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“Democracy is the art and science of mobilising the entire physical, economic and spiritual resources of various sections of the people in the service of the common good of all.”
To an extent the Article 301 of the Indian Constitution could be said to the derived or influenced from such a philosophy with the objective to protect the National integrity and unity with the help of hassle free flow of trade throughout the country. An intention to unify different fields and different regions with the help of this freedom guaranteed in Art. 301.
Even then for all practical purposes this freedom could not have remained absolute in order to ensure that a privatized market Grab economy does not further exploit the already starving population of India. Therefore this freedom was made subject to the other provisions of this Part (Part XIII). But as the researcher proceeds with the analysis of the position of inter-state trade it becomes clear that these provision which act as restrictions on this freedom bestowed by Article 301 is been severely hinders it . And therefore the Concept of Free Trade as envisaged by the constitution makers has remained a concept only with the amount of barriers and complications involved in interstate trade today. The free flow of trade and commerce are sine qua for the economic enhancement domestically as well as internationally has not given to the Indian Markets. The European Union is an amazing example of such a trade union which has opened up trade barriers among the countries of the union and has shown dramatic advancement in the field of trade and commerce. It is time for India to overhaul its current taxing system and central as well as state policy towards free trade.
Thus in this project the researcher will analyse the case laws which are responsible for the current position of the interstate trade and also the effect of Part XIII on them to determine how effective the provisions have been to strike a balance between the economic development and advancement of the country on one hand and the protection of the majority who were likely to the exploited and starved if the free market was allowed to thrive at the whims of capitalists.
An Analysis Of The Provisions And The Case Laws
The Constitution Makers have borrowed the concept of freedom of trade from the Australian constitution (Section 92) but the Indian version has a couple of changes in the scope of its application, and they are
- that the freedom guaranteed is not limited to among the states but ‘throughout the territory of India’ and,
- the privilege of trade being free is not qualified by the adverb ‘absolutely’ as in the Australian constitution.
And the reasons for these changes in the adaptation of this Article, from the Australian constitution, lies in the rest of the Articles of the Part XIII starting from Article 302 till 307. The Freedom is not absolute as the rest of the provisions impose several restrictions and exceptions to this freedom. Another very important aspect of the Part XIII of the Constitution is that it is not subject to any other part or provision of this constitution.
In the simplest sense any kind of tax that is levied on any particular activity which involves interstate transaction can be taken to be a restriction on the freedom of trade. But as taxes are also necessary for the functioning of the Centre and the State all of them cannot be treated as restrictions violating the Article 301. This question was first brought up in the Atiabari case in which the Apex court held that tax laws are not outside the scope of ‘the Freedom’. And therefore the Assam State Legislature had to amend the provision as to meet the requirements of the exception in Article 304(b) so that the tax that it imposed did not amount to a direct and immediate impact of the movement of the goods. This case has also gone into the historical background of the Making of this constitution in which it discusses that the makers of the Constitution were fully aware of the fact that economic unity was an absolute prerequisite for the stability and progress of the federal polity. Considering the possibility that there might be several political parties in the future, unlike the only congress majority then, with different ideologies and following different ‘isms’ for pursuing socio-economic goals is likely to give rise to a mechanism wherein the regional pull (by regions with higher influence) will affect the economic policy which in turn will have negative impact on the overall development of the economy of the nation as a whole. Thus the object of Part XIII to avoid such a possibility and to ensure that the political freedom won and political unity which had been accomplished by the Constitution, had to be sustained and strengthened by the bond of economic unity.
But this harsh approach towards the taxing power of the state was later review by a larger bench in the Automobiles case. Therefore to ensure that this freedom of trade did not evolve to be an absolute one legitimate restrictions like compensatory taxes or regulatory measures will not be taken into account as restrictions hampering the trade and thus would stay out of the purview of the Article 301. The court also dilated further on the issue raised in Atiabari about the problem of economic integration due to diversity in several fields. The two questions however stood out:
“ first that how to achieve a federal, economic and fiscal integration, so that economic policies affecting the interests of India as a whole could be carried out without putting an ever-increasing strain on the unity of India, particularly in the context of a developing economy. And 2nd that how to foster the development of areas which were under-developed without creating too many preferential or discriminative barriers”
Thus in order to completely grasp the complex scheme of the Arts. 301-305 which form the Freedom as well as the limitations on it have to be understood cumulatively. Moreover the best way to interpret these provisions is by keeping in mind the intentions of the constitution makers in evolving these provisions and according to the Supreme Court they are the following.
“first, in the larger interests of India there must be free flow of trade, commerce and intercourse, both inter-State and inter-State; second, the regional interests must not be ignored altogether; and third, there must be a power of intervention by the Union in any case of crisis to deal with particular problems that may arise in any part of India.”
