This article is written by Ronika Tater, from the University of Petroleum and Energy Studies, School of Law. In this article, she discusses the constitutional validity of entry tax with the support of the said case and various other relevant constitutional provisions and cases.

Introduction

In the historic judgment of Jindal Stainless Steel Ltd. & Anr v. State of Haryana & Ors.,(2016), the Supreme Court upholds the constitutional validity of entry tax legislations. In its 900 page order, the Supreme Court has explained the entire history, evolution and the various parameters of entry tax. 

Constitutional provisions 

The Seventh Schedule of the Constitution of India provides the three lists namely the Union List, the State List and the Concurrent List. Article 246 of the Constitution of India provides the subject matters on which the Parliament or the state legislatures have the power to make laws. Entry 52 of the State List provides for a levy of entry law thereby making entry tax valid in the constitutional scheme.  Entry tax is a type of tax imposed by the state governments on the movement of goods between states. It is paid to the government of the states while entering the goods. Following this provision, many states have passed and notified entry tax legislation. However, a law mentioned in the Seventh Schedule does not make it constitutionally valid unless it is in consonance with other provisions mentioned in the Constitution. Article 301 of Part XIII of the Constitution of India provides guarantee to the right to freedom of movement of goods throughout the territory of India with certain saving clauses as mentioned under Article 304 of the Constitution of India. Article 304 provides restrictions on trade, commerce, and intercourse among States. It provides the power to the State to impose such reasonable restrictions on similar goods manufactured or produced in that particular State or the interest of the public.

In the case of Atiabari Tea Co. Ltd. v. the State of Assam, (1961), while stating the objective of Part XIII, the Supreme Court held that the taxing laws are included in Article 301 and they do amount to restrictions on the freedoms guaranteed to trade. Thus, the restriction on free trade is not absolute. It also stated that taxes as directly and immediately would restrict trade and fall under Article 301 and restriction on imposition of tax on the carriage of goods or their movement by the State Legislature can only be levied after satisfying the condition mentioned under Article 304(b). Further, in the case of the Automobile Transport (Rajasthan) Ltd. v. the State of Rajasthan, (1962), the Supreme Court established a judicial doctrine of “compensatory taxes” in order to overcome the confusion presented under Part XIII. The Court stated that the imposition of the levy is not in the nature of “tax” but it is a “compensatory levy” which means that it is a regulatory measure for the use of trading facilities and not violative of Article 301 or saved by Article 304 of the Constitution of India.

Case analysis of Jindal Stainless Steel Ltd. v. the State of Haryana, 2002

Facts

In the case of Jindal Stainless Steel Ltd. & Anr v. State of Haryana & Ors.,(2002) the petitioner (Jindal Strips Ltd.) is an industrial manufacturing product within the State of Haryana. The raw material is purchased from outside the State and no sales tax is paid on the input of the raw material. Similarly, the finished products are sent to other States and no sales tax is paid on the export of finished products. Thus, the State of Haryana introduced the Haryana Local Area Development Act, 2000 (“Act”) for levies and collection of tax on entry of goods into the local area. The Act imposed entry tax not only on the vehicles bringing goods into the State but also vehicles carrying goods from one local area to another. Hence, the petitioners challenged the provisions of the Act for being violative of Article 301 and Article 304  of the Constitution of India before the Haryana  High Court.

Issue

1. Whether the Haryana Local Area Development Act, 2000 is violative of Article 301 and Article 304 of the Constitution of India?

Judgment

The High Court referred to the case of Bhagatram and Bihar Chamber of Commerce, (1962) where the High Court stated the concept of compensatory nature of tax has a wider meaning and there is a substantial link between the tax and the facilities extended to the manufacturer, hence the levy of tax cannot said to be invalid. Thus, in the instant case, the High Court upheld the validity of the said Act. It also stated that the entry tax was compensatory and did not violate Article 301 and Article 304 of the Constitution of India.

Further, in a subsequent judgment of Jindal Stainless Ltd. v. the State of Haryana, (2006), a Division Bench of the High Court held that the levy of entry tax was not compensatory in character and it is violative of the constitutional provisions. Thereby, the State of Haryana repealed the Act and enacted the Haryana Tax on Entry of Goods into Local Areas Act, 2008. Considering the importance of the issues in relation to Article 301, Article 304 and other provisions of Part XIII, in Jindal Stainless Ltd. & Anr v. State of Haryana & Ors, (2010), the earlier judgments were referred to a larger bench of nine to decide the constitutional power of levy of entry tax on various parameters.

Case analysis of Jindal Stainless Steel Ltd. & Anr v. State of Haryana & Ors.,(2016)

Facts of the case

In Jindal Stainless Ltd. & Anr v. State of Haryana & Ors, (2010) it was held that the matter to decide the constitutional power of levy of entry tax on various parameters should be referred to a larger bench of the nine-judge bench. Hence, these appeals questioning the interpretation of Article 301 to Article 307 under Part XIII of the Constitution are the subject matter of this Constitutional Bench. The questions raised before the Constitution Bench are of great public importance; they involve the question to decide on the power of the State Legislature to levy taxes and the following judgment would affect the federal character of our Constitution, Centre-State relationship, and fiscal policy matters.

