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The Constitutionality Of Entry Tax In India: Does The Landmark Judgment Of

Jindal Stainless Ltd. (2016) Bring Any Change?

By Subhashish Kumar*.

ABSTRACT

The issue of freedom of inter-state trade, commerce and intercourse has vexed the constitutional
experts as well as the merchants all over India before as well as after the advent of the
Constitution. Part XIII of the Constitution which governs inter-state trade had been challenged as
early as in the year 1958, and since then, time and again, lacunae had been pointed out in various
cases, the most recent one being Jindal Stainless Ltd. v State of Haryana (2016). The gravity of the
matter can be gauged from the fact that it was the only second time in history, the Supreme Court
had to constitute a nine-judge bench to adjudicate a tax dispute, the first time being the famous
Mafatlal case. This paper analyses the evolution of jurisprudence on freedom of interstate trade,
commerce and intercourse along with an elaborate historical note on Part XIII of the Constitution
and presents a critical analysis of Supreme Court’s judgment in Jindal Stainless (2016) to argue
that although federal structure of Indian polity is uncompromisable, what is required in today’s
globalising and liberalising world, is a liberal stand to a greater extent for trade nuances to match
the global pace of economic development.

**
2nd Year student of BALLB (Hons.), National Law Institute University, Bhopal.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

Table of Contents

ABSTRACT...........................................................................................................................................1

I. INTRODUCTION............................................................................................................................3

II. THE HISTORICAL DEVELOPMENT OF TRADE AND COMMERCE CLAUSES IN INDIA.


..............................................................................................................................................................4

III. ANALYSIS OF THE LEADING CASES INTERPRETING PART XIII OF THE


CONSTITUTION.................................................................................................................................6

IV. INTER-STATE TRADE REGULATIONS IN INDIA VIS-À-VIS GLOBAL PRACTICES......9

IV. REMEDIES AND CONCLUSION.............................................................................................10


THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

I. INTRODUCTION

“If the economic unity of India is one of the constitutional aspirations and if attaining and
maintaining such unity is a constitutional goal, such unity and objectives can be achieved only if all
parts of the country develop equally.”

-Supreme Court of India in Video Electronics’ case.1

Entry tax is a kind of impost levied by state governments on the goods entering or moving through
its territory. This issue has been a hotbed of contentions between the industries and the state
governments since adoption of the Constitution. In almost all of the cases, the conflicts have arisen
due to the presence of the word “Free” in Article 301 of the Constitution. However, the States have
tried to justify levies on the ground that Entry taxes do not amount to restriction on free flow of
trade as they are compensatory and regulatory in nature whose purpose is to providing better
facilities to the merchants2.

Moreover, the States have contended that Article 304(a) gives them power to impose tax on the
goods entering their territory. The legislative power is drawn from Article 246(3) under Entry 52 of
List II of the Seventh Schedule 3 of the Constitution. To this, the companies which suffered from
arbitrary tax imposition argued that this power comes with an inviolable fetter that the Parliament or
the state legislatures cannot impose any levy which amounts to “impediment or restriction” on
freedom of trade ensured by Article 3014. The question is of utmost importance not only because it
is core to Centre-State relationship, but it affects the lives of the citizens also.

The constitutionality of Part XIII5 of the Constitution have been challenged in the Supreme Court
and various High Courts throughout the country since its incorporation. However, in spite of
numerous pronouncements by full and constitution benches of the Supreme Court, the matter is yet
to be settled to the satisfaction of all parties. Time and again, the Supreme Court has heard the
assertions of the states as well as the traders and formulated some working test, but each time with
passage of few years, either a new judgment obscures the old ones or some loopholes in their ratio
are noticed.

