Background
The State of West Bengal, with effect from 01 April 2012, had introduced an ‘Entry Tax’ on entry of specified goods into the state of West Bengal for sale, use or consumption into the state. In November 2012, the levy was challenged before the Hon’ble High Court by a set of petitioners challenging the constitutional validity of the tax, on the grounds that the same was not compensatory in nature and was enacted without prior assent from the President of India.
Issue
Is the West Bengal Entry Tax Act constitutionally valid?
Contention:
Counsel for the Writ Petitioners:
The Counsel for writ petitioners challenged the constitutional validity and compensatory nature of tax vehemently, inter alia, on following grounds:
• Tax is in violation of Article 301 of Constitution of India (‘COI’) i.e. it restricts free trade, commerce and intercourse through territory of India.
• Tax is in violation of Article 304 of COI as the specified goods on which such tax is levied are already subject to tax under the local VAT laws and accordingly, tax is discriminatory in nature.
• Tax is in violation of Article 304 of COI as the prior assent of Hon’ble President of India has not been taken.
• Tax is in violation of Article 286 of COI to the extent it proposes to levy tax on entry of goods imported from outside India.
• Tax is not compensatory in nature as no direct and inextricable benefits are passed on to taxpayers against payment of tax.
• State has failed to discharge the onus of proving that tax is compensatory in nature as the tax proceeds are credited to consolidate fund of state i.e. general revenue for the state.
• Compensatory Tax is based on nature of recompense/reimbursement, which is not proved in the instant case
• Tax makes products of importers in the state expensive and costlier, making them uncompetitive as compared to manufactures in state/outside states. Tax is counter-productive.
Counsel for the State:
The Counsel for State raised, inter alia, following arguments:
• Tax provides for creation of compensatory tax fund from where the proceeds will be utilized for specified purposes of facilitating trade and commerce.
•Tax provides for uniform, non-discriminatory rate of taxation in respect of goods brought from outside the state and goods manufactured/produced locally.
• Tax is levied upon entry of goods, which is post importation of goods. Accordingly, Article 286 is not attracted as the same restricts state(s) power to levy tax on sale/purchase of goods.
Observations of the High Court:
After hearing the submission made by both parties and various judicial precedents quoted by both parties, the Hon’ble High Court observed, inter alia, following points:
• The objects of specified compensatory fund set up by the State do not fulfil the principles of equivalence, as the objects are general in nature and not specific for the taxpayers.
• The State has failed to discharge the burden to show that tax is compensatory in nature.
• Tax is contrary to the intention of the legislature as it is contrary to provision of Article 301 of COI relating to restrictions on trade, commerce and intercourse through states.
• Constitutional validity of similar tax in some other states has been upheld on basis of data and materials disclosed which provides specific, measurable benefits to class of tax payers. The State has failed to produce any such data/information.
• Tax can be said to be compensatory if tax is a recompense for specific, tangible and measurable benefits for taxpayers as a class.
• The State has failed to obtain prior assent of Hon’ble President of India.
Decision:
The Single Member Bench of the Calcutta High Court, Justice Indira Banerjee on 26 June 2013 struck down the West Bengal Tax on Entry of Goods into Local Areas Act, 2012, and held it as ultra vires, on the ground that the state has failed to discharge the burden of showing that the levy is compensatory in nature and hence is ultra-vires of Article 301 read with Article 304 (a) & 304 (b) of the Constitution of India.
Later:
The Court has given a six-week stay on the implementation of its judgment so that the parties can move against the order.
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