Entry Tax week 3 update 22 Aug


Key arguments and observations of the bench

In the matter of legality and validity of entry tax

Before 9 judge bench


The Constitution Bench of nine judges has been hearing the arguments every week on the constitutionality of levy of Entry Tax since 19 July 2016. In continuation of our earlier update we bring to you the highlights and issues discussed at the hearing of the matter. During the third week arguments were made by various advocates appearing on behalf of the assessees were completed and Ld. Attorney General, Mr. Mukul Rohatgi made submissions on behalf of the Union of India. This note highlights the key submissions made so far.

Key submissions of Mr. Lakshmikumaran

Mr. Lakshmikumaran, advocate appearing on behalf of the assessees, made his brief submissions before the Bench. He attempted to highlight the General Agreement on Trade and Tariff (GATT) and World Trade Organisation (WTO) regime. However, he was asked to limit his arguments to the Constitution of India and related provisions. His key submissions are as under:

  • Free trade in terms of Article 301 includes free trade in services, free trade in goods, free trade in capital and free trade in property. These four freedoms are envisioned to be protected under the Constitution.
  • The embargo on States’ legislative powers is carved out by Article 304. According to the express provisions of Article 304 (a) taxes on goods coming from other States are saved by Article 304 (a). However, other taxes being taxes on entry, taxes on professions, etc. are saved by Article 304 (b).
  • Taxes permitted by Article 304 (a) cannot be more than those levied on similar goods of the taxing/importing State. The machinery provisions of a tax statute also have to be looked at other than the charging Section. Therefore, Article 304 (a) and (b) both are applicable with respect to taxes.
  • Entry Tax cannot be levied as a compensatory tax. It must follow the mandate of Article 304 (a) and (b). There might be a situation where even if Article 304 (a) is complied with, Article 304 (b) can get violated. Therefore, tax laws must comply with both clause (a) and (b) of Article 304 of the Constitution of India.

2 Refer to earlier update for complete submissions of Mr. Harish N. Salve

Key submission of Mr. Jagdeep Dhankar, Senior Advocate

Mr. Dhankar, appearing on behalf of one the assesses, argued that Part XIII of the Constitution of India must be considered as a part of the basic structure, which has been inserted to preserve the economic unity of the nation. He also argued that compensatory taxes have Constitutional basis. Taxes can be levied by a State only in terms of Article 304 (a), i.e., only on goods being imported from other States, if similar goods are produced or manufactured within the importing/taxing State. The said provision envisions protection of goods of importing States by a levy of a neutralizing tax and does not restrict movement.

Submissions by Mr. Ravindra Srivastava, Senior Advocate

Mr. Srivastava’s submissions on behalf of the assessees mirrored Mr. Salve’s submissions.2 His key submissions are as under:

  • Compensatory taxes have no Constitutional basis and that the view of Justice Hidayatullah in the Automobile Transport Case should be followed.
  • The “Appreciable Adverse Effect Test” propounded by Mr. Datar3 can only be used to determine the reasonableness of the levy. However, the best test is that propounded in the Atiabari Tea Case and accepted by Justice Hidayatullah according to, which taxes having a direct and immediate effect on movement of trade and commerce come under the purview of Article 301.
  • Furthermore, “Appreciable Adverse Effect Test” needs rigorous inspection and the Supreme Court cannot look into the same.
  • Disagreeing with Mr. Salve he submitted that the proviso to Article 304 (b) cannot be read down since the principles of Constitutional interpretation do not permit an interpretation, which is likely to render an express provision otiose.
  • Some taxes according to the direct and immediate test of Atiabari Tea Case4 fall under Part XIII and they must comply with Article 302 or Article 304 as the case may be.

Key submissions of Mr. Venkataraman, Senior Advocate

Mr. Venkataraman, appearing on behalf of the assessees, argued on the matter with the background of the GST. He submitted that the proposed Article 246A. (Part of the proposed 122nd Constitutional Amendment) indicates the evolution of the convergence theory. The theory envisions a single taxation regime being imposed by the Union as well the States and brings about fiscal unity in the nation. The GST regime will empower the States as they have a wider tax net and power to tax the entire supply chain. An adverse judgment by this Court will disrupt the entire GST process.5 His key submissions on merits are as under:

    • There is no absolute power to tax. Taxes are always subject to some limitations and restrictions.
    • Part XIII is inserted to ensure economic unity and levy.
    • Article 301 is the parent provision restricting legislative powers of the State and the Union.
    • Fiscal and non-fiscal barriers are covered by Article 302 and the Union cannot enact any discriminatory law according to Article 303.
    • States can impose fiscal and non-fiscal restrictions in terms of Article 304.

4 (1961) 1 SCR 809

  • There are no unfettered rights in the Constitution and Entry 52 of List II has to be read harmoniously with Article 304 (a) and (b).
  • Entry 52 of List II is not a legislative power but a field of legislation and therefore, should be read down with respect to Article 304 (b).
  • Discriminatory taxes are completely prohibited. The charging and procedural provisions have to be looked at to ensure there is no levy of discriminatory taxes.
  • The compensatory tax theory evolved after the decision in the Automobile Transport Case cannot be accepted. Compensatory taxes should not be treated as an exaction but as a levy for the fulfilment of a benefit/project identified prior to the imposition of the levy.
  • “Appreciable Adverse Effect Test” should substitute the subjective test.

