Supreme Court Upholds Validity Of Entry Tax

A man sits on top of a truck laden with goods in the Burrabazar area of Kolkata(Photographer: Brent Lewin/Bloomberg)

On Friday, the Supreme Court upheld the levy of entry tax imposed by many state governments on the movement of goods from one state to another. Seven judges of the nine-member bench supported the levy, while two judges dissented.

The apex court ruled that states have the right to levy taxes as long as these are not discriminatory. The court added that a three-judge bench would decide whether each state's entry tax laws are in line with the constitution. The court also laid down a 10-point framework for the three-judge bench to decide the legality of such state laws.

Explaining the grounds on which the nine-judge delivered this verdict, senior advocate Rakesh Dwivedi, who represented six states - Assam, Bihar, Madhya Pradesh, Odisha, Tamil Nadu, and West Bengal said,

The first vital finding is that the taxes simplicitor, which is taxes that are non-discriminatory, are not covered by Part XIII of the Constitution and they can't be said to violate the freedom of trade and commerce. Secondly, they (the bench) said that Article 304(a) which talks about not discriminating between goods coming into the state from outside vis-à-vis the goods that are produced in the state, that restriction is applicable with only regard to discriminatory taxes and that's the sole limitation on taxes. There is no other provision that limits the power of the legislation to impose tax. The third vital finding that has been recorded is that clause (b), which talks of reasonable restrictions being imposed and obtaining of the sanction of the President, that provision doesn't apply to taxes. So, the tax legislation of the state need not be sent to the President for sanction before enforcement. They have also interpreted Article 304(a) to say that states are entitled to make some kind of distinction with a view to granting short term exemptions to the industries which are being set up in the state. But such exemptions shouldn't be prolonged for too long. So, they drew distinction between mere differentiation and discrimination.

Rakesh Dwivedi, Senior Advocate, Supreme Court (Counsel representing several states)

Over 2,000 cases have been filed by several companies against the tax that is levied by the state that receives goods.

2,000 Cases, Rs 30,000 Crore At Stake

The Supreme Court 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.

The nine-judge constitution bench also included 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.

The states that fought these cases in the apex court included 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.

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 Ltd., Hindalco Ltd., Reliance Industries Ltd., Steel Authority of India Ltd. 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.

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