The Jammu & Kashmir and Ladakh High Court has ruled that trade occurring across the Line of Control (LoC) between the Union Territory of Jammu & Kashmir and Pakistan-Occupied Kashmir (PoK) is to be considered intra-state trade as per the Goods and Services Tax (GST) Act, because PoK is legally a part of the territory of Jammu & Kashmir. The court's decision came while hearing writ petitions submitted by traders involved in barter and supply transactions with individuals across the LoC between 2017 and 2019. These traders had challenged show-cause notices issued by tax authorities that demanded GST payments, disputing the territorial and supply classifications on several fronts. The High Court dismissed a batch of 35 petitions challenging the GST show-cause notices issued to traders involved in the now-barred cross-LoC trade, emphasizing that the transactions in question constitute intra-state trade.

The bench of Justice Sanjeev Kumar and Justice Sanjay Parihar stated that it was undisputed that the area of the state under the de-facto control of Pakistan is part of the territories of Jammu & Kashmir. Therefore, the location of suppliers and the place of supply of goods were within the then State of Jammu Kashmir (now Union Territory), and the cross-LoC trade was nothing but an intra-state trade.

In 2008, the governments of India and Pakistan established confidence-building measures to allow regulated barter trade across the LoC on designated routes such as Srinagar–Muzaffarabad and Poonch–Rawalakote. This trade, regulated by a Standard Operating Procedure (SOP) issued by the Ministry of Home Affairs, involved the exchange of specific permissible goods between individuals on both sides of the LoC, which was then part of the State of Jammu & Kashmir.

Under the previous tax regime, specifically the Jammu & Kashmir VAT Act of 2005, cross-LoC trade under the SOP was treated as a zero-rated intra-state sale starting in 2012. With the introduction of GST in 2017, which included the Central GST Act and the J&K GST Act, traders continued cross-LoC supplies without paying tax, believing their trade remained intra-state. Tax authorities later detected this trade and issued show-cause notices for the financial years 2017–18 and 2018–19 under Section 74(1) of the GST Act, alleging suppression and seeking tax on these supplies.

The petitioners argued that the trade from Islamabad-Uri and from Rawalakot (PoK) to Chakkan-da-Bagh (Poonch), mutually agreed upon by India and Pakistan, was barter trade without any currency exchange. They contended that they had treated cross-LoC trade as a zero-rated sale, attracting no sales tax, and consequently, did not report these transactions or pay any tax on them for the financial years 2017–2018 and 2018–2019.

The authorities, acting on information from the Office of DGGI, JRU, Jammu, initiated investigations to determine whether the petitioners had paid GST on their outward supply of goods to PoK during cross-LoC trade and on inward supplies received from PoK up to October 12, 2017. Subsequently, the Superintendent, CGST and CX Range Srinagar, requested trade-wise and item-wise details of goods traded in and out by each cross-LoC trader from July 8, 2017, to March 7, 2019.

The High Court clarified that the territories of Pakistan-occupied Kashmir remain an integral part of Jammu & Kashmir. Consequently, trade between the UT of Jammu & Kashmir and PoK, conducted under the 2008 SOP, must be treated as intra-state supply under the GST law and taxed under the CGST/SGST regime.

Senior Advocate Syed Faisal Qadri represented the petitioners, while Tahir Majid Shamsi, DSGI, represented the respondents.