TaxTMI 
TaxTMI 
2007 (12) TMI 429
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....d it also impedes and restricts the free movement of trade and commerce, guaranteed across the Federal Polity under article 301 of our Constitution and for that reason also it is bad. It is further contended that the Presidential consent, which is so essentially to be obtained prior to the introduction of the Bill, needed in terms of clause (b) of article 304 of our Constitution having not been obtained, the impugned Entry Tax Act which seeks to impose restrictions on the freedom of trade and commerce, should be declared as invalid. Before we further elaborate the contentions canvassed on both sides, it will be relevant to notice the salient features of the Entry Tax Act. Prior to enacting the present Entry Tax Act, the Governor of Andhra Pradesh has promulgated the Andhra Pradesh Tax on Entry of Goods into Local Areas Ordinance, 2001; Ordinance No.1 of 2001. Present Entry Tax Act replaces the said Ordinance No. 1 of 2001. The statement of objects and reasons set out in the Bill indicates that in order to protect the interests and revenues of the State as some of the neighbouring States are found indulging in trade diversion by reducing the rates of taxes for certain goods than th....
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....bsp; Provided that if any such dealer, after importing the notified goods for the purpose of resale, consumes such goods in any form or deals with such goods in any other manner except reselling the same, he shall forthwith notify the assessing authority by the 20th of the month, succeeding the month in which such goods are so consumed or dealt with and pay the tax, which would have been otherwise leviable under sub-section (1), along with interest for the period of delay at the rate of 18 per cent per annum compounded quarterly. (3) If any dealer having imported the notified goods for the ostensible purpose of resale deals with such goods in any other manner or consumes the same and does not notify to the assessing authority as provided in sub-section (2) or does not pay the tax as required under sub-section (2) within the specified period, the assessing authority shall assess the amount of tax which such dealer is liable to pay and levy penalty equal to the amount of tax due, apart from collecting interest from the date of entry of the goods into the local area." A perusal of these provisions makes it clear that the levy and collection of tax on entry of notified goods into a ....
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....esent piece of legislation. The learned Special Government Pleader would urge that the entry tax sought to be levied is compensatory in nature and not regulatory and hence stands outside the purview of article 301. When once it stands outside the purview of article 301, the operation of article 304 of the Constitution is not attracted at all and hence there is no need to obtain the previous sanction of the President. Hence, no prior sanction of the President has, in fact, been obtained. Further the learned Government Pleader sought to justify the levy on the ground that the sum total of the sales tax suffered by the notified goods in the States of their manufacture/origin and the entry tax sought to be imposed, being equal to the levy of sales tax imposed on such goods in the State of Andhra Pradesh. Hence, far from preferring the local dealer or discriminating the importer, the present Entry Tax Act is seeking to create a level playing field amongst both types of dealers. It is, therefore, required of us to determine at the very outset as to whether the present levy is compensatory in nature or not, before necessarily examining the other questions. In Atiabari Tea Co. Ltd. v. St....
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....5 STC 544; [2006] 7 SCC 241. After noticing the jurisprudential principles evolved till then, their Lordships have reiterated that the doctrine of "direct and immediate effect of the impugned levy of tax on trade and commerce" propounded in Atiabari Tea Co. Case AIR 1961 SC 232 is a correct principle to assess the validity of tax versus the protection available under article 301. Their Lordships have also further held that the working test for determining the compensatory taxes propounded in Automobile Transport (Rajasthan) Limited AIR 1962 SC 1406 was also the correct principle and hence reaffirmed. It will be important, therefore, to notice how Jindal Stainless Steel [2006] 145 STC 544; [2006] 7 SCC 241 had unfolded the scope and width of articles 301, 302, 303 and 304. "Difference between exercise of taxing and regulatory power: 38. In the generic sense, tax, toll, subsidies, etc., are manifestations of the exercise of the taxing power. The primary purpose of a taxing statute is the collection of revenue. On the other hand, regulation extends to administrative acts which produce regulative effects on trade and commerce. The difficulty arises because taxation is also used as a....