Issues involved

1. Whether the State Legislative enactments to levy entry tax should satisfy the test mentioned under clauses (a) and (b) of Article 304 separately or individually or together?
2. Whether the imposition to levy entry tax in relation to Entry 52 List II of Schedule VII violative of Article 301 of the Constitution?
3. Whether Entry 52 List II of Schedule VII of the Constitution only provides taxing entries and nothing expressed or explicit is mentioned under Entry 52 List II of Schedule VII which would compel the State to spend the tax collected within the local area?
4. Whether the entry tax levied on the goods meant for being sold, used, consumed come to standstill after the movement of goods stops in the “local area”?
5. Whether the interpretation of Article 301 to 304 in the context of tax on vehicles mentioned in the Atiabari case and Automobile Transport case apply to the entry tax case and if yes, then to what extent?
6. Whether the non-discriminatory indirect State tax passed on by traders to the consumers violates Article 301?
7. Whether a tax levied on goods within the State directly hurdles the trade and thus violates Article 301 and can be saved by Article 304 or any other article?
8. Whether entry tax levied under Entry 52 List II of Schedule VII of the Constitution is in the nature of a compensatory levy?
9. Whether the entire State or any part will be covered as a “local area” for the purpose of entry tax?
10. Whether there is a balance of freedom of trade and commerce in Article 301 in consonance with the State’s authority to levy taxes under Article 245 and Article 246 of the Constitution in the context of movement of trade and commerce?

Cases referred

Several cases and concepts of the law were referred to answer the questions raised before the Constitutional Bench. The power to levy tax is inherent in the people and acts as an attribute of sovereignty. Article 245 deals with the extent of laws made by the Parliament for the whole or any part of the territory of India and the legislature of a State can make laws only for the State or part. Article 246 provides for the distribution of the legislative powers. In the case of Synthetics and Chemicals Ltd v. the State of U.P, (1990) it was recognized that in India, the Centre and the States both enjoy exercising the sovereign power within the constitutional limits conferred upon them. While interpreting the provision of Part XIII, the Court referred to the case of ITC Ltd. v. Agricultural Produce Market Committee and Ors, (2002), where it was held that the Constitution of India must be interpreted in such a way as it does not temper the power of the State Legislature. An interpretation should be made to ensure the promotion of federalism while upholding central supremacy. Further, while deciding on the question of non-discriminatory fiscal measures, hurdles to free trade, commerce, and intercourse under Article 301 should be answered in the view of the Constitutional Scheme stating the separation of power in a federal system of governance. 

The Court referred to the case of Kesavananda Bharati v. the State of Kerala, (1973) where the 13-Judge Bench stated that the Constitution should receive pragmatic interpretation that harmonizes and balances the aims and objectives in order to attain national goals. The Court observed that Article 301 enables goods, services, persons and capital to deal in trade, commerce and commercial intercourse throughout the territory of India. The expression “throughout” extends the ambit of freedom across and within state boundaries. The freedom guaranteed under this Article is not absolute; hence, it is subject to legislative control by the Parliament and the State Legislatures.

Judgment

The Supreme Court made the following observation:

• The expression ‘Free’ used in Article 301 does not mean “free from taxation”.
• Taxes that are non-discriminatory in nature are only valid and those taxes which are discriminatory in nature are unconstitutional.
• A levy that violates Article 304(a) cannot be saved even if it satisfies the procedure under Article 304(b).
• The concept of compensatory tax evolved in the Automobile Transport case and Jindal’s case (2002) is flawed and has no legal basis.
• The judgment of the above-mentioned cases in Atibari, Automobile Transport and Jindal and all other judgments relating to the extent of the same subject matter is overruled.
• Entry tax is levied on goods into a local area for use, sale or consumption is permissible however, similar goods are not produced within the taxing state.
• States are within the powers to form their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State are not discriminated against. Also, such measures taken by the State should not contravene Article 304(a).
• The question of whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the State from another country is yet to be decided.

Conclusion

The judgment does not resolve all the questions with regard to the levy of entry tax. In the instance case, the examination of the power of entry tax legislation will have to be decided on the discriminatory nature by the respective courts. Moreover, the levy of entry tax goes against the principle enshrined under the Goods and Service Tax (GST) regime. The aim and objective of GST are to create a common market throughout India without any taxes levied on the inter-state movement of goods. A constitutional amendment Bill may be required to facilitate the implementation of GST effectively.  

References

• https://main.sci.gov.in/judgment/judis/27647.pdf.
• https://www.mondaq.com/india/withholding-tax/544232/supreme-court-upholds-constitutional-validity-of-entry-tax.
• https://indiankanoon.org/doc/141946357/.
• http://www.bareactslive.com/HRY/hl784.htm.

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