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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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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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Entry Tax: The Four Constitutional Questions

Karan Lahiri has kindly passed on to me the four questions framed by the nine-judge bench of the Supreme Court in the ongoing Entry Tax case. They are:

  1. Can the levy of a non-discriminatory tax per se constitute infraction of Article 301 of the Constitution?
  2. If the answer to Question No. 1 is in the affirmative, can a tax which is compensatory in nature also fall foul of Article 301 of the Constitution of India?
  3. What are the tests for determining whether the tax or levy is compensatory in nature?
  4. Is the Entry tax levied by the States in the present batch of cases violative of Article 301 of the Constitution and in particular have the impugned State enactments relating to entry tax to be tested with reference to both Articles 304(a) and 304(b) of the Constitution for determining their validity?

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Six Opinions, One Problem: Why a Nine-Judge Bench of the Supreme Court will Rethink a Fifty-Year Old Case

(In this guest post, Alok Prasanna Kumar, a senior fellow at the Vidhi Centre for Legal Policy, lays out the background to the upcoming Entry Tax case, to be decided by a nine-judge bench of the Supreme Court)


While the Constitution of India has to be engaged with and interpreted as an indivisible whole, there are some parts of the Constitution that are clearly in tension with others. One such example is the tension between the power of the State Government to tax and raise revenues on the one hand, and the constitutional directive to ensure free movement of trade and commerce within the territory of India, protected under Part XIII of the Constitution, on the other. Intuitively, it is easy to see that prohibitively high entry taxes on goods within individual States will have the effect of hampering their free movement; constitutionally, however, the position is far more complex.

In the specific context of the entry tax, the conflict can be narrowed down to Articles 245 and 246 read with Entry 52 of List II of the Seventh Schedule (which allows the State Government to impose a tax on entry of goods into the State) and Article 304 of the Constitution which allows the imposition of very limited restrictions on the freedom of trade and commerce (as an exception to Article 301, which requires that inter-State trade and commerce be free). Under Article 304, a State may:

“(a) 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 (b) 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.”

This issue has received much judicial attention over the last six decades or so, starting with the judgment of the Supreme Court in Atiabari Tea Company v State of Assam, where an Assam law taxing carriage of goods into Assam was struck down as being in violation of Article 301 of the Constitution, and not saved by Article 304. The correctness of the analysis in Atiabari has been doubted in the last couple of decades or so, and thus the Supreme Court is all set to re-examine the issue in the context of Article 301 and 304.

In this piece I will briefly analyse the judgments delivered in Atiabari and Automobile Transport v State of Rajasthan which “clarified” Atiabari and lay out what is really at stake in the re-examination of these judgments to see if there is really a need to revisit precedents which have been standing for more than fifty years now.

The judgment in Atiabari was not unanimous ­— a rare instance when the then Chief Justice of India, Justice BP Sinha found himself in the minority. The key point of difference between the majority (Justice Gajendragadkar on behalf of himself, Wanchoo and Das Gupta JJ, and a separate judgment by Justice JC Shah) and the minority judgment is whether tax laws simpliciter are within the scope of Part XIII of the Constitution.

The majority judgment concludes that they are, and therefore must be reviewed under the scheme of Part XIII whereas the minority judgment concludes that they are not but they theoretically amount to a barrier to trade and commerce. Justice Shah’s concurring opinion is largely along the same lines as the majority opinion on the question of the restraint on the taxing powers of the State placed by Part XIII of the Constitution.

The distinction between these positions, when it comes down to it, is really, really narrow.

The majority concludes that taxes do affect freedom of trade and commerce, but the test for striking them down will be whether they have a “direct or immediate” effect of restriction on the freedom of trade and commerce. The minority judgment on the other hand, states that taxes simpliciter do not affect freedom of trade and commerce, but a tax may amount to a barrier to trade and commerce. In effect, the distinction really lies in how the two sides approach the question semantically, though in pragmatic terms it is hard to imagine a situation where a tax which amounts to a barrier to trade and commerce will not “directly and immediately” restrict the same and vice versa.

It is more accurate to state that the views of the judges (even though they seem to state otherwise) differed on the validity of the Assam law in question and its effect on freedom of trade and commerce in Assam, rather than a matter of constitutional principle on the nature of the relation between legislative powers of the State and Part XIII of the Constitution.

Reading all the three opinions, there is seemingly common consensus that taxes are under the purview of Part XIII. Yet, the court may have decided the question placed before it without necessarily addressing the tension placed before it – how to harmonise the State’s taxing powers with the need to have a common market across India. The test laid down in Atiabari re-states the manner in which this conflict will be framed by the Court in deciding cases relating to taxes affecting the freedom of trade and commerce guaranteed under Part XIII of the Constitution.

