Statutes enacted by several state legislatures imposing tax on entry of goods into local areas of the state have been declared invalid by the respective courts in recent times on the ground that they were restrictive of the freedom of trade and commerce envisaged by the Indian Constitution. Constitutionally, a compensatory tax is a compulsory contribution levied in proportion to the specific benefits derived to defray the cost of regulation or to meet the outlay incurred by some special advantage to trade, commerce and intercourse. Judicial scrutiny by the courts concluded that the provisions of the legislations were inconsistent with the parameters prescribed for compensatory taxes.
With the burden of refund claims looming large over them, several states took measures to re-enact their entry tax legislations with a view to cure the defects present in the earlier legislations.
The Hon’ble Punjab and Haryana High Court has in a recent decision held that the Haryana Tax on Entry of Goods into Local Areas Act, 2008 (“Entry Tax Act”) notified by the Haryana Government on April 16, 2008 is unconstitutional and void. The Entry Tax Act was introduced to repeal the erstwhile Haryana Local Area Development Tax Act (“LADT”) while at the same time validating the acts and deeds carried out therein vide a deeming fiction of law in the provisions. The newly enacted provisions provided that the dues collected would be deposited in a Trade Development Fund created under the aegis of the Act and subsequently utilised for development of infrastructure facilities required for the free flow of trade and commerce. In addition, it also envisaged establishment of a board whose mandate was to identify focus areas and ensure the appropriate utilisation of the Trade Development Fund for facilitation of trade and commerce.
The Hon’ble High Court after a detailed analysis of the provisions has held that the levy prescribed was not compensatory in nature as a quantifiable or measurable benefit for trade and commerce and could not be ascertained from the provisions. The Court analysed that the provisions pertaining to utilisation of the fund proceeds were in the nature of general development of the area and stated that provisions of the Entry Tax Act were clearly ambiguous in nature.
An additional principle pertaining to compensatory taxes is that the essential character of a compensatory tax is not to augment the revenues of the government though it may do so incidentally. The government of Haryana was unable to produce adequate data to support such a conclusion. Consequently, the Entry Tax Act was held to suffer from the vice of unconstitutionality.
It is interesting to note that the legislation promulgated by the State of Jharkhand reinforcing the entry tax levy through amendments in the existing legislation was also been held to be unconstitutional on similar grounds earlier this year. The newly enacted entry tax legislations of some of the other States introduced with a view to remedy the failings identified by their respective High Courts are also currently sub judice and the decisions of the Courts are eagerly awaited.
Mekhla Anand is a senior associate and Aparna Paul is an Associate at Amarchand & Mangaldas & Suresh A. Shroff & Co.
