FREEDOM OF TRADE COMMERCE AND INTERCOURSE
The Constitution-makers desired to promote free flow of trade and commerce in India as they fully realized that economic unity and integration of the country provided the main sustaining force for the stability and cultural unity of the federal polity and that the country should function as one single economic unit without barriers on internal trade.
The origins of Article 301 which states “Trade commerce and intercourse throughout the territory of India shall be free” may be traced directly to Section 92 of the Australian Constitution which states: Trade Commerce and intercourse among the States shall be absolutely free: but there are some significant differences between the two provisions
- Section 92 immunizes interstate trade only whereas Article 301 includes inter-state as well intra-State trade
- Section 92 makes freedom of trade’ absolutely ‘free but in India exceptions to Article 301 has been laid down in Article 302-304.
Meaning of trade, commerce and intercourse
Trade means buying and selling with intention to earn profit. Business is synonymous for trade – a systematic and organized activity with intention to gain.
Commerce means transmission or movement in which profit may not be the intention. Bringing a commodity for personal consumption is commerce. Commerce includes all transportation by land, air or water. It includes telephone telegraph or wireless or e-commerce which causes movement
Intercourse means commercial as well as non-commercial intercourse. Trade is a species of intercourse where the dominant element is to earn profit. Intercourse would include movements and dealings even of non-commercial in nature. It would include travel and all forms dealings with others. Such dealings may be by speech, music, radio or television.
The content of Article 301
Freedom under Article 301 means right to free movement of persons and things, tangible or intangible, commercial or non-commercial, unobstructed by barriers, inter-State or intra-State. All obstructions to free flow of trade would offend Article 301. The object of this provision to break down any barrier between States and within the State so that India maintains economic unity for sustained economic growth.
Exceptions to Article 301
- Parliament can impose such restriction on freedom of trade as may be necessary in public interest (article 302). However Parliament cannot discriminate between one State and another nor can it give preference to one State over another (Article 303(1). There is one case where discrimination among the States is permissible: it is in the case of famine or scarcity of goods in any part of India (Article 303(2))
- A State may by law impose on goods imported from other States any tax to which similar goods manufactured in the State are subject( Article 304 (a)
- A State may by law impose reasonable restriction on the freedom of trade commerce and intercourse in public interest. But this power is restricted in two respects:
(a) a State legislature cannot make a law with respect to trade and commerce which discriminates between the States (Article 303 (1) and
(b) a Bill imposing restriction on trade and commerce or intercourse shall not be introduced in the State Legislature without the previous sanction of the President
THE TEST OF DIRECT AND IMMEDIATE RESTRICTION
ATIABARI TEA CO LTD v STATE OF ASSAM, AIR 1961 SC 232( A five judge bench decision)
In this case the Supreme Court was concerned with the Assam Taxation (on goods carried by Roads and Inland Waterways) Act 1954 which was passed under Entry 56 of List II of the seventh Schedule of the Constitution. The appellants carried on the business of growing tea and exporting it to Calcutta via Assam. In the course of passing through Assam the tea was liable to tax under the Act.
The appellants contended that the Act had violated the freedom of trade guaranteed by Article 301as it had obstructed free flow of trade and as it was not passed after obtaining the sanction of the President as required by Article 304 (b) it was ultra vires.
MEANING OF “FREE”
The Supreme Court held that the accent on Article 301 is on the movement aspect of trade. This Article requires that the flow of the trade throughout India shall run smooth and unhampered by any restriction on the free flow and movement of trade. It is the free movement and transport of goods from one part of the country to another part that is intended to be saved by Article 301 and if a law or tax imposes a direct restriction on the very movement of such goods, it attracts the provision of Article 301 and its validity can be sustained only if it satisfied the requirement of Article 304(b).
The Court declared:
“Our conclusion therefore is that when Article 301 provides that trade shall be free throughout the territory of India it means that the flow of trade shall run smooth and unhampered by any restriction either at the boundaries of the States or at any other points inside the States themselves. It is the free movement or transport of goods from one part of the country to the other that is intended to be saved, and if any Act imposes any direct restriction on the very movement of such goods it attracts the provisions of Article 301. The freedom of movement of trade cannot be subject to any restriction in the form of taxes imposed on carriage of goods or their movements. Such restriction can be imposed by the State legislatures only after satisfying the requirements of Article 304(b) of the Constitution”
“Restriction freedom from which is guaranteed by Article 301 would be such restrictions as directly and immediately restrict or impede the free flow or movement of trade. Taxes may and do amount to restriction but it is only such taxes which directly and immediately restrict free movement of trade would fall within the purview of Article 301.”
