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Introduction:-
Article 301 says that trade, commerce and intercourse throughout
the territory of India shall be free. And “this article should be
understood in the context of an orderly society and it must
recognize the need and legitimacy of some degree of regulatory
control irrespective of the restrictions imposed by other articles
in part XIII . Thus,
Regulatory
measures and compensatory taxes for the use of trading facilities
do not come within the purview of restrictions contemplated by
article 301.
It is
pertinent to bear in mind that all taxation is not necessarily an
impediment or a restraint in the matter or trade, commerce and
intercourse. Instead of being such impediments or restraints, they
may, on the other hand, also provide for improvement of different
kinds of means of transport, for example, in cane growing areas,
unless there are good roads, facility for transport of sugarcane
from sugarcane fields to sugar mills may be wholly lacking or
insufficient. In order to make new roads as also to improve old
ones, cess on the grower of cane or others interested in the
transport of this commodity has to be imposed. It is the tax thus
realized that makes it feasible for opening new means of
communication or for improving old ones. It cannot therefore, be
said that taxation in every case must mean an impediment or
restraint against free flow of trade and commerce. The Supreme
Court in the
Atiabari Tea
Co. case
held that taxes, which hampered free flow of trade and commerce,
contravened Part XIII and, therefore were unconstitutional. The
Court qualified this decision in the Automobile Transport case and
ruled that
regulatory and
compensatory
taxes did not come within the purview of Article 301.
Thus, a
measure which operates on trade, commerce and intercourse directly
and immediately may not be violative of article 301 if it is
regulatory or compensatory in the form of imposition of taxes for
the use of trading facilities. For the sake of convenience I have
discussed the trade, commerce and intercourse in one section of my
paper. In the other part I have discussed in brief about taxes
being or not an impediment of trade, commerce and intercourse and
at the end - what are regulatory and compensatory taxes and how do
they not violate the article 301 with the help of case laws.
Scope &
Content Of Article 301:
Article 301 enacts a general rule that trade, commerce and
intercourse throughout the territory of India shall be free. The
object of this article in our federal constitution was 1).to
achieve the free flow of goods for trade, commerce and intercourse
without any internal borders between the states, 2).to gain a
sustaining force for the stability of the cultural and political
unity of the federal polity, so that the country should function
as the single economic unit devoid of any internal barriers.
The scope and content of Article 301 depends on the
interpretations of three expressions used therein, viz., 'trade,
commerce and intercourse',
'free'
and 'throughout the territory of India'.
The framers of
the Indian constitution, instead of leaving the idea of 'intercourse'
to be implied by the process of judicial pronouncements, expressly
incorporated the same in Article 301. The words trade and commerce
have been broadly interpreted. In most of the cases, the accent
has been on the movement aspect. For example, in the
Atiabari Tea
Co. v. State of Assam
case, the court emphasized:
whatever else
it (Art.301) may or may not include, it certainly includes
movement of trade which is of the very essence of all trade and is
its integral part," and, further, that "primarily it is the
movement part of the trade
which Article 301 has in its mind, that
the movement
or the transport of the trade must be free, and that it is the
free movement or the transport of goods from one part of the
country to the other that is intended to be saved.
The word 'free'
in Article 301 cannot mean an absolute freedom or that each and
every restriction on trade and commerce is invalid. The Supreme
Court has held in Atiabari that freedom of trade and commerce
guaranteed by Article 301 is freedom from such restrictions as
directly and immediately restrict or impede the free flow or
movement of trade. Therefore Article 301 would not be attracted if
a law creates an indirect or inconsequential impediment on trade,
commerce and intercourse which may be regarded as remote. The word
'free' in Article 301 does not mean freedom from regulation. As
has been observed by the supreme court: "there
is a clear distinction between laws interfering with freedom to
carry out the activities constituting trade and laws imposing on
those engaged therein rules of proper conduct or other restraints
directed to the due and orderly manner of carrying out the
activities."
Regulation of hours, equipment, weight, size of load, lights,
traffic laws are some examples of regulatory laws which are not
hit by Article 301.
The view is
definitely held now that Article 301 applies not only to
interstate but also to intrastate trade and commerce, i.e. trade
within the state. Therefore, it means freedom of trade commerce
and intercourse is there within the state and/or outside the state
and/or any part within the territory of India.
