SC Upholds Constitutionality of Entry Tax

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In a landmark move, a nine-Judge-bench of the Supreme Court of India has upheld the constitutionality of entry tax. As per SC, protection under Article 301 does not apply to taxes.

Revenue of over Rs 30,000-35,000 crore per annum for state governments is at stake on account of the litigation by companies on entry taxes which is levied by a host state on entry of goods into that state.

current issuesManufacturing companies had appealed that entry taxes restrict trade and freedom of movement of goods and therefore, violate rights under Article 301 of the constitution.

The companies challenged them on the ground that they are “against the concept of free trade and commerce under Article 301 (Freedom of trade commerce and intercourse) of the Constitution”.

Entry tax is imposed by many state governments on the movement of goods from one state to another. It is levied by the state that receives goods.

During the long drawn hearing the bench took into consideration arguments on whether states have the power to impede free trade by taxing movement of goods.

The jist of the argument of Attorney General Mukul Rohatgi was that now that GST bill has been passed, future entry tax issues will be resolved using those rules and the apex court need not interfere in the issue. But the Chief Justice was of the view that “lakhs of cases are pending across courts so what we feel is that past issues should be resolved first”.

Being the first company to challenge an entry tax levied by Haryana in the Supreme Court, in 2002, Jindal Steel Ltd. 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, Hindalco, Adani, Reliance Industries, SAIL later joined the bandwagon.

In their arguments, counsels representing companies told the Supreme Court that striking down entry tax laws would pave the way for the much awaited Goods and Services Tax (GST) and smooth implementation of it.

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.

Hence, the states argued, that they have the constitutional right to pass laws on issues placed in the ‘State List’ and ‘Concurrent List’ defined under the Constitution, including the movement of goods.

During the course of arguments the Chief Justice of India had observed that the constitution does not see tax as a barrier but it should not be imposed in such a way that it acts as a “barrier and obstruction to free movement of goods.”

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