1
Video Electronic v. State of Punjab, (1990) 3 SCC 87.
2
Arvind P. Datar, Commentary On The Constitution Of India, Vol. 3, 1665 (2nd edn., 2007).
3
It gives states the power to impose taxes on the entry of goods into local area for consumption, use or sale therein.
4
RN Bhaskar, “As Parliament Readies for GST Debate, Supreme Court to Decide on Entry Taxes”, Firstpost, available
at: http://www.firstpost.com/business/as-parliament-readies-for-gst-debate-supreme-court-to-decide-on-entry-taxes-
2899728.html (last visited on June 24, 2017).
5
INDIA CONST. art 301-307.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

It is noteworthy to mention here that Part XIII of the Constitution is in addition to Article 14 and
19. Article 19(1) (g) confers upon citizens a fundamental right to carry any profession, business or
occupation. There may or may not be any relation between Article 301 and Article 19 (1)(g) but
comparison can be made on the basis that Article 19(1)(g) entitles individuals to freedom of
profession, occupation, trade and business while Article 301 provides corporations and even states
protection against discriminatory tax measures of other states. Also, the Courts can resort to Part
XIII in Emergency when Article 19 remains suspended.6

II. THE HISTORICAL DEVELOPMENT OF TRADE AND COMMERCE CLAUSES IN INDIA.

The meaning and objective of part XIII of the Constitution can be deduced from the history of
adaptation of Articles therein. The chronology of evolution of these clauses from their original form
in the documents they were adopted from to the form in which they were drafted in the Constitution
preceded by intense Constituent Assembly debates can be referred to throw some light in this
direction.

Part XII and XIII of the Constitution provide for imposition of tax/ levy on trade, commerce and
intercourse and Part XIII as it stands today can be traced back to Section 297 of the Government of
India Act, 19357. The history of the three or four decades prior to the said enactment could be
referred to conclude that more than a century old highly-centralised British government culminated
with this Act as a somehow federal one 8. It broke the formerly unitary government into small and
autonomous Provinces to combine inter se with the Indian States in the Federation at a later period.
The demarcation was not only with regards to boundary but also in fiscs, taxing powers and
administration. The provinces were independent to exercise commerce powers within their region.
However, this power was limited by Section 297 of the Act, which was in two directions, namely,
Clause (a) of sub-section (1) banned restrictions at the barriers of the Provinces on the entry and
export of the goods, and clause (b) prohibited discrimination in taxing goods between goods
manufactured and produced in the Province as against goods not so manufactured or produced and
local discriminations9.

6
Prashanti, “Trade, Commerce and Intercourse”, available at: http://www.legalservicesindia.com/article/print.php?
art_id=2009 (last visited on June 24, 2017).
7
ALL INDIA REPORTER, the Constitution of India: art. 226, note 160 to art. 307, 1973.
8
VIRENDER SINGH, Indian Polity with Indian Constitution & Parliamentary Affairs, 11 (1st ed. 2016).
9
The bare text of section 297 of Government of India Act, 1935, available at:
https://www.legalcrystal.com/act/23044/government-of-india-act-1935-repealed-section-297. (Visited on June 26,
2017.)
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

The framework sought by the framers of our Constitution on the matter of trade and commerce was
hardly met by Section 297 owing to the pitfalls in Government of India Act, 193510. While framing
inter-state trade clauses, the founding fathers were more concerned with the unity and integrity of
the nation11 than the notion of lasseiz-faire because some of the provinces were economically
developed owing to their advantageous geographical position or some other reason and the
differences in language, religion, culture and on other social factors posed the danger of
balkanization of the Union cherished by the Constitution. In light of all this, the problem of the
integration faced by Constituent Assembly members was of many aspects. Political, economic,
cultural and social to name a few. To make the task more difficult, there were Indian states known
as Indian India besides the provinces. The provinces or the British India was 2/3 rd of the nation and
the Princely States as, they were later called, were the rest 1/3rd.

When India gained independence in 1947 and before the adoption of the Constitution in 1950, these
Indian States were merged with the Union of India. After the merger and acquisition was completed
till 1950, the Constitution of India comprised of Part A states, which broadly classified consisted of
Provinces existing since or created by British India and Part B states, which included the Indian
States as mentioned above. These native States enjoyed freedom to a greater degree than the
Provinces. There were trade barriers of various kinds in these Indian states which were both
regulatory and protectionist in nature. While these restrictions could have been justiciable in case of
some States, most of them made unjust discrimination between the goods locally produced and
imported from other states. These restrictions, be it in the form of taxation or other physical
barriers, when seen from the standpoint of the imposing state, may seem legitimate as they appear
to be doing welfare of local industries and manufacturers but they are as a whole detrimental to
nation’s economy.

