Constitution Bench Judgment on Entry Tax

Guest Post by Charanya Kumaran, Advocate, New Delhi

Recently, a Constitution Bench of 9 judges of the Supreme Court of India delivered a judgment on validity of entry tax legislations enacted by various States. Entry tax is a tax on entry of goods into a local area for use, consumption or sale and is levied by individual State Governments under Entry 52 of List II of the Seventh Schedule of the Constitution.

The issue in dispute is whether the levy/charging of entry tax by States infringes Article 301 of the Constitution. Article 301 provides that trade, commerce and intercourse shall be free within the territory of India. Since entry tax is a tax on entry of goods, which is linked to movement of trade and commerce, it had to be seen whether the freedom guaranteed under Article 301 is being violated.

Article 301 falls within Part XIII of the Constitution and is subject to the other Articles (Articles 301 to 304) of Part XIII. The Parliament and State legislatures are permitted to impose such restrictions on freedom of trade, commerce and intercourse as may be required in public interest under Articles 302 and 304(b) respectively. However, Article 303 prohibits creation of restrictions that have a result of giving preference to any one State over another except in situations arising from scarcity of goods in any part of India. Finally, Article 304(a) allows States to impose a tax on goods imported from other states to which similar goods produced in that state are subject, in order to prevent discrimination between such imported goods and locally manufactured goods.

The scope of Article 301 was examined by a bench of five judges of the Supreme Court in Atiabari Tea Co. Ltd. v. State of Assam[1], where a tax was levied on transport of sugar in the state of Assam. The tax was struck down on the ground that it had a direct and immediate effect of impeding the free movement of goods, which was an essential feature of freedom of trade. The law laid down in Atiabari was further clarified by a bench of seven judges in the Automobile Transport[2] case, where the tax on entry of motor vehicles was challenged to be violating Article 301. The Supreme Court carved out a class of taxes, known as compensatory taxes from the ambit of Article 301. According to the Court, such taxes were regulatory in nature – for provision and use of trade facilities – and could not qualify as restrictions. However, with time, from 1964 till 2003[3], divergent views emerged in High Courts and the Supreme Court regarding the understanding and application of compensatory tax theory.

In this backdrop, a nine-judge bench (Constitution Bench) of the Supreme Court was constituted to examine the validity of entry tax legislations under Part XIII of the Constitution. Different aspects of the issue were identified and explained.

Compensatory taxes

While answering the reference regarding compensatory taxes being out of purview of Article 301, the majority has held that the concept of compensatory taxes is not recognised by the Constitution and that it does not have any juristic basis. To this extent, cases from Automobile Transportation to Jindal Stripe have been overruled.

This means, entry tax legislations can no longer be challenged as not being compensatory, i.e. there is no correlation between the tax collected and facility provided to the trade. Similarly, States cannot try to uphold their entry tax legislations by inserting provisions such as for creation of a consolidated fund for entry tax, etc.

Whether non-discriminatory taxes would per se violate Article 301

While framing this question, it appears the Court has assumed that discriminatory taxes would anyway fall foul of Article 14 and Article 304(a). Hence, the majority decision only chose to examine whether Article 301 would cover non-discriminatory taxes.

The Court has recognized that the source of power to levy taxes for the Parliament as well as the States emanates from Article 245 and 246 read with Article 265 of the Constitution. Since the power to tax is a sovereign power of the State, any limitation on such power must be expressly provided in the Constitution and cannot be inferred by interpretation. The Court found that the language of Article 301 does not impose any fetter on taxing power of States. In this background, it has been held that non-discriminatory taxes would not per se be a restriction on the right to free trade, commerce and intercourse.

Scope of Article 304

With respect to the scope of Article 304, it has been held that Articles 304(a) and 304(b) operate in different fields. The Court has taken a view that Article 304(a) covers limitations on power of State to levy tax, whereas 304(b) does not deal with taxes at all.

Accordingly, the majority has held that to test whether an entry tax legislation is valid or not, it must fulfil the test of Article 304(a), in that it must not be discriminatory. The Court has also recognized such taxes can also be challenged under Article 14 of the Constitution, that deals with discrimination.

In other words, a tax levied to create a level playing field between goods imported from outside the state and goods produced within the state, would be valid. However, when a tax is levied in a discriminatory manner with an intent to create a trade barrier, such a tax would be struck down as being unconstitutional.

It is important to understand that the Constitution bench has not commented upon the validity of any particular entry tax legislation. Rather, it has urged the regular benches of the Supreme Court to decide the validity of individual State legislations based on the principles so formulated by it. 

[1] AIR 1961 SC 232
[2] Automobile Transport (Rajasthan) Vs. State of Rajasthan, AIR 1962 SC 1406
[3] Khyerbari Tea Co. Ltd. v. State of Assam, (1964) 5 SCR 975; G.K. Krishnan v. State of Tamil Nadu, (1975) 1 SCC 375; Bhagatram Rajeev Kumar v. Commissioner of Sales Tax, M.P., (1995) Supp (1) SCC 673; State of Bihar v. Bihar Chamber of Commerce, (1996) 9 SCC 136; Jindal Stripe Ltd. v. State of Haryana, (2003) 8 SCC 60; Jindal Stainless Ltd. v. State of Haryana, (2006) 7 SCC 241

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