Entry Tax: A regional trade barrier

By Cleofato A Coutinho
27 May 2013 13:49 IST

The state of Goa is set for a confrontation on the issue of entry tax with the Central Government over the hard hitting letter of the union ministry of road transport and highways which has called for the withdrawal of what the union ministry calls undue levy of tax/fee.  The Union ministry has termed the Goa Government entry tax as ‘not rational’ in light of National Permit Regime under the Motor Vehicles Act in terms of which the Goa government gets its share. As expected the Chief Minister has rejected the Central Ministry’s claim.

The Goa government’s decision to impose the entry tax is to offset the revenue loss from the closure of mines and possibly the revenue loss on the deduction of VAT on petrol. The government’s decision is seen by some as an act of self reliance ‘we know what is right and what is good for Goa’ and that outsiders should not dictate to us what is good for us. But can we ignore that we are part of a federal country? And such a country can prosper only by co-operation and economic unity. There is no place for narrow and parochial interests particularly which create trade barriers by restricting flow of commodities. Free flow of trade, commerce and intercourse is the essence of federal system, particularly in a country of our nature. Article 301 of the constitution of India which makes trade, commerce or intercourse free throughout the country attempts to eliminate regional and territorial economic barriers created by state laws.

Most of the federal countries like Canada, Australia and the United States have powers to regulate country’s economy in the hands of the central government and the provinces are deprived from creating inter provincial trade barriers. In fact in Australia with a view to promote economic unity of the country and discouraging the state from raising trade barriers, the states have been debarred  from levying taxes.

Despite a constitutional embargo, certain restrictions like Octroi which also create trade barriers were permitted in our country. The different sales tax provisions of different states which created preferential treatment are now rationalized by VAT. The proposed Goods and Service Tax is also an attempt to further rationalize the country’s tax structure. At a time when the country is in the mood of rationalizing the tax structure the Goa’s entry tax is certainly a step backward in the promotion of rationalization and bringing about economic unity.

In our country indirect or remote barriers like Octroi, sales tax has been charaterilized as not creating barriers in the area of commerce. Certain regulatory and compensatory taxes are permissible and the movement of interstate trade and commerce provisions of taxes are held good on the basis of the state making provisions for facilities by way for road and such taxes are held to be in the nature of regulation and compensation in providing road network and infrastructural facilities. But those taxes are taxes across the board and non discriminatory between the states.

Octroi as a barrier has been levied on goods entering into local jurisdiction by some states and the collection is made at check posts specially set up for the purpose. There has been two fold criticism of the Octroi for a longtime. One of the main objections to Octroi was that it creates obstruction of smooth movement of goods thereby causing loss to business and losses in production. Secondly Octroi was seen as breeding ground for corruption in the absence of proper assessment at the check posts. The police and excise officials always saw check-post posting as the most lucrative assignment they can dream of and the most favoured officials were awarded such postings! There has been a national debate over abolition of Octroi and the government of Maharashtra had even appointed a committee on substitution of Octroi which had recommended entry tax on goods which the committee preferred since it did not require the network of check posts.

The entry tax on vehicles not registered in Goa discriminates between local vehicles and vehicles from other states, thus is a preferential treatment for vehicles from the state of Goa. This is certainly a regional trade barrier coming in the way of free flow of trade, commerce and intercourse within the country.  

There is always a presumption in favour of a law particularly a tax law and the one who challenges the law will have to bring material before the court in case of a legal challenge to question the legality but from the trend of case law it is apparent that the courts have generally accepted the challenge to an impediment on the ‘movement’ of trade and commerce as direct and hence violative of Article 301 of the constitution of India.   The entry tax of the nature brought in by the Goa legislature can be said to be one which creates an impediment to the movement of trade and commerce.

There is no doubt that the Supreme Court’s interim stay on mining activities have brought down our revenue collection and the state government has to look for new ways of revenue generation. In such a situation should not we seize the opportunity for fiscal consolidation by good politics and good economics? Like introducing certain (if not entire) VAT on petrol and have a relook at some of the popular schemes brought in wake of competitive electoral populism of the 2012 assembly elections! Good but unpopular decisions can be taken in hard times and the general public shall certainly appreciate the government’s predicament an except good economic measures.   

In any case the government has exempted certain types of trucks from certain neighbouring states and has also brought a 25% discount on monthly passes. Thus the revenue collection shall not be the same as anticipated. They why the adamancy?