Article 302
authorizes Parliament to impose restrictions in the public
interest. Article 303 prohibits state preference or discrimination
on regional basis, but makes an exception for Parliament in order
to meet a situation of scarcity in any part of the country.
Article 304 prohibits the states from making any discrimination
against goods 'imported'
from other states in taxing them. It only authorizes the states to
impose 'reasonable' restrictions in the public interest with the
sanction of the President. Article 305 removes the laws, as they
existed on January 26, 1950, and later at the commencement of the
Fourth Amendment, 1955, from the operation of Article 301 and 303.
Article 306, now repealed, dealt with the former Native States
authorizing them to levy import-export duties on the goods to and
from the rest of the country in accordance with the terms of their
accession. Article 307 envisages an authority appointed by
Parliament to carry out the objectives of the first four Articles
of this Part. No such authority has ever been constituted. Part
XIII allows reasonable restrictions imposed by the states in the
'public interest.’ One is strongly inclined to think that a tax is
always in the public interest and, therefore, the prohibition does
not apply to it.
Regulatory
And Compensatory Tax:
Tax is a compulsory Contribution and is the sovereign attribute of
the State. It is a branch of Public Finance of every Economy.
Taxation is collection of revenue and Public expenditure is the
application of the revenue so collected. Tax is necessary for the
Functioning of Every Economy of the World, without it all the
duties and the obligations of the state will be undone and power
unused.
To smoothen
the movement of interstate trade and commerce, the state has to
provide many facilities by way of roads etc.. The concept of
regulatory and compensatory taxation has been evolved with a view
to reconcile the freedom of trade and commerce guaranteed by Art.
301 with the need to tax such trade at least to the extent of
making it pay for the facilities provided to it by the state,
e.g., a road net-work. If a charge is imposed not for the purpose
of obtaining a proper contribution to the maintenance and upkeep
of the road, but for the purpose of adversely affecting trade or
commerce, then it would amount to, a restriction on the freedom of
trade, commerce and intercourse.
The concept of
regulatory and compensatory taxation has been applied by the
Indian courts to the state taxation under entries 56 and 57 of
List II.
Atiabari Tea
Co. V. State Of Assam :
Facts:
A tax levied by the State of Assam on the carriage of tea by road
or inland waterways was held bad for "the
transport or movement of goods is taxed solely on the basis that
the goods are thus carried or transported, and thus "directly
affects the freedom of trade as contemplated by Art. 301."
The Supreme
Court took the view that the freedom guaranteed by Art. 301 would
become illusory if the movement, transport, or the carrying of
goods were allowed to be impeded, obstructed or hampered by the
taxation without satisfying the requirements of Art. 302 to 304.
The court did not take into consideration the quantum .of tax
burden, which by no means was excessive. Simply because the tax
was levied on 'movement' of goods, from one place to another, it
was held to offend Art. 301.
The view
propounded in Atiabari was bound to have great adverse effect upon
the financial autonomy of the states. It would have rendered their
taxing power under entries 56 and 57, List II.
Accordingly,
the matter came to be re-considered by the Supreme Court in
Automobile
Transport V. Rajasthan :
Facts:
The State of Rajasthan had levied a tax on motor vehicles ( Rs. 60
on a motor car and Rs. 2000 on a goods vehicle per year) used
within the state in any public place or kept for use in the state.
The validity of the tax was challenged. Taking the view that
freedom of trade and commerce under Art. 301 should not unduly
cripple state autonomy, and that it should be consistent with an
orderly society, the Supreme Court now ruled that regulatory
measures and compensatory taxes for the use of trading facilities
were not hit by Art. 301 as these did not hamper, but rather
facilitated, trade, commerce and intercourse.
Issue:
A working test to decide whether a tax is compensatory or not
would be to enquire whether the trades people are having the use
of certain facilities for the better conduct of their business and
paying not patently much more than what is required for providing
the facilities? A tax does not cease to be compensatory because
the precise or specific amount collected is not actually used in
providing facilities.
