ENTRY TAX IN INDIA - REG.
Srinivasa Kiran Sistla
CS A Rengarajan
It gives an idea about entry tax. kindly go through the same
Best regards
Entry Tax - Legality of the levy and chaos across various states
Hiral Raja
Entry 52, List II of the Seventh Schedule of the Constitution of India enables the states to enact law providing for levy of entry tax into a local area for consumption, use or sale therein. Entry 52 provides as follows:
“Taxes on entry of goods into a local area for consumption, use or sale therein.”
Hon’ble Supreme Court in the case of Atiabari Tea Company, Limited vs. State of Assam and Others [1961-(048)-AIR -0232 –SC] has held that power to tax vested by the legislative list in the Parliament or State legislatures, is circumscribed by Part XIII (Trade, Commerce and intercourse within the territory of India) of the Constitution and if the exercise of that power does not confirm to the requirements of Part XIII, it will be regarded as invalid. Hence vide this judgment, Hon’ble Supreme Court has confirmed that even tax legislation would have to bear the scrutiny of Part – XIII and in case the tax legislation infringes with the Part XIII of the Constitution, then the same will be held invalid and unconstitutional.
Part XIII of the Constitution deals with Trade, Commerce and Intercourse within the territory of India.
Analysis of the relevant provisions of the Part – XIII:
Article 301: 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 free.
Article 304: Restriction on trade, commerce and intercourse among States
Notwithstanding anything in article 301 or article 303, the Legislature of a State may by law -
(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:
Provided that no Bill or amendment for the purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President."
Hence based on the above, it can be seen that legally any state legislature can impose entry tax. However in case such entry tax directly and immediately impedes free flow of trade and commerce, then it would violate Article 301.
Article 301 is subject to the limitations and conditions in Articles 302, 303 and 304 i.e. Article 301 is binding upon the Union legislature and the State legislature, but the Parliament can get rid of the limitation imposed by Article 301 by enacting a law under Article 302. Similarly, a law made by the State Legislature in compliance with the conditions imposed by Article 304 shall not be hit by Article 301. Hence in case entry tax provisions enacted by the state are able to satisfy the conditions imposed by Article 304, it can be held legal.
Article 304 (a) allows the state legislatures to impose any tax to which similar goods manufactured in its own state are subjected so as not to discriminate between imported goods and manufactured in its state;and
Article 304 (b) allows the state legislatures to impose reasonable restrictions on the freedom of trade, commerce or intercourse, provided they fulfill the following three conditions:
· Such restrictions shall be in public interest;
· They shall be reasonable; and
· They shall be subject to the procurement of prior sanction of the president.
An exception to the Article 301 and its operation was judicially crafted by the seven member bench of Hon’ble Supreme Court in the case of Automobile Transport (Rajasthan) Ltd. vs. State of Rajasthan [AIR 1962-(049)-AIR -1406 –SC]. In that case, the challenge was to the Rajasthan Motor Vehicles Taxation Act, 1951. The challenge to Article 301 was rejected by holding that “the taxes are compensatory taxes which instead of hindering trade, commerce and intercourse facilitate them by providing and maintaining the roads". It further observed that “if a statute fixes a charge for a convenience or service provided by the State or an agency of the State, and imposes it upon those who choose to avail themselves of the service or convenience, the freedom of trade and commerce may well be considered unimpaired." Thus, the concept of "compensatory taxes" was propounded. Therefore, taxes which would otherwise interfere with the unfettered freedom under Article 301 were protected from the vice of unconstitutionality if they are compensatory. Hence based on this judgment, the working test for deciding whether a tax is a compensatory or not was to enquire whether the trade is having the use of certain facilities for the better conduct of its business and paying not patently much more than what is required for providing the facilities".
Further Hon’ble Supreme Court in a three member bench in G. K. Krishnan & Ors. v. State of T.N. & Ors. [1975-(062)-AIR -0583 –SC] held that "the very idea of a compensatory tax is service more or less commensurate with the tax levied".
Hence these judgements emphasized that the imposition of compensatory tax must be with definite purpose of meeting the expenses on account of providing or adding to the trading facilities either immediately or in future provided quantum of tax is based on a reasonable nexus to the actual or projected expenditure on the cost of the service or facility.
This working test was applied by all the Courts in India from 1962 to 1995 in relation to motor vehicles taxes to decide whether the levy was compensatory or not.
