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The levying of taxes by the state has always been in question regarding their validity and the enactment of legislation by the state for that purpose. The freedom that is provided under Article 301 of the Constitution sometimes creates a dilemma on whether the taxes come under the purview of the restriction on trade and commerce or not? A similar question arose in the present case in which legislation of Haryana was challenged by a trader of the state.

The court in the case has laid reference to the various cases through which the constitutionality of the act challenged has also been explained and many of the questions in relation to taxes have been answered. The judgment of the case is a lengthy one and the case note provides the keynotes of the judgment and the case as it is important to understand the significance of the case for the purpose of levying taxes by the states.

Brief Facts-

There have been various instances in which the levying of taxes by different states has been challenged. The issue of levying of tax is been continued for a long time. Jindal Stainless Steel is an industry and a product manufacturing unit is established in the state of Haryana. For an industry to work, it becomes important to export and import materials according to needs. The Jindal steel imported raw materials and exported goods for revenue and sale to other states.

In 2000, Haryana Local Development Act was enacted to collect taxes in an entry from other states and also to regulate other taxes on the products being imported and exported. The act focused on the internal development of the state. The maintenance of the industrial sector needed the taxes to be levied so that along with the work, the development also takes place.

The Haryana Local Development Act, 2000 has been challenged by the petitioner in the present and has been stated as unconstitutional. However, many of the states in the country have enacted laws that levy taxes on the entry of goods into the local areas. The article has been mainly pointed out in Article 301 of the Indian Constitution. The article provides for the freedom of trade and commerce and intercourse. The act of 2000 has been challenged previously in various instances. However, the emphasis was laid down on the cases Atibari tea Co. v. State of Assam (AIR 1961 SC 232), Automobile Transport (Rajasthan) Ltd. Etc. v. State of Rajasthan and Ors. (AIR 1962 SC 1406), and it was held by the Division Bench of High Court of Punjab and Haryana that the taxes that are levied under the Act are compensatory and hence do not violate Article 301 of the Constitution.

The levying of taxes on the entry of goods has been stated against the freedom of trade and commerce as per the Constitution and such actions of the government are being said as arbitrary. The collection of taxes by the government has been challenged in many cases earlier too. However, they have been referred to in the contentions of the parties.

Issues Raised-

1. Whether the tax levied by the state on the entry of goods is violative of Article 301 of the Indian Consti9tution?
2. Whether the enactment of the Haryana Local development act, 2000 violative and unconstitutional?
3. Whether the levy of taxes on entry of goods are important to be considered and tested about articles 304 (a) and (b) of the Constitution?
4. Whether the levying of taxes on the goods being entered in the local area for being stored are to be treated the same as the goods being imported for sale?
5. Whether the principle laid down in the case of Atibari and Automobile Transport also applicable in the present scenario?
6. Whether the taxes which are stated as non-discriminatory infringe the right mentioned in Article 301 of the Constitution?
7. Whether levying taxes as per Entry 52 List II of Schedule VII is in contradiction with Article 301 of the Constitution?
8. Whether the internal and external goods be differentiated about Article 304 (a) and Article 304 (b) of the Constitution?

Important provisions-

The case involves various articles of the Constitution and their relation to the levying of taxes. Some of the major and important provisions to be considered while reading the case are-

Article 301 of the Constitution of India- Freedom of Trade and Commerce. It states that trade and commerce must be free across the country and no discriminatory restrictions must be imposed on it.

Article 304 of the Constitution of India- Restrictions on Trade and Commerce notwithstanding anything contained in Articles 301 or 303- It states that the taxes can be levied by the state and the center and it does not infringe the rights contained in Article 301.

Article 265 of the Constitution of India- No tax can be levied by the state except by the authority of law. This signifies the importance of enactment of the legislature for the imposition of taxes.

Article 356 of Constitution of India- Failure of machinery in the state. It states the provisions or the conditions that can arise when a failure of machinery takes place in the state.

Article 302 of the Constitution of India- Power of the Parliament for imposing restrictions on trade. It states that the parliament has the power to impose restrictions on the freedom stated in Article 301.

Article 366(28) of the Constitution of India- States the imposition of taxes irrespective of the kind.

Entry 57 List II of Schedule VII- It states the right of levying taxes by the states on vehicles. This is important for the maintenance of roads and highways of the states.