The concept of
compensatory tax evolved in this case was something new as in
Atiabari, the court had dismissed the argument that the money
realized through the tax would be used to improve roads and
waterways rather curtly by saying that there were other ways,
apart from the tax in question, to realize the money, and that if
the said object was intended to be achieved by levying a tax on
the carriage of goods, the same could be done only by satisfying
Art. 304(b).
Decision:
The court ruled that Art.301 did not hit the tax, as it was a
compensatory tax having been levied for use of the roads provided
for and maintained by the state. Thus, to this
extent, the majority view in Atiabari was now overruled by
Automobile.
Since then the concept of regulatory and compensatory taxes has
become established in India with reference to entries 56 and 57,
List II, and the concept has been applied in several cases, and
progressively the courts have liberalized the concept so as to
permit state taxation at a higher level.
Further in the
case of
State Of
Mysore V H. Sanjeevah
, section 39 of the Mysore forest Act was in question as violative
of the freedom under Art. 301. It was held by the Court that the
provision is invalid on the ground that it totally prohibits the
movement of forest produce during the period between Sunset and
Sunrise is prohibitory of right to transport Forest produce. The
court held that the rule cannot be called valid because
A rule
regulating transport in its essence, certain to certain conditions
devised to promote transport; such a rule aims at making the
transport orderly, so that it does not harm other person carrying
the same vocation, and enables transport to function for the
public good.
G.K. Krishnan
V. State Of Tamil Nadu :
Facts:
The State of Tamil Nadu increased the motor vehicles tax from Rs.
30 to 100 per seat per quarter and this was challenged as being
violative of Art. 301
Issue:
whether a non-discriminatory tax levied by a state should be
regarded as a restriction on trade and commerce because of the
feeling that this would curtail state autonomy to levy taxes
falling in the state legislative sphere?
But the Supreme Court upheld the tax. The court stated, "A
compensatory tax is not a restriction upon the movement part of
trade and commerce." The tax should not go beyond "a proper
recompense to the State for the actual use made of the physical
facilities provided in the shape of a road." In the instant case,
the tax collections amounted to over Rs. 16 crores while the
expenditure for the year amounted to Rs. 19.51 crores and this
amount did not include the grants to local governments for the
repair and maintenance of roads within their jurisdiction. The tax
was thus held to be compensatory and hence valid.
The Supreme
Court further liberalized the state taxing power by upholding a
state tax on passengers and goods carried on national highways.
Bolani Iron
Ores V. State Of Orissa:
A compensatory tax is levied to raise revenue to meet the
expenditure for making roads, maintaining them and for
facilitating the movement and regulation of traffic. The Supreme
Court held that taxation under entry 57, List II, couldn’t exceed
the compensatory nature, which must have some nexus with the
vehicles using the roads. The regulatory and compensatory nature
of the tax is that taxing power should be used to impose taxes on
motor vehicles, which use the roads in the state or are kept for
use thereon.
International
Tourist Corporation V. State Of Haryana:
Facts:
The state of Haryana levied a tax on transporters plying motor
vehicles between Delhi and Jammu & Kashmir. They use national
highway, pass through Haryana without picking up or setting down
any passenger in the state. The responsibility for constructing
and maintaining of national highways rests on the Centre. It was
therefore argued by the transporters that the tax could hardly be
regarded as compensatory, but the court rejected the contention.
The Supreme
Court said that what is necessary to uphold such a tax is the
existence of a specific, 'identifiable'
object behind the levy and a 'sufficient
nexus'
between the 'subject
and the object of the levy.'
The court further said that a state incurs considerable
expenditure for maintenance of roads and providing facilities for
transport of goods and passengers. Even in connection with
national highways, a state incurs considerable expenditure not
directly by constructing or maintaining them but by facilitating
the transport of goods and passengers along with them in various
ways such as lighting, traffic control, amenities for passengers,
halting places for buses and trucks. That part of a national
highway which lies within municipal limits is to be developed and
maintained by the state. There is thus sufficient nexus between
the tax and the passengers and goods carried on the national
highways to justify the imposition of the said tax.
Decision:
the tax was held to be valid.
Malwa Bus
Service V. State Of Punjab:
Facts:
In this case, in the year 1981, the State of Punjab substantially
increased the rate of tax on every stage carriage plying for hire
and transport of passengers. The rates adopted were Rs. 500 per
seat per year subject to a maximum of Rs. 35,000 per bus
irrespective of the distance over which it operated daily.
