Free Trade and Taxing Power of the States Under

the Constitution of India

Varghese George Thekkel

Introduction
Provisions of our Constitution manifest the unitary nature of the ‘Union of India.’ The
Constitution is designed to meet divisive tendencies that may manifest themselves in
different forms. There are provisions which are calculated to resist these forces within the
constitution. Some of such manifestations are in the form of taxes, which erect economic
barriers within the country seriously jeopardizing the economic unity of the nation. Often
these taxes are imposed by the state legislatures on trade from other states to protect the
trade in the state from competition from them. This protectionist attitude would tend to
create independent economic areas within the country immune from competition from
other parts of the country.

Economic unity of the nation was one of the major concerns of the constitutional framers,
as reflected in the part XIII of the constitution. The provisions envisage meeting divisive
tendencies that may arise in the future. Art.301 reflects the benign thought of the
constitutional framers regarding economic unity of the nation. It states that ‘trade,
commerce and intercourse through out the territory of India shall be free.’ In Atiabari Tea
Co. Ltd v. State of Assam 1 (herein after Atiabari case) Supreme Court held that taxing
laws are not excluded from the operation of Art.301 and a law imposing tax has to
answer the requirements of the Art.301. Two major categories of taxing statutes that are
usually accused of being unconstitutional are Entry Tax and different sales tax
provision. 2

1
AIR 1961 SC 232
2
Now most of the states have shirted to VAT.

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Free Trade under the Constitution of India

Origin of the concept of commerce clause can be traced to the America constitution. 3 On
the face of it the commerce clause is nothing more than conferment of power on the
Congress “To regulate commerce with foreign nations, and among several states, and
with the Indian Tribes.” The court has construed the commerce clause both as grant of
power to the national government and as a limitation on the power of the states. Hence
the states do not have the power regarding matters related to inter-state commerce.

Part XIII of the constitution is inspired by the concept of commerce clause under the US
Constitution. The part deals with the domestic trade and commerce which extend to the
whole territory of India. Art.301 of the Constitution reads:

‘Subject to other provisions in this Part, trade, commerce and intercourse throughout the territory of India
shall be free.’

Trade can be either (1) inter-state 4 or (2) intra-state 5. As mentioned in the introduction
the purpose of introducing such provisions in the constitution is to safeguard the
economic unity of the country which is substantially diverse economically and socially.
Such provisions are absolutely necessary for maintaining the economic unity of a country
which is federally structured. The state legislatures may be swayed, in response to local
pressure, to take measure to take care of regional interests without any regard to national
economy as a whole 6. In long run any trade barrier between any states would
prejudicially affect the national interest by Balkanizing some areas from other parts of the
country. As different parts of the nation have complimentary role in economic progress of

3
Article I, s 8, cl.3 of the United States Constitution
4
Trade which is reaches beyond the boundary of one state and extends to two or more states.
5
Trade which is confined within the territory of a state
6
M.P. Jain; Indian Constitutional Law, fifth Edn. at page 742

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the country, such balkanization is highly undesirable to the prosperity of the country. The
resources of the country shall be pooled together for the common prosperity of the whole
nation. The national prosperity though economic unity is preferred over narrow regional
interests. The purpose of the free trade clause is explained by Prof. M.P. Jain in following
words

No federal country has an even economy. Some of its constituent units may be agricultural while others
may be industrial. Some states may produce raw materials while the processing and manufacturing
industries may be located in other states because of other favourable factors, like availability of cheap
labour or cheap electric energy. These circumstances create the possibility that the constituent units which
have the legislative power of their own may, to serve their own narrow and parochial interests, seek to
create trade barriers by restricting the flow of commodities either from outside or to other units 7.

Part XIII essentially lays down restrictions upon the power of parliament and the state
legislatures to impose restrictions upon trade, commerce and intercourse. Art. 301 states
that the trade, commerce and intercourse shall be free though out the territory of India.
The words ‘through out the territory’ of India removes all inter-state and intra-state
barriers and brings the effect, for the purpose of freedom of trade, that the entire country
is a unit. But this provision is made subject to the other provisions in Part XIII. Both
parliament and state legislatures are competent to put restrictions upon the free trade
under certain circumstances. Parliament can put any restrictions on the freedom of trade
and commerce in the public interest (Art. 302), except that it cannot give preference (to
one state over other) or make any discrimination (against one state over other) by virtue
of any entries in the legislative list relating to trade and commerce (Art.303 (1)) unless it
is necessary to do so to meet a situation created by scarcity of goods in any part of the
territory of India (Art.303 (2)) 8. The term ‘restriction’ in Art.302, is not qualified by the
word reasonable and hence the restrictions imposed by the parliament under Art.302 in
public interest need not be reasonable. Neither the parliament nor the state legislatures
have the power to discriminate between states. But as said earlier under Art. 303(2) the
parliament has the power to make such a legislation to meet a situation arising from of
scarcity in any part of India. Even the state legislature can impose discriminatory
7
Ibid at page 736
8
H.M. Seervai Constitutional Law of India Vol.3, 4th Edn. at page 2590.

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restrictions provided they are reasonable restrictions imposed in public interest provided
further that the President sanction the bill the before it is introduced in the state
legislature (304(b)). Such legislation would be valid even if it obtains the sanction of the
president subsequently (Art.255).

The words commerce and trade have received very broad interpretation by the Courts. It
has been understood as related to the movement of goods from on part to the other part of
the country. In short what is meant to be protected under the free trade clause is the free
movement of the goods through out the territory of the country. This has been
emphasized by courts in several cases. Moreover utmost sanctity has been attached to the
provisions by the court. In Atiabari case Supreme Court observed:

The provisions contained in Art.301 guaranteeing the freedom of trade, commerce and intercourse is not a
declaration of a mere platitude, or the expression of a pious hope of declaratory character; it is not a mere
statement of a directory principles of state policy; it embodies and enshrines a principle of paramount
importance that the economic unity of the country will provide main sustaining in the stability and progress
of the political cultural unity of the country 9.

It may be noted that the freedom under Art.301 is not an absolute freedom. Supreme
Court has held in Atiabari Case 10 Art.301 insulates only from direct and immediate
restriction to the free flow of trade. In other words an indirect or inconsequential
impediment on trade would not be hit by Art.301. Gagendragadar J observed that:

“Thus the intrinsic evidence furnished by some of the Articles of Part XIII shows that taxing laws are not
excluded from the operation of Art. 301; which means that tax laws can and do amount to restrictions
freedom from which is guaranteed to trade under the said Part.”

