Compensatory tax test under Article 301 fails where State cannot show direct trade-related benefit and prior sanction is absent

Entry tax on goods entering local areas was analysed under Article 301, which bars measures that directly and immediately impede trade, even where the impost is framed as a tax. The levy can be saved only if the State proves it is compensatory by showing a quantifiable, measurable benefit and a direct nexus between the tax collected and trade-related facilities provided. General local infrastructure expenditure was held insufficient without specific linkage to the burdened trade. On the material described, that compensatory nexus was not shown, so Article 304(b) scrutiny applied and the absence of prior Presidential sanction rendered the levy invalid.

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Issues: Whether the levy of entry tax under the Andhra Pradesh Tax on Entry of Goods into Local Areas Act, 2001 violated the freedom of trade, commerce and intercourse under Article 301 of the Constitution of India and was invalid for want of previous Presidential sanction under Article 304(b); and whether the State had established that the levy was compensatory in nature.

Analysis: The levy operated on the entry of notified goods from outside the State into a local area and thereby affected the movement of trade across the State boundary. Taxing measures are not outside Part XIII merely because they are in the form of a tax; if their direct and immediate effect is to impede trade, they attract Article 301. A levy can still be sustained if it is shown to be compensatory, but the burden lies on the State to demonstrate a quantifiable and measurable benefit, together with a direct relationship between the tax collected and the facilities or services provided to trade. General infrastructure spending for local bodies, roads, lighting, sanitation and similar public obligations is not enough unless it is shown to be specifically linked to the traders or the trade activity burdened by the levy. The material placed by the State did not establish such nexus, and the collection generated under the Act was not shown to be reimbursement for identifiable trade-related facilities. As the levy was not shown to be compensatory, the restrictions required scrutiny under Article 304(b), and the admitted absence of prior Presidential sanction was fatal.

Conclusion: The levy was held to be unconstitutional and invalid for infringing Article 301 and for having been enacted without the previous sanction mandated by Article 304(b).

Ratio Decidendi: A tax on the movement of goods will be protected from Article 301 only if the State proves that it is compensatory, meaning that it is broadly proportional to a quantifiable benefit or facility provided to trade; failing such proof, and absent compliance with Article 304(b), the levy is unconstitutional.

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