According to the budget figures for 1981-82, the revenue receipts
of the government from motor vehicles tax was Rs. 50 crores as
against the expenditure of Rs. 34 crores. The tax was challenged
on the ground that it was not compensatory as the government was
using it for augmenting its general revenues, but the court upheld
the tax as compensatory.
In the instant
case, the budget expenditure on the roads and bridges did not
include the expenditure incurred by the state on other heads
connected with road transport, such as, the directorate of
transport, transport authorities, provision for bus stands,
lighting, traffic police, grants to local authorities. Taking all
this expenditure into account, it became clear that a substantial
part of the levy on motor vehicles was being spent annually on
providing facilities to motor vehicles operators. The court also
pointed out that in later years, the government expenditure on
roads and bridges had substantially increased. It also said that
the figures of income and expenditure for only one year might
present a distorted picture. In this case, cumulative figures of
receipts and expenditure for nine years (1973-1982) presented a
different picture. Describing the principle underlying such a tax,
the court said: "what
is essential is that the burden should not disproportionately
exceed the cost of the facilities provided by the state."
Decision:
Therefore the tax imposed by the state of Punjab was held to be
valid.
Further in case of
Meenakshi V
State Of Karnataka
, the Court upheld the increase in the passenger tax on the
vehicles of Bus Operators even though the imposition was made to
compensate the loss of revenue due to abolition of Octoroi.In the
course of exempting the tax laws from the purview of Art. 301. The
Court has even relaxed the limitation of Art. 304(a). Upholding
the validity of State Notifications giving tax exemptions to or
imposing lower rate of tax on certain goods made within the State,
the Court held that the notifications do not violate Art. 301 and
therefore do not violate Art. 304(a) also.
Conclusion
The position as it stands today is not as vague as it was during
the time of the Atiabari and the Automobile cases. We must
reconcile the ratio in these two landmark cases. From the
discussion of the Supreme Court in the said cases, the following
salient features can be noticed:
# Measures that operate on freedom of trade and commerce remotely
and indirectly do not impede Article 301 and need not be justified
under the provisions of Article 304 (b).
#
Measures which operate directly and immediately on the freedom of
trade, commerce and intercourse may be violative of Article 301,
unless it is not violative of the reasonableness aspect guaranteed
by Article 304 (b).
# Lastly,
those measures having direct and immediate effect will not come
under the restrictive provisions of Article 301 provided that
these measures are compensatory or are regulatory. The Supreme
Court in the Automobile case has read this additional gloss into
the Article 301.
To reconcile
the freedom of trade and commerce and the power of taxation, the
Supreme Court has evolved the concept of regulatory and
compensatory tax. This means that Article 301 cannot stand in a
way of a regulatory or compensatory tax. The concept of regulatory
and compensatory tax has been applied by Indian Courts mainly to
the State taxation under Entries 56 and 57 of List II. The need
for imposing this type of a tax is to impose a levy on trade and
commerce at least to the extent of making it pay for the
facilities provided by the State, for example, a road network and
other infrastructural facilities. The reason for this is that
taxes of this nature facilitate rather than hamper, the flow of
trade and commerce.
It can be thus
stated that the freedom of trade and commerce can be infringed in
any manner except for the situations when regulatory and
compensatory measures are imposed. Otherwise, restrictions imposed
on the freedom of trade and commerce may take the form of fiscal
as well as non-fiscal measures. Thus, there is a violation of this
freedom only when a legislative or executive act operates to
restrict trade, commerce and intercourse, directly and
immediately, as distinct from creating some indirect or
inconsequential impediment that may be regarded as remote.
Only taxes
that directly and immediately restrict trade will be in
contravention to Article 301. When a tax is imposed solely on the
basis that goods are carried or are transported, it would affect
the freedom of trade and commerce, or when a tax that
discriminates between goods of one State and another is imposed,
it would violate Article 301.Further it has to be concluded that
only those taxes that directly hamper the trade or business will
be void, otherwise no tax can be struck down as being invalid of
Article 301. Laws, which are purely regulatory and compensatory in
nature, are not violative of the freedom so guaranteed.
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author can be reached at: akanksha.nliu19@legalserviceindia.com /
