Luxury tax on cigarettes struck down for restricting trade and breaching constitutional limits on declared goods.

The Kerala HC held that the State had legislative competence under Entry 62 of List II to tax luxuries, but the luxury tax on cigarettes was unconstitutional because it directly and immediately restricted trade and commerce, offended article 301, and was not saved by article 304(b) in the absence of Presidential sanction. It also conflicted with the restrictions on declared goods under article 286(3) and section 15(a) of the Central Sales Tax Act because the levy exceeded the permissible limit and was not a valid single-point levy. Invalidity was confined to section 4A and the Schedule; the remaining luxury tax provisions for hotel accommodation and services survived under severability.

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Issues: (i) Whether the State Legislature had legislative competence to enact section 4A of the Kerala Tax on Luxuries Act, 1976 as amended to levy luxury tax on cigarettes; (ii) Whether the levy of luxury tax on cigarettes violated article 301 of the Constitution of India and was saved by article 304(b); (iii) Whether the impugned provision could be sustained in view of article 286(3) of the Constitution of India, section 15(a) of the Central Sales Tax Act, 1956 and the related fiscal enactments; (iv) Whether, if section 4A and the Schedule were unconstitutional, the remaining Act survived on the doctrine of severability.

Issue (i): Whether the State Legislature had legislative competence to enact section 4A of the Kerala Tax on Luxuries Act, 1976 as amended to levy luxury tax on cigarettes.

Analysis: Entry 62 of List II empowers the State to impose taxes on luxuries. Cigarettes and tobacco were treated as luxury articles, and the levy was framed as a luxury tax on a commodity included in the Schedule. The subject-matter therefore fell within the State's taxing field.

Conclusion: The State Legislature had legislative competence to enact the provision.

Issue (ii): Whether the levy of luxury tax on cigarettes violated article 301 of the Constitution of India and was saved by article 304(b).

Analysis: The levy was imposed at the point of first supply on the value of cigarettes and operated upon despatch and supply in the course of trade. In substance, it directly affected the movement of goods and constituted a direct and immediate restriction on free trade, commerce and intercourse. Since no previous sanction of the President was obtained for legislation under article 304(b), the restriction could not be justified under that clause. It was also not a mere regulatory or compensatory levy.

Conclusion: The levy offended article 301 and was not saved by article 304(b).

Issue (iii): Whether the impugned provision could be sustained in view of article 286(3) of the Constitution of India, section 15(a) of the Central Sales Tax Act, 1956 and the related fiscal enactments.

Analysis: Cigarettes were declared goods under section 14(ix) of the Central Sales Tax Act, 1956, and State taxation on such goods was subject to the restriction of a maximum rate of 4 per cent and single-point levy under section 15(a). The impugned levy, being 5 per cent on the value of cigarettes at supply, exceeded that limit and conflicted with the statutory restrictions. The parallel reliance on the Additional Duties of Excise (Goods of Special Importance) Act, 1957 and the Kerala General Sales Tax Act, 1963 did not validate the levy where the constitutional prohibition under article 301 remained unfulfilled.

Conclusion: The impugned levy could not be upheld against the statutory and constitutional restrictions governing declared goods.

Issue (iv): Whether, if section 4A and the Schedule were unconstitutional, the remaining Act survived on the doctrine of severability.

Analysis: The invalid provision related only to the levy on cigarettes under section 4A and the Schedule introduced by the Finance Bill, 1994. The original Act dealt with luxury tax on hotel accommodation and services, which was distinct in subject and operation. The valid and invalid parts were separable and the remaining provisions formed a complete code on their own.

Conclusion: The invalidity was confined to section 4A and the Schedule, and the rest of the Act survived.

Final Conclusion: The luxury tax provision introduced for cigarettes was struck down for violating the constitutional guarantee of free trade, while the pre-existing statutory scheme dealing with hotel-related luxury tax remained intact.

Ratio Decidendi: A State tax which, in substance, directly and immediately restricts the movement of declared goods in trade and commerce, and is not saved by article 304(b), is unconstitutional even if the State has legislative competence in the field of luxuries.

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