2017, against Form C declarations, which are required to claim concessional tax rates under Section 8 of the CST Act.

Upon inspection, both entities were found to be non-functional or fictitious, leading Rajasthan’s Commercial Tax Department to cancel their Form C declarations under Rule 17(20) of the Rajasthan CST Rules, which was introduced in 2014. This rule allowed cancellation if the declarations were obtained by “fraud, misrepresentation, or in contravention of law.”

The High Court of Rajasthan declared Rule 17(20) ultra vires, stating that the State had no power to legislate on cancellation of Central declarations. The State of Rajasthan appealed to the Supreme Court.

“Who Has the Power to Frame Rules for Form C Declarations?”

The Court extensively examined Section 13 of the CST Act, which distributes rule-making power between the Central Government under Section 13(1) and the State Government under Sections 13(3) and 13(4).

Emphasizing the exclusive nature of Central rule-making under Section 13(1)(d), the Court observed: “Clause (d) authorizes only the Central Government to prescribe the form and particulars of declarations, including Form C… Nowhere is there a provision empowering the State to cancel such declarations.”

Referring to Rule 12 of the Central Sales Tax (Registration and Turnover) Rules, 1957, the Court noted: “Form C is prescribed under Central Rules. The rules do not provide for cancellation of declarations, nor empower State authorities to do so.”

“Subordinate State Rules Cannot Conflict With Central Law”

Justice Abhay S. Oka, writing for the Bench, emphasized: “If the State Government exercises rule-making power under Section 13(3) in a way that is inconsistent with rules framed under Section 13(1), such rules are liable to be struck down.”

The Court relied on the precedent of R. Nand Lal & Co., reiterating: “A direction that there shall be a separate declaration for each transaction must emanate from the authority under Section 13(1)(d)… not from the State. Rules framed by the State must not contradict Central Rules.”

“Power to Cancel Registrations Is Not the Same as Power to Cancel Declarations”

The Court clarified that while Section 7(5) of the CST Act expressly allows for cancellation of registration certificates, Section 8(4), which governs the use of C-Forms, contains no such provision for cancellation.

“It is significant that Section 7 provides for cancellation of registration certificates, but no such authority is conferred under Section 8 for cancellation of declarations furnished thereunder.”

Therefore, the Court concluded: “Rule 17(20), in seeking to cancel declarations issued under a Central rule framework, is beyond the powers of the State and hence, ultra vires.”

Upholding the High Court's ruling, the Supreme Court declared: “Sub-rule (20) of Rule 17 of the Rajasthan Rules is inconsistent with the Central Registration Rules framed under Section 13(1)(d) of the CST Act. The State Government has no power to cancel Form C declarations.”

The Court thus dismissed the State of Rajasthan’s appeal, reaffirming the federal structure of tax legislation and reinforcing that States cannot legislate in areas exclusively reserved for the Centre under the CST Act.

Date of Decision: April 16, 2025