Guest Post: The Supreme Court’s Entry Tax Judgment – I: The Majority Opinions

(In this two-part series, Aditi Dani and Vikram Hegde examine the decision of the nine-judge bench of the Supreme Court, delivered late last year, on the constitutional validity of entry taxes imposed by states)

How many 9 judge bench decisions have there been? Justice D.Y.Chandrachud, in his minority opinion in Jindal Stainless [4] v. State of Haryana, claims that there have been only eight reported decisions of 9 judge benches. Justice Ramana claims there have been only 17 judgements of 9 judges or more, of which four judgments are by eleven judge benches and one by thirteen judges, and hence 12 judgments by nine judge benches in all. A book released earlier this year, counts three more.

Whatever be the number, it increased by one on 11th of November when the Supreme Court pronounced its judgment in Jindal Stainless [4] v. State of Haryana. Alok Prasanna Kumar had covered the circumstances it arose in and the issues before the Court.

Preliminary Objection: Revisiting Old Judgments

It may be appropriate to mention the preliminary objections raised by some of the counsel, at the very outset, though the Court, in the course of the hearing did not deal with these issues, till they had almost become moot. Reliance had been placed on the decisions of Constitution Benches in Keshav Mills; Bengal Immunity Co. v. State of Bihar and Lt. Col. Khajoor Singh v. Union of India to state that precedent ought not to be disturbed unless there was a “baneful effect” on the public and there was a “fair amount of unanimity that the previous decision is ‘manifestly wrong’”. Perhaps Justice Ramana answers this best when he points out that approximately 60 Constitution Bench judgments have been overruled in 60 years hence implying that there was nothing wrong in reconsidering Atiabari Tea Company and Automobile Transport Company.

The Questions

The referring bench had framed eleven questions for consideration by the 9 judge bench. On the very first day of hearing, the Court distilled the 11 questions into four questions and set out to consider the following questions:

  1. Could the levy of non-discriminatory tax per se constitute infarction of Article 301?
  2. If yes, can compensatory tax also fall foul of Article 301?
  3. What are the test for determining whether a particular tax or levy is compensatory in nature?
  4. Are the entry taxes levied in the present batch to be tested with reference to both Article 304(a) and 304(b)?

As it turned out, the answer to the first question would render the answers to the rest of the questions either unnecessary or obvious. In answering the questions, the Court has delved into some other themes in law and polity which we shall examine.

The First Question

The First question, i.e., could the levy of non-discriminatory tax amount to a restriction of the freedom of trade, commerce and intercourse guaranteed under Part XIII of the Constitution, is crucial. While the Chief Justice and the concurring judges agree that this question is to be answered in the negative, they have different reasons for doing so.

Justice Thakur lays the ground for this examination by acknowledging some of the settled principles and tools of interpretation. The Constitution must be interpreted as a whole, and an interpretation that renders another provision redundant must be avoided and to achieving this may “involve ironing some rough edges”.

Then, expressing a sentiment that is echoed by all the judges in the majority, Justice Thakur holds that power of taxation is an attribute of sovereignty. The principle is well settled. However, this power has been recognized by the courts more readily in the case of the Union, than in the case of the states (see Jagannath Baksh Singh vs State of UP). This judgment, coming from a bench of nine judges, significantly lends its weight to strengthening the taxing power of the states where it affirms that state governments enjoy the sovereign power of taxation to the same extent as the Union.

The power of taxation is limited on two counts:

i) There are a host of provisions in the constitution which limit the power of taxation, mainly in Part XII of the Constitution.

ii) Such taxing power, as divided between the Union and the State cannot be deduced from a general entry on that subject in the lists in the seventh schedule. However, the constitutional limitation on the power of taxation must be express.

Justice Ramana expresses a similar opinion on the power of taxation of the states, which we shall examine in greater detail when we discuss federalism.

