“To preserve the balance of trade in favour of a nation ought to be a leading aim of its policy. The avarice of individuals may frequently find its account in pursuing channels of traffic prejudicial to that balance, to which the government must be able to oppose effectual impediments.” ~ Alexander Hamilton [Alexander Hamilton, Continentalist No. 5, Papers 3: 75 (18th April, 1782)]
“Difficult and complicated problems are raised by Part XIII of our Constitution largely due to defective drafting.” ~ HM Seervai [HM Seervai, Constitutional Law of India 2587 (4th edn.)]
The state’s power of taxation and the value and need of freedom of trade, commerce and intercourse (hereinafter “freedom of trade”) are two opposite ideas – necessitating that a balance is found. While the value of freedom of trade is undeniable; as with all freedoms, it cannot be limitless. Similarly, the power of taxation is an element of a state’s sovereignty but such sovereignty cannot be allowed to run amok and trample on constitutional rights and values.
Issues of freedom of trade and taxation are not unique to India. In fact Hidayatullah, J notes in Automobile Transport Ltd. v. State of Rajasthan, AIR 1962 SC 1406 (hereinafter “Automobile”) that Latham, CJ of the High Court of Australia is known to have said,
“that when he died, S. 92 [of the Australian Constitution which is in pari materia to Art. 301 of the Indian Constitution] would be found to be written on his heart!”
Part XIII of the Constitution is a vital albeit flawed pillar of our Constitution and reflects a core constitutional value – federalism. The economic unity of the country would be a dream if individual states could erect barriers and impinge on freedom of trade.
Before I dive into the core of the post, it would be prudent to briefly discuss the relevant provisions.
- Art. 301 is the general blanket provision that mandates that trade, commerce and intercourse be free throughout India.
- Art. 302 is an exception to Art. 301 and gives the power to the Parliament to impose restrictions on the freedom mandated under Art. 301.
- Art. 303(1) is an exception to the exception in Art. 302 and restrains the Parliament from imposing restrictions under Art. 302 discriminatorily. It also restrains a state from doing so (interestingly Art. 302 never gives any power to the States in the first place!).
- Art. 303(2) is an exception to the exception’s exception. Confused? Rightly so. Art. 303(2) allows the Parliament to act in contravention of Art. 303(2) when there is scarcity of a particular good in any part of India.
- Art. 304 applies to states and is a non-obstante clause. It overrides Art. 301 and 303 and allows states to levy taxes on “imported” goods as long as same tax is imposed on like local goods (quite like the concept of national treatment in international trade law). It also allows states to impose “reasonable restrictions” on the freedom mandated under Art. 301. The latter part (Art. 304(b)) is pretty much an analogue to Art. 302, except that the consent of the President is required before introduction of a bill seeking to impose “reasonable restrictions”.
Seeing the above, one thing is clear – Part XIII is not the brightest beacon of skillful drafting and has been rightly criticized over the years. [See Automobile, para 10 (Das, J). See also HM Seervai, Constitutional Law of India 2601 (4th edn.)]
In this post – that I am going to divide into three parts – I will discuss and briefly analyze I) the opinions in Atiabari Tea Co. Ltd. v. State of Assam and Ors., AIR 1961 SC 232 (hereinafter “Atiabari”); II) the opinions in Automobile; and III) finally pick the one I believe reflects the correct constitutional position on the impact of taxation on the freedom of trade and commerce.
I. Atiabari – “Free from what?”
In Atiabari the Supreme Court of India was concerned with a tax that was levied on goods that were carried across the State of Assam. By a majority of four to one, the Court – Gajendragadkar, J writing for himself Das Gupta and Wanchoo, JJ; Shah, J concurring; Sinha, CJ dissenting – held that the impugned Act was in fact void as it violated the freedom of trade as set out in Part XIII.
Gajendragadkar, J’s judgment is a median between Shah, J’s concurrence and Sinha, CJ’s dissent. His reasoning in large part is dominated by the impact the Court’s decision will have on the legislative power of the States and the Parliament and thus shows an appreciation of the concerns put forth by Sinha, CJ in his dissent [Atiabari, para 35 (Gajendragadkar, J)]. There is no doubt that the majority is right in holding that tax laws are not per se outside the purview of Part XIII of the Constitution [Atiabari, para 50 (Gajendragadkar, J)] and if a tax impinges on Part XIII, the Court can step in and remedy the situation. However, the question then is when does a tax impinge on Part XIII? Do all taxes have to comply with Part XIII? The majority said no and I concur with them. It would be an unreasonable construction of the Constitution if all taxes had to satisfy the requirements of Part XIII. So what then forms the basis for an enquiry into a possible conflict with Part XIII? Gajendragadkar, J’s answer is that when taxes ‘directly and immediately’ restrict trade they fall within the scope of Art. 301.
