1. Entry Tax: The constitutional deadlock cleared
The Supreme Court, in a historic judgment of Jindal Stainless Steel Ltd. vs Union of India pronounced today, has upheld the validity of entry tax legislations.
2. Entry Tax: Genesis
2.1 Article 246 read with the Seventh Schedule (divided in 3 lists) of the Constitution of India provides the subject matters on which the Parliament or the State Legislatures are empowered to make laws. Entry 52 of the State List provides for levy of entry tax.1 Under this power, various states in India have passed and notified entry tax legislations.
2.2 While plain reading of Article 246 read with Entry 52 of the State List would make it appear that the levy of entry tax is valid in the constitutional scheme, but it is rather complex. Merely because a law has been made under an entry of the Seventh Schedule does not make it automatically valid and constitutional. It is equally important that other edifices set out in the constitution should not be violated.
2.3 In respect of entry taxes, certain impinging provisions can be found in Part XIII (Articles 301 – 304) of the constitution. Part XIII, inter alia, guarantees a right to freedom of movement of goods throughout the territory of India with certain saving clauses in Article 304. The motivations and ambitions of Part XIII was explained by the Supreme Court of India in its landmark judgment in the case of Atiabari Tea Co. Ltd. vs State of Assam2 which is quoted as under:
"33.In drafting the relevant Articles of Part XIII the makers of the Constitution were fully conscious that economic unity was absolutely essential for the stability and progress of the federal policy which has been adopted by the constitution for the governance of the country. Political freedom which had been won, and political unity which had been accomplished by the Constitution, had to be sustained and strengthened by the bond of economic unity. It was realised that in course of time different political parties believing in different economic theories or ideologies may come in power in the several constituent units of the Union, and that may conceivably give rise to local and regional pulls and pressures in economic matters. Local or regional fears or apprehensions raised by local or regional problems may persuade the State Legislature to adopt remedial measures intended solely for the protection of regional interests without due regards to their effect on the economy of the nation as a whole. The object of Part XIII was to avoid such a possibility. ..... The provision contained in Art. 301 guaranteeing the freedom of trade, commerce and intercourse .... embodies and enshrines a principle of paramount importance that the economic unity of the country will provide the main sustaining force for the stability and progress of the political and cultural unity of the country."
2.4 Basis the above, the constitutional vires of almost every entry tax legislation has been under the scrutiny of courts for a very long time. There are multiple proceedings pending at various high courts in India, as also in the Supreme Court. The main submission in these proceedings has been that entry tax violates Article 301, and is not saved by the flexibility under Article 304.
2.5 To overcome the hurdle presented by Part XIII, the Supreme Court in Automobile Transport (Rajasthan) Ltd. vs State of Rajasthan3 propounded a judicial doctrine of "compensatory taxes". The court held that this impost is not hit by Article 301 as it is not in the nature of a "tax", but rather a "compensatory levy" which is nothing but a regulatory measure for the use of trading facilities which does not violate Article 301 of the Constitution of India, and is also saved by Article 304. This judgment was also followed in several other judicial pronouncements.4
2.6 In its subsequent judgment, the Supreme Court in the case of Jindal Stainless Steel vs State of Haryana5, held that the entry tax levied on goods entering the State of Haryana was unconstitutional and the earlier precedents were incorrect.
2.7 Subsequently, in 2009, the Supreme Court in Jaiprakash Associates Ltd. vs Union of India6 and again in Jindal Stainless Ltd. & Anr. v. State of Haryana & Ors.7 doubted the correctness of the judgment rendered in Jindal Stainless and placed the matter before a larger bench of 9 judges to decide the constitutional vires of levy of entry tax on various parameters.
3.1 The Supreme Court in a 900-page order has dissected the entire history, evolution and the very concepts of entry tax. Salient observations are noted below:
3.1.1 Only such taxes which are non-discriminatory in nature are valid, those taxes which are discriminatory in nature are unconstitutional.
3.1.2 The factum as to whether an entry tax is discriminatory or not has to be examined by the respective benches hearing the same.
3.1.3 The concept of compensatory tax is flawed and has no legal basis.
This judgement does not close one of the most hotly contested and debated issue at the Supreme Court. Now, the examination of vires of entry tax legislation will have to be decided on the ground of discrimination by the respective courts. Depending on the outcome of such determination, past arrears of entry tax may or may not arise.
The upcoming Goods and Services Tax (GST) however will subsume the levy of entry taxes. Hence, the impact of this judgment will be primarily on the past periods, and little direct impact in the foreseeable future till GST is implemented
1. Taxes on the entry of goods into a local area for consumption, use or sale therein.
2. AIR 1961 SC 232
3. AIR 1962 SC 1406
4. Bolani Iron Ores vs State of Orissa [AIR 1975 SC 17]; Bhagatram Rajeev Kumar vs Commissioner of Sales Tax, M.P [(1995) 96 STC 645 (SC)]; State of Bihar vs Bihar Chamber of Commerce [1996 SCALE (1) 760].
5. AIR 2006 SC 2550
6. 2008 (16) SCALE 90
7. (2010) 4 SCC 595
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