 Compensatory Tax

We may recollect here that the Court in Automobile Transport Company vs State of Rajasthan, had laid down that a “compensatory tax” would not amount to a restriction for the purpose of Part XIII of the Constitution. This, in a way acted as a mid-way view, between taxes being considered to be within the contemplation and the opposite view. The concept of Compensatory Tax, which had held the field for half a century, was rejected by almost all judges in Jindal Stainless [4]. On the one hand, all counsel for the assessees, barring two (Mr. Ganguli and Bagaria, senior counsel), conceded that the Compensatory Tax theory was either conceptually wrong or unworkable and impractical. The Union and the states would argue the same with added vehemence. Perhaps mindful that constitutional principles cannot be decided by consent of parties, but without expressly mentioning so, Justice Thakur examined the validity of compensatory taxes. Reasoning that there is no concept of tax being compensatory other than in a larger sense, in that all taxes are for public good, and compensatory taxes would obliterate the difference between a tax and a fee, Justice Thakur rejects the Compensatory Tax theory. That it is also unworkable in practice, is an added flourish to what is already decided.

Is tax a restriction of the freedom of trade, commerce and intercourse?

Have done away with the mid-way status quo, the paths that remained to be chosen between were the two relatively extreme ones, i.e., that either taxes can constitute a restriction of the Freedom of Trade and Commerce (as guaranteed by the Constitution) or they do not. This was framed by Justice Thakur as a choice between the views of Justice Gajendragadkar and Chief Justice B.P.Sinha, in Atiabari Tea Company. Justice Thakur relies upon the very wording of Article 304 to hold that Articles 304(a) and 304(b) refer to two different topics altogether. Article 304(a) is considered, by Chief Justice Thakur, to be the only provision containing any restrictions on the power of taxation.

Further reasoning that the expression “may impose by law” in Article 304(a) does not constitute a restriction on the power to tax, Chief Justice Thakur reduces the scope of the restriction to the effect that taxation of import of goods is justified only if similar goods manufactured within the state are also taxed. The restriction also means that there cannot be any discrimination between locally produced goods and imported goods of similar nature.

Some amount of attention is paid to the non-obstante clause in Article 304 and its implications. Relying upon the opinion of Justice S.K. Das in Automobile Transport Company, Justice Thakur holds the non-obstante clause to be applicable to the Article 304(b) alone. This is perhaps what he means when he earlier says “ironing out rough edges”.

Where Chief Justice Thakur arrives upon the conclusion on the basis of the brass tacks, Justice Bobde, concurring, adopts a more conceptual approach. Justice Bobde holds that Entry Tax is an impost levied in the course of the freedom of trade. But for freedom of trade, there would be no transaction and there would be no occasion for the levy of a tax and hence Entry Tax is not a restriction of the freedom of trade and commerce.

Justice Shiva Kirti Singh agrees with his maternal grandfather, Chief Justice B.P.Sinha, who in Atiabari held that taxes simpliciter would not amount to restrictions on free trade and commerce. However, he disagrees with Justice Sinha on his comments in Atiabari that a high rate of tax may amount to a restriction. Justice S.K.Singh says “these observations create practical difficulties of insurmountable proportions. Hence these deserve to be treated as obiter or interpreted in the light of the entire passage, to mean suchtaxes which impose an impediment to the free flow of trade, commerce and intercourse by creating discriminatory tariff wall/trade barrier” (emphasis in the original).

Justice Ramana, though, approaches the issue from a somewhat activist standpoint, ultimately bases his conclusions on a highly technical examination. He views the presence of a non-obstante clause in 304(a) as an indication that the Constitution protects the State legislations under Article 304(a) and (b) from overemphasized effect on freedom of trade under Article 301.

Justice Ramana then examines the Indian Judgments on the point in detail, and finally holds that if a state makes a law on subjects enumerated in Entry No. 45 to 63 of List II, of the Seventh Schedule, it is doubtful whether it can be invalidated only on grounds of violation of Article 301 and Article 304(a). Recognizing that various provisions of Part XII (Finance) deal with taxes and in Part XIII (Trade) only Article 304(a) mentions taxes, Ramana J. holds that these parts are distinctly separate. Every tax law made by a state need not be answerable to general provisions relating to trade, commerce and intercourse. Justice Ramana reasons that Article 304(a) is an isolated provision dealing with discriminatory taxes alone and this cannot be an evidence of 301 being applicable to tax statutes and held that since there are a number of restrictions envisaged in the provisions of Part XIII, Freedom of Trade under Article 301 must be understood to be only clarificatory and not absolute.