The test of “direct and immediate” comes from Australia – much like the wording of Art. 301 – however, the majority in its reliance on the Australian jurisprudence related to S. 92 of the Australian Constitution failed to consider that the provisions of Part XIII were quite different from S. 92, even though S. 92 had been the ‘inspiration’ for Part XIII. Part XIII of our Constitution was internally adequate insofar that the various articles (Arts. 301-307) provided the principles and the exceptions to them. On the other hand, S. 92 of the Australian Constitution was a standalone so wide in it’s wording that the Australian Courts had to devise ways to protect any measure – no matter how necessary and/or reasonable. While our understanding was primarily inspired by Commonwealth v. Bank of New South Wales  AC 325, a case that was overruled in 1988 by in Cole v. Whitfield (1988) 165 CLR, the law has not moved and our understanding of freedom of trade is still the same. Thus, it is apposite that a larger bench is being set up to reconsider Atiabari and Automobile.
Shah, J’s opinion gives freedom of trade as wide a meaning as is possible. Unfortunately, this is why it cannot be accepted. It is also why both the majority [Automobile, paras 10-11 (Das, J); Automobile, para 38 (Subba Rao, J)] as well as the minority [Automobile, para 124 (Hidayatullah, J)] in Automobile rejected it. The problem with Shah, J’s wide-view of Art. 301 is that it could be effectively wielded as a weapon against acquisition of property by the state, imposition of tariffs, licensing regimes, price-control, nationalization, taxation, for that matter any form of regulation. It would essentially force the State to become a bystander as “free trade” creates what can best be described as chaos.
Sinha, CJ’s dissent is the opposite of Shah, J’s in that while Shah, J would strip the State of almost all powers of regulating trade, commerce and intercourse, Sinha, J would preserve all taxes, so long as they are not discriminatory and thus prevent the erosion of the States’ authority to levy taxes under Arts. 245 and 265. A consequence of this would be the possibility that the State can abuse its powers of taxation. However, possibility of abuse alone is not reason to whittle down a particular power, especially when other checks exist. Sinha, CJ also rightly notes that Australian jurisprudence is unhelpful as our Constitutional framework is distinct from the Australian framework [Atiabari, para 25 (Sinha, CJ)]. However, most of Sinha, CJ’s arguments are easily taken care of by the majority [Cf. Atiabari, para 12 (Sinha, CJ) with Atiabari, para 37 (Gajendragadkar, J)] as well as by reference to the Constituent Assembly Debates [Builders’ Association of India v. Union of India, (1989) 2 SCC 645, para 2 (Venkataramiah, J). See also V. Niranjan, The Upcoming Controversy Over Articles 301-304 of the Constitution – Taxation and Part XIII of the Constitution of India (2011) 5 SCC(J) 72, 99].
II. Automobile – Clarifying So Little
Atiabari was decided on September 26, 1960. Within 191 days of the judgment in Atiabari (the Union and the States were not happy with the Court’s interpretation of Part XIII), a 5-Judge Bench of the Supreme Court passed an Order on April 4, 1961 stating that the matter decided in Atiabari requires consideration by a larger bench. Thus, Automobile came up before a 7-Judge Bench. It is interesting to note that the sanctioned judge strength of the Supreme Court of India in 1962 was 14 Judges. 5 of these had already decided Atiabari. 7 new judges heard Automobile, effectively meaning that 12/14 judges of the Supreme Court, not to mention some of the brightest legal minds of to ever grace the bench, had weighed in on the issue of freedom of trade. What is sad is that the issue still remains convoluted. This speaks to the complicated nature of the issue and the reality of there probably being no right answer.
In Automobile the Supreme Court was concerned with a tax on inter-state transportation imposed by Rajasthan. By a majority of four to three, the Court – Das, J writing for himself, Kapur and Sarkar, JJ; Subba Rao, J concurring; Hidayatullah, J dissenting and in doing so joined by Ayyangar and Mudholkar, JJ – held that the impugned Act did not violate the freedom of trade as set out in Part XIII.
As with Atiabari, let us begin with the majority judgment. The majority in Automobile agrees with the majority in Atiabari, however, adds a clarification. Seervai suggests that this clarification in effect overruled Atiabari and the word clarification was merely judicial courtesy [HM Seervai, Constitutional Law of India 2597 (4th edn.)]. Later judgments of the Supreme Court, however, have maintained the opposite and do not see Automobile as overruling Atiabari [Jindal Stainless Ltd. (2) v. State of Haryana, (2006) 7 SCC 241, para 9 (Kapadia, J); Jindal Stainless Ltd. (3) v. State of Haryana, (2010) 4 SCC 595, para 4 (Order)]. I tend to agree with the latter view, inasmuch, while I agree with Seervai that Gajendragadkar, J and Das, J differ in their interpretation of the provisions of Part XIII, that plus the clarification in and of itself does not overrule Atiabari. However, Mathew, J observes in Automobile that Automobile “practically overruled” the decision in Atiabari.
