Is Entry Tax Constitutional? Apex Court’s Decision Today Will Impact Rs 30,000 Crore In Arrears

It is judgment day in the Supreme Court on Friday as a nine-judge bench will deliver the much-awaited judgment on over 2,000 cases filed by several companies against states levying entry tax on the movement of goods.

Entry tax is imposed by many state governments on the movement of goods from one state to another. It is levied by the state that receives goods.

The bench led by Chief Justice of India, Justice TS Thakur examined the validity of entry tax over month-long arguments by companies and states. The bench considered arguments on whether states have the power to impede free trade by taxing movement of goods.

At the first hearing of these cases on July 19, the Attorney General for India, Mukul Rohatgi, had told the court that all future entry tax issues will be resolved with the passage of the Goods and Services Tax (GST). But the Chief Justice of India opined that lakhs of cases are pending across courts and past issues should be resolved first.

Read: The Tax Case That May Cost India Inc Rs 30,000 Crore

Jindal Stainless Ltd. was the first company to challenge an entry tax levied by Haryana in the Supreme Court, in 2002. Jindal contended it was beyond the power of states to impose tax on the inter-state movement of goods. Several companies filed similar petitions thereafter.

All major companies including Vedanta, Hindalco, Adani, Reliance Industries, SAIL and others had challenged the constitutional validity of entry tax provisions on the ground that they are against free trade and commerce as provided under Article 301 of the constitution.

In their arguments, counsels representing companies told the Supreme Court that striking down entry tax laws would pave the way for the much awaited Goods and Services Tax (GST).

However, states refuted these arguments by saying their sovereign powers should not be diluted as the right to levy and entry tax is essential to the division of tax powers between the Centre and states. Hence, the states argued, that they have the constitutional right to pass laws on issues placed in the ‘State List' and ‘Concurrent List' defined under the Constitution, including the movement of goods.

States fighting these cases in the apex court include Haryana, Bihar, Tamil Nadu, Kerala, Rajasthan, Odisha, Uttar Pradesh, Jharkhand, Chattisgarh, Assam and Madhya Pradesh. State governments' counsels have claimed arrears of over Rs 30,000 crore plus interest from leading companies.

The nine-judge constitution bench led by the Chief Justice of India, TS Thakur includes Justice AK Sikri, who was earlier heading the tax bench in the Supreme Court, Justice SA Bobde, Justice Shiva Kirti Singh, Justice NV Ramana, Justice R Banumathi, Justice AM Khanwilkar, Justice DY Chandrachud, who delivered the Vodafone tax judgment when he was a judge in the Bombay High Court, and Justice Ashok Bhushan.

During the course of arguments the Chief Justice of India had observed that the constitution does not see tax as a barrier but it should not be imposed in such a way that it acts as a “barrier and obstruction to free movement of goods.”

BloombergQuint earlier spoke to lawyers involved in the case who said that if the Supreme Court finds the levy of entry tax unconstitutional, companies won't have to pay anything by way of past claims. If however, the court upholds the constitutional validity of entry tax, companies will have to pay past claims and tax in the future, till entry tax is abolished under the Goods and Services Tax regime.