By appreciating the fact that the country is a federal country, He further observed that:-

9
Supra, foot note 1, at 247
10
Supra, foot note 1

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“Thus considered we think it would be reasonable and proper to hold that restrictions freedom from which
is guaranteed by Art. 301, would be such restrictions as directly and immediately restrict or impede the free
flow or movement of trade. Taxes may and do amount to restrictions; but it is only such taxes as directly
and immediately restrict trade that would fall within the purview of Art. 301. The argument that all taxes
should be governed by Art. 301 whether or not their impact on trade is immediate or mediate, direct or
remote, adopts, in our opinion, an extreme approach which cannot be upheld. If the said argument is
accepted it would mean, for instance, that even a legislative enactment prescribing the minimum wages to
industrial employees may fall under Part XIII because in an economic sense an additional wage bill may
indirectly affect trade or commerce”.

The position that only such taxes which directly impinge on the free trade would be hit by
Art.301 was reiterated by the Supreme Court in Kalyani Stores v. State of Orissa 11.

The kind of freedom contemplated under the Constitution is freedom from all kinds of
restrictions. Constitutional prohibition extends to all forms of restrictions 12. But it seems
that courts are more concerned about the restraints on the movement of goods. Further
certain activities may not be regarded as Trade, commerce or intercourse 13. It has been
held by the Supreme Court in Atiabari case 14 rejecting the contention that freedom under
Art.301 does not include freedom from tax, held that even a tax can be a restriction and
hence a tax which is restrictive of the freedom of trade is unconstitutional.

This position has been reaffirmed by the Court has held that Art. 301 guarantee freedom
from taxes also. In India Cement v. State of Andhra Pradesh, Supreme Court observed:

There can be no dispute that taxation is a deterrent against free flow. As a result of favourable or
unfavourable treatment by way of taxation, the course of flow of trade gets regulated either
adversely or favourably. If the scheme which Part XIII guarantees has to be preserved in national
interest, it is necessary that the provisions in the Article must be strictly complied with 15.

11
AIR 1966 SC 1686
12
District Collector v. Ibrahim AIR 1970 SC 1275 an attempt by a state to create a monopoly to deal in
sugar in favour of co-operative societies has been held to be violative of Art.301.
13
In State of Bombay v. R.M.D.C. AIR 1957 SC 699 it has been held that gambling is not a trade for the
purpose of Art.301. S.C. held that only lawful trading activities come under the purview of Art.301.
14
AIR 1961 SC 232
15
AIR 1988 SC 567 at 574

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But this impunity is not an absolute one. There are several entries in all the three lists
enabling the Parliament and the state legislatures impose tax in relation to trade,
commerce and intercourse 16. While determining the scope of the free trade due
consideration should be given to these entries.

It may be noted that only restrictions to the free trade is hit by the Article and regulatory
measures are not hit by Art.301. A law mandating the declaration of the goods by the
passengers passed through the state was held to be not violative of Art.301 which was
done for the purpose preventing evasion of sales tax 17 as it was only a regulatory measure
rather than a restriction.

Entry taxes

Art.301 in no case would give an absolute impunity from taxation. There are entries in all
the three lists which enable the parliament or the state legislatures to impose tax in
relation to trade. (List I entries 89 and 92A. List II entries 52, 54, 56 and 60. List III entry
35.) The freedom of clause in Art.301 cannot be extended to such an extent that it would
completely negate the taxing power of the state legislatures. This does not mean that
states can create trade barrier defeating the entire purpose of Art.301. Then question
becomes one of delicate balancing between free trade clause and taxing power of the
legislatures. It is pertinent to note that constitution itself allows exception to the free
trade in favour of parliament (art.302 and art.303 (2)) and state legislature (art.304) in
certain circumstances. This suggests that our constitutional framers never wanted it to be
an absolute right. 18 Thanks to several factors namely taxing power of the legislatures,
restrictions imposed by the Constitution, economic unity of the nation, playing at the

16
List I entries 89 and 92A. List II entries 52, 54, 56 and 60. List III entry 35.
17
State of Bihar v. Harihar Prasad, AIR 1989 SC 1119.
18
Further the provision was introduced in line with similar provision in the Australian Constitution (s.92),
which states that the trade shall be absolutely free. In India while we adopted the provision we deliberately
did not use the term absolutely to qualify the freedom given.

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same time it becomes a very difficult task for the judiciary to find the extend and ambit of
freedom of trade clause. The complexity in the interpretation is manifest in several
judicial pronouncements.

As it was already said judiciary is more concerned about the impediment to the free
movement of trade than other impediments. So judiciary is more likely to strike down a
statute imposing restraint to the movement of trade directly. Thus in Atiabari case
Supreme Court held:
“Our conclusion, therefore, is that when Art. 301 provides that trade shall be free throughout the territory of
India it means that the flow of trade shall run smooth and unhampered by any restriction either at the
boundaries of the States or at any other points inside the States themselves. It is the free movement or the
transport of goods from one part of the country to the other that is intended to be saved, and if any Act
imposes any direct restrictions on the very movement of such goods it attracts the provisions of Art. 301
and its validity can be sustained only if it satisfies the requirements of Art. 302 or Art. 304 of Part XIII” 19.

Court further observed:

…………when it is said that the freedom of the movement of trade cannot be subject to any
restrictions in the from of taxes imposed on the carriage of goods or their movement all that is meant is that
the said restrictions can be imposed by the State Legislatures only after satisfying the requirements of Art.
304 (b). It is not as if no restrictions at all can be imposed on the free movement of trade 20.

In effect it was held that a restriction on the movement of the goods can only be sustained
if and only if such legislations imposing tax, meets the requirements of Art.302 or
Art.304. Under art.302 the parliament is empowered to impose such restriction on
freedom of trade, commerce and intercourse between one state and another or within any
part of the territory of India in public interest. But the parliament while exercising this
power shall not discriminate between the states or give any preference to any state than
other states, except for the purpose meeting a contingency arising from scarcity of goods
in any part of the territory of India (art.303). State legislatures are also having power to
impose reasonable restrictions provided such legislation has obtained the sanction of the
president before the introduction of the bill in the state legislature (art.304) or after the

19
AIR 1961 SC 232 at page 254
20
Ibid at page 254

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passing of the bill (art.255). Further such a state legislation has to be reasonable, unlike in
the case of legislation by the parliament. Under art.304 state legislatures are also
empowered to impose any tax on goods imported from other states to which similar
goods produced in the state are subject, so, however, as not to discriminate between
goods so imported and goods so produced in the state. In short, the effect of Atiabari case
is that, a legislation imposing a restriction on the free movement of trade should be for
public purpose. In the case of a state legislation it has to be meet two additional
requirements that it must be reasonable and must obtain the sanction of the president. As
the Act under challenge had not obtained the sanction of the president it was struck down
as unconstitutional.