This view is echoed by Justice Banumathi who also makes a distinction between Part XII and Part XIII of the Constitution. Justice Banumathi also makes takes into consideration the sum total of powers conferred on the Union and the States in the constitutional scheme and determines that the Parliament has occupied an overwhelming space and that the power to make reasonable restrictions in public interest is therefore with the states. To subject even the tax levying power to presidential assent as contemplated under Article 304(b) is to erode the pillars of federalism this country is built on.

Also, though the Court in Atiabari had not based its judgment upon the position of law in Australia, where a similar “Commerce Clause”, being Section 92 of the Australian Constitution, provides for freedom of trade and commerce, there was reference to decisions of the Australian High Court in James v. Commonwealth and Commonwealth v. Bank of New South Wales. Chief Justice Thakur accepts the contention on behalf of the states that these judgments have been since overruled in Australia in Cole v. Whitfield and holds that the support that Atiabari and Automobile drew from Australian law, has “fizzled out” with the passage of time. Justice Ramana, examining the law in Australia, notes that in Cole v. Whitfield and later cases, the High Court of Australia held that Section 92 of the Australian Constitution only meant that Australia would be free from protectionist burdens.

In the US Constitution, the relevant clause is Article 1 Section 8 Clause 3, which is also known as the Commerce Clause. Justice Ramana examines the decisions wherein the Court had limited the power of the States to pass restricting legislations and also points out the shift in 1977, when it was clarified that it is only discriminatory restrictions by way of taxation that would be affected and holds that our Constitution directly provides what the Supreme Court of US has interpreted.

Justice Thakur thus answers the first question by stating that levy of taxes on import of goods from other states is not by itself and impediment under the scheme of Part XIII of the Constitution. This naturally means that a non-discriminatory entry tax would not have to pass through the more rigorous procedure in Article 304(b). Bobde, Shiva Kirti Singh, Ramana, and Banumathi concur with this decision.

Such a conclusion by the Court has a bearing upon the other questions that arise in the matter. On whether a non discriminatory tax would have to be tested under Article 304(b), the majority answers in the negative.

An argument was advanced on behalf of the assessees that when a state does not produce a particular type of goods but levies an entry tax on such goods and an equal tax imposed on such goods manufactured within the state, it would amount to discriminatory taxation though facially it would be an equal tax. This argument, which took up significant time of the court (the heuristic example given during the hearings, but didn’t find its way into the judgment, was that of coconuts in Punjab: If Punjab imposes an Entry Tax on coconuts imported into Punjab equal to the excise duty on coconuts produced in Punjab, such an entry tax, it was contended, would be discriminatory as no coconuts are produced in Punjab) is rejected by Justice Bobde with reasoning which is beautiful in its simplicity. Justice Bobde points out that discrimination would arise only when the state produces goods similar to those imported. When the state doesn’t produce such goods, the question of discrimination does not arise.

 Historical view

Justice Thakur, as do many other judges, takes a look at the historical circumstances which necessitated Part XIII of the Constitution. Pre independence, India was divided in to several Princely states, apart from the territories held by the British Raj. The lack of economic unity was acutely felt and discussed extensively in the Constituent Assembly. This gave rise to Part XII of the constitution, a fact accepted by all judges Atiabari onwards.

The judgment is also notable the multiple references to the collection of documents titled Framing of India’s Constitution edited by B. Shiva Rao. While this is certainly not the first judgment to do so, it is perhaps notable for the extent to which it relies upon the work for its understanding. This is of great help to the Court in considering this aspect not only on the basis of the statements made by various members and leaders of the Constituent Assembly, but also on the basis of the transition of the “Commerce Clause” from being part of the Fundamental Rights chapter in the earlier drafts of the constitution and eventually being moved to constitute a chapter by itself. The “germ plasma” for Article 301 comes from clause 13 in the draft submitted by the sub-committee on fundamental rights in the Constituent Assembly.

