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Article 301 reads
as follows:
"301. Subject to the other
provisions of this part, trade, commerce and intercourse
throughout the territory of India shall be free."
Article
304 of the Constitution of India reads as follows:
"304. Restrictions on
trade, commerce and intercourse among States.- Notwithstanding
anything in article 301 or article 303, the Legislature of a State may by law-
(a)
impose on goods imported
from other States or the Union territories any tax to which
similar goods manufactured or produced in that State are subject, so,
however, as not to discriminate between goods so imported and goods so manufactured or produced; and
(b)
impose such reasonable
restrictions on the freedom of trade, commerce or intercourse
with or within that State as may be required in the public
interest:
Provided that no Bill or
amendment for the purposes of clause (b) shall be introduced or
moved in the Legislature of a State without the previous sanction of the
President."
The scope of Article 301 and 304
(a) have been considered by the Supreme Court on many
occasions. The decisions in the following judgement will help
better understanding.
1. Firm A.T.B. Mehtab Majid &
Co. Vs. The State of Madras and Another - (14 STC 355)
In this case the validity of a
rule which provided for differential levy on Tanned Hides and
Skins purchased from outside the State and on Hides and Skins
Tanned and sold within the State, was under consideration. The
levy of tax on tanned hides and skins purchased from outside
the State was with reference to their sale price whereas the
rate of tax on hides and skins tanned within the State was
with reference to the purchase price of raw hides and skins.
The rule was struck down by the
Supreme Court as violative of Article 301 and 304(a) of the
constitution with the following observation:
"...It
is therefore now well settled that taxing laws can be
restrictions on trade, commerce and intercourse, if they
hamper the flow of trade and if they are not what can be
termed to be compensatory taxes or regulatory measures.
Sales Tax, of the kind under consideration here, cannot be
said to be a measure regulating any trade or a
compensatory tax levied for the use of trading facilities.
Sales tax, which has the effect of discriminating
between goods of one State and goods of another, may
affect the free flow of trade and it will then offend
against Article 301 and will be valid only if it comes
within the terms of Article 304(a).
Article
304(a) enables the Legislature of the State to make laws
affecting trade, commerce and intercourse. It enables the
imposition of taxes on goods from other States if similar
goods in the State are subjected to similar taxes, so as
not to discriminate between the goods manufactured or
produced in that State and the goods which are imported
from other States....".
2. Video Electronics Pvt. Ltd. and
Another Vs. State of Punjab and Another and other petitions -
77 STC 82
In this case the Supreme Court
has given clear observations as to the circumstances in which
a legislation will be considered as violative of Article 301
and 304 of the Constitution of India.
In this case the same rate of
tax was charged on goods whether manufactured within the State
or purchased from outside the State. However exemption was
given to specify goods manufactured within the State for a
certain period and subject to conditions.
The Supreme Court upheld the
validity of granting of exemption for specified class of
dealers for limited period subject to conditions.
"A
backward State or a disturbed State cannot with parity
engage in competition with advanced or developed States.
Even within a State, there are often backward areas
which can be developed only if some special incentives
are granted. If the incentives in the form of subsidies
or grant are given to any part or unit of a State so
that it may come out of its limping or infancy to
compete as equals with others, that does not and cannot
contravene the spirit and the letter of Part XIII of the
Constitution. However, this is permissible only if there
is a valid reason, that is to say, if there are
justifiable and rational reasons for differentiation. If
there is none, it will amount to hostile
discrimination".
The Supreme Court also made the following observations as to
the circumstances which may amount to discrimination.
"The granting of exemption
from tax by a State to a special class for a limited period on
specific conditions, while maintaining the general rate of tax
on goods manufactured by all the producers in the State who do
not fall within the exempted category at par with the rate
applicable to imported goods, does not interfere with the
freedom of trade and commerce envisaged by Article 301.
If the power of granting
exemption from tax is exercised in a colourable manner
intentionally or purposely to create unfavorable bias by
prescribing a general lower rate on locally manufactured goods
either in the shape of general exemption to locally
manufactured goods or in the shape o a lower rate of tax, such
an exercise would be struck down by the Courts."
The denial of input credit on
purchases from outside the State may be challenged by those
opposed to VAT. The urgent need is to over come the
constitutional constraint by suitable legislative changes.
What then is the
alternative?
The discussion paper of Maharastra has
suggested the replacement of the Central Sales Tax by a
Central Purchase Tax to be levied by the importing State, and
allow input tax rebate. This will need amendments to Article
269, Article 246(1) and an amendment to the relevant Entry 92A
& 92-B of Union List (List-I) of the Constitution.
What is your
suggestion?
I
look forward to your views.
I
shall be posting my views shortly.
S. SRIDHARAN
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