Freedom of trade, commerce and intercourse

1. Why Part XIII exists

A federation needs a single economic unit. If each State could put up barriers against goods from other States, the country would break into separate markets. Part XIII, drawn partly on section 92 of the Australian Constitution, guarantees that trade moves freely across State boundaries, while letting Parliament and the States regulate it in the public interest.

2. The scheme of Articles 301 to 307

• Article 301 — subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free. It covers both inter-State and intra-State trade.
• Article 302 — Parliament may by law impose restrictions on that freedom as may be required in the public interest.
• Article 303(1) — neither Parliament nor a State legislature may give preference to one State over another, or discriminate between States, by reference to any entry relating to trade and commerce in the Seventh Schedule. 303(2) — Parliament may do so if it declares it necessary to deal with scarcity of goods.
• Article 304(a) — a State may tax goods imported from other States if similar goods made in the State bear the same tax, so that there is no discrimination.
• Article 304(b) — a State may impose reasonable restrictions on trade with or within the State in the public interest, but the Bill needs the previous sanction of the President. Under Article 255 later assent cures the lack of sanction.
• Article 305 — existing laws and laws providing for State monopolies (Article 19(6)(ii)) are saved.
• Article 306 — repealed by the Seventh Amendment (1956).
• Article 307 — Parliament may appoint an authority to carry out the purposes of Articles 301 to 304. None has been appointed.

3. Article 301 and Article 19(1)(g) compared

Article 19(1)(g) is a fundamental right of citizens to carry on any trade or business, and is enforceable under Article 32. Article 301 is a guarantee of free movement of trade throughout India; it is not in Part III, and a company or non-citizen can invoke it. Article 19(1)(g) is suspended during a national emergency under Article 358; Article 301 is not.

Not every activity is “trade”. In State of Bombay v. R.M.D. Chamarbaugwala, 1957 INSC 34, AIR 1957 SC 699, gambling was held to be outside the protection of Articles 19(1)(g) and 301 because it is res extra commercium.

4. Are taxes restrictions? The cases

Atiabari Tea. In Atiabari Tea Co. Ltd. v. State of Assam, 1960 INSC 163, AIR 1961 SC 232, Assam taxed tea and jute carried by road or inland waterway through the State. The Court held that taxes may be restrictions on the freedom in Article 301 if they directly and immediately impede the free movement of trade. Since the Act had not gone through the procedure in Article 304(b), it was struck down. Only remote or indirect effects fall outside Article 301.

Automobile Transport. The next case softened this. In Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, 1962 INSC 127, AIR 1962 SC 1406, a seven-judge Bench upheld a tax on motor vehicles using Rajasthan's roads. Regulatory measures, and compensatory taxes charged for the use of trading facilities such as roads and bridges, do not hamper trade but help it, and so are outside Article 301 altogether. This became the “compensatory tax” doctrine. In Jindal Stainless Ltd. v. State of Haryana, 2006 INSC 224, (2006) 7 SCC 241, a Constitution Bench required a measurable link between the tax and the facilities provided.

Jindal Stainless (nine judges). In Jindal Stainless Ltd. v. State of Haryana, 2016 INSC 1019, (2017) 12 SCC 1, a nine-judge Bench reviewed the field while deciding the validity of State entry taxes. By majority it held:

• Taxes are not per se restrictions on trade under Article 301. Only discriminatory taxes, or regulatory measures that impede the free flow of trade, are caught. Atiabari and Automobile Transport were overruled on this point.
• The compensatory tax doctrine has no basis in the Constitution and was rejected.
• A non-discriminatory tax under Article 304(a) needs no previous sanction of the President. Article 304(a) and 304(b) are independent: a State tax law is tested under 304(a) for discrimination, and 304(b) applies to non-tax restrictions.
• Not every differentiation is discrimination. A State may give an exemption or lower rate to local goods if it is based on a reasonable classification, such as backward-area development; whether a given entry tax law was discriminatory was left to regular Benches.

Entry taxes on goods were later largely subsumed in GST from 2017, but the 2016 decision remains the governing law on Articles 301 and 304.

5. Problem

A State levies an entry tax of 5 per cent on cement brought in from other States, while cement made in the State pays no comparable tax. A dealer challenges it.

After Jindal Stainless a tax is not automatically a restriction under Article 301, so the question is whether it meets Article 304(a). Article 304(a) allows a tax on imported goods only if similar local goods are subjected to the same tax. Here local cement bears nothing comparable, so the levy discriminates against goods from other States and is invalid. The State's defence would be a reasonable classification (for example, a time-bound incentive for backward-area industry); if it cannot show one, the dealer succeeds.

How this is examined

As an essay on freedom of trade, commerce and intercourse, or a short note on Article 301 or compensatory taxes. Write the scheme of the Articles, then tell the story of the cases in order: Atiabari (direct and immediate), Automobile Transport (compensatory taxes), Jindal Stainless 2016 (taxes not restrictions unless discriminatory). Close with Article 304(a) and the requirement of non-discrimination.