Guest Post: The Supreme Court’s Entry Tax Judgment – II: The Dissents

(In this second part of their two-part series, Aditi Dani and Vikram Hegde examine the dissenting opinions in the nine-judge Supreme Court bench’s entry tax decision.)

In a video recently doing the rounds on social media, Justice Rohinton F. Nariman, at a lecture organized by the Bombay Bar Association at the Bombay High Court, on the importance of dissenting opinions, refers to the words of a Chief Justice of the United States’ Supreme Court, Charles Evans Hughes: the “role of a dissenting opinion in a court of last resort is an appeal to the brooding spirit of the law and the intelligence of a future day”. It is in this spirit that we may consider the dissenting and differing opinions in this case.

Banumathi J. and ‘local area’

Banumathi J., differs from Justice Thakur’s opinion on one crucial aspect. The Chief Justice holds that intra state discrimination was never within the scope of consideration of the Constituent Assembly, and hence rejects the argument that Article 304(b) would have be made applicable to taxes to act as a bulwark against intra-state discriminatory levy. Banumathi J., instead, relies on the observations made in State of Bihar and Ors. v. Bihar Chamber of Commerce and Ors., that “the State is a compendium of local areas …. the purposes and needs of local areas are no different from the purposes and needs of the State.” She observes that the Entry tax is a State level levy and the entry tax revenue is treated as the State Revenue. It is spent on the development of local bodies and the State in general. It is the State which has the power to tax; the local authorities themselves cannot levy the tax. Where the local areas cover the entire State, the difference between the ‘State’ and ‘a local area’ practically disappears. She points out the distinction between the levy of entry tax and levy of octroi, observing that the latter is only a local levy; entry tax is not collected is at the behest municipality or a panchayat attached to a checkpost. She does not advert to Shaktikumar M. Sancheti v. State of Maharashtra in this respect, which has been referred to by Justice Chandrachud.

Justice Chandrachud

While Justice Bhushan rightly refers to Justice Chandrachud’s judgment as scholarly, it would have certainly been much easier to understand, if only he had employed a little more clarity in a few places. Justice Chandrachud does a thorough job of tracing the socio-economic and political compulsions behind the guarantee enshrined in Article 301 and the Constitutional history in respect of freedom of trade and commerce (and Mr Harish Salve had advanced extensive arguments on this point).

On merits, Justices Chandrachud concludes thus:

A tax is not necessarily a restriction in every case – A tax may amount to a restriction where its direct and inevitable effect is to restrict the freedom of trade, commerce and intercourse. To establish whether a tax is a restriction for the purposes of Part XIII of the Constitution, the person who seeks to assail the validity of that tax under must show that it amounts to a restriction on the freedom on the flow trade and commerce guaranteed by Article 301. The test of ‘direct and inevitable effect’, for the purpose of Part XIII is not applicable to determine infringement of the fundamental right under Article 19(1)(g). The latter involves an individual right, whereas in context of Part XIII, the matter is to be looked at from the perspective of trade and commerce as a whole.

It may be inferred from his judgment that he does not agree with the majority on non-discriminatory taxes not constituting an infraction of Article 301. He observes that:

“The proposition that taxes do not constitute a restriction on the freedom of trade and commerce (save and except for a discriminatory tax which violates Article 304(a)) does not reflect a valid constitutional principle. … As a statement of constitutional principle, neither of the two positions which lie at the extreme ends of the spectrum is valid : at one end is the position that all taxes are restrictions and at the other end, is the position that no tax (except a discriminatory tax on goods) is a restriction.”

In other words, Article 304(a) does not exhaust the universe of taxation contemplated in Article 304; Discriminatory taxes not levied on goods, or discriminatory taxes levied on goods in “public interest”, are outside Article 304(a); Article 304(a) only prohibits the levy of a tax:

  • on ‘goods’
  • ‘imported from other States’
  • which discriminates between goods imported and similar goods produced or manufactured in that State.

Article 304(a) does not cover taxes on persons (profession taxes or luxury tax) or taxes on activities (betting and gambling): A discriminatory tax which is not on goods is not within the prohibition of that Article. Similarly, a discriminatory tax on goods which does not traverse State boundaries would also not fall within the ambit of Article 304(a), though it would offend Article 301. In that case, a State may justify the imposition of such a tax in the public interest, but it must meet the requirements of Article 304(b). If Article 304(b) were to be construed to not include taxes, such a course of action would be barred, however legitimate the State interest.

Articles 304(a) and (b) may be read conjunctively or disjunctively, depending on whether the tax legislation carries ‘restrictions’: this part is a bit confusing, for he doesn’t say so explicitly. An overall reading of his judgment would suggest that he concludes thus. He observes that:

  • In the context of Article 304(a), the use of the expression ‘may’ in the prefatory part, together with ‘and’, which separates clauses (a) and (b), indicates that the true meaning and intent is conveyed by the joint and several and/or.
  • The Legislature may impose a tax falling under clause (a) as well as a reasonable restriction falling under clause (b). Alternately it may impose one of them.
  • However, when it imposes a tax and/or a restriction, the state legislature has to abide by the conditions of clauses (a) and (b) respectively.
  • Unless the tax imposed constitutes a ‘restriction’, the proviso to Article 304(b) will have no application for, it is only when there is a restriction that the question of its reasonableness can arise.