Submissions by Mr. Dhruv Aggarwal, Senior Advocate

Mr. Aggarwal appeared on behalf of the assessees and made his separate submissions on various issues arising in the matter. Following are his key submissions:

  • Part XIII is a part of basic structure to ensure the economic integrity and sovereignty of the nation.6 (Reference was made to the Preamble to the Constitution)
  • The proviso to Article 304 (b) is inserted to ensure that only the President as the head of the Union gives sanction to a State legislation affecting freedom of trade and commerce.
  • The proviso is not a mere formality.
  • Taxes may be an impediment under Part XIII and they have to satisfy Article 304 (b) if imposed by the States.
  • Article 304 carves out an exception from the Article 301 thereby empowering States to enact certain laws in restraint of freedom of trade and commerce.
  • The exception under Article 304 (b) is a general exception and a genus of power. Whereas, Article 304 (a) is a specie thereof. Therefore, all taxes have to be reasonable restrictions in public interest and discriminatory taxes are not permitted.
  • Entry Tax as per Entry 52 is a movementbased tax, which can be levied on entry into a local area for sale, use, consumption therein. An entire State does not constitute a local area.

Submissions of Mr. Gopal Jain, Senior Advocate

Mr. Jain appeared on behalf of the assessees and made the brief submission that the Constitution must be read as a whole. No provision of the Constitution can be ignored and one part does not supersede another unless expressly stipulated. The proviso is inserted to ensure certainty, unity and stability. The President uses his independent mind to scrutinize State legislations, which affect freedom of trade and commerce. He also submitted that there is a need for certainty in tax laws and therefore, decisions which have stood the test of time should not be interfered with.

7 Shree Mahavir Oil Mills v. State of J&K , (1996) 11 SCC 39

Submissions of Ms. Suruchi Agarwal, Advocate

Ms. Agarwal appeared on behalf of assessees. The key submissions made by him are as under:

  • Some Stated by way of Entry Tax legislations are indirectly taxing branch transfers, which is not permissible under Entry 52. Entry Tax can only be levied if there is consumption, sale or use with a local area.
  • Article 304 (a) is a facet of Article 3017, thereby, meaning that only under the circumstances stated in Article 304 (a) can trade and commerce be impeded.
  • The pre-condition under Article 304 (a) requires that similar goods be produced or manufactured within a taxing State before it can levy taxes on goods being imported from other States/Union Territories.
  • No tax can be levied under Article 304 (a), if there is no local comparable to ensure that there is any discrimination.
  • Therefore, Article 304 (b) covers other taxes.
  • The Constitution of India is a federal Constitution with a unitary bias. In this light the onus falls on Article 304 (b) and its proviso to balance regional interests vis-à-vis national interests.

Mr. Rohatgi (AG) presented the case of the Union of India. His key submissions are as under:

  • The States have an unrestricted sovereign and plenary power to tax on areas mentioned in List II. This power can be curtailed only by express provisions in the Constitution of India.
  • Part XIII of the Constitution of India does not include taxes under its purview except for the specific reference in Article 304 (a).
  • The entire ethos of Part XIII is discrimination. However, States have the power to develop certain backward areas or industries by giving them tax benefits and tax holidays. Such discrimination is permitted under Article 304 (a), since it is not deliberate and hostile discrimination.
  • Article 304 (a) and (b) are to be read disjunctively. Clause (a) only pertains to discriminatory taxes and Clause (b) applies to non-fiscal measures.
  • All taxes are presumed to be a reasonable restriction in interest. Subjecting them to the rigours of Article 304 (b) and the proviso will make the President the super adjudicator over the legislative powers of the States, which cannot be permitted.
  • Levy of taxes by a State is essential for governance and such powers, if subjected to Article 304 (b) will destroy sovereignty, federalism and economic unity.
  • Justice Sinha correctly stated in his minority opinion in the Atiabari Tea Case that if a tax is non-discriminatory then it is outside the purview of Part XIII.
  • There are no fetters on the taxing powers of the States guaranteed under Article 245 read with Article 246 of the Constitution
  • The Constitutionality of taxes can only be tested against Part III of the Constitution and no other test is required. If taxes satisfy the tests of Part III then they cannot be struck down on any other ground.


The decision of the Constitution Bench has far-reaching consequences for the trading community. The view of the majority that non-discriminatory taxes per se do not constitute restrictions on the freedom of trade and commerce necessarily implies that state legislatures, in exercise of their law-making powers, could impose a wide range of taxes on trade, commerce and intercourse and such taxes could not be challenged on the grounds of being violative of the freedom guaranteed by Article 301 of the Constitution of India.
The only ground for challenging such levy, which is left after the majority judgment, is of discrimination. Hostile discrimination subsists as a valid ground to challenge a tax as being in violation of Article 304 (a) as well as of Article 14. Further, even while the majority judgment provides for the tests relating to discriminatory taxes, it will be imperative for the assessees to bring out specific grounds to show that the overall differential levy on account of exemption/set-off/rebates etc. is without any rationale or is not mere “differentiation” but leads to a hostile discrimination against the goods manufactured in other states.