In Automobile Transport v State of Rajasthan, a seven judge bench of the Supreme Court had the opportunity to go into the questions decided in Atiabari once again. Here the imposition of a tax on bus service providers by the State of Rajasthan was questioned and the law imposing the tax upheld, prior to the judgment of the Court in Atiabari.

Once again, it was a split verdict with three separate opinions being delivered. While upholding the correctness of the judgment in Atiabari, the majority judgment (delivered by Justice SK Das also on behalf of Kapur, Sarkar, Ayyangar and Mudholkar JJ) classifies the views expressed in a spectrum with Justice Shah’s view being the “widest view” which states that Part XIII imposes a limitation on the taxing power of States and CJI Sinha’s views as the “narrowest”. While rejecting the “narrowest” and the “widest” view, the majority view takes the so-called middle view espoused by the majority in Atiabari, with one clarification relating to “compensatory taxes” being outside the purview of Part XIII of the Constitution. Justice Subba Rao’s concurring opinion contains no reference to a “compensatory tax” instead deeming regulations and laws (including possibly taxes and cesses) that are necessary to improve free trade as being outside the purview of Part XIII. Justice Hidayatullah who delivered the minority judgment agrees with the majority that the view in Atiabari is correct and that a regulatory or compensatory tax would be out of the purview of Part XIII, but differs on the facts on whether the law in question is unconstitutional.

Automobile Transport is not without its problems.

The differences between the three views in Atiabari has, in my view, been artificially enlarged in the majority opinion. More problematic though is the concept of a “compensatory tax” — an oxymoron given that a tax by definition does not involve quid pro quo. This only complicates matters further.

Atiabari’s test, while not being comprehensive in addressing all aspects of the tension between States’ taxing power and Part XIII, did at least lay down a clear standard to some extent. The “clarification” only muddles things up further.

The confusion can be seen in the multiple judgements it took to understand what is “compensatory” about these “taxes”, culminating in the Constitution Bench judgment in Jindal Stainless Ltd v. State of Haryanawhich laid down the test of “working proportionality” in determining the “compensatory” nature of a tax.

Doubts about the correctness of the position laid down in Atiabari were first expressed by a two judge bench in Jaiprakash Associates v State of Madhya Pradesh which referred it to a Constitution Bench which then made a reference to a larger Bench on the following questions:

  1. Whether Article 304(a) and Article 304(b) deal with different subjects?
  2. Whether the impugned taxation law to be valid under Article 304(a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent?
  3. Whether the word “restrictions” in Article 302 and in Article 304(b) includes tax laws?
  4. Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination?
  5. Does Article 303 circumscribe Article 301?
  6. Whether “internal goods” would come under Article 304(b) and “external goods” under Article 304(a)?
  7. Whether “per se test” propounded inAtiabari case should or should not be rejected?
  8. Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution?
  9. Whether the word “restriction” in Article 304(b) includes tax laws?
  10. Is taxation justiciable?
  11. Whether the “working test” laid down inAtiabarimakes a tax law per se violative of Article 301?
  12. Interrelationship between Article 19(1)(g) and Article 301 of the Constitution?

In context of the entry tax, the question boils down to this: would a tax on the entry of goods into a territory, that is more than an “equalizing levy”, automatically be deemed to be a restriction on the free movement of trade and commerce?

Perhaps the answer lies somewhere beyond the pure interpretation of legal text and requires the court to take into account the actual economic and fiscal impact of entry taxes. There is nothing per se wrong with the fairly pragmatic test that the Supreme Court laid down in Atiabari, but there is definitely a need to take it forward and address the various aspects outlined in the above questions.

A purely legalistic answer that doesn’t allow for any room to assess the real-world impact of a tax would make most of this exercise futile and fail to advance the jurisprudence on the issue. A hint of this approach was provided by Justice Arijit Pasayat in the context of a “compensatory tax” question in Jindal Stainless Ltd (3) v State of Haryana, where the case was remanded to the High Court to expressly take on record material particulars on the compensatory nature of the levy.

By itself, the issue of the entry tax may not matter much in the larger scheme of things beyond the assessees and the State Governments in question. However, the issue of balancing the State’s power to levy taxes and free trade throughout India is one that is still alive and very much part of the ongoing debate regarding the GST. If the current acrimony between political parties and States is any indication, it is highly likely that that the Constitutional amendments and the laws implementing the GST are going to face challenge before the Supreme Court. The principles laid down by the nine judge Bench in answering the 12 questions will no doubt be crucial in assessing the constitutionality of the GST as well.


Filed under Inter-State Trade and Commerce