Freedom Of Trade, Commerce, Goods Movement Not Absolute: Supreme Court
The Supreme Court on Friday upheld the levy of entry tax imposed by many state governments on the movement of goods from one state to another by upholding states powers to frame such legislations. Seven judges of the nine-member bench supported the levy, while two judges dissented.
The apex court ruled that states have the right to levy taxes as long as these are not discriminatory. The court held a majority view that trade and commerce activities are not free from taxes but has not given any opinion or direction regarding individual states tax laws. The apex Court has left the decision on whether each state’s entry tax laws are valid to smaller benches.
Several cases are pending in the Supreme Court and across High Courts that have challenged the levy of entry tax laws by different states. Smaller benches of the apex Court will have to determine whether each state’s entry tax law is in line with the constitution and the nine-judge bench ruling.
“ The Registry shall now place the matters before regular benches for an expeditious disposal of the same in the light of what has been observed by us above,” states the nine-judge bench judgment.
Explaining the grounds on which the nine-judge bench delivered this verdict, senior advocate Rakesh Dwivedi, who represented six states -- Assam, Bihar, Madhya Pradesh, Odisha, Tamil Nadu, and West Bengal -- said, the bench drew the distinction between differentiation and discrimination.
The first vital finding is that the taxes simpliciter, which is taxes that are non-discriminatory, are not covered by Part XIII of the Constitution and they can’t be said to violate the freedom of trade and commerce. Secondly, they [the bench] said that Article 304(a), which talks about not discriminating between goods coming into the state from outside vis-à-vis the goods that are produced in the state, that restriction is applicable only with regard to discriminatory taxes and that’s the sole limitation on taxes. There are no other provisions that limit the power of the legislation to impose taxes. The third vital finding that has been recorded is that clause (b), which talks of reasonable restrictions being imposed and obtaining of the sanction of the President, that provision doesn’t apply to taxes. So, the tax legislation of the state need not be sent to the President for sanction before enforcement. They have also interpreted Article 304(a) to say that states are entitled to make some kind of distinction with a view to granting short-term exemptions to the industries which are being set up in the state. But such exemptions shouldn’t be prolonged for too long. So, they drew the distinction between mere differentiation and discrimination.”Rakesh Dwivedi, Senior Advocate, Supreme Court
The court also laid down a 10-point framework for three-judge benches to decide the legality of such state laws.
The criteria includes that the word ‘free’ used in Article 301 does not mean “free from taxation” and only taxes prohibited by Article 304(a) can be considered discriminatory; and tax on entry of goods into a local area for use, sale or consumption is permissible although similar goods are not produced in the state among others.
Article 301 protects free movement of trade in a common and unified market while Article 304 (a) outlines the criteria for states to levy taxes on movement of goods.
Freedom of trade, commerce and intercourse — Subject to the other provisions of this part, trade, commerce and intercourse throughout the territory of India shall be freeArticle 30, Constitution of India
Restrictions on trade, commerce and intercourse among States Notwithstanding anything in Article 301 or Article 303, State may impose on goods imported from other States or the Union territories any tax to which similar goods manufactured or produced in that State are subject, so, however, as not to discriminate between goods so imported and goods so manufactured or produced; and impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purposes of clause shall be introduced or moved in the Legislature of a State without the previous sanction of the President.Article 304(a), Constitution of India
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, the apex court ruled.
Read the nine-judge bench order here
The constitution bench added that states are empowered to design their legislations to ensure that the tax burden on goods imported from other states and goods produced within the State fall under the same category. "Such measures, if taken, would not contravene Article 304(a) of the Constitution," the judgment said.
The apex court has left it open for smaller benches to decide on an important point argued for days by states and companies on whether the entire state can be notified as a "local area" and whether entry tax can be levied on goods entering India from another country.
Entry Tax Is Not Compensatory: SC
The majority ruling spells out that entry tax is not compensatory in nature. “The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal's case has no juristic basis and is therefore rejected.”
What is compensatory tax? States levy tax on trade and commerce activities which is their major source of revenue. However, such tax would be violative of Article 301 under the Indian Constitution if it impedes the freedom of trade and commerce. To show that these taxes are not violative, states declare these type of taxes as compensatory and regulatory by saying that this kind of tax is for facilitating trade and commerce.
2,000 Cases, Rs 30,000 Crore At Stake
The Supreme Court bench, led by Chief Justice of India Justice TS Thakur, examined the validity of entry tax over month-long arguments by companies and states. The bench considered arguments on whether states have the power to impede free trade by taxing movement of goods.
