Luxury tax on cigarettes can be within State competence, yet still fail if it directly restricts free trade.

A State levy on cigarettes was analysed as a tax on luxuries within Entry 62 of List II, so incidental overlap with sale or purchase did not by itself defeat legislative competence under Article 286. The article also notes that the amended Section 4A regime, by taxing supply and burdening the movement of goods through stockists, directly restricted trade and commerce; as it was neither shown to be compensatory nor supported by Presidential sanction under Article 304(b), it was treated as violating Article 301. The discussion therefore distinguishes valid State taxing power from an unconstitutional direct restraint on free trade.

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Issues: (i) Whether the amended luxury tax provisions on cigarettes were beyond the State Legislature's competence and hit by Article 286 of the Constitution of India read with Article 366(29A)(f) and Section 15 of the Central Sales Tax Act, 1956; (ii) Whether Section 4A of the Kerala Tax on Luxuries in Hotels and Lodging Houses Act, 1976 as amended, together with the Schedule and related definitions, imposed a direct and immediate restriction on trade and commerce in violation of Articles 301 and 304 of the Constitution of India.

Issue (i): Whether the amended luxury tax provisions on cigarettes were beyond the State Legislature's competence and hit by Article 286 of the Constitution of India read with Article 366(29A)(f) and Section 15 of the Central Sales Tax Act, 1956.

Analysis: The levy was treated as a tax on luxuries falling within Entry 62 of List II of the Seventh Schedule to the Constitution of India. Even if the measure incidentally touched aspects of sale or purchase, its true character remained a levy on luxuries. Article 286(3) did not extend the restriction relied upon by the challengers to sub-clause (f) of Article 366(29A), and incidental trenching upon another field did not deprive the State of competence where the legislation was in pith and substance within the permissible entry.

Conclusion: The challenge to legislative competence failed and the provisions were not invalid on that ground.

Issue (ii): Whether Section 4A of the Kerala Tax on Luxuries in Hotels and Lodging Houses Act, 1976 as amended, together with the Schedule and related definitions, imposed a direct and immediate restriction on trade and commerce in violation of Articles 301 and 304 of the Constitution of India.

Analysis: The levy was imposed at the point of supply on cigarettes and was collected by stockists engaged in trade. Its operation directly burdened the movement of goods in inter-State and intra-State commerce. The tax was not shown to be a compensatory levy for facilities provided by the State, nor was it supported by prior Presidential sanction as required for a restriction saved by Article 304(b). Applying the settled test that only regulatory or compensatory measures are outside Article 301, the impugned levy was held to be a direct restriction on free trade.

Conclusion: The amended provisions were unconstitutional for violating Article 301 and were not saved by Article 304.

Final Conclusion: The State appeals failed, while the petitioners succeeded on the challenge under Part XIII of the Constitution of India, and the impugned levy was struck down despite the rejection of the competence objection.

Ratio Decidendi: A State levy that, in pith and substance, is a tax on luxuries within Entry 62 may be within legislative competence, but if its operation directly and immediately restricts the free flow of trade and is neither compensatory nor supported by compliance with Article 304(b), it is unconstitutional under Article 301.

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