However in the case of M/s. Bhagatram RajeevKumar vs. Commissioner of Sales Tax, M. P. and others [1995-(SU1)-SCC -0673 –SC], wherein the challenge was to the M.P. Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976, the Hon’ble Supreme Court went on to say, that "the concept of compensatory nature of tax has been widened and if there is substantial or even some link between the tax and the facilities extended to dealers directly or indirectly the levy cannot be impugned as invalid". The dictum in Bhagatram’s case was relied on by a Bench of two Judges in the case of State of Bihar vs. Bihar Chamber of Commerce [1996-(009)-SCC -0136 –SC], which reiterated the position that "some connection" between the tax and the trading facilities extended to dealers directly or indirectly is sufficient to characterize it as compensatory tax. The Court further went to hold that that the State provides several facilities to the trade, such as, laying and maintenance of roads, waterways, markets etc. and on this premise, it was held that the entry tax was compensatory in nature. The learned Judges did not consider it necessary to put the burden on the State to furnish the details of facilities provided to the traders and the expenditure incurred or incurable thereafter.
Hence post the decisions in Bhagatram's case and in the case of Bihar Chamber of Commerce, the test applied was that even if the purpose of imposition of the tax is not merely to confer a special advantage on the traders but to benefit the public in general including the traders, that levy can still be considered to be compensatory. According to this view, an indirect or incidental benefit to traders by reason of stepping up the developmental activities in various local areas of the State can be brought within the concept of compensatory tax, the relationship between the tax known as compensatory tax and the trading facilities not being necessarily either direct or specific. These decisions clearly expanded the scope of the judicially evolved compensatory taxes and were in contrast with the doctrine of direct and immediate benefit as propounded in the Automobile Transport (Rajasthan) Ltd. vs. State of Rajasthan [AIR 1962-(049)-AIR -1406 –SC].
Hon’ble Supreme Court in a five member bench in the case of Jindal Stainless Ltd. and another vs. State of Haryana and others [2006 – 145 – STC-0544 – SC], while dealing with the issue on constitutional validity of LADT in Haryana has laid down the following principles to verify whether a particular tax enactment is valid on the grounds of it being a compensatory tax :
- The concept of compensatory tax is not there in the constitution but is judicially evolved in Automobile Transport case as a part of regulatory charge.
- Compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the cost of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. It might incidentally bring in net revenue to the government but that cannot be an essential ingredient of the compensatory tax.
- Whenever any law is impugned as violative of Article 301 of the Constitution, the courts have to verify whether the impugned enactment facially or patently indicates quantifiable data on which compensatory tax is sought to be levied. The Act must facially indicate quantifiable or measurable benefit.
- If the provisions are ambiguous/even if the Act does not indicate facially the quantifiable benefit, the burden will be on the State as a service/facility provider to show by placing the material before the Court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/measurable benefit provided/to be provided to its payers.
- Once it is shown that the enactment invades freedom of trade, it is necessary to enquire whether the State has proved that the restrictions imposed by it by way of taxation satisfy the conditions laid down in Article 304(b):
- Such restrictions shall be in public interest;
- Such restrictions shall be reasonable and
- Such enactment shall be subject to the procurement of prior sanction of the president.
Further the Hon’ble Supreme Court also decided that constitutional validity of various entry tax enactments, which are subject matter of pending appeals, SLP’s and writ petitions will now be disposed of in light of the above principles. Hence Hon’ble Supreme Court in its abovementioned judgment upheld the doctrine of direct and immediate effect as propounded in the Automobile Transport case and gave a clear direction to verify all the entry tax enactments by applying this doctrine.
Based on the above principles, various appellate authorities and high courts have held respective State’s Entry Tax Act’s as unconstitutional:
- Haryana – Jindal Strips Limited and Another vs. State of Haryana and Others. [2008-(012)-VST -0149 -P&H]
- Rajasthan – Dinesh Pouches Ltd. vs. State of Rajasthan and Others. [2008-(016)-VST -0387 –RAJ].
- Jharkhand – Tata Steel Lmited vs. State of Jharkhand and Others [2008-(017)-VST -0209 –JHA]
- Andhra Pradesh – Sree Rayalaseema Alkalies and Allied Chemicals Limited vs. State of Andhra Pradesh and others. [2008-(013)-VST -0015 –AP]
- Arunachal Pradesh – Jaiprakash Associates Limited (Cement Division) vs. State of Arunachal Pradesh and Others. [2009-(022)-VST -0310 –GAU]
- Assam – ITC Limited vs. State of Assam [2007-(009)- VST -250 (Gauhati)]
- West Bengal - National Hydroelectric Power Corporation Ltd. vs. ACCT Siliguri charge and others [2008-(015)-VST -0158 –WBTT]
Karnataka High Court has based on the above principles held the levy of entry tax legal in the case of Manipal Academy of Higher Education vs. State of Karnataka and others [2008-(013)-VST -0377 –KAR].