The decision had its adverse impact on the taxing power of the state. This virtually made
it necessary for the state legislature to obtain the sanction of the president to impose tax
under entries 52, 56 and 57 of the list II.

The impact of the Atiabari case on taxing power of the states was so grave that when
three appeals from Rajasthan which were pending before the Supreme Court, came
before the constitutional bench of the S.C. they were referred to a larger bench of
seven judges so that Atiabari case could be reconsidered 21. Thus Automobile
Transport (Rajasthan) Ltd v. State of Rajasthan22 was considered by a bench of
seven judges. On the passing of the Rajasthan Motor Vehicles Taxation Act, 1951
(Rajasthan Act XI of 1951) and the promulgation of the rules made thereunder the
second respondent demanded from the appellants payment of the tax due on their
motor vehicles. The first appellants were called upon to pay the due under R. 23 of
the Rajasthan Motor Vehicles Taxation Rules. When the appellants failed to pay the
tax demanded from them, the second respondent issued certificates under S. 13 of the
Act to the third respondent for recovery of the tax due as arrears of land revenue. On
receipt of the demand notices the second and the third appellants filed appeals before
the Transport Commissioner, Jaipur, under Section 14 of the Act. These appeals were

21
H.M. Seervai; Constitutional law of India Vol.3 fourth edn. at 2595
22
AIR 1962 SC 1406

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however, dismissed by an order of the Transport Commissioner. The first appellant
did not file any appeal. Thereafter the three appellants filed three separate writ
petitions in the Rajasthan High Court in which their main contention was that the
relevant provisions of the Act imposing a tax on their motor vehicles were
unconstitutional and void as they contravened the freedom of trade, commerce and
intercourse throughout the territory of India declared by Art. 301 of the Constitution
and therefore, the demand and attempted collection of such tax were illegal and
should be prohibited. The prayers which the appellants made in their respective writ
petitions were mainly these (1) that it be declared that the Rajasthan Motor Vehicles
Taxation Act of 1951 and the Rules made thereunder are invalid and not in
accordance with the provisions of the Constitution of India and consequently null and
void and inoperative, and (2) that a writ of prohibition or mandamus or any other
appropriate writ, direction or order directing the respondents not to realise any tax
from the appellants under the provisions of the Rajasthan Motor Vehicles Taxation
Act of 1951 be issued. These writ petitions were dismissed by the high court
observing that the tax did not restrict the free trade free trade directly. It was
observed that the effect on the freedom of trade was only ‘indirect’ and
‘inconsequential’. The matter was appealed to the Supreme Court and it was referred
to bench of seven judges.

On behalf of the states it was argued that sufficient importance has not been attached to
the power of the state legislature to raise revenue in relation to trade matters under the
Indian Constitution. The interpretation in Atiabari case would mean that state will have
to obtain the sanction of the president for introducing a regulation or control over the
trade. This would stop or delay effective legislation which may be urgently necessary.
Even such legislation as imposes traffic regulations would require the sanction of the
President.

On the other hand it was argued on behalf of the appellants that the tax imposes a direct
and immediate restriction on the movement of trade and commerce and the act imposing
tax has not been obtained the sanction of the president and consequently invalid. The

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court rejecting the argument that all state laws regulating the trade would require sanction
of the president to be valid observed:
“Such an interpretation would, in our opinion seriously affect the legislative power of the State
Legislatures which power has been held to be plenary with regard to subjects in list II. The States must also
have revenue to carry out their administration and there are several items relating to the imposition of taxes
in list II. The Constitution-maker's must have intended that under those items the States will be entitled to
raise revenue for their own purposes. If the widest view is accepted then there would be for all practical
purposes, an end of State autonomy even within the fields allotted to them under the distribution of powers
envisaged by our Constitution. An examination of the entries in the lists of the Seventh Schedule to the
Constitution would show that there are a large number of entries in the State list (list II) and the Concurrent
list (list III) under which a State Legislature has power to make laws. Under some of these entries the State
Legislature may impose different kinds of taxes and duties, such as property tax, profession tax, sales tax,
excise duly etc., and legislation in respect of any one of these items may have in indirect effect on trade and
commerce. Even laws other than taxation laws, made under different entries in the lists referred to above,
may indirectly or remotely affect trade and commerce. If it be held that every law made by the Legislature
of a State which has a repercussion on tariffs, licensing marketing regulations, price-control etc., must have
the previous sanction of the President, then the Constitution in so far as it gives planary power to the States
and State Legislatures in the fields allocated to them would be meaningless. In our view the concept of
freedom of trade, commerce and intercourse postulated by Art. 301 must be understood in the context of an
orderly society and as part of a Constitution which envisages a distribution of powers between the States
and the Union, and if so understood, the concept must recognise the need and the legitimacy of some
degree of regulatory control, whether by the Union or the States: this is irrespective of the restrictions
imposed by the other articles in Part XIII of the Constitution. We are, therefore, unable to accept the widest
view as the correct interpretation of the relevant articles in Part XIII of the Constitution” 23.

Regarding the argument that art.301 does not mandate freedom from taxation S.C. was in
agreement with its view in Atiabari case. But Court observed that the as per Art.265 no
tax can be collected without the authority of law, such law has to be in accordance with
the provisions of the Constitutions. Art. 245 confers legislative power to be exercised in
accordance with the provisions of the Constitution. In short even though power is
available to the state legislature to impose tax the same has to be exercised in accordance
with the provisions of the constitution.

