The Tax Case That May Cost India Inc Rs 30,000 Crore

What’s being referred to as the ‘entry tax case’ is in reality a bunch of 2000 cases and could result in a combined tax burden of over Rs 30,000 crore for several companies including Vedanta Aluminium, Reliance Industries, Tata Steel, Essar Steel, Aditya Birla Group, Jindal Group, Adani Enterprises.

Last week a nine-judge bench at the Supreme Court began hearing these cases, that in effect all come down to one issue, whether the levy of entry tax by states is constitutionally valid.

The nine-judge constitution bench is led by the Chief Justice of India, TS Thakur, and includes Justice AK Sikri, who was earlier heading the tax bench in the Supreme Court, Justice SA Bobde, Justice Shiva Kirti Singh, Justice NV Ramana, Justice R Banumathi, Justice AM Khanwilkar, Justice DY Chandrachud, who delivered the Vodafone tax judgment when he was a judge in the Bombay High Court and Justice Ashok Bhushan.

How It All Began

In 2002, Jindal Stainless Ltd. was the first company to challenge entry tax in the Supreme Court, in this case entry tax levied by Haryana. Jindal contended it was beyond the power of states to impose tax on the inter-state movement of goods.

The case was eventually referred to a larger bench of five judges for more clarity on the meaning of free trade. In 2006, the five-judge bench directed hearing of all related cases following which, in 2008, a two-judge bench framed ten questions for consideration by the larger bench.

The five-judge bench then determined that a 1962 Supreme Court judgment on the constitutional validity of entry tax needed revisiting and hence, in 2010, referred the matter to a larger bench of nine judges. By that time several conflicting decisions on entry tax, by various high courts, had reached the apex court and Jindal Stainless was joined by several other companies and manufacturers’ associations in litigating the matter.

While constituting a nine-judge bench in May this year, Chief Justice Thakur observed, “these matters have lingered. Time has come and we must discuss (this issue). Our stay (on entry tax) deprives government of its dues.”

At the first hearing of these cases on July 19, the Attorney General of India told the court that all future entry tax issues will be resolved with the passage of the Goods and Services Tax (GST). But the Chief Justice opined that lakhs of cases are pending across courts and past issues should be resolved first.

So far three day-long hearings have been held on the matter.

What is Entry Tax?

Simply put, entry tax is the tax levied by a local area body, such as a municipal corporation or state government, to permit the movement of goods into the area. For instance, Haryana levies an entry tax of up to five per cent on goods from other states.

In the Supreme Court, among the states fighting for the right to levy entry tax are Haryana, Bihar, Tamil Nadu, Kerala, Rajasthan, Odisha, Uttar Pradesh, Jharkhand, Chattisgarh, Assam and Madhya Pradesh.

Is Entry Tax Constitutional?

In their petitions, companies, such as Vedanta, Jindal, Essar, Reliance and others, have argued that entry tax violates Article 301 of the Constitution of India. Article 301 protects free movement of trade in a common and unified market.

In Court, Senior Advocate Harish Salve, the lawyer leading the petitioners’ cases began his arguments by saying “not all taxes are good taxes.”

Salve represents several companies including Reliance Industries and Vedanta Limited. He argued that states were violating Article 301 by restricting trade and the freedom of movement of goods. Salve stressed on how the Constitution permits restrictions on movement of goods only in public interest and where similar tax is levied on goods produced in any state. “This is clarified in Article 304(a) and 304(b) of the Constitution,” he said.

Top Lawyers Arguing Against Entry Tax

Harish Salve
Arvind Datar
Ravindra Srivastava
S.K. Bagaria
A.K. Ganguly
Gopal Jain

States on the other hand claim the constitutional right to pass laws on issues placed in the ‘State List’ and ‘Concurrent List’ defined under the Constitution, including the movement of goods.

“Article 246 of the constitution permits passing of laws by the state legislatures on issues featuring on State and Concurrent lists for the whole or any part of the state,” points out one state’s affidavit in Court.

Top Lawyers Arguing In Favour Of Entry Tax

PP Rao
Rakesh Dwivedi
Attorney General of India - Mukul Rohatgi

Past Position

The issue of the constitutional validity of entry tax has been litigated before in the Supreme Court. The provisions of Article 301 of the constitution were first examined in Atiabari Tea Company Limited vs State of Assam in 1960 by a five-judge bench that stressed on the need for ‘economic unity.’ The judgment went against entry tax as it upheld the protection allowed to free movement of goods under Article 301. “If there are restrictions on the free flow of goods from one part of the country to the other, growth of modern industry will not be possible,” the Court observed.

There were doubts raised over the Atiabari order and the next year, in 1961, it was referred to a larger bench of seven judges in the Automobile Transport (Rajasthan) Company Ltd vs State of Rajasthan (1962). The bench ruled in favour of entry tax and thereby reversed the position taken in 1961. Disagreeing with the earlier judgement, the seven-judge bench held that entry tax was compensation for the facilities extended by a state for the sale of goods.

GST Impact

In their arguments, counsels representing companies told the Supreme Court that striking down entry tax laws would pave way for the much awaited Goods and Services Tax (GST).

This week Parliament might debate the constitutional amendment bill that if enacted will allow for the implementation of GST in India. The Lok Sabha has passed the bill and it now awaits clearance from the Rajya Sabha after which it will need approval from state legislatures and then the President’s assent.

The Narendra Modi-led government has made public its intention to propose subsuming entry taxes in GST, even taxes levied by local bodies, when it tables the Constitution Amendment Bill in the Rajya Sabha.

The Attorney General too argued, at the first hearing of the entry tax cases, that the implementation of GST will resolve the entry tax issue.

But as Senior Advocate KK Venugopal pointed out in an interview with BloombergQuint, even if the GST Bill is passed it will impact only future transactions.

If GST is not passed in this Parliament session and the apex Court upholds the constitutional validity of entry tax “then states will be entitled to collect such tax going forward” said Venugopal.

Rajeev Dimri, who leads the indirect tax practice at BMR Legal told BloombergQuint in an interview on the phone, that the issue pending before Court is related to past liabilities and GST will not apply retrospectively, so there is no link between the two.

While many suggest that GST will resolve the entry tax issue, Arvind Datar, senior advocate and counsel for a company in the ongoing entry tax matter, told BloombergQuint in an interview on the phone that he believes trade and commerce issues will continue even if entry tax is abolished.

“It appears as per Article 246a of the GST each state can levy its own GST. Which means each state will levy its own GST, there will be inter-state GST and one Central GST. So if each state has its own GST how can you rule out the possibility of trade barriers,” he said.

Datar added that only Entry 52 of the State List and Article 304 of the Indian Constitution are being argued in Court and if abolished they will have minimal impact as other tax provisions will remain.

How Will This End?

The numbers are staggering. So far, during arguments in court, state governments’ counsels have claimed arrears of over Rs 30,000 crores plus interest, from corporate houses. Lawyers involved in the cases say it is difficult to give a precise figure for the amount recoverable from companies as lakhs of cases are pending in high courts.

If the Supreme Court finds entry taxes unconstitutional, companies pay nothing in past claims. But if the Court upholds the constitutional validity of entry tax, companies will have to pay past claims and also tax in the future, till entry tax is abolished.

The matter is expected to be heard for a month before any final decision arrived at by the bench.

(BloombergQuint attended Court hearings, accessed written submissions by companies and states in Courts and spoke to lawyers, and tax experts closely watching this case in the Supreme Court for this story.)