Assam State Government reintroduced the Entry Tax Act after removing the deficiencies in the earlier Acts and their new entry tax Act was held legal – Indian Oil Corporation vs. State of Assam and Others [2009-(021)-VST -0076 - GAU]
However in case of Haryana, even the new entry tax introduced after removing the deficiencies in the earlier Act was held illegal – Indian Oil Corporation vs. State of Haryana [2009-(021)-VST -0010 -P&H ]
Certain State governments in their respective High Courts took a view that entry taxes levied in their states, though are not compensatory and are not complying with the Article 304 (b), are covered under the Article 304 (a) i.e. on account of introduction of such entry tax, there is no discrimination in the provisions of the Act between the goods imported from outside the state and those manufactured or produced in the state. Further their contention was that clause (a) and (b) of Article 304 of the Constitution of India is independent of each other; if law is saved under Article 304(a) then it need not be tested with reference to clause (b) of Article 304 for determining its validity. Also their view was true nature of entry tax is to be seen and the nature of entry tax is conceptually different from transport cases. In most of the cases, entry tax was introduced after abolition of Octroi. Based on these arguments, following entry taxes were held legal by the respective high courts.
- Reliance Industries Limited vs. State of Orissa [2008-(016)-VST -0085 –ORI]
- Madhya Pradesh - Godfrey Philips India Limited vs. State of Madhya Pradesh and Others [2008-(017)-VST -0465 –MP]
In all these above mentioned cases, aggrieved party, be it the State or assesses have filed SLP with the Supreme Courts to decide on the constitutional validity of the entry tax of the respective states and for granting interim stays. Two member bench of Supreme Court in the case of Jaiprakash Associates Ltd. vs. State of M.P. and Others [2009 – 021-VST-0001-SC] has held that the principles evolved by the Hon’ble Supreme Court in the case of Jindal Stainless Ltd. and another vs. State of Haryana and others [2006 – 145 – STC-0544 – SC] was based on the approach of levy of transport cases. Transport cases are conceptually and contextually different from Entry Tax cases. The concept of compensatory tax really had its matrix in transportation cases and does not apply to general notion of Entry Tax. Hence considering the importance of issues relating to Article 301 and 304, they have once again referred the issue to larger bench to answer following major questions of law:
- Whether levy of entry tax in terms of Entry 52 List II of Seventh schedule is violative of Article 301 of the constitution? If the answer is affirmative, can the levy be protected if it is compensatory? What are the yardsticks to be followed for determining the compensatory character of the Entry Tax?
- Whether state enactments relating to levy of entry tax have to be tested with reference to both clauses (a) and (b) of Article 304 of the constitution for determining their validity and whether clause (a) or Article 304 is conjunctive with or separate from clause (b) of Article 304?
- Whether interpretations of Article 301 and 304 in case of transport cases in Atiabari case and Automobile Transport case apply to Entry Tax cases?
- Whether entry tax can be termed as a tax on movement of goods when there is no bar at the entry of goods at the State border or when it passes through a local area within which they are not sold, used or consumed?
Hence from the above, it can be seen that there is a lot of confusion across all the states on the legality of the levy. Since entry tax has been held unconstitutional by high courts in majority of the states, Companies/assessees in these states are clearly in a lurch whether to pay these entry taxes or stop paying entry taxes. They have either stopped paying entry taxes, or are paying entry taxes under protest with absolutely no clarity on the legality of the levy. The Entry tax authorities have been approaching Supreme Court for granting interim relief against the respective High Court judgments and Hon’ble Supreme has been asking the assesses to pay the either part amounts/full amounts/file the returns on a case to case basis until the disposal of these SLP cases in Supreme Court.
In today’s world, Companies need clarity whether a particular levy is applicable or not so that they can accordingly decide on their end pricing to the consumer. As a country, we cannot keep so many Companies/assessees in lurch. We hope that Supreme Court decides on the constitutional validity of these entry tax acts at the earliest and the Companies/ assessees are given a clear verdict on the legality of these Entry Tax Acts once and for all.
With Globalisation, Industries require larger markets and as a Country we cannot develop, if we try and fragment every state and give liberty to them to levy entry taxes as per their whims and fancies. Obviously States should not resort to such entry taxes for augmenting its revenues. Further Central Government needs to ensure that they do not allow such controversies to rope in the proposed Goods and Service Tax (GST) scenario and they make it clear while implementing Goods and Services Tax (GST) that states cannot levy any entry tax on goods received within the state for consumption, use, or sale therein.
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csarengarajan
Company Secretary, Chennai
email csaren...@gmail.com
mobile 093810 11200
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CS A Rengarajan
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