23
AIR 1962 SC 1406 at Para 11

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In this case the court carved out an exception when tax inter-state tax would be valid.
Court held that there must be nexus between the tax imposed and facilities afforded to the
trade. The tax imposed must be proportional to the facilities afforded for such tax to be
upheld as Constitutional; in short the tax has to be compensatory in nature. The court
considered the facilities made available to the user of the motor vehicle and the annual
tax they are made to pay. Court stressed that a working test has to be applied in order to
find the compensatory nature of the tax. It was concluded that it would be impossible to
judge the compensatory nature of a tax by a meticulous test, and in the nature of things
that cannot be done. Court also found it unnecessary to put the proceeds of the tax into a
separate account so long as the state defrays the expenses of affording the facilities to the
traders.

Regarding the distinction between tax and fee Court considered it unnecessary to go into
the question to determine the compensatory character of the tax. Court observed:

“It was also pointed out to us that the taxes raised under the Act were not specially ear-marked for
the building or maintenance of roads. We do not think that these considerations necessarily determine
whether the taxes are compensatory taxes or not. We must consider the substance of the matter and so
considered. there can be no doubt that the taxes imposed are no hindrance to the freedom of trade,
commerce and intercourse. If a statute fixes a charge for a convenience or service provided by the State or
an agency of the State, and imposes it upon those who choose to avail themselves of the service or
convenience, the freedom of trade and commerce may well be considered unimpaired. In such a case the
imposition assumes the character of remuneration or consideration charged in respect of an advantage
sought and received” 24.

The effect of the observation is that the entry taxes should be more like fee than like tax
in order to be valid. The tax so collected has to be utilized for affording facilities. It
shall not be treated as a means of revenue augmentation. When the tax collected is
disproportionately higher than the facilities afforded such tax would a restriction of the
kind contemplated to be prevented by the Art. 301 of the Constitution.

24
Ibid at Para 21

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Court held that licensing of motor vehicles is regulatory and would not violate art.301.
Similarly, a fee for administrative purposes may also be viewed as a part of regulation.
Such licensing and fees fall outside Art. 301, because they cannot be viewed as
restrictions, and therefore do not need to be processed under Art. 304. Thus Automobile
case craved out an exception to the principle laid down by the S.C. in Atiabari case.
The effect of the case is that a tax which is essentially regulatory or controlling would not
be hit by art.301.

The position expounded in the Automobile case was upheld in G.K. Krishnan v. State of
Tamil Nadu25. It was held that if a tax is compensatory or regulatory, it cannot operate as
a restriction and hence would not be infringing art.301. A tax which is direct having the
effect of hindering the movement only would be violative of art.301. Regarding
determination of the compensatory nature of the tax court held that it cannot be said that a
tax is not compensatory for the reason that precise amount collected was not expended to
provide the facilities and ‘it would be impossible to judge the compensatory nature of a
tax by a meticulous test and in nature of things it could not be done’.

Over a period of time court started to give much liberal view with respect taxing power
of the states in matters related to trade. In International Tourist Corporation v. State of
Haryana 26 Supreme Court upheld the validity of a state legislation imposing tax on
vehicle using national high ways which is wholly maintained by the centre on the ground
that the tax is compensatory for state incurs expense in respect of lighting, traffic control,
amenities for passengers, halting places.

In Malwa Bus Service v. State of Punjab27 a state tax was upheld as compensatory despite
it was shown that the expenditure for providing the amenities was 34 crore and revenue
receipts was 50 crore. It was held that the burden imposed for the facilities shall not be
disproportionate to the expenditure involved in providing the facilities. It was held that
exact correlation between the expenditure and revenue receipt is impossible to attain. It

25
(1975)1 SCC 375
26
AIR 1981 SC 774
27
AIR 1983 SC 634

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would not be bad if in some cases the revenue receipt is marginally excessive having
regard to the total cost of expense.

In Meenakshi v. State of Karnataka 28 a tax imposed to compensate the revenue loss due
to abolition of octroi was held to be valid. Maharaja Tourist Service v. State of Gujarat
29
witnessed further dilution of the principle compensatory tax. A tax was upheld on the
basis of the existence of nexus between the subject and object of the levy. It is not
necessary to show that the whole or substantial part of the tax collected was utilized.

Bhagatram Rajeevkumar v. CST, M.P. 30 was a deadly blow to the principle of

compensatory tax, wherein it was held:-
‘The concept of compensatory tax has been widened and if there is substantial or even some link between
the tax and the facilities extended to such dealers, directly, or indirectly the levy cannot be impugned as
invalid’

The effect of this is that a tax which has some link with the facilities extended would be
valid. The facilities need not be even directly extended to the tax payer. Even an indirect
benefit derived would be sufficient to justify the tax. Virtually this position made it
impossible for a tax payee to successfully challenge the validity of any tax imposed by
the state of whatever nature. It is submitted that the decision is not in consonance with the
ratio laid down by the seven judge bench of the S.C. in Automobile case 31. It is obligatory
on the part of the state to show that the tax imposed and the facilities provided must have
some proportional relationship. If a tax which is not having any direct nexus with the
facilities extended shall be of restrictive nature and will be violative art.301 of the
constitution. The interpretation given by the court in the case would have the effect of
negating the entire purpose art.301. A tax imposed by a state even if its direct effect is
restriction on the trade would be valid if the state shows that it has some indirect
connection with the facilities given. This would mean that the state can impose burden
for the purpose augmenting revenue. Compensatory tax is an exception carved out by the

28
AIR 1983 SC 1283
29
AIR 1991 SC 1650
30
1995 Supp(1)SCC 673
31
AIR 1962 SC 1406

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court in the Automobile case to freedom of trade clause under art.301. It was perceived
that tax which proportional to the facilities have a positive impact on the freedom of
trade. Income generated by such a tax can be utilized for the betterment of the facilities
extended by the state which would in turn help trade rather than restricting it.

The principle underwent further erosion in State of Bihar v. Bihar Chamber of

Commerce 32. Bihar legislature levied a tax on entry of goods into a local area for
consumption, use or sale. The tax was levied under entry 52 33 of the List II. It was
challenged as violative of art.301. It was argued for the state that the tax is compensatory
in nature and hence falls beyond the purview of art.301. In the case state gave nothing to
show that the tax is compensatory in nature. Court felt that ‘judicial notice can be taken
of the fact that the state does provide several facilities to the trade including laying and
maintenance of roads, water ways and markets, etc. Since the levy is by the state, court
must also look to the facilities provided by the state for ascertaining whether the state has
established the compensatory character of the tax. On this basis it must be held that the
state has established that the impugned act is compensatory in nature. The finding is by
itself sufficient to negative the attack based on art.301’. The court also held that ‘for the
purpose of establishing the compensatory character of a tax it is not necessary to show
that every rupee collected was spent for extending facilities. It is enough some connection
is established between the tax and the trading facilities provided. The connection can be
direct one or indirect one’.

