Freedom of Trade, Commerce and Intercourse

Article 303(2) is the one exception: Parliament may do so if it declares by law that it is necessary for the purpose of dealing with a situation arising from scarcity of goods in any part of India. Note that no such power is given to a State.

Article 304(a) permits a State to tax goods imported from other States, but only so as not to discriminate: the tax must be one to which similar goods manufactured or produced in that State are subject. The test is equality of treatment, not the absence of a tax.

Article 304(b) permits a State to impose reasonable restrictions on the freedom in the public interest, and attaches a procedural condition: no Bill or amendment for that purpose may be introduced or moved in the State legislature without the previous sanction of the President.

Article 305 saves existing laws and laws providing for State monopolies. Article 306 is spent. Article 307 allows Parliament to appoint an authority to carry out the purposes of articles 301 to 304, and Parliament has never done so.

The compensatory tax doctrine, and its end

For fifty years the central question was whether a tax is a restriction on the freedom at all, and the answer was a doctrine the Constitution does not mention.

The problem. If every tax that made goods more expensive to move were a restriction under article 301, then almost every State tax on transport or entry would need the President's previous sanction under article 304(b), and States would be unable to fund the roads and bridges the trade actually uses.

The doctrine. The courts developed the idea of a compensatory tax: a levy which is really a charge for the use of trading facilities provided by the State, such as roads, is not a restriction on trade but a payment for what makes the trade possible, and therefore falls outside article 301 altogether. A compensatory tax needed no presidential sanction.

Its development. The doctrine emerged in Atiabari Tea Co Ltd v. State of Assam (1961), where a tax on goods carried by inland waterways was struck down as a direct and immediate restriction on movement, and was refined the following year in Automobile Transport (Rajasthan) Ltd v. State of Rajasthan (1962), which added the compensatory tax exception. For half a century the argument in every case was whether a particular levy was compensatory, and the tests for that grew increasingly elaborate.

Its abandonment. In Jindal Stainless Ltd v. State of Haryana (2016) a nine-judge Bench held that the compensatory tax doctrine has no basis in the Constitution and abandoned it. The reasoning, in outline, was that Part XIII contains no such exception, that the doctrine had been imported from an Australian and American context that the Indian text does not share, and that it had become unworkable. The Court held that a tax simpliciter is not a restriction on the freedom under article 301, and that what article 304(a) requires is non-discrimination: a State may tax goods from other States provided it taxes its own like goods in the same way.

The judgments in all three cases are in the case bank's queue and have not been read, so no citation is printed for any of them and none should be invented. What is described above is the doctrinal history, and a student writing on it should confirm the citations against a report.

The position now

Stated as a working test, which is what a problem question needs.

Is the impugned measure a tax? If it is, it is not by that fact alone a restriction under article 301. The question becomes whether it discriminates.

Does it discriminate against goods from other States? Compare the treatment of the imported goods with that of like goods produced within the State. If the imported goods bear a heavier burden, article 304(a) is violated and the levy is bad, and no presidential sanction can save it, because 304(a) is not subject to that proviso.

Is the measure a non-fiscal restriction? A licensing requirement, a quota, a checkpost delay, a prohibition on movement. Then article 301 is engaged directly, and the State needs article 304(b): a reasonable restriction in the public interest, with the previous sanction of the President, or subsequent assent, which article 255 permits to cure the want of previous sanction.

Is it Parliament that has acted? Then article 302 supplies the power, subject to the anti-discrimination rule in article 303(1) and its scarcity exception in 303(2).

What Part XIII means for federalism

Two observations belong in an essay.

It is a limit on the States that has no equivalent limit on the Union. Parliament may restrict the freedom in the public interest under article 302 with no procedural condition; a State needs the President's previous sanction under article 304(b). Article 303(1) does bind both, but only article 303(2) provides an escape, and only for Parliament. The asymmetry is deliberate and it is another instance of the general tilt.

Its practical importance has fallen sharply since 2016. The goods and services tax subsumed entry tax, octroi, central sales tax and most of the levies that generated Part XIII litigation, and abolished the check posts that were the visible form of the problem. What Part XIII was trying to achieve by prohibition, article 246A has largely achieved by unification. That is worth saying, because it is an example of a constitutional problem solved by redesign rather than by adjudication.

A worked example

State Z levies an entry tax on goods brought into the State for consumption, at a rate of two per cent. Goods manufactured within the State are subject to a local levy at one per cent. The Bill was passed without the President's previous sanction. Separately, State Z requires every vehicle carrying goods into the State to obtain a permit, for which it charges a fee said to cover the cost of maintaining the roads used.

The entry tax. Since Jindal Stainless a tax simpliciter is not a restriction under article 301, so the question is not whether the tax burdens trade but whether it DISCRIMINATES. Article 304(a) permits a State to tax goods imported from other States only so as not to discriminate, that is, only a tax to which similar goods produced in the State are subject. Two per cent against one per cent is discriminatory on its face, and the tax fails. Note that article 304(a) is not subject to the previous-sanction proviso, so no assent could cure it.

The permit requirement. This is not a tax but a non-fiscal restriction on movement, so article 301 is engaged directly. The State needs article 304(b): a reasonable restriction in the public interest, with the previous sanction of the President. That sanction was not obtained.

Can the want of sanction be cured? Article 255 provides that an Act is not invalid for want of a recommendation or previous sanction if the necessary assent was in fact given. So if the Bill was reserved and received the President's assent, the defect is cured; if it was simply passed and assented to by the Governor, it is not.

What the compensatory tax doctrine would have done. Before 2016 the State would have argued that the permit fee was compensatory, a charge for the trading facility of the roads, and therefore outside article 301 altogether. Jindal Stainless abandoned that doctrine, so the argument is no longer available.

Quick revision

• Article 301: trade, commerce and intercourse throughout the territory of India shall be free, subject to the rest of Part XIII.
• Article 302: Parliament may restrict in the public interest. Article 303(1): no preference or discrimination between States by either legislature, with a scarcity exception in 303(2) available only to Parliament.
• Article 304(a): a State may tax imported goods only so as not to discriminate against them. Article 304(b): reasonable restrictions in the public interest, with the previous sanction of the President.
• The compensatory tax doctrine, from Atiabari and Automobile Transport, held that a charge for trading facilities fell outside article 301. Jindal Stainless (2016), nine judges, abandoned it.
• The current test is non-discrimination: a tax simpliciter is not a restriction, and article 304(a) asks whether like goods produced in the State bear the same burden.
• GST has taken away most of the litigation by removing the taxes that caused it.

Test yourself

1. How does article 301 differ from section 92 of the Australian Constitution in its wording, and what follows?

2. Distinguish the powers of Parliament under article 302 from those of a State under article 304, and identify the asymmetry.

3. What was the compensatory tax doctrine, in which cases did it develop, and on what reasoning was it abandoned?

4. State the current working test for a fiscal and for a non-fiscal measure under Part XIII.

5. Why has the practical importance of Part XIII fallen since 2016?