Coming to the substance of the clarification. The majority held that regulatory measures and compensatory taxes do not come within the purview of the restriction under Art. 301 and therefore, such measures are not required to comply with Art. 304(b) [Automobile, para 17 (Das, J)]. Whether a need existed to introduce concept of compensatory taxes to already muddled waters or not is debatable.
With all due respect, Subba Rao, J in his concurrence creates more confusion than provide clarity [See Automobile, paras 31, 33-34, 36 (Subba Rao, J)]. A reading of these paragraphs makes one wonder what his true position is, especially with regard to non-commercial intercourse and the value of Australian jurisprudence. Apart from the internal conflicts, little emerged as novel from Subba Rao, J’s judgment that has not already been accounted for by the majority.
With even more respect to Hidayatullah, J, the dissenting opinion – extremely well written as it is – borders on verbosity. He discusses the entire Australian jurisprudence on point and the evolution of the relevant provisions in light of the colonial history of India. He argues that there are two types of taxes – one that fall on all people, both tradesman and non-tradesman and these are not covered by Part XIII [Automobile, paras 125-126 (Hidayatullah, J)]. This point stands to reason since if all taxes could be considered from the prism of Part XIII, the Income Tax Act, 1961 would probably be prime candidate for multiple challenges. The other type of taxes cover only tradesman for the reason that they are tradesman. Those taxes can be covered under Part XIII [Automobile, para 127 (Hidayatullah, J)].
On the facts he concludes that the tax at hand in Automobile was directly and immediately imposed on tradesman by reason of their trade, and was not on an activity ancillary to the trade [Automobile, para 136. (Hidayatullah, J)]. He also disagrees with the majority that the impugned tax was regulatory. In my opinion, all that emerges from the minority’s judgment – is a very eloquent difference of opinion with no real clarity on the true position of law.
III. First Among Equals?
In my above analysis, I have mentioned some drawbacks of each of the opinions which leads me to the conclusion that all of them are at some level unsatisfactory. While Atiabari and Automobile are currently pending reconsideration by a larger bench of 9 Judges [Jindal Stainless Ltd. (3) v. State of Haryana, (2010) 4 SCC 595, para 14 (Order)]; until such time as that Bench gives its decision, Atiabari clarified by Automobile hold the field. So which opinion best reflects the correct constitutional position?
By process of elimination, Shah, J is the first to lose the race. His view is far too wide and goes against the clear (sometimes obscure) wording of the Constitution of India. Closely behind him is Sinha, CJ (regrettably so, as on principle I agree with him that the states’ powers of taxation should be preserved to the largest extent. However, his judgment and my views are not reflected in the structure of the Constitution).
Subba Rao, J’s concurrence added little value to the question at hand and in fact was riddled with internal contradictions about certain points – one such point being non-commercial intercourse. Hidayatullah, J’s dissent as I have noted above is a dissent with the interpretation of facts more than the principle. I found little in his judgment to affect my choice or understanding of the issue.
That leaves the majority in Atiabari and the majority in Automobile. The latter written by Das, J is sound. However, it must be noted that Das, J agrees with Atiabari as decided and only tries to clarifies that an exception exists as to regulatory and compensatory taxes without actually delineating what would be covered by the exception. What kind of compensations must be made for a tax to be really compensatory? It must be borne in mind that a tax by definition does not oblige a State to indulge in a quid pro quo like a fee does as was observed by Chinnappa Reddy, J in a later case [International Tourist Corporation v. State of Haryana, (1981) 2 SCC 318, para 8]. In light of this Gajendragadkar, J’s opinion for the majority in Atiabari is the winner for me as the matter stands.
The reason for my choice is that even though Gajendragadkar, J places a lot of importance on Australian jurisprudence (which should not be the case as the structures of the Constitutions are distinct. While we have a more federal structure, with states enjoying wide powers, Australian provinces enjoy lesser autonomy as is evidenced from a bare reading of the Australian Constitution), the test of “direct and immediate” seems to work in the Indian context. That said a word of caution must be sounded against reliance on foreign decisions [Arvind P. Datar, Inter-State Trade, Commerce, and Intercourse, in The Oxford Handbook of the Indian Constitution, 491].
What are the other options? Exclude all taxes? That is untenable. Include all taxes? That is untenable too. Strike a balance and see what actually hits the freedom mentioned in Art. 301? That is what he did. Does this have drawbacks? Yes. The test of “direct and immediate” is a subjective one the power of determination of what affects Art. 301 “directly and immediately” to the judiciary while at the same time eating away at states’ autonomy. But that is a cross we must bear for the other options are worse.
With 9 Judges of the Supreme Court set to hear Jindal Stainless Ltd. & Anr. Etc. v. State of Haryana & Ors. Etc., CA No. 3453 of 2009 the week beginning 18th July, it would be interesting to see which way the Court would go. I envisage a “clarificatory” overrulling of Automobile.
*The present post is adapted from a paper written in 2013 during college while studying for an elective course titled “Constitutional Aspects of Taxation”.