However, such regulatory measures as traffic regulations, licensing of vehicles, marketing and health regulations, price control, economic and social planning , prescribing minimum wages only indirectly impeded the free flow of trade. These are regulatory measures which promote and facilitate trade and are permissible for an orderly society.
Since the impugned Act had not satisfied the requirement of obtaining previous assent to the Bill by the President as required by Article 304(b) it was struck down as unconstitutional.
THE COCEPT OF COMPENSATORY TAX
AUTOMOBILE TRANSPORT CO v STATE OF RAJASTHAN AIR 1962 SC 925( A seven judge bench decision)
In Automobile case the Court held that regulatory measures or compensatory taxes for the use of trading facilities did not hamper trade, commerce and intercourse and therefore were not hit by Article 301. Rajasthan Motor Vehicles Taxation Act 1951 provided that no one could use or keep for use a motor vehicle in Rajasthan without paying an appropriate tax.
Relying upon Atiabari case the appellants argued that since the previous sanction of the President was not obtained the Act was invalid
The Supreme Court held
The interpretation which was accepted by majority in the Atiabari case is correct, but subject to this clarification: Regulatory measures or measures imposing compensatory taxes for the use of trading facilities do not come within the purview of restrictions contemplated by Article 301 and such measures need not comply with the requirements of the proviso to Article 304(b) of the Constitution.
The Court found that in 1952-1953 the income from motor vehicle taxation was about 34 lakhs and the expenditure on new roads and maintenance of old roads was about 60 lakhs. In 1954-55 the estimated income from tax on vehicles was 35 lakhs but the expenditure on maintenance of roads was 65 lakhs. The Supreme Court upheld the validity of the impugned Act as imposing compensatory tax which was permissible and not violative of freedom guaranteed by Article 301.
Thus the State was charging from the users of motor vehicles nearly 50% of the cost incurred by the State in maintaining and making roads
For the purpose of ascertaining whether a tax was a compensatory or not, it is necessary to inquire whether the traders were having the use of facilities for better conduct of their business and paying not patently much more that what was required for providing the facilities. It was explained by the Court that the State had to find funds for making and maintaining roads and fund could only be raised through taxation, It was further clarified that tax so collected for providing trading facilities need not be kept in a separate fund.
A compensatory tax does not offend the freedom of trade, commerce and intercourse guaranteed by Article 301 and therefore such taxes need not meet the requirement of Article 304(b).
G K KRISHNAN v STATE OF TAMIL NADU (1975) 1 SCC 375
In this case the writ petition challenged the validity of a notification by Government of Tamil Nadu enhancing the motor vehicle tax on omnibuses from Rs 30 per seat per quarter to Rs 100 per seat per quarter, The question for consideration was whether the tax was a compensatory tax? It was found that Rs 19.51 crores had been spent not only for maintenance of the roads but also for the construction of new ones and that the receipt from the vehicle tax was only 16.38 crores.
Following Autombile Transport Case (1962) the Supreme Court held that the impugned tax was a compensatory tax and did not violate Article 301. The Court observed that regulations like rules of traffic facilitate freedom of trade and commerce whereas restrictions impede that freedom. The collection of tax or toll for the use of roads, bridges, aerodromes, does not operate as barrier or hindrance to trade. For a tax to become a prohibited tax, it has to be a direct tax effect of which is to hinder the movement part of trade. If the tax is compensatory or regulatory it cannot operate as a restriction on the freedom of trade and commerce. A compensatory tax need not satisfy the requirements of Article 304(b).
The Court referred to the working test enunciated in Automobile case according to which the working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business not patently paying much more than what is required for providing the facilities.
The very idea of a compensatory tax is service more or less commensurate with the tax levied
The Court therefore upheld the notification enhancing the tax on motor vehicles in Tamil Nadu as it was held to be a compensatory tax.
