Compensatory tax doctrine and Article 301 challenge to local area development levy referred to larger Bench for reconsideration.

A challenge to the Haryana Local Area Development Tax Act, 2000 raised whether an entry tax on goods brought into local areas infringed the freedom of trade under Article 301 and whether the compensatory tax doctrine, as developed in later cases, remained sound. Earlier authority treated a levy as valid only where it was closely linked to facilities or services provided to traders, but later decisions had broadened the concept to include more general developmental benefits. Because the levy was earmarked for local area development without a clear nexus to trading facilities, and the case exposed divergence in the doctrine, the constitutional question was referred to a larger Bench for authoritative determination under Article 145(3).

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Issues: Whether the challenge to the Haryana Local Area Development Tax Act, 2000, on the ground that the levy was a restriction on free trade under Article 301 and whether the compensatory tax doctrine, as applied in later cases, required authoritative reconsideration by a larger Bench under Article 145(3).

Analysis: The levy was examined as an entry tax on goods brought into local areas, with the tax distributed to local bodies for development of local areas. Earlier decisions had treated tax measures as infringing Article 301 where they directly and immediately restricted trade unless saved by Article 304, while the compensatory tax exception had been recognised where the levy was commensurate with facilities or services provided to traders. The reasoning in later cases had expanded the compensatory concept to include indirect or general developmental benefits, creating uncertainty as to whether a levy meant for general local development without a demonstrated nexus to trading facilities could still be treated as compensatory. In view of this divergence, the constitutional question was considered to require authoritative settlement by a larger Bench.

Conclusion: The question of the validity of the levy under Article 301, in light of the compensatory tax doctrine, was referred for decision by a larger Bench under Article 145(3).

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