It can be seen that the concept of compensatory tax has been constantly diluted by the
judiciary. The effect of it would be the total overriding of the freedom of trade by the
taxing power of the states.

In Jindal Stainless Ltd v. State of Hariyana 34 Supreme Court was caught up by the
possibility of entry taxes resulting in economic balkanization of the country. When the
matter originally came before division bench of the court it was referred to a bench of

32
AIR 1996 SC 2344
33
‘Taxes on the entry of goods into local area for consumption, use, or sale therein.’
34
(2006) 7 SCC 241

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five judges as the bench doubted the correctness of the ratio in Bhagatram Rajeevkumar
and State of Bihar v. Bihar Chamber of Commerce. In the case Hariyana Local Area
Development Tax Act 2000 was challenged as violative of art.301. The act provided for
the levy and collection of tax on entry of goods into the local areas of the State for
consumption or use therein. The Act was enacted for levy and collection of tax on the
entry into the local area of the state, of a motor vehicle for use or sale, and for other
goods for use or consumption therein. The entire state is divided into local areas. The Act
covers not only vehicles bringing goods into the state but also vehicles carrying goods
from one local area to the other. Further s.22 of the Act provided that the tax collected by
the state under the Act shall be distributed among the local bodies. An amendment to s.22
was brought to the effect that the money collected through the tax shall be used for
facilitating free flow of trade and commerce. Court considered the purpose of Art.301
and the evolution of the concept of compensatory tax. The court was satisfied that the
judgment in Bhagatram Rajeevkumar is not in conformity with the judgment of seven
judge bench in Automobile case. It was observed by the court that in the above cases the
learned judges did not consider it necessary to put the burden on the state to furnish the
details of facilities provided to the traders and the expenditure incurred or incurable
thereafter. Court explained the effect of the cases in following words:-

“…… the pre-1995 decisions held that an exaction to reimburse/recompense the State the cost of existing
facility made available to the traders or the cost of specific facility planned to be provided to the traders is
compensatory tax and that is implicit in such levy that it must, more or less, be commensurate with the cost
of service or facility. Those decisions emphasized that the imposition of tax must be with the definite
purpose of meeting the expenses on account of providing or adding to the trading facilities either
immediately or in future, provided the quantum of tax is based on a reasonable relation to the actual or
projected expenditure on the cost the service or facility. However, post-1995 decisions in Bhagatram case
and in Bihar Chamber of Commerce now say that even if the purpose of imposition is not merely to confer
a special advantage on the traders but to benefit the public in general including the traders , that levy can
still be considered as to be compensatory. According to this view, an indirect or incidental benefit to traders
by reason of stepping up of the developmental activities in various local areas of the state can be brought
within the concept compensatory tax, the nexus between the tax know as compensatory tax and the trading
facilities not being necessarily either direct or specific” 35.

35
Ibid at p. 252

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In clear terms court held that it is not sufficient to have some indirect connection with tax
collected and the trading facilities in the state, but there must exist actual or direct
connection between the tax and the trade facilities.

Court observed that the commerce clause is limitation on the power of the state and it is
not dependent on any law being enacted. Hence the state cannot enact a law that impedes
the free flow of the trade between the states. Court held that the basis of the working test
under Automobile case is the doctrine of direct and immediate effect mentioned in
Atiabari case. Therefore whenever a law is impugned as violative of art.301, the court
will have to examine the effect of the operation of the impugned law on the inter-state
and the intra-state movement of goods, which movement constitutes an integral part of
trade. The concept of compensatory tax is not there in Constitution but is judicially
evolved in Automobile Transport Case. In the generic sense tax, toll, subsidies, etc. are
manifestations of the exercise of the taxing power of the state. Taxation is also a measure
of regulation. If the impugned Act seeks to control/regulate the conditions under which
an activity like trade is to take place then such law is regulatory and not inconsistent with
Art.301.

Court explained the difference between tax and fee. Tax is levied as a part of common
burden. In the case of tax there is no identification of any specific benefit and even if
such identification is there, it is not capable of direct measurement. In the case of tax, a
particular advantage, if it exists at all, is incidental to the state action. On the other hand
fee is on the principle of equivalence. In the case of fee or compensatory tax the principle
of equivalence applies. The basis of the fee and compensatory tax is the same. The
benefit should measurable or quantifiable. Compensatory tax or fee has to be broadly
proportional to the benefit derived. The value of the quantifiable benefit is represented
by the costs incurred in procuring the facility i.e. amount derived as tax shall be
proportional to the cost of the facility provided. Incidental net revenue may not make it
not compensatory in nature. If the effect of the tax is that it impedes the trade then
Art.301 is violated.

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The court has to see whether the impugned enactment contains any quantifiable data on
the basis of which compensatory tax is levied. The Act must facially indicate the benefit
which is quantifiable. It must broadly indicate proportionality to quantifiable benefits. If
the Act does not indicate the benefit, the burden will be on the state as a service/facility
provider to show by placing material before the court, that the payment of the
compensatory tax is a reimbursement/recompense for the quantifiable/measurable benefit
provided or to be provided to the tax payers. The court thus overruled the decision in
Bhagatram Rajeevkumar to the above extend there by reinstated the position in
Automobile case.

When the court is seized with the exercise balancing the taxing power of the states and
free trade under art.301 of the constitution none could be disregarded and maximum
scope should be given to both. Constitution on the one hand says that trade shall be free
through out the territory of India on the other hand confers power on the state legislatures
to impose taxes on the entry of goods into a local area for consumption, use or sale
therein. 36 When the power to tax is given specifically can it be said that imposing a tax
would be restriction on the free trade? This question it seems that has been answered by
the court in the Atiabari case that a tax can be a restriction of the free trade. The position
is correct since although the state legislature has the power to impose tax, the same has to
be exercised in conformity with the provisions of the constitution. 37 If the taxing power is
exercised not in conformity with the provisions of the constitution such exercise would
be invalid.

VAT and Commerce clause

Free trade among the states is often hampered by the trade barriers created by different
sales tax rates prevalent in different states, and multiple taxations. Low Sales tax was one

36
Entry 52 of List II
37
Art.245 (1) reads;- Subject to the provisions of this Constitution Parliament may make laws for the
whole or any part of the territory of India and the Legislature of a State may make laws for the whole or
any part of the State.