The contention of the Petitioners-

The petitioners stated that there is a difference between the compensatory and regulatory taxes. The law should be made in such a way that it does not restrict the freedom of trade and commerce as per article 301 of the Constitution. Thus, there stands a difference between regular and compensatory taxes. Compensatory taxes are important to be paid as they are a source for the development of the roads and facilitating the movement of vehicles in and out of the state. However, such taxes cannot be levied by infringing the freedom provided for trade and commerce.

The petitioners referred to various case to validate their contention that the levying of taxes by the government on the incoming foods was violative and was not valid. The case Bolani Iron Ores v. state of Orissa[1] has been stated in which the Supreme court held that as per Entry 57, List II cannot exceed the compensatory nature, also the same must have nexus with the vehicles being used for the transportation. The compensatory taxes must be used only for motor vehicles. However, the tax in the present scenario was being levied on the goods.

The taxes that are stated as non-discriminatory must be levied following the Constitution. Also, the taxes that are being collected on the incoming goods are “fees” being collected in the name of “taxes”. Such collection of fees is against the rights and is restricting the practice of trade and commerce unfairly. It was also stated that the states such as Arunachal Pradesh, Assam, Jharkhand, Kerala, etc. have also struck down the levying of such taxes as they were discriminatory and were held to be violative of Article 304 (a) of the Constitution. The contention of the petitioners was contradicted regarding the precedents by the respondents.

Contentions of the Respondents

The state has placed the contention that the enactment of the Act of 2000 was an integral step to be taken to levy taxes. The reliance has been placed on the case Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell and Co. Ltd. [2] to state the difference and meaning of fees and taxes. The supreme court in the above-stated case held that “fees” “cess” “tax” or “duty” are various kinds of imposts that are collected by the state and it comes within the sovereign power of the state. This revenue is generated for the welfare of the state and. The authority of the collection of taxes is stated under Article 265 of the Indian Constitution and to levy a tax, the presence of legislation for the same is important and necessary as an authority without any legislative power cannot levy taxes. Hence, the enactment of the Act of 2000 by the state of Haryana is valid and the contention raised by the petitioners that the amount being collected is “fees’ and not “tax”, all comes under a similar purview and the sovereign power of the state.

Also, it has been stated for examining the levying of the taxes by the government and questioning the validity of Indian Legislations, sometimes the emphasis is placed on American and Australian decisions. However, in the case of Atibari Tea and Co., the court expressed the view that it is not always correct to pay emphasis on the international judgments to check the validation of the Indian laws as every country functions differently. So, it would not be justifiable to make a comparison out of them every time.

The taxes do not have a limited variety and the Entry 56 of Part II of Schedule VII links to the roads and highways in a manner that the levying of taxes on the goods are associated with the roads and highways that are used for their transportation. The power of the state to collect taxes is valid to the extent that the reason behind is the maintenance and welfare of the state.

Another case that was referred to is Raja Jagannath Baksh Singh v. State of UP and Anr.[3], in this case, the Supreme Court observed that the collection of taxes is paramount for the states. It is correct to state that the collection of taxes comes under the sovereign power of the state. However, the same also stands as a necessity for them to progress and to collect revenue for the development.

Ratio Decidendi

The bench of Justice T.S. Thakur, Justice A. K. Sikri, Justice S.A. Bobde, Justice Shiva Kirti Singh, Justice N.V. Ramana considered the following in consideration with the contentions of the parties,

a. For the question that arose concerning levying of non-discriminatory taxes, it was held that the discriminatory taxes are prohibited by Article 304 (a) and no infringement takes place in the non-discriminatory taxes. Hence, such taxes are not violative of Article 301 of the Constitution.

b. Taxes are a part of the trade and the term used “freedom” and “free” in Article 301 does not include the meaning “free from the levying of taxes”. Taxes help in the generation of revenue for the government and payment of taxes by the corporates does not infringe any kind of freedom.

c. Within the Articles, 265 read with Article 366 (28) of the Constitution, every kind of impost collected by the government is valid and can be termed as a cess, fees, tax, or duty. The only issue that arises is that the rate of taxation cannot exceed the valid limit.

d. For the same cause, the enactment of the legislature for levying taxes by the state is necessary as the collection of taxes by the states must be backed up by legislation and authority.

e. Reliance was placed upon cases such as Keshvananda Bharati v. the State of Kerala[4] and S.R. Bommai v. Union of India[5] to establish the quasi-federal nature of the Indian Constitution. This states that the mind of the Constitution makers has clearly stated the necessity of the actions that are to taken by the center and the state.