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....a licence. A tax is a payment where the special benefit, if any, is converted into common burden. 41.. On the other hand, a fee is based on the 'principle of equivalence'. This principle is the converse of the 'principle of ability' to pay. In the case of a fee or compensatory tax, the 'principle of equivalence' applies. The basis of a fee or a compensatory tax is the same. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. In the case of a tax, even if there is any benefit, the same is incidental to the Government action and even if such benefit results from the Government action, the same is not measurable. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is measurable. 42.. A tax can be progressive. However, a fee or a compensatory tax has to be broadly proportional and not progressive. In the principle of equivalence, which is the foundation of a compensatory tax as well as a fee, the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services, which costs in turn be....
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....cidentally bring in net-revenue to the Government but that circumstance is not an essential ingredient of compensatory tax. 44. . . 45.. To sum up, the basis of every levy is the controlling factor. In the case of 'a tax', the levy is a part of common burden based on the principle of ability or capacity to pay. In the case of 'a fee', the basis is the special benefit to the payer (individual as such) based on the principle of equivalence. When the tax is imposed as a part of regulation or as a part of regulatory measure, its basis shifts from the concept of 'burden' to the concept of measurable/quantifiable benefit and then it becomes 'a compensatory tax' and its payment is then not for revenue but as reimbursement/recompense to the service/facility provider. It is then a tax on recompense. Compensatory tax is by nature hybrid but it is more closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense. If the impugned law chooses an activity like trade and commerce as the criterion of its operation and if the effect of the operation of the enactment is to imped....
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....on of its operation? If yes, the next question is: what is the effect of operation of the law on the freedom guaranteed under article 301? If the effect is to facilitate free-flow of trade and commerce, then it is regulation and if it is to impede or burden the activity, then the law is a restraint. After finding the law to be a restraint/restriction one has to see whether the impugned law is enacted by the Parliament or the State Legislature. Clause (b) of article 304 confers a power upon the State Legislature similar to that conferred upon Parliament by article 302 subject to the following differences: (a) While the power of Parliament under article 302 is subject to the prohibition of preference and discrimination decreed by article 303(1) unless Parliament makes the declaration under article 303(2), the State power contained in article 304(b) is made expressly free from the prohibition contained in article 303(1) because the opening words of article 304 contain a non obstante clause both to article 301 and article 303. (b) While Parliament's power to impose restrictions under article 302 is not subject to the requirement of reasonableness, the power of the State to impos....
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...., installation of street lights, supply of water, sanitation programmes, cleanliness schemes, etc., within their local areas. They need huge funds for implementing all these schemes. There has been a resource crunch. For several reasons the local bodies especially in villages are not able to generate their own resources to meet the growing expenditure on account of provisions of various amenities and facilities. The local bodies therefore need funding by the State Government. The State Government has to provide substantial funds to these bodies to enable them to discharge their statutory obligation. 16. It is submitted that well laid out roads would help and ensure free-flow of trade and commerce. Establishment of market yards, waterways and other amenities for the traders within local areas attracts more trade from other States. It is only such provision of the facilities within the State that would attract more traders from other States to dispatch their goods. The infrastructure facilities within the local area are the real attraction for more flow of goods from other States. It all needs substantial allocation of funds. A statement showing the funds allotted by the Government ....
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....e next two years the allocation was Rs. 78.09 and 48.11 crores. This statement, obviously, is indicative of the priority choice accorded for the said subjects by the State in it's annual exercise of planning and allocation of funds. It has no bearing or relationship with the impugned levy of the entry tax. Clearly, the impugned levy is sought for making necessary addition to the State's overall revenue. For one to justify, a particular tax levied to be compensatory in nature, it is essential that there should be direct and intricate relationship between the collection of tax and its intended expenditure. The broad and generalised statements mentioned by the State Government, as were noticed supra by us, are all representing or corresponding to the basic and fundamental obligations of any Government, which they owe to their citizens. They are not special features specific to cater to the needs of the people indulging in trade or commerce. Construction of roads, culverts and bridges or providing basic health care facilities or rest-houses for the transport operators on the waysides are not exclusively intended or meant for promoting any class, or even generally, the trade or....