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of the major tools used by the states to attract industries to the respective states, resulting
in a tax war between the states. The conformity of this position to the Constitutional
mandate of ‘free trade through out the territory of India’ had to be doubted. The VAT 38
was contemplated as solution to the problems of double taxation of commodities and
multiplicity of taxes, resulting in a cascading tax burden.

VAT was first adopted by Brazil and now almost 130 countries follow this system, 39
which includes many developing countries. 40 This is a much broader form of tax than
income tax or corporation tax, since it applies to potentially to any economic transaction
under which anyone adds value to any business activity. 41 It is an indirect tax as it is
taxed as part of the price of the goods. Although the VAT is collected from the
consumers the legal obligation to account for the tax is on the person who supplies the
goods. So the tax payer is not the ‘taxable person.’ 42

The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect
through the concept of input tax credit/rebate. This input tax credit in relation to any
period means setting off the amount of input tax by a registered dealer against the amount
of his output tax, (tax payable would be the amount obtained after such set-off). The
Value Added Tax (VAT) is based on the value addition to the goods, and the related
VAT liability of the dealer is calculated by deducting input tax credit from tax collected
on sales during the payment period. 43

38
In VAT when the goods are sold the value additions to them in such transactions are taxed. Thus VAT is
collected at each point of value addition. In other words it is a multipoint tax, since tax is paid at different
stages. It would be a levy under entry 54 of the constitution.
39
White Paper on State Level value added Tax by empowered committee of sate finance ministers dated
January 17; 2005.
40
Dr. S.B. Singh; A proposed model for VAT and its revenue implications.
http://www.stvat.com/strvat/pages/article/arhart/proposedmodel.htm; visited on 25-05-08.
41
Geoffrey Morse & David Williams; Davis: Principles of Taxation, 5th Edition, Thomson, Sweet &
Maxwell, at page 405.
42
Ibid at page 409.
43
White Paper on State Level value added Tax by empowered committee of sate finance ministers dated
January 17; 2005.

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Under ideal VAT there will not be several tax rates for the goods. Basic VAT rates would
be 4% and 12.5%. In addition to it there would be a special category of tax exempted
goods and a special VAT rate of 1% for ornaments. 44

The following illustration will show how does VAT work:-

A sell wood to B for Rs. 10/- to which VAT at 12.5% is added. B would be purchasing it
for 10+1.25=11.25 rupees. In this A would keep Rs.10/- with him and pay 1.25 as VAT.
B turns the woods into pieces of furniture, then sold it to C for 20 plus 12.5% VAT which
22.5 rupees. B would retain rupees 20 as that is the price of the furniture. Since he has
45
paid already 1.25 as VAT while purchasing wood that would credited to him, and he
has to pay tax only for the value addition, at the rate of 12.5%. In this case the value
addition is Rs 10/- and VAT for the same would be 1.25 rupees. B can collect the 12.5%
of rupees 20 from C (that is 2.50 rupees) and retain the amount he has paid by way of
VAT while purchasing the wood from A (1.25 rupees). He would pay the remaining 1.25
to the VAT authorities as tax on the value addition.

Previously we had sales tax system in which the tax was born by the residents of the
states, who consume the goods. Sale tax to be born by the residents of a state per se is not
unconstitutional as inhibiting free trade. Sale taxes fall within the exclusive domain of the
state legislatures, 46 but inter-state sale or purchase is in the domain of the parliament.47
But even in the case of inter-state sale such taxes collected by the Union shall be assigned
to the states. 48 Such proceeds from the tax shall be distributed among those states in
accordance with the principle parliament may by law formulate. 49 Parliament has enacted
Central Excise Act for the purpose and the principles of distribution of the proceeds of
the inter-state tax are determined therein. The crucial distinction between the sales tax

44
ibid.
45
This called the input Tax credit.
46
Entry 54 of the state List.
47
Entry 92A of the Union List.
48
Art.269 (1) of the Constitution.
49
Art.269 (2) of the Constitution.

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principle and the CST is that former is destination based and the latter is origin based.
Even the VAT is based on destination.

This would create conflict between the VAT and the CST in the implementation level,
especially regarding allowing the input credit. Assume a case where an industry in
Maharashtra purchase raw materials from the Karnataka for which Central Excise Tax
has to be paid. But since the CST is origin based such tax collected would go to the
Karnataka state. Since Maharashtra is not benefited by the CST it will not give any input
credit to the raw materials so procured while such input credit would be available with
respect to the raw materials procured from Maharashtra. This would result in such
finished product, manufactured using the raw materials brought from other states,
becoming less competitive in the Maharashtra Market as compared to the industries using
the raw materials available locally, which would create distortions in the competition. It
may be noted under the VAT system Tax paid on inputs procured from other States
through inter-State sale and stock transfer will not be eligible for credit. 50 This creates
economic distortions in the country which would prove prejudicial to the economic
integration of the country. To tide over such economic distortions the industry will have
to relocate such place to derive maximum tax benefit. This would result in a lot of
expenditure on account of relocation, logistics, compliance etc. 51This creates doubts
regarding the constitutionality of system.

Art. 301 of the Constitution mandates the free trade, commerce and intercourse through
out the territory of India. In the above illustration the trader who procures raw material
form Karnataka would be placed in a less advantageous position when compared with the
one who procures it locally. This would militate against Art.301 of the Constitution.

Central Sales Tax being a law made by the parliament it has to be test whether the
parliament has the power to make such discrimination under the part XIII of the

50
White Paper on State Level value added Tax by empowered committee of sate finance ministers dated
January 17; 2005.
51
Sachin Menon & Santosh Dalvi: An ideal alternative to Central Sale Tax in the VAT Regime;
http://www.stvat.com/strvat/pages/article/arhart/cstinvat.htm visited on 25-05-2008

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constitution. 52 Art.303 denies both the parliament and the State legislatures the power to
discriminate against any state, except in the event of scarcity of goods in any part of India
parliament may make such laws. The constitutional validity of the not allowing the input
credit to goods brought from other states has to be tested in the light of this prohibition.

The question of violation of Art. 14 also may arise in such a scenario, since it involves
discrimination between goods from one state and another. Whether such discrimination is
constitutionally sustainable or not is a paramount question. Such discrimination is the
kind of which is expressly prohibited by the constitution under Part XIII.

