Compensatory tax doctrine fails where no measurable benefit to payers is shown; levy held unconstitutional under free trade principles.

The levy under the Haryana Local Area Development Tax Act, 2000 was not compensatory because the scheme did not show a quantifiable, measurable benefit to the payer broadly commensurate with the tax collected. Although the proceeds were stated to fund local infrastructure and civic services, the Act did not earmark any direct or exclusive facility for the traders, and the State failed to establish a sufficient nexus between the tax and the trading facilities claimed. The levy was therefore treated as a restriction on the free flow of trade and commerce, hit by Article 301 of the Constitution, and invalid.

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Issues: Whether the levy under the Haryana Local Area Development Tax Act, 2000 was compensatory in nature and therefore outside the mischief of Article 301 of the Constitution.

Analysis: The statutory scheme provided for levy on entry of goods into local areas, distribution of the tax among local bodies, and utilisation of the proceeds for development of infrastructure such as roads, bridges, culverts, sewerage, drainage, sanitation, waste management, electricity and drinking water. The Court applied the Constitution Bench parameters on compensatory tax and held that a levy can be sustained only if it satisfies the facial test and discloses a quantifiable or measurable benefit to the payer of the tax, broadly commensurate with the cost of the facilities or services provided. The Court found that the Act, even as amended, retained the character of a general development levy and did not earmark any specific direct or exclusive facility to the payers of the tax. The material placed by the State did not discharge the burden of showing a sufficient nexus between the tax and the trading facilities claimed. The expenditure data also did not establish that the levy was reimbursement or recompense for measurable benefits.

Conclusion: The levy was held not to be compensatory and was held to constitute a restriction on the free flow of trade and commerce; it was therefore hit by Article 301 of the Constitution and was invalid.

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