Compensatory tax test failed where entry tax was not linked to measurable benefits for the payer class.

Entry tax under the U.P. Tax on Entry of Goods Act, 2000 was held not to be proved compensatory in character for Article 304(b) purposes. A compensatory levy must satisfy the principle of equivalence by showing quantifiable benefits to the payer class and a proportional link between the tax collected and the special facilities provided. The State bore the burden of justifying the levy with relevant material and data, but the record showed only general use of collections for developmental and civic purposes through the consolidated fund. That did not establish any specific, measurable or additional benefit to scheduled traders, so the levy failed the compensatory tax test.

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Issues: Whether the levy of entry tax under the U.P. Tax on Entry of Goods Act, 2000 was compensatory in nature and therefore saved by Article 304(b) of the Constitution of India.

Analysis: The question was decided on the constitutional test governing compensatory tax. A compensatory levy must broadly reflect the principle of equivalence, must be supported by quantifiable and measurable benefits to the payer class, and must bear some proportional link with the special facilities or advantages said to be provided. The State carried the burden of showing, through relevant material and data, that the tax collected from the scheduled traders was a reimbursement or recompense for identifiable facilities. The material placed on record showed only that the collections entered the consolidated fund and were thereafter used by local bodies and the State for general developmental and civic purposes such as roads, bridges and grants-in-aid. That material did not demonstrate any specific, additional or measurable benefit to the scheduled trades, nor any direct linkage between the amount of entry tax collected and the facilities allegedly provided to the payers of the levy.

Conclusion: The levy was not proved to be compensatory tax and the State failed to discharge the burden of justification.

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