The regulatory measures also join in the list of exceptions to the Freedom in Art. 301. In the Krisanan case the court observed that
“there is a clear distinction between laws interfering with the freedom to carrying out the activities constituting trade and laws imposing on those engaged therein rules of proper conduct or other restraints directed to the due and orderly manner of carrying out the activities.”
The Current Position Of The Applicability Of Part XIII
In some recent cases the courts have given more conclusive means of deciding what amounts to restrictions to the Freedom of Trade and what can fall into its exceptions. The Jindal Stainless v. State of Haryana case has dealt thoroughly with the issue of compensatory tax vis-a-vis Article 301 and overruled the decision of the Bihar Chambers case w.r.t. the parameters of the judicially evolved concept of ‘Compensatory Tax’.
Justice Kapadia, speaking for the constitutional Bench held that the doctrine of direct and immediate effect of impugned under the Article 301 and the working test which is vital in deciding the nature of the tax, whether it is compensatory or not was valid. But the test of “some connection” which was propounded in Bhagatram case and followed by in the Bihar chambers case wasn’t good law.
The SC concluded by stating that the basis of every levy was the controlling factor and in case of ‘a tax’ the basis of levy, which was the common burden, was the ability/ capacity to pay. And in case of ‘a fee’ the levy was based on the principle of equivalence and the special benefit to the tax payer. It further explained that the basis of a tax shifts from the concept of ‘burden’ to the concept of measureable or quantifiable benefit in cases where it is imposed as a part of a regulation or a regulatory measure and that it then becomes a ‘compensatory tax’, thus no longer acting as a revenue to the government but as a reimbursement to the service/facility provider.
Burden On The State
Relating this concept of tax to the cases in which such a tax is imposed on trade and commerce activities then the Art. 301 is violated and in such cases:
“whenever a law is impugned as violative of Article 301 of the Constitution, the Court has to see whether the impugned enactment facially or patently indicates quantifiable data on the basis of which the compensatory tax is sought to be levied. The Act must facially indicate the benefit which is quantifiable or measurable. It must broadly indicate proportionality to the quantifiable benefit. If the provisions are ambiguous or even if the Act does not indicate facially the quantifiable benefit, the burden will be on the State as a service/facility provider to show by placing the material before the Court, that the payment of compensatory tax is a reimbursement/recompense for the quantifiable/ measurable benefit provided or to be provided to its payer(s). As soon as it is shown that the Act invades freedom of trade it is necessary to enquire whether the State has proved that the restrictions imposed by it by way of taxation are reasonable and in public interest within the meaning of Article 304(b)”
Scope Of Articles 301, 302 & 304 Vis-A-Vis Compensatory Tax:
Considering the above doctrine dilated by court, it is clear that whenever a law is challenged on the ground of violation of Art. 301, the court has also to determine the effects of the operation of the impugned law on inter/intra state trade in addition to applying the doctrine of pith and substance to determine the basis of the Levy.
The Vijayalakshmi Rice Mills Case is another recent case which deals with the ability of the state legislatures to the levy of cess without violating Art. 301. It was contended that the cess levied under the Act (Andhra Pradesh Rural Development Act, 1996) did not correspond to any of the entries in List II or III of the Seventh Schedule and this rendered the cess invalid and moreover the there was no quid pro quo in the levy of cess, and hence could not be said to be a fee. On the argument of the respondent that it was in fact a fee and therefore it came under Entry 66 of List II. But the court on this ground made it clear that co-relationship between the totality of the fee and the totality of expenses of the services was indispensible even though mathematical precision wasn’t necessary between the service rendered and the fee realised. Thus a fee levied for rendering to the service of rural development was held viable and the validity of the act was upheld.
Thus with this position of the case laws on the Freedom of trade and commerce, the following is the likely procedure to be followed while deciding a case.
First is to check whether the law, be it taxation or non-taxation, violates the Freedom in Art. 301. And to do that first it is necessary to know the scope of operation of such law, whether the operation of the act of that law affects movement of trade, commerce or intercourse throughout the country.
If it is so then the next question is: What is the effect effect of operation of the law on the freedom guaranteed under Article 301? If the effect is to facilitate free flow of trade and commerce then it is regulation and if it is to impede or burden the activity, then the law is a restraint. After finding the law to be a restraint/restriction one has to see whether the impugned law is enacted by the Parliament or the State Legislature
GST: To Strengthen The Unified And Integrated Domestic Trade.
