State tax on passengers and goods carried by road upheld as compensatory, regulatory, and not contrary to free trade protections.

Entry 56 of List II was held to authorise a State tax on passengers and goods carried by road, including carriage over National Highways, and the residuary power in Entry 97 could not displace that specific taxing field. The levy was also sustained as compensatory and regulatory because exact equivalence between collections and expenditure is not required, only a sufficient nexus with road-related facilities and services used by traffic. As the tax operated within the State and was compensatory in character, it was not hit by Article 301, and the related tax schemes did not create hostile discrimination under Article 14. The State levies were upheld as valid.

---

---

Issues: (i) Whether the State Legislature had competence under Entry 56 of List II to levy passengers and goods tax on carriage over National Highways, or whether the subject fell exclusively within Parliament's power under Entries 23 and 97 of List I; (ii) whether the impugned levy was valid as a compensatory and regulatory tax notwithstanding that National Highways were primarily maintained by the Union; (iii) whether the levy violated Article 301 of the Constitution, and in the connected State enactments whether the tax scheme offended Article 14.

Issue (i): Whether the State Legislature had competence under Entry 56 of List II to levy passengers and goods tax on carriage over National Highways, or whether the subject fell exclusively within Parliament's power under Entries 23 and 97 of List I.

Analysis: Entry 56 of List II expressly authorises taxes on passengers and goods carried by road, and the absence of any exclusion for National Highways was held to be significant. The distribution of legislative powers required Entry 97 to be confined to matters not enumerated in List II or List III, and the residuary power could not be used to trench upon a clear State field. Reading the constitutional entries as a whole, the subject of taxation on passengers and goods carried on National Highways was held to fall within the State taxing entry rather than the Union residuary entry.

Conclusion: The levy was within the legislative competence of the State and not reserved exclusively to Parliament.

Issue (ii): Whether the impugned levy was valid as a compensatory and regulatory tax notwithstanding that National Highways were primarily maintained by the Union.

Analysis: A compensatory or regulatory tax does not require exact equivalence between collections and expenditure. What is required is a specific and identifiable object behind the levy and a sufficient nexus between the tax and the facilities or services available to the taxed users. The State was found to incur expenditure on road infrastructure, traffic regulation, lighting, amenities, halting places, and other facilities benefiting traffic moving on National Highways, including stretches within municipal areas. The existence of this nexus was treated as sufficient to sustain the levy.

Conclusion: The levy was held to be a valid compensatory and regulatory tax.

Issue (iii): Whether the levy violated Article 301 of the Constitution, and in the connected State enactments whether the tax scheme offended Article 14.

Analysis: Regulatory and compensatory taxes were treated as outside the inhibition of Article 301. Since the tax was confined to the distance covered within the State, it was not regarded as an unconstitutional burden on inter-State trade, commerce, or intercourse. In the related challenges, the Court also held that a tax based on user of roads, or a lump-sum worked out by reference to freight, carrying capacity, or period of operation, did not by itself create hostile discrimination under Article 14.

Conclusion: The levy did not violate Article 301 or Article 14.

Final Conclusion: The constitutional challenges to the passengers and goods taxation provisions failed, and the State levies were upheld as valid exercises of taxing power.

Ratio Decidendi: A State tax on passengers and goods carried by road, including on National Highways, is valid where it falls within Entry 56 of List II and bears a sufficient nexus to regulatory and compensatory public facilities, and such a tax is not hit by Article 301 merely because it applies to inter-State movement within the State.

---