It was in the background of all these that The Constitution had to provide for part XIII, namely,
Article 301-307, the ultimate purpose of which was abolition of trade barriers set up by the princely
states and the object being free flow of trade, commerce and intercourse to secure national solidarity
and economic unity12. The proposal to provide for freedom of trade and commerce was followed by
a spate of intense debates between assembly members because these, as some believed, would
amount to stripping states of their right to impose levy/tax and in turn of their sovereignty. While
others favoured them for the same reasons as discussed above, namely, unity and integrity of the
country. It is noteworthy to mention that inter-state trade and commerce was dealt with Articles
10
MANJUSREE MISHRA, Freedom of Trade and Commerce and Taxation in India, 01 (1st ed. 1999).
11
D. D. BASU, Shorter Constitution of India, 885 (12th edn., 2000).
12
P. M. BAKSHI, The Constitution of India, 273 (11th edn., 2011).
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

243, 244 and 245 in the Draft Constitution of 1948. While later on 8 th September 1949, Dr B.R.
Ambedkar moved an amendment seeking to delete Article 243, 244 and 245 and the same was
adopted. Simultaneously, a new part XA was introduced containing draft Article 274-A to E 13.
Ambedkar informed the House that the Articles that were otherwise scattered were now brought
together so as to ensure that members could get a holistic idea regarding trade and commerce. 14
Now renumbered, they appear as Articles 301 to 307 of the Constitution of India.

Though it may not occur at first, part XIII of the Constitution is also significant for consolidating
federal character of the nation. The debate whether India is a truly federal country or partially
federal inclined towards the centre is as old as the Constitution itself. However, the settled legal
position seems to be that the Constitution provides for a quasi-federal polity with a bias towards the
centre15. The interpretation of part XIII of the Constitution affects the federalism as well since the
power of taxation is a sovereign right of the states 16 and if Article 304 is interpreted in such a way
so as not to give states this power, it will amount to denuding them of their sovereignty and the
constitution of its federal character. The Supreme Court, in support of this proposition, has said that
The Constitution of India must not be interpreted in a manner which will amount to emasculation of
state legislatures vis-à-vis the Parliament.17

III. ANALYSIS OF THE LEADING CASES INTERPRETING PART XIII OF THE


CONSTITUTION.

M.P.V. Sundararamier v. State of Andhra Pradesh 18 was one of the very first cases whose
jurisprudence was connected with part XIII of the Constitution. Thereby, a petition under Article 32
was filed before the Supreme Court for a Writ of Prohibition against Andhra Pradesh government’s
order imposing tax on inter-state sale and purchase of yarn. The levy was challenged on the ground
that it amounted to impediment on free flow of trade, commerce and intercourse and thus, is
violative of Article 301 of the Constitution. The Court, however, discarded the arguments of the
petitioner terming them implausible and suffering from infirmities.

13
MANJUSREE MISHRA, Freedom of Trade and Commerce and Taxation in India, 56 (1st ed. 1999).
14
Constituent Assembly debates, Thursday, the 8th September, 1949, available at:
http://parliamentofindia.nic.in/ls/debates/vol9p29b.htm (Visited on June 24, 2017).
15
T.S. Thakur, CJI, A.K. Sikri & A.M. Khanwilkar, JJ. in Jindal Stainless Ltd. and Anr v. State of Haryana and Ors,
TS-455-SC-2016-VAT, ¶32.
16
THOMAS M. COOLEY, Book on Taxation, Chapter 2, (vol. 1, 4th Ed.).
17
ITC Limited v. Agricultural Produce Market Committee and Ors (2002) 9 SCC 232.
18
AIR 1958 SC 468.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

Three years later came the landmark Atiabari Tea Co. Ltd. v. the State of Assam & Ors 19
[hereinafter referred to as Atiabari] in which petitioner had challenged the constitutional validity of
Assam Taxation (on goods carried by Road or Inland Waterways) Act, 195420. The said enactment
imposed levies on the goods transported from other states through road or inland waterways. The
petitioner had questioned the validity of such levies. The five-judge bench in its historic judgment
struck down the said enactment holding it ultra vires to the Constitution and held that it was
violative of Article 301. The Court had decided that the taxes and levies can and do amount to
restriction on freedom of trade and the working test for determining this was whether the tax or levy
in question directly and immediately amounts to restriction on free flow of trade.