Article 304(a) does not contemplate only the levy of tax under Entry 52 of List II: The expression “any tax” in Article 304(a) does not mean a tax which is referable to only one subject of legislation falling under a taxing entry in List II. When a legislature legislates, the full range of its plenary powers is available to it, since the source of legislative power is traceable to Articles 245 and 246, and not to the entries in the Lists. The legislatures are not confined to imposing a tax under one entry while formulating a fiscal law. Hence, Article 304(a) does not fetter the States from ensuring an equality of tax burden between goods that are imported from other states and goods manufactured or produced within.

The entire State is not a ‘local area’ – A local area cannot be defined with reference to the entire state. Justice Chandrachud relies on the decision in Shaktikumar M. Sancheti v. State of Maharashtra (1995) 1 SCC 351 as also the 73rd Constitution Amendment which fortifies the principle laid down in Diamond Sugar Mills Ltd v. State of U. P. (dealt with in Shaktikumar Sancheti’s case) that a local area an area administered by a body (such as Municipalities, Panchayats or local board) constituted under the law for the governance of local affairs in any part of the state.

Entry tax can be imposed on goods imported into India from other countriesEntry 83 of List I (customs) and Entry 52 of List II (entry taxes) have separate and distinct fields of operation. The distribution of powers with reference to the taxing entries in List I and II is mutually exclusive. Provisions of the Customs Act do not detract from the power of the state legislatures under Entry 52 nor do they denude the states from levying an entry tax once the taxable event under state law has occurred. Banumathi J. also makes a similar observation.

He agrees with the majority on the other counts i.e.

  • Prohibited from making a hostile discrimination, the State may however make a reasonable classification under Article 304(a).
  • To levy tax on goods imported from another State, it is not necessary for the State to produce or manufacture similar goods.
  • The concept of compensatory tax, replete with doctrinal problems, is best eschewed.

Two reasons why you should read his judgment closely:

  • For the history of socio-economic and political compulsions in creating and preserving fiscal autonomy of States. These observations may be relevant in construing the GST Amendment. But that is really the subject of a whole other post.
  • For referring to caselaw concerning the constitutional power to levy taxes.

Justice Bhushan

Justice Bhushan agrees with Justice Chandrachud on most counts, but agrees with the majority on overruling the compensatory tax theory. His is a fairly straight-forward judgment (though it spans 181 pages) and his direct and precise answers are appreciated. He concludes thus:

  • Levy of a non-discriminatory tax may constitute infraction of Article 301 if it impedes the freedom of trade, commerce and intercourse, unless saved under Article 302 – 304. He agrees with Justice Chandrachud here and disagrees with the majority.
  • A State law made under Article 304(a), not containing any restriction on the freedom of trade, commerce and intercourse, need not comply with Article 304(b). However, a law made under Article 304(a) which contains restrictions on freedom of trade, commerce and intercourse is also subject to the proviso to clause (b) of Article 304 of the Constitution. The compliance of Article 304(b) proviso whether required or not shall depend on the nature and content of the State legislation. Here also, Justice Bhushan agrees with Justice Chandrachud, on the true intent of the two clauses being joint and several.
  • The word ‘restriction’ appearing in Article 303(b) also covers tax legislation. Justice Bhushan agrees with Justice Chandrachud. He further holds that the ‘direct and immediate effect test’ as laid down in Atiabari and approved in Automobile Transport still holds good.
  • He disagrees with Justice Chandrachud (and the majority) on the imposition of tax on imported goods if no similar goods are manufactured / produced within the State. Justice Bobde agrees with Justice Bhushan in this respect. Justice Bhushan observes that imposition of tax on the locally manufactured or produced goods is a condition precedent for imposing tax on similar goods coming from other States. The question of discrimination shall arise only when first condition that is locally manufactured or produced goods are taxed by a State. No question of discrimination arises if the first condition is not fulfilled. For this purpose, he relies on State of Madhya Pradesh Vs. Bhailal Bhai and Others and Kalyani Stores Vs. State of Orissa .[1]
  • He agrees with the majority on grant of set offs / exemptions, observing that the same has to be limited to a specified category for a short period based on intelligible differentia; exemption in general terms of unlimited nature cannot be approved.
  • He does not comment upon the entire State being a local area and imposition of entry tax on goods imported into the Indian landmass.

Both dissenting judgments carry similar observations on Article 245 and 246 being the source of all legislative power, similar to the observations in the majority judgment. But these, being obvious and repetitive in nature, are not specifically adverted to here.

[1] Chandrachud J. also adverts to Kalyani Stores but observes that the principle laid down therein cannot be extrapolated to Article 304(a) where the tax which is imposed is not in the nature of a countervailing duty under Entry 51 of List II.

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