The Supreme Court last week upheld the levy of entry tax by states. A nine-judge Constitution Bench headed by Chief Justice TS Thakur in a majority verdict of 7:2 ruled that the freedom of trade under Article 301 of the Constitution was not free from tax, and a non-discriminatory levy of tax is not violative of Article 304(a). It held that states have the right to levy taxes as long as these are not discriminatory. States fighting these cases in the apex court included Haryana, Bihar, Tamil Nadu, Kerala, Rajasthan, Odisha, Uttar Pradesh, Jharkhand, Chattisgarh, Assam and Madhya Pradesh.
Laying down a 10-point framework for the regular benches to decide the legality of such state laws, CJI Thakur, who penned down the judgment for judges AK Sikri and AM Khanwilkar, said “the compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected”.
As the SC endorsed entry tax, companies will have to pay arrears of over R30,000 crore plus interest and future taxes till it is abolished under the GST regime. Over 2,000 cross-appeal cases were filed by several companies and states on levying entry tax.
While judges SA Bobde, Shiva Kirti Singh, NV Ramana and R Bhanumathi also concurred with the findings of CJI, 2 out of 9 judges—Justice DY Chandrachud and Justice Ashok Bhushan—disagreed with the majority view. Justice Bhanumathi preferred to write a separate judgment, saying she had difference of opinion on one or two points only. She was of the view that the term ‘local area’ implied the entire territory of the state.
Justice Chandrachud noted that a tax can impose restriction where its direct and “inevitable effect is to restrict the freedom of trade, commerce and intercourse.” He also held that a local area is not the entire state.
The other dissenting judge on the bench Justice Ashok Bhushan dismissed states’ arguments of holding entry tax as compensatory in nature by saying that the concept is not compatible with the Constitution.
While attorney general Mukul Rohatgi had told the court that all future entry tax issues will be resolved with the passage of the GST, legal experts say that will not solve the states’ past problems.
Senior advocate KK Venugopal pointed out that if the GST Bill is passed it will impact only future transactions. If the GST is not passed, then states will be entitled to collect such tax arrears based on accounts maintained by them.
Welcoming the SC’s judgement, the Odisha government said that it would earn balance R1,500 crore from different companies as some dealers have paid 50% of entry tax pursuant to the apex court’s interim orders.
The provisions of Article 301 of the constitution were first examined in the case, Atiabari Tea Company Ltd vs State of Assam, in 1960 by a five-judge bench that emphaised on the need for economic unity and ruled against entry tax. After doubts arose over the Atiabari ruling, the issue was referred to a larger bench of seven judges in the Automobile Transport (Rajasthan) Company Ltd vs State of Rajasthan (1962). The bench then ruled in favour of tax.
Jindal Steels Ltd then challenge the levy by Haryana in 2002. Later, other manufacturing companies including Vedanta, Reliance, SAIL and Hindalco followed. The case was eventually referred to a larger bench of five judges for more clarity. In 2006, the five-judge bench directed hearing of all related cases following which, in 2008, a two-judge bench framed 10 questions for consideration by the larger bench.
Later in 2010, the issue was referred to a 9-judge Bench by a Constitution Bench led by Justice SH Kapadia. After a six-year hiatus, CJI Thakur then finally heard the matter overruling previous apex court decisions in Atiabari and The Automobile Transport. The assessees had relied upon these cases for assailing entry taxes while the states have sought for overruling the two decisions.
Senior Advocate Harish Salve batted for the companies, arguing it was beyond the power of the states to impose such tax on goods entering their territory. 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.