The legal principle laid down in Atiabari21 came for re-consideration two years later in Automobile
Transport (Rajasthan) Ltd. v. The State of Rajasthan & Ors 22 [hereinafter referred to as Automobile
Transport] in which Rajasthan Motor Vehicles Taxation Act, 1951 was challenged on the same
ground as in Atiabari case. The seven-judge bench upheld the pronouncement of Atiabari while
formulating the Compensatory tax doctrine which would be exception to Article 301 of the
Constitution. It says that a tax or levy which is compensatory in nature is not violative of Article
301 and thus, does not amount to restriction or impediment on freedom of trade, commerce and
intercourse. Also, for taxes of such nature, the previous sanction of the president as per the proviso
of Article 304(b) is not required. The working test of the said doctrine as crafted by the court was
that the traders should pay taxes as per the facilities they are provided for the better conduct and
convenience of their business23.

The judgments of Atiabari and Automobile Transport 24 ruled the interpretation of part XIII of the
Constitution for more than three decades without doubts and challenges, though with some
exception such as G.K. Krishnan v. State of Tamil Nadu 25. It was not till 1995 that Supreme Court
delivered a judgment digressing from the principles of Atiabari and Automobile Transport. In 1995,
MP Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 was challenged before
Supreme Court in the case reported as M/s. Bhagatram Rajeevkumar v. Commissioner of Sales Tax,
M.P. and Others26. The Three-judge Bench in the said case widened the concept of compensatory

19
(1961) 1 SCR 809.
20
Assam Act XIII of 1954.
21
Supra note 8.
22
(1963) 1 SCR 491.
23
Juhi Bansal, “Entry Tax: Is it Constitutional?”, available at: http://www.servicetaxindia.co.in/forms/entrytax.pdf
(Last visited on June 24, 2017).
24
Id.
25
(1975) 1 SCC 375.
26
(1995) Supp. (1) SCC 673.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

tax as a result of which the compensatory tax doctrine was obscured. The court held that even some
link between the tax levied from the traders and the facilities provided to them by the states is
enough for a levy to be valid. The above judgment was followed in Bihar Chamber of Commerce
and Others v. State of Bihar27 which was in the context of Bihar (Tax on Entry of Goods into Local
Areas for Consumption, Use or Sale Therein) Act, 1993. The two-judge bench in the said case
maintained the ratio of the Bhagatram Case28 that the “some connection” between the taxes paid and
the facilities provided is enough and opined that almost every tax is compensatory in nature. Thus,
the pronouncements of Atiabari29 and Automobile Transport30 on the one hand and Bhagatram and
Bihar Chamber of Commerce31 on the other were mutually divergent on the fundamental concept of
compensatory tax if not on other aspects.

The terminus a quo of farrago of contentions, confusion and uncertainties, which the nine-judge
bench of Supreme Court in Jindal Stainless Ltd. & Anr. V State of Haryana & Ors. 32 [hereinafter
referred to as Jindal Stainless Ltd. (2016)] heard, could be traced linearly to the challenges made in
the High Court of Punjab and Haryana against the Constitutional validity of Haryana Local
Development Act, 2000. On May 5 2000, the state of Haryana issued the Haryana Local Area
Development Tax Ordinance, 200033. The ordinance was later replaced by the aforementioned Act
of 2000. Therein, a provision stipulated for levy and collection of tax upon entry of goods to local
area from outside. The constitutional validity of the said Act was challenged in High Court of
Punjab and Haryana in Jindal Strips Ltd V. State of Haryana 34 on the ground that it violated Article
301 and 304 of the Constitution. The High Court tested the merit of this contention against the
parameters set by Supreme Court in cases of Atiabari, Automobile Transport, Bhagatram and Bihar
Chamber of Commerce and accordingly dismissed the said petition and connected matters, in its
order dated December 21, 200135, stating that the levy was compensatory in character and hence
outside the purview of Article 301 of the Constitution.