Disclaimer: Views expressed above are the author's own.

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Cleofato A Coutinho

Cleofato Almeida Coutinho is a senior lawyer and one of the constitutional expert in Goa. A member of Law Commission of Goa, he also teaches at Kare College of Law in Madgao.

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As of date, entry tax in updated formats is operational in 20 states of India that includes Bengal, Orisa, Bihar, Assam, Jharkhand, Kerala and of late Goa. So, should we say all these 20 states are showing their adamancy!

For academic purpose, let’s look at a brief overview of three court cases, in three different courts, in connection with Entry Tax:

Entry Tax in Kerala

The Kerala High Court has now declared that the Kerala Entry Tax Act violates Article 301 in Thressiamma Chirayil vs State of Kerala decided on 18 Dec 2006.

Earlier, in Rajan vs State of Kerala, the Kerala High Court had upheld the Act. Subsequently, in, Fr William Fernandez vs State of Kerala, the High Court had held that Entry Tax cannot be imposed on goods imported from outside the country.

But in the latest decision in Thressiamma’s case, the High Court held that

a)the enactment failed the test of “compensatory tax” as enunciated by the Supreme Court in Jindal Stainless Steel Ltd vs State of Haryana;

b)the enactment violated article 301 providing for free trade and commerce throughout India; and

c)the state had failed to obtain the prior assent of the President under article 304(b)

But this decision has not resulted in free movement of goods from other states into Kerala. The Commissioner, Commercial Taxes has issued Circular 51/2006 dated 19 Dec 2006 and has made it mandatory for all goods brought in by persons who are not registered dealers to issue a Certificate of Ownership in Form No 16 of the KVAT Rules, 2005 and such Certificate should be countersigned by the Assessing Authority where the value of the goods exceeds Rs 5,000.00. This has the effect of preventing import of goods by unregistered persons from neighboring states as the assessing officers are reluctant to issue such certificates.

Further, it has been reported that the state government has prepared a new Entry Tax Bill and has sent it to the President for prior assent.

Entry Tax in Jharkhand

Having noted the position in Gujarat, where the Gujarat High Court upheld the constitutional validity of the Entry Tax Act in Eagle Corporation Pvt Ltd vs State of Gujarat and Others, let me examine the status of the Entry Tax Act in Jharkhand.

Tata Iron & Steel Co Ltd was aggrieved by a demand for entry tax on coal imported by them and challenged the levy. The Jharkhand High Court, in Tata Iron & Steel Co Ltd vs State of Jharkhand and Others, has held that:

a) The State government is not authorized to levy entry tax on imported goods as contended by TISCO.

b) The Court did not accept the argument of TISCO that coal is a raw material in production of steel and held that it is fuel consumed in the manufacture of steel.

c) The Court accepted the contention of TISCO that Sec 3 [charging section] of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 is ultra vires on the ground that it violates article 301 of the Constitution of India and is not saved by article 304(b) of the Constitution.

Article 301 of the Constitution imposes restriction on the legislative powers of States to ensure freedom of trade and commerce throughout India.

Article 304(b) authorizes the State Government to impose reasonable restrictions on freedom of trade and commerce in public interest.

Entry tax in Gujarat

The State Governments have introduced Entry Tax to be paid by actual users who bring goods from outside the state for use or consumption inside the State. The principal reason for this levy was that the States were losing revenue when goods were brought from other states.

However, in the recent past, these Acts have been challenged in various High Courts with varying results.

The Gujarat High Court in Eagle Corporation Pvt Ltd vs State of Gujarat and Others held that “Considering the various provisions of the Act, Statement of Objects, settled legal position and the facts stated hereinabove, it cannot be said that the provisions of the Act and the levy of the Entry Tax on the specified goods are violative of Article 304 of the Constitution of India. We hold that, levy of Entry Tax is neither discriminatory between the goods so imported and goods so manufactured or produced in a local area, the challenge to the constitutional validity of the Gujarat Tax on Entry of Specified Goods for the Local Areas Act, 2001 (Entry Tax Act) and the levy of Entry Tax therefore fails. The petition deserves dismissal and it is accordingly dismissed.”

Conclusion from three cases:

Is interpretation of law a difficult proposition (to common man, including me!) or laws itself are full of flaws!

- Uday, Margao | 07 th June 2013 19:38


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