Further such a discriminatory taxation has implications regarding the right to carry on
any occupation, trade or business enshrined under Art. 19 of the Constitution. Reasonable
restrictions can be imposed on this right in the public interest only. An adverse
discrimination which is has bearing on this right and has nothing to do with the interest of
the public 53 will not pass the constitutional muster, and would liable to be struck down on
account of violating the right to carry on any occupation, trade or business.

Such provisions have to be appreciated in the light of Ataibari 54 case in which it was held
that tax laws are also subject to the provisions of the Part XIII, violation of which would
render such laws invalid.

In A.T.B. Mehtab B. Majid & Co. vs. The State of Madras 55 Rule 16 of Madras General
Sales Tax (Turnover and Assessment) Rules, 1939 was challenged as violative of the
constitution. The petitioner was a dealer in hides and skins. Rule 16 imposed certain tax
on the skin or hides tanned outside the state while exempting skins and hides tanned in
the state. The effect of this rule is that tanned hides or skins imported from outside the
State and sold within the State are subject to higher rate of tax than the tax imposed on
hides or skins tanned and sold within the State. It was held that “it is now well-settled that

52
Since the Art. 301 is subject to the other provisions of the Part XIII.
53
In a sense it increases the burden of the public by double taxation which has to borne by the public at the
end.
54
AIR 1961 SC 232
55
AIR 1963 SC 928

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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)." it was
held that rule 16 is invalid.

Court’s aversion of the discriminatory sale tax practices is manifest in these decisions.
Courts have always discouraged discriminatory taxation of goods from other states. In H.
Anraj vs. Tamil Nadu, 56 S.C. struck down the discriminatory taxation against lotteries
from states other than Tamil Nadu. Lotteries from other states sold in Tamil Nadu, were
subject to the tax, while lotteries from the state were exempted.

In Weston Electroniks vs. State of Maharashtra 57, S.C. struck down higher rate of tax
imposed on goods imported from other states than goods from the state of Maharashtra,
than the goods manufactured locally. The court observed that the provision is violative of
the Art. 301 of the Constitution and hence unconstitutional.

India Cements vs. state of Andra Pradesh 58 the State of Andhra Pradesh in exercise of
powers conferred under Sub-section (1) of Section 9 of the Andhra Pradesh General Sales
Tax Act, 1957 by an order reduced the rate of tax on sale of cement made to the
manufacturing units of cement products in the State of Andhra Pradesh. And the State of
Andhra Pradesh and Karnataka by invoking there power under s.8 (5) of the Central Sales
Tax Act, 1956 reduced the tax payable on inter-state sale of cement. All the three order
were challenged as violative of Art. 301 of the constitution. Court observed that “In cases
the notifications operate against the provisions of Article 301 of the Constitution, they
have got to satisfy the requirements contained in that Part.” Court felt that Taxation is a

56
MANU/SC/0318/1985; AIR 1986 SC 63.
57
AIR 1988 SC 621
58
AIR 1988 SC 567

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deterrent and the provisions of the Part XIII has to be complied with strictly. Court came
to the conclusion that both the notifications that favoured the local manufacturers over
the manufacturers from other states, and hence violative of the constitution and hence
liable to be quashed.

Video electronic Pvt. Limited vs. state of Punjab 59 in this case it was held that taxes
which do not directly or immediately restrict or interfere with Trade would be excluded
from the ambit of Art. 301. It was also held that states’ plenary power to raise revenue
under different entries List II of seventh can be exercised without the prior assent of the
president. Court felt that the concept of economic barrier is a dynamic concept and has to
be understood according to the changing circumstances. In this case the court upheld the
power to grant exemption or to reduce the rate of tax in special cases for achieving the
industrial development or to provide tax incentive to attain economic equality in growth
and development was upheld.

CST is origination based and the VAT is consumption based. CST the tax collection is
retained by the originating state. Since the consuming sate is not getting the tax it is not
willing to give input tax credit. This would create conflict and cascading effect. While the
purchases made within the state is concerned such input credit is allowed and when it is
made from out side the state input credit is not allowed. This would make the goods from
states other than the state concerned costlier and less attractive in the concerned state’s
market. When such credit is denied the avowed purpose of the VAT to avoid double
taxation and cascading effect 60 is being negated. Once the input credit is denied such
goods are doubly taxed, which would have a cascading effect resulting in higher taxation
and phenomenon like vertical integration. 61

59
AIR 1990 SC 820
60
Cascading effect is that the goods would be taxed as many times it was transferred. If only te value
addition is transferred such cascading effect can be avoided.
61
In what is referred to as Vertical integration the traders avoid purchasing goods from other by
manufacturing such goods by themselves so that they can avoid being taxed twice for such goods. Assume
an instance of a manufacturer purchasing one of the components for other manufacturer to be used in his
final product. If input credit is not allowed in the final product the manufacturer will have to pay sales tax
for the entire price of the goods. If the manufacturer avoids purchasing such component from other

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This rises serious doubt as to the constitutional validity of such denial as this would place
goods from outside the state in disadvantage as compared to that from within the state.
Art.303 denies power to both state legislatures and parliament, to make any
discrimination between the states. Although it can be argued that the consuming state is
not getting the benefit of the CST and hence it cannot allow input credit, the consequent
effect of such denial is constitutionally unsustainable.

As a solution to the problem CST should be made destination based. This would
eliminate the incompatibility of the Central sales tax with the Value Added Tax. The
states are not ready to give the input credit since they would be losing the revenue, since;
although they give input credit they will not be getting the benefit of the Central Sales
Tax (which will be payable to the state of origin not to the state of destination). Once the
CST is made destination based this incompatibility would disappear and the states would
be willing to allow input credit. But in such a case some state, which are mainly
exporting states would be losing revenue. One should be mindful; of the fact that states
depend heavily on their income from sales tax. States now collect 15,000 crores every
year by way of CST. 62It will not be workable of acceptable for them to loss the income
suddenly. Central government will have to compensate, especially in the initial years of
the implementation of the scheme such states if such states are to be persuaded to accept
the system. CST has been decided to be phased out. 63 But the alternative has to be
compatible with the VAT. Such a new system should provide for inter-state input credit
in order to make the VAT meaningful as far as inter-state sales and purchases are
concerned. This would be possible only if such new system of taxation is based on
destination.