The correctness of the said judgment of High Court of Punjab and Haryana was challenged in
Supreme Court in Jindal Stripe Ltd. and Anr. V. State of Haryana and Ors. 36 (Civil Appeal No. 3453
of 2002). A two-judge bench of Supreme Court examined the Appeal and noticed an apparent
27
(1996) 9 SCC 136.
28
Supra note 16.
29
Supra note 10.
30
Supra note 13.
31
Supra note 17.
32
TS-455-SC-2016-VAT.
33
Ordinance No. 10 of 2000.
34
Writ Petition (Civil) no. 6630.
35
Jindal Strips Ltd. v. State of Haryana, [2003] 129 S.T.C. 534.
36
(2003) 8 SCC 60.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

conflict between the pronouncements of the Supreme Court in Atiabari37 and Automobile
Transport38 cases on the one hand and Bhagatram 39 and Bihar Chamber of Commerce 40 on the other.
The Court, noticing divergence in interpretation of Compensatory tax doctrine in these two sets of
pronouncements, referred the case to a constitution bench for a more authoritative under Article
145(3). Thereafter, the matter was accordingly placed before a constitutional bench of Supreme
Court in the case reported as Jindal Stainless Ltd. and Anr. V. State of Haryana and Ors. 41 which, in
its order dated April 13 2006, reversed the pronouncements of Bhagatram Case and Bihar Chamber
of Commerce case on the ground that the test of “Some connection” laid down in Bhagatram was
incompatible with the working test of compensatory tax theory formulated by the seven-judge
bench of Supreme Court in Automobile Transport case.

The matter was thereafter placed before a two-judge bench of the Supreme Court for hearing of the
appeals in light of the abovementioned judgement. This bench observed that the High Courts earlier
had found themselves bound by the ruling of Bhagatram and Bihar Chamber Of Commerce cases
and also, in the absence of relevant data they could not determine whether the levies in question are
in accordance with compensatory tax doctrine. Thus, the appeals were not heard immediately and
were referred to their respective High Courts for reconsideration of the said aspect. The High Courts
accordingly re-heard these cases. Levies which were found violative of principles of Compensatory
tax doctrine and in contravention of the procedure and the proviso stipulated in Article 304(b), were
held to be infraction of Article 301 and were accordingly struck down. Assam, Arunachal Pradesh,
Jharkhand, Kerala and Tamil Nadu are few states whose levies were stuck down by their respective
High Courts.

Consequently, the governments of these states challenged the judgment in the Supreme Court and
the initial appeal came up before a two-judge bench which, in its order dated December 18, 2008,
referred the matter to a constitutional bench for an authoritative judgment 42. Assesses in this appeal
pleaded before the Bench that though the Court in Jindal Stainless Ltd. and Anr. V. State of
Haryana and Ors43 dealt with some aspects of the matter, many other issues remain to be considered
and decided upon and that the levies imposed upon entry of the goods were in the nature of “a fee”
and not “a tax”. The bench, thus, formulated as many as ten questions for consideration by the
constitutional bench. Thereafter, the matter was placed before a five-judge bench of the Supreme
37
Supra note 8.
38
Supra note 12.
39
Supra note 14.
40
Supra note 15.
41
(2006) 7 SCC 241.
42
Jaiprakash Associates Limited v. State of Madhya Pradesh and Ors, (2009) 7 SCC 339.
43
Supra note 31.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

Court which briefly discussed the cases of Atiabari 44, Automobile Transport45 and Keshav Mills Co.
Ltd v. C.I.T.46 among others. The case was reported as Jindal Stainless Limited and Anr. v State of
Haryana and Ors.47 Thereafter, the five-judge bench again referred the matter to a larger bench for
reconsideration of the judgment of Atiabari and Automobile Transport. This is how Jindal Stainless
Ltd. and Anr v. State of Haryana and Ors.48 came to hearing before the nine-judge bench of
Supreme Court in 2016.