THE POWER OF STATE LEGISLATURES
CASES ON ARTICLE 304 (a)
VIDEO ELECTRONICS (PVT) LTD V STATE OF PUNJAB (1980) 4 SCC 134
In this case the petitioners who carried on the business of selling cinematographic films and other equipment like projectors, sound recording and reproducing equipment, industrial X ray films, graphic art films etc, had challenged the notifications issued by the governments of Punjab and Uttar Pradesh which had provided temporary exemption to the new electronic local industries from paying sales tax. The UP notification stipulated that the said benefit shall be available only to those units who have commenced their production between the dates specified in the notification.
The Punjab notification provided that the rate of sales tax payable by an electronic manufacturer unit existing in Punjab would be one percent as against normal twelve percent applicable to units from other States
In the case of UP notification the Supreme Court held that in as much as it was a case of grant of exemption to a special class for a limited period on specified conditions and was not extended to all the products of those goods, it did not offend the freedom of trade guaranteed by Article 301 and 304 (a)
Similarly in the case of Punjab notification it was held that the exemption was for certain specified goods and overwhelmingly large number of local manufacturers of similar goods were subject to sales tax.
It could not be said that the local manufacturers were favoured as against outside manufacturers
The Supreme Court upholding the validity of the impugned notifications ruled:
“A state which is economically and technically weak on account of various factors should be allowed to develop economically by granting exemptions, concessions, subsidies to new industries”
Accordingly the impugned notifications were held not violative of Article 304(a).
Thus a temporary exemption from sales tax to specified goods made within the State with a view to giving incentives and encouragement to the local industry does not infringe Article 304(a) of the Constitution.
Under Jammu and Kashmir General Sales Tax Act the State government issued notifications stating that as the cost of production of edible oil in the State of Jammu and Kashmir was higher than the cost of production of edible oil in the adjoining States the producers of edible oil in the State of Jammu and Kashmir will be exempted from paying sales tax on edible oil. But the manufacturers /producers of edible oil from other States were liable to pay tax at the rate of 8%.
The appellant challenged the constitutional validity of tax exemption as infringing the requirement of Article 301 and 304(a) of the Constitution.
In this case the Supreme Court invalidated the imposition of 8% sales tax by the State of J&K on the edible oil imported from other States from which the Edible Oil produced with in J&K was exempted. The Court rejected the State’s plea that such arrangement was necessary to encourage the State oil industry and to subsidize high cost of oil production within the State .By exempting unconditionally the edible oil produced within the State of J&K altogether from sales tax while subjecting the edible oil produced in other States to sales tax at 8%, the State of J&K has brought about discrimination by taxation prohibited by Article 304(a) of the Constitution.
It was held that the exemption granted from payment of sales tax to local manufacturers /producers of edible oil is unconstitutional and violative of Article301 and 304(a) of the Constitution.
Citing Video Electronics case the Supreme Court observed that a limited exception created in that case cannot be enlarged to eat up the main provision in Article 304(a) which totally prohibits discriminatory taxation by a State. By exempting unconditionally the edible oil produced within the State of Jammu and Kashmir altogether from sales tax the State had brought about discrimination by taxation prohibited by Article 304(a).
The notifications were held to be violative of Article 301 and Article 304(a)
The concept of compensatory tax has been evolved judicially in order to provide more autonomy to the States for raising revenue through taxes under Entries 56 and 57 of List II. It has consistently been held that these taxes are by their very nature compensatory in character and are therefore outside the purview of Article 301.The power to impose tax under entry 56 or 57 List II is the power to impose taxes which are in the nature of compensatory or regulatory measures and when a tax is regulatory or compensatory in nature the measure of tax need not be proportionate to the expenditure incurred in the services provided to the traded people.
Thus regulatory measures or compensatory taxes do not offend Article 301 and such measures need not satisfy the requirement of Article 304(b).
Thus the test for adjudging the validity of law on ground of Article 301 may be stated in the following manner:
- A measure which operates on trade, commerce and intercourse indirectly or remotely is not violative of Article 301
- A measure which operates on trade, commerce and intercourse directly and immediately is violative of Article 301
- A measure which operates on trade, commerce and intercourse directly and immediately may not be violative of Article 301 if it is
(a) Regulatory or
(b) Imposes compensatory tax for the use of trading facilities.
Jindal Stainless Ltd. v. State of Haryana (2016)
- Only such taxes which are non-discriminatory in nature are valid, those taxes which are discriminatory in nature are unconstitutional.
- The factum as to whether an entry tax is discriminatory or not has to be examined by the respective benches hearing the same.
- The concept of compensatory tax is flawed and has no legal basis.
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