The system that would replace the CST should be tax neutral, and one which does not
distort the economic behavior and market choices. In effect tax shall not be consideration

manufactures, by manufacturing it by himself, he can save the sales tax paid for that component. But in
such case the expertise would suffer.
62
White Paper on State Level value added Tax by empowered committee of sate finance ministers dated
January 17; 2005.
63
ibid.

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of an industrialist in determining whether to start the industry in particular state or not.
When the tax start to determine it, the industries would be compelled to take measure
which are otherwise inefficient. Resulting in serious economic repercussion such as
increased cost of production and inefficiency.

The CST should be made vattable and input credit should be allowed. Other wise it
would result in discrimination between the goods from different states, which would be
violative of Art. 301 of the Constitution.

Scope of Commerce Clause

So the actual question that is to be addressed is where the correct balance lies between the
free trade and the power of the state impose tax. Such an interpretation has to answer the
legitimate taxing power of the state and the free trade requirement under art.301. The
scope of the taxing power shall not in such a way that it burdens or act as a restrain on the
free trade. It may be noted that the mandate under the Art.301 is that trade shall be free
through out the territory of India. The provision was incorporated by drawing inspiration
from the constitution of the Australia. 64 But the framers of our constitution made very
significant change while they incorporated the provision into our constitution, they
avoided using the absolutely free (as in the Australian Constitution) instead they used the
term free implying that the freedom is not absolute and subject to restrictions.
Constitutional framers expressly mentioned the circumstances in which such restrictions
are permissible. 65 In the light of these express provisions it can be inferred that
restrictions can be imposed only in compliance with those provisions. In other words the
state can impose restrictions only in circumstances mentioned in the Art. 304. When a
restriction is imposed by the state in public interest the proviso to Art. 304 mandate that
previous sanction of the President has to be obtained. 66 A restriction can be validly
imposed by the state if and only if it has obtained the sanction of the president.

64
Section 92 of the Constitution of Australia
65
Art.302-304
66
The action would be valid even if the sanction of the president is obtained subsequently. See Art. 255

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When it comes to the tax it has to be seen whether it is restrictive in character. If it
restrictive in character it has to meet two requirements; it should be in public interest and
it must have obtained the sanction of the president. But the crucial question is whether it
is a restriction or not. If it is not a restriction state is free to impose such tax. So when a
tax on the movement is imposed by a state what is to be looked for is whether it is
restriction or does it burden the trade in any way. If it can be shown that it does not
burden or in any way act as a restriction, the trade such tax would pass the judicial
muster. 67

When a tax is compensatory in nature it does not act as a burden on the trade but it in fact
facilitate the trade by providing resource for the facilities for the trade. In that way so
long as the tax is compensatory it plays a facilitating role and not a restricting role.
Adequate and proper infrastructure is imperative for the trade. Such taxes and its
appropriation to give better infrastructural support to the trade. Constant vigil is needed to
ensure that under the guise of the compensatory tax, taxes calculated to protect the
narrow, parochial interest are not imposed.

But in the case of denial of input credit in the case of VAT-CST scheme would not be
constitutionally sustainable as it burden trade from other states. It would be bad on two
counts firstly it burden the trade more than the permissible or justifiable limits by double
taxation. Secondly it is in discrimination of goods from one state to the other.

Constitution of Authority under Art.307

Free trade and the restrictions, taken as a whole is complex. For the same reason and in
due consideration of the importance of free trade, framers of the constitution inserted

67
Otherwise it would bad if it is not in public interest and has not obtained the assent of the president.

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provision 68 to appoint an authority to carry out the purposes of Art.301 to 304. So far we
have not constituted an authority under the provision to carry out the purposes of the
chapter. It is high time for us to think seriously about constituting an authority to see that
the provisions are complied with by all the concerned. Sarkaria commission
recommended the constitution the constitution of such an authority with power to (a)
survey and bring out periodically a report on the restrictions imposed on intra-State and
inter-State trade and commerce by different governments and their agencies ; (b)
recommend measures to rationalise or modify the restrictions imposed to facilitate free
trade and commerce ; (c) examine complaints from the public and the trade in this regard
; and (d) suggest reforms in the matter of imposition, levying and sharing of taxes for
purposes of Part XIII of the Constitution. A specialized authority would be in a better
position to keep a constant vigil regarding the compliance with the provisions of the part
XIII.

Conclusion

The concept of federalism is not universally same in character. It varies from country to
country. Even in countries characterized as predominantly federal in character, such as
United States, there are provisions to avoid trade barriers within the country. Australia is
no exception in this regard. Framers of our constitution very rightly believed that there
must be express provision in the constitution to maintain the economic unity of the
country. They took special care to avoid the erection of trade and economic barriers
within the country and introduced provisions to ensure free flow trade within the territory
of the country. The provisions regarding the freedom of trade, commerce and intercourse
is a direct limitation on the power of the state. It is to be noted that in the U.S. the
provisions regarding freedom of trade is merely an enabling provision. In Australia the
only inter-state trade is protected. But in India the provisions are limitation on the power

68
Art.307. Parliament may by law appoint such authority as it considers appropriate for carrying out the
purposes of articles 301, 302 303 and 304, and confer on the authority so appointed such powers and such
duties as it thinks necessary

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of the state and there is no requirement of a further legislation to ensure freedom of trade.
Under Indian Constitution both inter-state and intra-state trade is protected.

The scope of power under a written Constitution is well defined. The grounds on which
and circumstances in which restrictions can be imposed on the freedom of trade
commerce and intercourse is well defined in the constitution. Under our Constitutional
scheme a state wishing to restrict the freedom of trade will have to follow the
requirements under Art.304 (b). Any endeavour to depart from the clear mandate of the
Constitution is to be eschewed. The justification for restriction on basis of federalism is
not well founded. Federalism in Indian context is not an abstract idea. The scope
federalism and powers of the states, under Indian federal scheme, are circumscribed by
the provisions of the constitution. At the same time no right can be absolute in a free and
democratic society. The law that restrictions of the regulatory nature can be imposed is a
reasonable interpretation of the Constitution. But under the guise of it states shall not be
allowed to further their narrow, parochial and protectionist interest. It is the duty of the
judiciary to see that the restrictions imposed on free trade are constitutionally permissible
and thereby to prevent the economic balkanization of the Indian Union. An authority
under Art.307 is highly desirable to have watch over the implementation of the provisions
of under part XIII.

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