States have right to levy entry tax on goods: Supreme Court

11 Nov 2016


In a move that would make a mockery of the new goods and services tax (GST) that promises to make indirect tax rates uniform across the country, the Supreme Court today upheld the competence of state legislatures to levy an entry tax on goods coming into the state.

Upholding the constitutional validity of state legislations with regard to levy of entry tax on goods coming into its territory, a nine-judge bench ruled in a majority 7:2 verdict that the tax legislation by states do not require the consent of the President under Article 304 B of the Constitution.

The bench headed by Chief Justice TS Thakur, however, said that though a state government is empowered to impose tax on goods coming from other states, it cannot discriminate between goods from within and outside the state.

The apex court said that if a state imposes entry tax on products made within the state, it cannot tax identical products entering from other states at a higher rate.

The bench also laid down certain criteria, including test of economical development and reasonableness, to adjudge validity of a particular law framed by a state.

The Supreme Court also held that while a state government has authority under entry 52 of list 2 to design its fiscal policy, it should be used in such a way that it does not disturb the federal structure nor is violative of any other constitutional provision.

The bench, however, left it for the smaller regular bench to adjudicate upon the term 'local area' whether it would refer to the entire state or some pockets within its territory.

Besides the CJI, Justices AK Sikri, SA Bobde, SK Singh, NV Ramanna, R Banumathi and AM Khanwilkar supported the majority view while Justices DY Chandrachud and Ashok Bhushan delivered separate minority judgement.

Justice Banumathi, who shared the minority view also read out, a separate verdict expressing her disagreement on some of the points by saying that in her opinion the term 'local area' implied the entire territory of the state.

The Supreme Court had, on 19 July, commenced hearing on the demands of the states relating to entry tax without heeding to the plea of the centre to wait for the passage of GST Bill in Parliament.

The bench had, on 20 September, reserved the judgement after a marathon hearing on the batch of petitions which had been pending since 2002.

Parliament has already passed the GST (Goods and Services Tax) Amendment Bill, which, according to it, would have subsumed the tax law under challenge. The apex court was of the view that the issues related to past levies by the states would be decided in the matter.

Attorney General Mukul Rohatgi had submitted that some arrangement could be made in respect to past demands by the states relating to entry tax after GST Bill, involving a Constitution amendment, was passed by Parliament.

Entry tax is imposed by state governments on movement of goods from one state to another. It is levied by the state that receives goods. The entry tax provisions of various states was challenged by some companies on the ground that they are against the concept of free trade and commerce under Article 301 (freedom of trade commerce and intercourse with the territory of India) of the Constitution.

The bench had relied on two judgements passed by the apex court in 1960 and 1962 on the issue.

The decision to refer the case to the larger bench came during the hearing of matters filed by companies, including Vedanta Aluminium Ltd, Essar Steel Ltd, Tata Steel Ltd, Adani Enterprises Ltd and the Odisha government. Jindal Stainless Ltd had brought the matter way back in 2002 when the company had challenged the validity of the Haryana Local Area Development Tax Act, 2000.

The company had challenged the validity of the Act contending that it was violative of Article 301 since it imposed restrictions on trade and is not protected by Article 304. It was argued that the enactment of the law that levies sales tax on inter-state sales was beyond competence of the state legislature.

The apex court on 26 September 2003 had referred the matter to a larger bench of five judges which on 13 April 2006 directed hearing of petitions challenging the constitutional validity of the various state laws on entry tax on goods travelling from one state to another.

Later, the issue was referred to a bench of nine judges by an order of 16 April 2010 and several questions were framed, including the balancing of freedom of trade and commerce in Article 301 vis-a-vis the states' authority to levy taxes under article 245 and Article 246 of the Constitution. Further, the bench dwelt on the issue whether taxation is justiciable and also on the inter-relationship between Article 19(1)(g) (Right to practice any profession, or to carry on any occupation, trade or business) and Article 301.

There are around 2,000 petitions by goods manufacturers and their associations who have challenged the constitutional validity of entry tax laws enacted by the different states.

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