1. Is there a case for states carrying on with entry tax?

Is there a case for states carrying on with entry tax?

While entry tax facilitates trade development in the levying state, under the GST, it loses its relevance

Published: January 29, 2015 2:04 AM

It is indeed welcome that consensus between the Centre and the states has finally been reached for amending the Constitution to implement GST. As reiterated by the PM at the Global Business Summit, “This alone has the potential to make India competitive and attractive for investment.”

To make the GST an instrument to attract investment and make it globally competitive, its design should be such that the cost of business transactions is as less as possible. The broader the base of GST, the lower would be the rate of tax. The finance minister, Arun Jaitley, has introduced the Constitution (102nd Amendment) Bill 2014 in Parliament, which aims at creating an integrated national market for goods and services by replacing the plethora of indirect taxes levied by the Centre and the states with the GST. Thus, all taxes on goods and services, except alcohol for human consumption, will be brought under the purview of GST.

Historically, entry tax was being levied by many states for a variety of reasons. First, it was introduced by some states to extend their tax base by imposing a tax on items of additional excise duty in lieu of sales tax (AEDILST) (viz., textiles, tobacco and sugar). Second, some states levied this tax on the pattern of the ‘use-tax’ of the US to have equal incidence of tax on items sold within the state and imported from outside. Of late, this tax is levied on e-commerce in Assam to collect tax on inter-state transactions by the consumers. Finally, it was used by another set of states to combat evasion of tax. With this objective in view, the tax was levied on the first purchase by the dealer, which was adjusted against the tax to be paid on sales of the commodity in the state. That means a dealer paying sales tax does not, in effect, pay any entry tax.

Unlike Octroi, entry tax is not collected at the time of entry of a commodity into the state. It is an account-based levy assessed and collected on the pattern of sales tax, generally from the same set of registered dealers. It is collected along with the sales tax liability of the dealers. In recent years, many of the states have resorted to using this tax to mop up resources or to curb evasion of tax. The yield from entry tax as a percent of total state-VAT revenue varies between 2% and 20% in different states.

Prima facie, entry tax has served its objectives under state-VAT. It has attracted many court cases and as of now, the issue is sub judice. It is important to understand that entry tax has no place under the GST regime. First, as a prelude to state-VAT, one of the objectives of entry tax, which is that of capturing the tax differential between the originating state and the consuming one, loses its basis. Second, under the new regime, items in the AEDILST are being abolished. Hence, another ground for the levy of this tax ceases to have any relevance. Finally, the levy of entry tax for checking tax evasion also loses its ground under the GST regime since the tax is levied and collected from the first dealer, as well as from all other dealers in the chain, with set-offs for earlier payments.

The rationale for entry tax indicates that, under the existing system of state-VAT, this tax enables the government to get revenue on the first sale or purchase in the state; the set-off is given from the tax when state-VAT is paid. Under the GST regime, this phenomenon is built into the system. All dealers in the chain of transactions pay tax and claim set-offs on their purchases. Therefore, entry tax does not have any place under the GST. In fact, without subsuming entry tax into the GST it would not have “the potential to make India competitive and attractive for investment.”

By Mahesh C Purohit
The author is Director, Foundation for Public Economics and Policy Research


The Constitution of India provides separately for powers and areas in which taxes can be levied both by the central and state Governments. Accordingly, both central and state governments have levied taxes and duties on goods and services.

Further, Article 301 of the Constitution provides that trade and commerce throughout the country shall be free. Article 304 of the Constitution empowers the states to levy those taxes on imported goods which goods manufactured in the state are subjected to. However, such tax should not be discriminatory though the state may impose reasonable restriction on freedom of trade and commerce in public interest. Accordingly, many states have levied entry tax on goods imported in the state from time to time, which has been challenged by industry being violative of Article 301 of the Constitution.

Provisions of the Constitution with respect to freedom of trade and commerce have been subject matter of judicial interpretation in a number of decisions of Supreme Court. Starting with decision in the case of Atiabari Tea Company in 1960, Automobile Transport (Rajasthan) Ltd. case in 1962, Bhagatram Rajeev Kumar case in 1995, Bihar Chamber of Commerce case in 1996 and reference to larger Constitutional bench in 2008 in Jindal Strips Limited, various Constitutional benches of the Supreme Court have dealt with the issue. In a recent ruling, the Supreme Court has asked a number of companies to pay 50% of entry tax to Rajasthan. Now the issue is likely to attain finality with decision of larger Constitution bench of Supreme Court.

While deciding these cases, the concept of `compensatory taxes’ evolved, whereby taxes that interfere with freedom of trade or commerce under Article 301 of the Constitution have been held to be constitutional where the same are compensatory in nature. Compensatory tax represents costs incurred in providing facilities/services on the principle of ‘pay for value’ and it should add value to trade and commerce. Supreme Court further observed that whenever a law is challenged on the ground of violation of Article 301 of the Constitution then effect and operation of such law on inter-state and intra-state trade and commerce has to be examined.

While the Constitution empowers states to levy taxes on goods imported, many states have imposed entry tax on entry of goods in to the state to augment revenue only. However, on the face of it such entry tax legislations are enacted for the purpose of development of trade, commerce and industry and for the creation and maintenance of infrastructure facilities for free flow of trade and commerce in the state.

Where states levy entry tax on goods after doing a detailed study on the twin needs—of infrastructure development and free flow of trade and commerce—and the quantum of fund required therefore, and a large portion of such taxes are actually spent for intended purpose, they are within their right to levy entry tax. Any contrary intent or execution will only lead to the Supreme Court holding such enactments as ‘unconstitutional’.

With the introduction of the Goods and Service Tax (GST), entry tax is proposed to be incorporated in state GST, the issue will no longer hurt industry. Let us pray that the GST is introduced as expected, with effect from April 2016, and ushers in new dawn in taxation regime in India.

By Ashok Dhingra
The author is with Ashok Dhingra Associates, Attorneys at Law

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