Entry Tax –Supreme Court Constitutional Bench Judgement Analysis

CA Koduri Jitendra Babu

1. Long pending dispute regarding constitutional validity of entry tax levied by various States has been settled by Hon ‘bless Supreme Court by its judgement delivered on 11.11.2016. The court by a majority judgement of 7-2 held that States are within their right to levy entry tax, provided there is no discrimination between the goods imported from other States and goods within the State. The Court held that tax is not a restriction on freedom of trade and commerce as envisaged under Article 301 of the Constitution. The court held that levy of entry tax cannot be treated as restriction and therefore cannot be held as unconstitutional. The Court overruled it’s earlier judgements in the cases of Atiabari and Automobile Transport, which ruled the field for more than 50 years.

2. Summary of the issues decided as per judgement are as under:

I. Taxes simpliciter are not within the contemplation of Part XIII of the Constitution of India. The word ‘Free’ used in Article 301 does not mean “free from taxation”.

II. Only such taxes as are discriminatory in nature are prohibited by Article 304(a).  It follows that levy of a non-discriminatory tax would not constitute an infraction of Article 301.

III. Clauses (a) and (b) of Article 304 have to be read disjunctively.  

IV. A levy that violates 304(a) cannot be saved even if the procedure under Article 304(b) or the proviso there under is satisfied.

V. The compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal’s case has no juristic basis and is therefore rejected.

VI. Decisions of this Court in Atiabari, Automobile Transport and Jindal cases (supra) and all other judgments that follow these pronouncements are to the extent of such reliance over ruled.

VII. A tax on entry of goods into a local area for use, sale or consumption therein is permissible although similar goods are not produced within the taxing state.

VIII. Article 304 (a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation.  Therefore, incentives, set-offs etc. granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a).  The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters.

IX. 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.  Such measures if taken would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters.

X. The questions whether the entire State can be notified as a local area and whether entry tax can be levied on goods entering the landmass of India from another country are left open to be determined in appropriate proceedings.

3. The court has referred the cases to regular bench for deciding whether the entry tax acts of various States discriminate between goods imported from outside the State and goods within the State.

4. In effect, the court has brought down the test for validity of entry tax levy to single point i.e., discrimination as embedded in article 304 (a).

5. The Court negated the contention that 304 (a) and 304 (b) should be read together, and held that they have be read disjunctively. The court held there is no necessity of obtaining Presidential Assent, for entry tax acts by States Governments. The court further held that if there is discrimination between the goods imported from outside the State and goods within the State, the Entry Act of a State becomes violation of Article 304 (a), and even Presidential Assent doesn’t save the Act. This is due to the ruling of the Court that article 304 (a) and 304 (b) are independent and cannot be read adjunctively.

6. The court held that entry tax levy cannot be held as invalid, for the reason similar goods are not manufactured within the State.This is negation of the judgement of High Court of Orissa.

7. The Court left open the two issues to be decided by referral bench – validity of levy on goods imported from outside the Country and brought into land mass of the Country; whether entire State can be termed as Local area and such levy can be considered as valid.

8.  Now, the referral bench has to decide the following issues, with respect to Entry Tax Acts of each of the States:

i. Whether the enactment discriminates between goods imported from other States and goods within the State; If there is discrimination, the levy is invalid. Else the levy is valid.

ii. Whether entry tax can be levied on the goods imported from outside the Country, as States have no jurisdiction to levy tax on goods imported from outside Country under Section 5 of the CST Act. The referral bench has to decide this issue independently as there are no directions on this aspect from the bench. However, Justice R. Bhanumati in her judgement held that levy of entry tax on imported goods is valid.

iii. Whether levy is valid, where entire State is termed as ‘local area’. There are no directions to the referral bench on this ground also.

9. The constitutional bench however has not laid down any parameters to be taken into consideration by the referral bench in respect of above three open issues.

10. With specific reference to first issue, how to decide whether there is discrimination between goods imported from other States and goods within the States. Can it be said that there is no discrimination if the entry tax act of a State permits set-off of entry tax paid. Can it be said that there is no discrimination if the entry tax act of a State stipulates that no entry tax is payable on goods which are sold after payment of VAT.

