The Supreme Court upheld the demand of entry tax by states for allowing goods and raw materials into their territories. A nine-judge

Constitution Bench declared it did not restrict freedom of trade or other constitutional provisions on inter-state trade. However, the taxing measure should not be discriminatory and restrict entry of goods from other states. In a majority verdict of 7:2, the Bench, headed by Chief Justice T S Thakur, said the compensatory tax theory as evolved in earlier judgments has no juristic value and is over-ruled.

  1. States are well within their right to design their fiscal legislations to ensure that the tax burden on goods imported from other States and goods produced within the state fall equally. Such measures, if taken, would not contravene Article 304(a) of the Constitution. The question whether the levies in the present case indeed satisfy this test is left to be determined by the regular benches hearing the matters.
  2. According to estimates, states would gain about Rs 35,000 crore from entry tax after this verdict
  3. Separate minority judgments were delivered by Justices D Y Chandrachud and Ashok Bhushan which held as unconstitutional the power of the states to legislate their entry tax laws. Judge Bhanumathi preferred to write a separate judgment, saying she had difference of opinion on one or two points only, but otherwise was in agreement with the majority view.
  4. The majority verdict said if taxing law is non- discriminatory, it can be said to be constitutionally valid without the legislation having to go through the test or the process envisaged by Article 304(b).
  5. Constitutional validity of any taxing statute has, therefore, to be tested only on the anvil of Article 304(a) and if the law is found to be non-discriminatory, it can be declared to be constitutionally valid without the legislation having to go through the test or the process envisaged by Article 304(b).
  6. The majority verdict said “the compensatory tax theory evolved in Automobile Transport case and subsequently modified in Jindal's case has no juristic basis and is therefore rejected”. It said that only such taxes as are discriminatory in nature are prohibited by Article 304(a) and it follows that levy of a non-discriminatory tax would not constitute an infraction of Article 301.
  7. Jindal Steels Ltd was the first to challenge the entry tax levied by Haryana in 2002. Later, other manufacturing companies such as Vedanta, Reliance, Steel Authority of India Ltd and Hindalco followed. According to these firms, it was beyond the power of the states to impose entering its territory. 
  8. The essence of the guarantee in Article 304(a) lies in the same or similar goods being treated similarly in the matter of taxation. The question, therefore, is whether that guarantee is violated if the goods subjected to levy of entry tax are not produced or manufactured within the State levying the tax. Our answer is in the negative. This is because there is no question of any discrimination if goods from outside the state are not at a disadvantage vis-a-vis goods produced or manufactured within that State. It is true that a levy on goods that are not produced or manufactured in the state is likely to make such goods costlier but that is not enough for the levy to be considered unconstitutional,” the bench said.
  9. The apex court held that "a non-discriminatory tax does not per se constitute a restriction on the right to free trade, commerce and intercourse guaranteed under Article 301.
  10. It said a tax on entry of goods into a local area for use, sale or consumption therein is "permissible although similar goods are not produced within the taxing state. It said that incentives, set-offs granted to a specified class of dealers for a limited period of time in a non-hostile fashion with a view to developing economically backward areas would not violate Article 304(a).