The Goods and Service Tax Bill which was supposed to be enacted by now is still pending as a bill due to various complications. The GST if enacted would have drastically impacted the inter-state trade and it is likely so that whenever in the future the GST will be enacted it will do its job. One of the several advantages of the GST is that it will not only replace the existing Sales tax by central and the state governments but also subsume most of the indirect taxes on the supply of goods and services. It includes central excise duties, additional custom duties, cesses levied by the union and surcharges in case of the Centre. And in case of the States it would replace purchase tax, state excise duty, luxury tax, octroi, entry tax in lieu of octroi. Under the GST regime the CST was to be reduced to zero by 1st April of this year! But the States have lobbied against it as after that the Centre alone would levy IGST and the exporting state will transfer to the centre the credit of SGST used in the payment of the IGST
Purohit in his article says that the implementation of the IGST mechanism would prove to be a daunting task as all statewise exports and imports would have to be recorded. Moreover he says that
“the importing state will have to give set-off as soon as the import takes place and will get it back only after a delay of a month or so. Given the fiscal scenario of the states today, the states exporting goods may not find it possible to fulfil their commitment to transfer the tax amount promptly to the central pool.”
Thus this model seems to be built on various assumptions which might require more time, efforts and planning than anticipated.
To sum up, the position of inter-state as of now is clear that the laws cannot have a direct and immediate impact on the free flow of trade. But any measure merely facilitating and not restricting the trade is Regulatory measure which is not hit by article 301. And the judicially evolved concepts regulatory and compensatory taxes have their well justified reasons as discussed earlier. Given all of this there may be very less confusion in deciding in any case whether any tax or measure violates the freedom of trade as in Art. 301. But if we go back to the intention of the constitution makers which was making the inter-state trade as less complicated and burden free as possible, not only from the point of view of laws but also from the actual number of effective restrictions imposed. Thus if all of this is looked at from an economic point of view every field in trade and commerce are surrounded with numerous restriction which might be not affecting the constitutional validity of the enactment. But considering the increasingly globalizing and liberalizing world these restrictions end up being inefficient in its objective of protecting public interest and hamper the economy’s progress. Therefore in order to enforce the constitutional mandate of common market it is time to invoke the article 307 of the constitution.
In his article, Bagchi illustrates how the ill effects of the regulations designed to control trade and factor movement and traffic obstructions are compounded by a system of taxation that allows the states to under-cut each other to attract trade and industry to their respective territories (‘tax competition’) and to export their taxes by taxing inter-state sales on origin basis – the two undesirable practices associated with subnational taxation that fiscal economists universally warn against. Thus keeping in mind the heavy dependence of the states on the centre, Bagchi suggests taking advantage of this situation by setting up an authority as provided for by Art. 307 of the constitution. The ‘Grants Mechanism’ which is already being used in a big way to control the states in matter of regulating trade and implementing fiscal reforms by attaching conditions to the grants. But there is no legal authority with the centre in using these methods and moreover the centre itself is many times involved implementing measures that constrain free trade. Thus it is all the more necessary to entrust the task of enforcing the common market mandate to an independent authority such as the one contemplated in Article 307
Thus if effectively implemented, the invoking of Art. 307 may prove crucial to the success Indian economy coupled with a entirely new legislation like GST to deal with the complications of regulating and Taxing inter-state trade. As much of the reasons for slow progress of the economic reforms can be attributed to inefficient restrictions and outdated regulations. The spectacular economic achievement of China after its opening up can be attributed to the Chinese federalism which allows greater freedom for market to operate.
- Singh, M.P., ‘ V. N. Shukla’s Constitution of India, Eleventh Edn., Eastern Book Company, Lucknow, 2008.
- Jain, M.P., ‘Indian Constitutional Law’ , Vol 1, Fifth Edn., Wadhwa and Company Nagpur, 2003.
- Baghchi, A., ‘Enforcing Constitutions Common Market Mandate’, Economic and Political Weekly, Vol. 37, No. 24, p. 2303, June 15, 2002.
- Purohit, M., ‘Issues in Introduction of Goods and Service Tax’, Economic and Political Weekly, Vol. XLV, No. 5, p. 12, January 30 2010
- Commission on Centre-State Relations: Questionaire, available online at; http://commcentrestate.gov.in/ques, last visited 08.04.2010
- GST – A Working Mechanism, available online at, www.assocham.org/events/recent/event_397/SessionI_K_S_Suresh.ppt, Last visited 08.04.2010
- Impediment to interstate trade (Part I), (The unlucky) Part XIII, Constitution of India, available online at, http://tax.indiainfo.com/reviews/interstate.html, last visited 08.04.2010
- Objects and Basic Scheme of the CST Act, available online at; http://www.dateyvs.com/cst01.htm, last visited on 08.04.2010
- Trade Commerce and Intercourse within the territory of India, Available online at: http://interstatecouncil.nic.in/CHAPTERXVIII, last visited 04.04.2010
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