Jindal Stainless Ltd v State of Haryana

Facts

• Several States had enacted legislation imposing entry tax on goods brought into a local area within the State for consumption, use or sale.
• The levies were challenged on the ground that they impeded the free flow of trade and violated Art.301, and that they had not been sanctioned by the President under the proviso to Art.304(b).
• The States defended them as compensatory in character, relying on Automobile Transport (Rajasthan) Ltd v State of Rajasthan (1962), and pointed to expenditure on roads, infrastructure and trade facilities.
• Under the compensatory tax doctrine as it had developed, a State was required to establish a quantifiable and measurable benefit conferred on the payers of the tax, corresponding to the burden imposed.
• That requirement had proved extremely difficult to satisfy, since general revenue expenditure could rarely be traced to particular traders, and it had generated a long line of conflicting decisions.
• The questions were accordingly referred to a Bench of nine Judges.

Issue

1. Whether taxes as such fall within Art.301; whether the doctrine of compensatory tax forms part of the constitutional scheme; and what test governs a State tax under Part XIII.

Held

• By a majority of seven to two, Chandrachud and Bhushan JJ dissenting, the Court held that the concept of compensatory tax is a judicial construct with no textual foundation in the Constitution and must be discarded. Its application had proved unworkable, the requirement of a quantifiable measurable benefit being incapable of consistent satisfaction. The Court further held that a tax simpliciter is not a restriction on the freedom declared by Art.301. Part XIII is directed against discriminatory fiscal measures and against barriers that impede the flow of trade, and not against the imposition of taxes as such, for otherwise the taxing powers conferred on the States by the Seventh Schedule would be largely nullified. Accordingly, where a State tax is challenged, the operative question is whether it offends Art.304(a) by treating goods imported from other States less favourably than similar goods produced within the State. The entry taxes were upheld in principle, subject to examination of each levy for discrimination.

Ratio Decidendi

A constitutional doctrine must be traceable to the text, and the compensatory tax exception appeared nowhere in Part XIII; it had been devised to relieve States from a reading of Art.301 that was itself too wide. The better course was to correct the reading rather than to maintain an unworkable exception to it. Once it is accepted that Art.301 is aimed at discrimination and at barriers, the exception becomes unnecessary, because a non-discriminatory tax is not a barrier and requires no justification.