f. It was also stated that when Article 301 and 302 are read together, it establishes the fact that valid restrictions can be imposed on the trade by the legislatures and the restrictions which are discriminatory in nature can only be opposed. All the other legislations enacted to establish valid rules and regulations cannot be said to be unconstitutional.

g. The consideration was also given to Synthetics Chemical Ltd. V. State of U.P and Ors. (1990) 1 SCC 109 in which it was stated that both center and state have the sovereign powers to implement new legislation and impose restrictions on that basis.

h. The evolution of the impositions of taxes has been considered to be important and the legislative authorities are to be given importance to coordinate with the government.


The views expressed by the Hon’ble judges led to the conclusion that the state has the power to implement legislatures and such legislatures can exercise their powers to levy taxes. The sovereign power of the state and the center can be exercised for the benefit of the traders as well as the state. The taxes levied on the manufacturers or the traders must not be discriminatory in nature.

However, if compliance has to be placed with the Constitution so that the taxes do not contradict the Constitution. The test known as the twin test must be passed by the taxes before being imposed by the state. This test is embodied in Article 304 (a) so that the nature of the test in terms of goods can be checked. The test comprises of the following conditions-

i. Irrespective of the usage of the goods in the state, the similar goods that are produced locally must have a similar tax. This means that the taxes cannot differ on similar kinds of goods based on other factors, the place of production of such similar goods must also be taken into consideration.

j. The taxes imposed by the state must not discriminate between the two varieties of goods. This means that if tax is being levied on the goods, no scope of discrimination must arise and the taxes must be decided upon the varieties of goods.

The view has been placed on the taxes and their non-discriminatory nature by the bench to hold the validity of the sovereign nature of the states.


The economy of the country is managed by both the public and the public sector. In this judgment, it has been stated that the levying of taxes is valid and this is significant to note that the taxes are an important part of the trade. To keep a balance between the states and the trading, the collection by the government is necessary to generate revenue that is in turn used by the traders.

The objective of the compensatory tax is valid and the economic sector also pays importance to it. for the development of the roads through which the goods are transferred comes under the duty of the state. Such duties need revenue that is collected as taxes. It is not necessary to collect imposts in name of taxes. Fees, cess, or duty are also one of a kind.

The judgment has clarified the doubt concerning the term “freedom” used in Article 301 of the Constitution. It is significant to note that freedom of trade and commerce does not include the freedom of taxes and it is a duty to respect the legislation enacted by the state and is for the welfare of the traders as well.

The validity of the Act of 2000 was also challenged several times previously in various cases. However, in the present case, its necessity has also been clarified. The other significant feature is the evolvement of the twin test through which chances of fraud have become negligible. The trader will also not face problems and will be assured that the taxes which are being collected by them are valid and legal.

Case Comment (Observation)

As per the conditions stated and the points clarified in the case, states are empowered to collect taxes that are not derogatory. States are not being arbitrary will collecting taxes as the same come under their power. People need to pay taxes as the generation of revenue by the government is also necessary for the development of the state.

Also, it is just necessary to note that no discrimination takes place and the taxes that are levied are not much higher. The difference in the rates of taxes must not be much higher because this will create a discrepancy amongst the states. Such discrepancy may lead to the development of the trade hub in only certain areas of the country. The tax that is levied must be considered and must be equal in rates.

The most important point to be considered is that the act that has been challenged is known as Haryana Local Development Act, 2000. The enactment of the act states the term “
development” and the scheme of the levying of taxes are stated in it. This clearly means that the emphasis is being laid on the development of the state through the act and the taxation is legal and valid for the development.

Several such acts can be enacted by the states to propose various schemes for the imposition of taxes on the goods as well as vehicles that are being used for the transportation of the goods. This judgment has paved a pay for the development, levying of imposts in various forms (that too with the implementation of twin test on the taxes) and clarification of various dilemmas in relation to freedom and restrictions on trade and commerce across the country.

[1] Bolani Iron Ores v. state of Orissa 1975 AIR 17
[2] Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell and Co. Ltd (2009) 10 SCC 755
[3] Raja Jagannath Baksh Singh v. State of UP and Anr AIR 1962 SC 1563
[4] Keshvananda Bharati v. the State of Kerala AIR 1973 SC 1461
[5] S.R. Bommai v. union of India 1994 AIR 1918
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Author: Ashutosh Chhipa

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