The nine-judge constitution bench also included 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.
The Chief Justice of India-led bench has given a stark observation on how these matters have been lingering on for over 50 years.
"Even after 50 years and several illuminating pronouncements of this court, the cleavage in the judicial opinion as to the true and correct legal position on the subject continues to loom large and haunt lawyers and litigants and, if we may say so, even judges alike. The present reference to a larger Bench is in that backdrop expected to give a quietus to this raging legal controversy of considerable complexity, though given the perseverance of the litigants and the ingenuity of the bar a quietus is only a pious hope which has and may even in future elude us," notes the judgment.
If taxes are eventually meant to serve larger public good and for running the governmental machinery and providing to the people the facilities essential for civilised living, there is no question of a tax being non-compensatory in character in the broader sense.
Supreme Court of India nine-judge bench order on entry tax, 2016
The states that fought these cases in the apex court included Haryana, Bihar, Tamil Nadu, Kerala, Rajasthan, Odisha, Uttar Pradesh, Jharkhand, Chattisgarh, Assam and Madhya Pradesh. State governments’ counsels have claimed arrears of over Rs 30,000 crore plus interest from leading companies.
Jindal Stainless Ltd. was the first company to challenge an entry tax levied by Haryana in the Supreme Court, in 2002. Jindal contended it was beyond the power of states to impose a tax on the inter-state movement of goods. Several companies filed similar petitions thereafter.
All major companies including Vedanta Ltd., Hindalco Ltd., Reliance Industries Ltd., Steel Authority of India Ltd. and others had challenged the constitutional validity of entry tax provisions on the ground that they are against free trade and commerce as provided under Article 301 of the constitution.
As advocate Anuradha Dutt pointed out during her conversation with BloombergQuint, this judgment is a big setback for companies who approached the apex Court as “litigation on entry tax will continue.”
While the 10 point criteria was unanimously decided by nine judges, each judge has given a separate explanation for upholding states’ powers to levy such tax.
Here is a look at some observations made by the judges who heard the matter:
The Union does not exist in isolation rather it is a co-operative association of the states. Taking into consideration various problems faced and differences which exist between the states, importance of state’s power to tax cannot be ignored or stifled. Poverty, unemployment, backwardness and adverse climate etc. are running amok within our Country. No state, in this grand Union, should be made to feel discriminated and embarrassed because of the mere fact that history has not been congenial to them and have remained under-developed. Any restriction imposed should not come in the way of natural development of a state on the ground that it creates barriers for free movement of the goods and trade.Justice N.V. Ramana, Judge in the Supreme Court of India.
Levy of entry tax on the goods imported from the other states is not discriminatory merely on the ground that there are no similar goods manufactured or produced within the taxing state. Levy of entry tax on the goods imported from outside India which enter into a local area for consumption, use or sale therein is within the legislative competence of the state.Justice R Bhanumati, Judge in the Supreme Court of India
Two out of nine judges — Justice Dr D.Y. Chandrachud and Justice Ashok Bhushan — have disagreed with other judges on the bench and given dissenting orders.
Justice Chandrachud noted in his part of the judgment that a tax can impose restriction where its direct and “inevitable effect is to restrict the freedom of trade, commerce and intercourse.”
I have had the privilege of reading the draft of the judgment of the learned and distinguished Chief Justice. My judgment has been necessitated by my inability to agree with some of the crucial issues raised there, especially on its conclusion that taxes (except for discriminatory taxes) can never be restrictions within the meaning of Part XIII (of the Indian Constitution. This part related to Trade and Commerce.)Justice Dr D.Y. Chandrachud, Judge in the Supreme Court of India
Justice Chandrachud has also held that a local area is not the entire state. The other dissenting judge on the bench Justice Ashok Bhushan has said, “The views of Dr. Justice D.Y. Chandrachud in his scholarly judgment are fairly near my own except on few subjects on which I have expressed different opinion.”
Justice Bhushan raises the point of how levy of taxes can be “presumed to be in public interest,” but must pass the test of whether they are restrictive or not.
Justice Bhushan has dismissed states’ arguments of holding entry tax as compensatory in nature by saying that the concept is not compatible with the Constitution. “ The compensatory tax theory brings dichotomy which is inconsistent with the language employed in Article 301,” said Justice Bhushan in his order.