IV. INTER-STATE TRADE REGULATIONS IN INDIA VIS-À-VIS GLOBAL PRACTICES.

What later constituted Article 301 of the Constitution was introduced as clause 13 in the draft
submitted by the Sub-Committee on Fundamental Rights comprising Mr K.M. Munshi, Sir Alladi
Krishnaswami Ayyar and Sir B.N. Rau amongst others and it is clear from the note of Sir B.N. Rau
that it was adopted from Section 92 of the Australian Constitution, only the proviso at the end of the
clause was new49. Textually, the prime difference between the trade clauses enshrined in Indian
Constitution and in Australian constitution is that the latter incorporated the phrase “absolute
freedom” and “among the states” while our Constitution preferred the terms “free” and “throughout
the territory of India” instead50.

The Supreme Court in the past has also relied broadly upon the jurisprudence developed by
Australian Courts on the matter of freedom of trade and commerce. The test of Direct and
Immediate effect applied by the Bench in Atiabari was formulated by High Court of Australia in
James v. Commonwealth of Australia51 and Commonwealth of Australia and Others v. Bank of
New South Wales and Others.52 However, Australian courts in successive cases discerned the
changes begot with advent of modern trade policies and ever-growing need of economic
liberalisation and diluted these trade and commerce clauses accordingly. The current legal position
of Australia in this regard is that only such taxes are prohibited which are introduced on a
protectionist measure, thus, causing restriction on trade, commerce and intercourse. The view
adopted by the High Court of Australia, later on, was that not all kind of tax and levies are
impediment to free flow of trade but only those discriminatory in nature will violate section 92 of

44
Supra note 8.
45
Supra note 12.
46
AIR 1965 SC 1636.
47
(2010) 4 SCC 595.
48
Supra note 22.
49
OXFORD UNIVERSITY PRESS UK, The Oxford Handbook of the Indian Constitution, 488 (Sujit Choudhry,
Madhav Khosla et.al. (eds.), 1st Ed. 2016).
50
V. N. Shukla’s Constitution of India, 848 (Mahendra P. Singh ed., 11th edn., 2008)
51
(1936) A.C. 578.
52
(1950) A.C. 235.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

Australian Constitution53. Thus, there has been a paradigm shift in interpretation of trade clauses in
Australia.

In the United States, the power of the state to regulate the matters of inter-state trade is governed by
Article 1, Section 8, and Clause 3 of the United States Constitution. These are known as Commerce
Clauses54. The clause is in three parts, namely, the regulation of trade with foreign nations,
regulation of trade among the states of US and lastly, regulations of trade affairs of Indian Tribes.
Historically, the US Congress drew power from this clause to prevent adoption of discriminatory
measures of the states by time and again enacting statutes such as Interstate Commerce Act of in
1887 and the Sherman Antitrust Act in 1990. Though, as a necessary consequence, the Congress
interpreted this clause to rob states of their power to tax interstate trade.

In Canada, Section 121 of the Constitution Act, 1867 55 renders the borders of provinces within
Canada permeable for the purpose of intercourse of trade and commerce. It entitles the
manufacturers of Canada to have their growth, produce or manufacture free admission into any of
the provinces.

IV. REMEDIES AND CONCLUSION.

In Jindal Stainless Steel Ltd. (2016)56, the nine-bench of Supreme Court held that the word “free” in
Article 301 does not mean “free from taxation” and Part XIII does not prohibit taxes of all kind.
The effect of the judgment is that taxes which make discrimination between goods of home state
and other states will fall foul of Article 304(b). Though, Taxes which are non-discriminatory in
nature does not violate Article 301. The Court held that levy of a tax on goods entering the taxing
state will not amount to discrimination even though no similar goods are manufactured within its
territory. Though the questions such as what constitutes local area and whether an entire state can
be notified as local area were left open to be determined by appropriate proceedings. It overruled
the judgments of Atiabari, Automobile and Jindal cases to the extent in conflict with the present
judgment and discarded the age-old compensatory tax doctrine evolved in Automobile Transport
case57 imputing it to be legally unfounded. It held that mere differentiation is allowed by Article 304
and incentives, set-offs, etc. granted to backwards groups of manufacturers of the home state for
economic development is not an infraction of Article 304 though it should be non-hostile and for
limited period. The court also held that clause (a) and (b) of Article 304 are to be read disjunctively,
53
Cole v. Whitefield, (1988) 165 CLR 360.
54
It states, “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”
55
Formerly the British North America Act, 1867 (a part of Canadian Constitution.)
56
Jindal Stainless Ltd. & Anr. v. State of Haryana & Ors, TS-455-SC-2016-VAT.
57
Supra note 14.
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

i.e., if any levy does not satisfy Article 304(a), it cannot be saved even though it is not violative of
Article 304(b). It is imperative to mention here that Justice Chandrachud dissented from the
majority view on many aspects, one of which was on meaning of Article 301 itself. It can be
inferred from his judgment that he does not agree with the majority on non-discriminatory taxes not
constituting an infraction of Article 30158.

