Can a cross Border supply Escape GST? J&K HC Says No
In an important development for GST jurisprudence surrounding special trade arrangements, the Jammu & Kashmir and Ladakh High Court has ruled that cross-LoC barter transactions constitute taxable intra-State supplies under the GST framework.
The Court rejected the writ petitions filed by several traders challenging the validity of show cause notices issued under Section 74 of the CGST Act and observed that cross-LoC trade, despite being introduced as a Confidence Building Measure between India and Pakistan, does not automatically enjoy exemption from GST in the absence of a specific statutory notification.
Key High Court observation
The High Court observed that the territories presently under Pakistan’s de-facto control continue to form part of the territory of the erstwhile State of Jammu & Kashmir for purposes of constitutional interpretation and GST law.
“The location of the suppliers and the place of supply of goods were within the then State of Jammu & Kashmir and therefore the cross-LoC trade affected by the petitioners was nothing but an intra-State trade.”
Background of the dispute
Cross-LoC trade was introduced in 2008 as a Confidence Building Measure between India and Pakistan through the Srinagar-Muzaffarabad and Poonch-Rawalakote routes.
The trade operated as a barter mechanism where goods were exchanged without movement of currency. During the VAT regime, such trade enjoyed zero-rated treatment under the Jammu & Kashmir VAT law.
However, after introduction of GST in 2017, no specific exemption notification was issued exempting cross-LoC trade from GST.
The GST authorities later initiated investigations alleging that several traders failed to disclose outward and inward cross-LoC supplies in their GST returns and thereby evaded payment of GST.
Why the High Court held GST applicable
The Court relied upon the definition of “India” under Section 2(56) of the CGST Act read with Article 1 of the Constitution and further referred to the definition of “State” under the J&K GST Act.
On this basis, the Court concluded that:
- Cross-LoC trade was not import-export trade between two sovereign jurisdictions for GST purposes
- Both the supplier and place of supply were situated within the same State/Union Territory
- The transactions therefore constituted intra-State supplies under Section 8 of the IGST Act
- Absence of a specific GST exemption notification meant the supplies remained taxable
Important findings on Section 74 proceedings
The petitioners had argued that the case, at best, fell under Section 73 and not Section 74 since there was no fraud or suppression of facts.
However, the Court noted that the traders had allegedly failed to disclose the transactions in GST returns and had also not cooperated during investigation proceedings.
The Court therefore held that the allegations disclosed a prima facie case of suppression of facts sufficient to justify issuance of notices under Section 74 of the CGST Act.
Key takeaways for businesses
- Special trade arrangements or politically sensitive trade mechanisms do not automatically create GST exemption
- In absence of a specific exemption notification, GST liability may still arise even where no money changes hands
- Non-disclosure of transactions in GST returns may expose taxpayers to extended limitation and penalty proceedings under Section 74
Conclusion
The ruling marks an important judicial pronouncement on the GST treatment of cross-LoC trade and clarifies that the special political character of such trade does not override the statutory framework of GST law.
By treating cross-LoC barter transactions as intra-State supplies, the High Court has significantly widened the interpretational scope of GST jurisdiction over unconventional and non-monetary trade arrangements.
The judgment is likely to have far-reaching implications not only for cross-LoC traders but also for businesses engaged in barter-based or special regulatory trade structures under GST.