The references to the speeches of the members of the Constituent Assembly are numerous and many sections including a humorous interlude by Shri P.S.Deshmukh on the proliferation of non-obstante clauses are extracted wholesale.

The extracts of the Constituent Assembly show that the prominent voices, Dr. Ambedkar, Alladi Krishnaswami Ayyar, T.T.Krishnamachari etc. were quite keen on the removal of trade barriers within India and that the three points guiding Dr. Ambedkar when framing the scheme of Free Trade and commerce were i) To the extent possible, and in the interest of India as a whole, free trade between the units should be permitted as far as possible. ii) The interests of the states cannot be disregarded, iii) The Centre is to intervene in the case of any crises. On the other hand, C. Rajagopalachari expressed his concern that a lot of the “units” (states) were dependent on revenue from such entry taxes and would be hit if such taxes were taken away in the name of free trade.

The result of this examination of history is best summed up by Justice Ramana who in his concurring opinion states that the power of the State to levy any tax on goods imported is specifically saved and declared in the final clause, therefore it would be impermissible to test a law imposing entry tax with reference to Article 304(b). Taxes were not intended to be a restriction of the freedom of trade.


The judgment is notable for the multiple expositions on the nature and importance of federalism in India and also its centrality to our polity.

Chief Justice Thakur lays the ground for upholding differentiation when he relies upon Video Electronics to approve of the thought that economic equality is possible only if all parts of the country develop equally. An economically backward state would have a greater leeway to impose taxation and other measures to promote industries within their own jurisdiction. As long as the discrimination does not promote an unfavourable bias and as long as discrimination is in favour of a particular class of industry and for a period of time, it is permissible. Exemptions etc. would not be discriminatory so long as the intention is to equalize the fall of the fiscal burden on goods from within and outside the state. However, the most evocative lines on federalism come from Justice Ramana. He makes an interesting observation that Economic Unity in India is not a sustainable assertion as “82.5˚ Meridian or Indian Standard Time line seems to starkly divide India broadly as affluent West and destitute East”. However, in the face of dismal economic statistics, Justice Ramana holds strikes a note of optimism and faith in the federal system where he says

All is not lost in what we have achieved. We have stood with each other and for what is right? We have enacted laws and struck them down for right reasons. We have been beaten down but never gave up. We have braved poverty and hunger. We have cared about neighbors and have strived to be a welfare State. We have constructed great many things and achieved many more. We have advanced on scientific fronts and reached distances in universe which were unfathomable five decades back. We have earned a respectable name in the international scenario. We have produced great artists, many leaders and great men. We were not scared so easily by any adverse situation. First step in solving any problem troubling the present is recognizing that there is one India but India as a union of States. States being independent entities under the Constitution require resource to perform their duties under the Constitution.”[1]

He also makes some important observations that under the Constitutional Scheme, the powers of the Union and States are parallel. And that Parliament cannot be a super legislature over the state assemblies. “The Union does not exist in isolation rather it is a co-operative association of the States”. Tracing the history of federalism, he opines that the overriding powers given to the Union are only exceptional circumstances and that the States are supreme in the sphere allotted to them.

The recognition of this constitutional ethos clearly has a concrete effect on the decision in Jindal Stainless[4]. For example the view of Seervai that if Article 304(b) is interpreted to include taxes, it would dislocate the whole scheme of taxation in the Constitution is relief upon. Holding that “it would be surprising if the Union Legislature, i.e., Parliament could not take away the taxing powers of the State Legislatures and yet it would be open to the Union Executive under Article 304(b) to deprive the State Legislatures of their taxing powers” Justice Thakur echoes the thoughts of Matthew J. in G.K.Krishnan v. State of T.N.

[1] These are the authors’ second most favorite lines in Justice Ramana’s judgment. The first place goes to his concluding statement – “Lastly, it was a wonderful sight to see young practitioners ably assisting their seniors which only goes on to reflect vibrancy of Indian Supreme Court Bar.”

(In the next post, the authors will discuss differences in view, and the dissenting opinions)


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