In case of goods not meant for sale, but for use in the manufacturing or service rendered by the dealer:

10.1    For ex., a dealer in State ‘A’ imports from another State a machinery which is used in the manufacture of goods for re-sale. He has purchased the goods on CST @2% against ‘C’ form. He has remitted entry tax @5% on the machinery to the State ‘A’. Total taxes paid by him are 7% (CST 2% and Entry Tax 5%). If he purchases the same machinery within the State, he is liable to pay VAT @5%. Had there been no entry tax, the dealer would have procured the machinery @2% CST. Due to levy of entry tax, he is incurring net additional tax of 5%. If one considers the tax paid on purchase from outside the State and within the State, the net additional impact on the dealer is 2%. Can it be called as discrimincation? Since State is levying same 5% either as entry tax or VAT on the machinery, State can argue that there is no discrimination. But, dealer can argue that he is put at loss, by levying entry tax the goods procured from outside the State are made costly, the lower rate of CST is of no avail to him on account of additional entry tax and therefore there is discrimination.

10.2    Take another case, where the machinery purchased from outside the State is not eligible for 2% CST against ‘C’ Form. Then the rate of CST could be 5% assuming the machinery falls under 5% Schedule of that State. In such a case, the dealer is incurring total tax of 10% (5% CST and 5% VAT). If he buys the machinery within the State, the tax component would be 5% VAT. Therefore, procurement from outside the State is restricted by levy of entry tax. But, State can argue that there is no discrimination, as entry tax levied on the goods procured from outside the State is equivalent to VAT levied on goods sold within the State. Dealer can argue that there is discrimination since he is restricted from purchasing goods from outside the State, on account of additional tax burden by way of entry tax.

In case of goods imported from other States for re-sale

10.3    In case of traded goods, can it be said that there is no discrimination in case (i) set-off of entry tax is permitted or (ii) no entry tax is payable on the goods that will be sold on payment of VAT within the State after import from other States?

State can argue that since set-off of entry tax is permitted, there is no discrimination between goods imported from other States and goods within the State. For ex., a dealer has purchased Steel materials from outside the State for sale against 2% CST. He is required to pay entry tax @5%. Total cost to him is 7%. Set-off is permitted on the entry tax. Then, net cost to him is 2%, as entry tax is taken credit in his returns. But, this is on account of his choice to procure goods from outside the State. As against this, a dealer within the State, purchases Steel materials within the State, pays 5% Vat, takes set-off of 5% and uses the same against his VAT payment. Net tax impact on him is only on the profit margin added by him.  There seems to be no discrimination in this case.

In some States, no entry tax is leviable at all, if the goods are meant for sale within the State on payment of VAT, after import from outside the State. In such a case, no entry tax is payable on the dealer importing goods from outside the State. There appears to be no discrimination in this case also.

On the other hand, if no set-off of entry tax is permitted or tradable goods are made liable for entry tax, can it be said that there is discrimination?

In the above example, if the dealer is not permitted to set-off of entry tax, then his cost would be 7% (2% CST plus 5% Entry tax), while the dealer within the State does not incur any tax expense, since he is permitted set-off of VAT paid on local purchases.

11. Therefore, again long battle is expected before the referral bench, as the issues to be decided are many in number and complex in nature.

12. Most pertinent thing to be taken into consideration by the Hon ‘ble referral bench while deciding the validity of Entry Tax Acts of each of the States is – applicability of interest on either parties. The issues involved in the dispute are too complex and was to be entrusted to no less than nine judges bench of the Supreme Court for final decision. The Hon ‘ble Court itself, after analysis of various constitutional provisions, have expressed the view that the issues involved were complex and finally unsettled the legal position that is ruling the field for more than five decades. That being the complex nature of the issues, we cannot expect expertise either from the trade/industry and departmental authorities in interpretation and coming to conclusion on the applicability of or otherwise of the entry tax. Therefore, it is equitable to both the parties, if it is held that interest burden will not accrue to the losing party in the dispute, either it is State or trade/industry.

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