With a nine-member bench of the Supreme Court on Friday ruling that the states are constitutionally empowered to levy entry taxes in the case of domestic goods and leaving several hundreds of individual cases on such taxes to be decided by its division bench, companies in several businesses — mostly infrastructure and energy firms that need to transport raw materials and products in bulk — face the prospect of having to cough up close to R25,000 crore as unpaid arrears in the near future.
While businesses haven’t commented on whether they would pass on the burden to the consumers — decisions need to be taken only after the individual cases, some of which are on charges of alleged discrimination, are disposed of — analysts said it was unlikely that companies would choose to take the hit.
“States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other states and goods produced within the state fall equally.” the apex court said.
The constitutional bench hasn’t, however, taken a call on whether goods imported from other countries — which anyway face the barrier of customs duty — could also be subject to the entry taxes once they enter any state.
“As such, there is no impact on oil and gas companies, especially the marketing companies. But this in turn will create an additional burden on the consumers as again, the company will pass on the additional cost by introducing state-specific charges (SSCs) the way they have done earlier,” said Dhaval Joshi, research analyst at Emkay Global Financial Services.
Companies that challenged entry tax including Relianace Industries, Jindal Stainless Steel, Hindalco, Vedanta and SAIL had contended that the abolition of entry taxes would allow smooth implementation of GST. The apex court had in 2013 asked the companies to pay 50% of entry tax and interest amounts demanded/assessed by the states concerned on goods imported by them from other states for their plants and services.
The majority (7:2) judgment of the SC also overruled the concept of compensatory taxes holding that the concept of compensatory taxes does not have any juristic basis. It has further been held that Article 304(a) & 304(b) are disjunctive and the states do not require presidential assent to pass the entry tax law.
“However, the landmark SC decision does not really put an end to the entry tax litigation as it said that validity of individual state laws has to be decided by the smaller bench on the touchstone of guidelines laid down by the apex court and Article 304(a) of the Constitution i.e. if entry tax is discriminatory in nature, it will still be unconstitutional. For instance, if entry tax is imposed on particular goods entering into local area of a state and there is no corresponding levy on same goods manufactured within the State, it is prima-facie discriminatory without any intelligible differential, in which case, the entry tax law of that state would still be unconstitutional,” wrote Sujit Ghosh, partner and national head, Advaita Legal.
Entry taxes are levied by most states, and they are largely product-specific. The rates are 0-6% in Assam, 1-5% in West Bengal, 1-12% in Odisha, 0.5-10% in Madhya Pradesh, 2-16% in Bihar and up to 30% in Tamil Nadu.
Attorney-general Mukul Rohatgi argued that with the the constitutional amendment for the goods and service tax (GST) providing for subsuming entry taxes in GST, the future cases could be resolved in the light of the change and so apex court could refrain from interfering in the issue. But chief justice TS Thakur said “lakhs of cases are pending across courts so what we feel is that past issues should be resolved first.”