Article 301 of the Constitution ensures the freedom of trade commerce and intercourse throughout Indian territory and this cannot be denied or discriminated against while imposing sales tax. This was stated by the Supreme Court while interpreting Article 301 in conjunction with Article 304(a), in State of Uttar Pradesh & Anr. vs M/s.Laxmi Paper Mart & Others, JT 1997 (2) SC 238. The facts revealed that exercise books manufactured from paper purchased within UP were being exempted from sales tax while all other kinds of exercise books were being subjected to a 5 per cent sales tax.
The high court considered three situations viz: (i) exercise books made from paper purchased from within Uttar Pradesh; (ii) exercise books made outside UP but sold in the state; (iii) exercise books manufactured in UP using paper bought from outside the state.
Dealing with situation (ii) the HC held that by imposing sales tax on such exercise books, the State was violating Article 301 read with Article 304(a). The apex court upheld this verdict and stated that the state was indeed offending clause (a) of Article 304.
Article 301 of the Constitution provides that subject to other provisions of Part XIII of the Constitution, trade, commerce and intercourse throughout the territory of India shall be free. The main objective of this Article is to ensure that the economic unity of India is not damaged by internal barriers. The freedom is subject to restrictions imposed by laws authorised by Articles 302 and 304, but it cannot be taken away by a mere executive act. Tax laws directly and immediately restricting trade falls within the purview of Article 301.
Section 304(a) permits the state legislature to tax goods from other states, provided similar goods are produced within the state and are subjected to similar taxes, so as not to discriminate between goods imported and those manufactured within the state. By this clause, the principle of freedom of inter-state trade and commerce declared in Article 301 is subordinated to the state power of taxing goods imported from other states.
Explaining the rationale behind this judgement, the court stated that its decision in ATM Mehtab Majid & Co vs State of Madras (1963 Suppl.(2) SCR 435), clearly governed the issue. The said decision considered a situation where the state of Madras subjected the tanned hides/skins imported from outside and sold within the state to a higher rate of tax compared to the hides/skins tanned and sold within the state. Similarly, it subjected the imported raw hides/skins tanned within the state to a higher tax compared to raw hides/skins purchased in the state and tanned within the state. The following holding in the said decision is relevant:
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 state legislatures to make laws affecting trade, commerce or 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 goods imported from other states. This means that the sales tax on tanned hides or skins imported from outside is subject to a higher tax by the application of the proviso to sub-rule of r.16 of the Rules, then the tax is discriminatory and unconstitutional and must be struck down.
Recently, clause (a) of Article 304 was considered in Shree Mahavir Oil Mills & Anr vs State of J&K (JT (1996)10 SC 837). It was pointed out that the aforesaid clause though worded in positive language has a negative aspect. It is, in truth, a provision prohibiting discrimination against the imported goods. In the matter of levy of tax and this is important to bear in mind the clause tells the state legislatures: tax you may the goods imported from other states/union territories, but do not, in that process, discriminate against them vis-a-vis goods manufactured locally. In short, the clause says: levy of tax on both ought to be at the same rate. This was and is a ringing declaration against the states creating what may be called tax barriers or fiscal barriers, at or along their boundaries, in the interest of freedom of trade, commerce and intercourse throughout the territory of India guaranteed by Article 301.
Once the discrimination was cleared, the courts enquiry came to an end. The price structure of imported goods vis-a-vis locally manufactured goods or the economics of the importer was not considered.
The decision thus establishes the principle that exercise of power under Article 304 can only be effective if the tax or duty imposed on goods imported from other states and the tax imposed on similar goods manufactured within the state are the same.
The main objective of Article 301 is to ensure that the economic unity of India is not damaged by internal barriers. The freedom is subject to restrictions imposed by laws authorised by Articles 302 and 304, but it cannot be taken away by a mere executive act.
