Jindal Stainless Limited along with companies like Vedanta, Hindalco, Reliance Industries and others (collectively, “Appellants”), in an appeal to the Supreme Court, challenged the decision of multiple High Courts, which imposed entry tax on goods that are being imported in their respective state. The Appellants contended that such decision of the High Courts is violation of Article 301 of the Indian Constitution, which ensures free trade and commerce throughout India. However, it was contended by the various states that they have a constitutional right to levy such tax and pass any other law with respect to subjects falling under the ‘State List’ and the ‘Concurrent List’.
These appeals bring to fore for determination of vexed questions touching the interpretation of Articles 301 to 307 comprising Part XIII of the Constitution of India, which have been the subject matter of several Constitution Bench decisions of the Hon’ble Supreme Court, all but one, decided by majority.
In exercise of their legislative powers under Entry 52 of List II of the Seventh Schedule to the Constitution, several States in the country, at least 14 of whom are parties to these proceedings, have enacted laws that provide for levy of a tax on the “entry of goods into local areas comprising the States”. The constitutional validity of these levies was questioned in the different High Courts by assesses/dealers aggrieved of the same, inter alia, on the ground that the same were violation of the constitutionally recognised right to free trade commerce and intercourse guaranteed under Article 301 of the Constitution of India. Article 301 of the Constitution of India is reproduced hereunder for ease of reference:
- Can the levy of non-discriminatory tax per se constitute infraction of Article 301 of the constitution of India?
- If the answer to the above is in affirmative, can a tax which is compensatory in nature also full foul of Article 301 of the Constitution of India?
- What are the tests for determining whether the tax or levy is compensatory in nature?
- Is the Entry tax levied by different states is violation of Article 301 of the Constitution and in particular have the impugned State enactment relating to Entry tax to be tested with reference to both Article 304 (a) & 304 (b) of the Constitution for determining their validity ?
On 11th November 2016 the Hon’ble Supreme Court by a majority of 7:2 answered the reference in the following terms:
- Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word ‘Free’ used in Article 301 does not mean “free from taxation”.
- Only such taxes as are discriminatory in nature are prohibited by Article 304(a). It follows that levy of a non-discriminatory tax would not constitute an infraction of Article 301.
- Clauses (a) and (b) of Article 304 have to be read disjunctively.
- A levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied.
- The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected.
- Decisions of this Court in Atiabari, Automobile Transport and Jindal cases (supra) and all other judgments that follow these pronouncements are to the extent of such reliance over ruled.
- A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the taxing state.
- Article 304 (a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation. Therefore, incentives, set-offs etc. granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a). The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters.
- States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the State fall equally. Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters.
- The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings.
The question whether the levies in the Entry Tax enacted in Different States satisfies the test of Article 304(a) i.e. discriminatory in nature is left to be decided by the regular benches hearing the matter.
Now the broad principle which needs to be observed by the Regular Benches is whether the tax on intra movement is discriminatory or not?
The Levy of Entry Tax in some states is imposed on intra as well as inter State movement of goods, however, there is a blanket exemption on intra-state movement of goods. Hence, there is no levy of Entry Tax on intra-state movement of goods.
“State Legislature in exercise of its taxing power can grant exemption\set off to locally produced and manufactured goods only to a limited extent based on intelligible differentia which is not in nature of general\unspecified exemption”.