India has quite a history of inter-state conflicts vis-à-vis trade and commerce giving rise to
unfriendly state borders, complex taxation system, poor transportation infrastructure and a bad
record of ease of doing business. Such factors discourage both domestic as well as international
investment. It is without a doubt that free flow of trade and commerce, without geographical or
fiscal barriers, is a sine qua non for overall economic prosperity of any nation. Trade both with
other countries and within the country should be as less complicated and burden-free as possible
with minimisation of laws and other effective restriction measures. With government’s apparent
efforts to establish India as a business-friendly nation, present scenario is likely to change in the
long run- if not in the near future. Make in India and GST aim to address this issue. As was
submitted by Learned Attorney General Mukul Rohatgi to a question by the Bench in the same
case, with GST bill’s likely roll-out from July 1, 2016, the only effect of the judgment of Jindal
Stainless Ltd (2016)59 shall be with regard to Entry tax as was enforced in the past. Nevertheless, it
was crucial to be decided as tax liabilities of over Rs. 30000 crores are at stake 60. The Supreme
Court in Jindal Stainless Ltd. (2016) case had an opportunity to settle this issue to give a message in
light of ever-growing need of globalisation and liberalisation. It is pertinent to note that an
enactment may not be constitutionally invalid but they when looked from the economic point of
view, may be inefficient in its objective of protecting the public interest and end up hampering the
progress of overall economy instead. Despite so many judicial pronouncements, with one more
addition, regarding freedom of trade, commerce and intercourse, no straightjacket formulae as to
what constitutes “impediment” to free flow of trade could be evolved. The current criterion for a
levy to be in agreement with Article 301 is that it should not make discrimination between locally
produced goods and those imported from other states. However, this may be vague to the extent it is
subject to interpretation. A particular levy imposed indiscriminately may be reasonable for local
industries and manufacturers of taxing state while they may be inoperably high for manufacturers of

58
Jindal Stainless Ltd., Supra note 22, ¶278.
59
Supra note 41.
60
Suhasini Krishnan, “Entry Tax: The Case That Could Cost India Inc Rs 30,000 crore”, The Quint, available at:
https://www.thequint.com/business/2016/07/26/entry-tax-the-case-that-may-cost-india-inc-rs-30000-crore-gst-state-
supreme-court-reliance-jindal-constitution (last visited on June 24, 2017)
THE CONSTITUTIONALITY OF ENTRY TAX IN INDIA.

the same goods from other states. This is likely on account of differences in economic factors such
as annual turnover, labour costs, demand/supply within or outside the state, economy of scale, etc.

Also, federalism, as discussed by the Court in the said case, is undoubtedly of paramount
importance, nevertheless like every system, it has few drawbacks as well. One of which is that
states will always tend to design policies to enrich their residents at the cost of rest of the country
and as long as they have the power to regulate their affairs with other states, conflicts are likely to
arise between states’ sovereignty and national interest. China is an example in this regards whose
federalism allows market to operate freely and results are in the open to examine.

It is time the unworked Article 307 of the Constitution is invoked and a separate and independent
authority is set up dealing exclusively with the matters of interstate trade and commerce because
many times even the Centre itself has made implementation in constraint of free trade. This body
alongside implementation of GST can solve the long vexed issue of freedom of interstate trade,
commerce and intercourse. The importance of free flow of trade and commerce without
discrimination between regions was recognised as early as in 1711 when Lord Smith LC in an old
leading case Mitchel v. Reynolds said,

“It is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his
own mode of carrying it on according to his own discretion and choice. If the law has regulated or
restrained his mode of doing this, the law must be obeyed. But no power short of the general law
ought to restrain his free discretion.”