Article 301 declares that, subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free. The object is economic unity: to prevent the country from fragmenting into a set of internal customs barriers, and to ensure that a producer in one State can reach a market in another on the same terms as a local producer.
Legal Framework
| Provision | Subject | Key Rule |
|---|---|---|
| Art.301 | The freedom | Trade, commerce and intercourse throughout the territory of India shall be free, subject to the other provisions of Part XIII |
| Art.302 | Parliament's power to restrict | Parliament may impose restrictions on inter-State or intra-State trade as may be required in the public interest |
| Art.303(1) | Bar on preference and discrimination | Neither Parliament nor a State Legislature may give preference to one State over another, or make discrimination between States, by virtue of any trade and commerce entry in the Lists |
| Art.303(2) | Exception for Parliament | Parliament may do so if it declares by law that it is necessary for the purpose of dealing with a situation arising from scarcity of goods in any part of India |
| Art.304(a) | State taxation | A State may tax goods imported from other States, provided it does not discriminate between imported goods and similar goods manufactured or produced within the State |
| Art.304(b) | State restrictions | A State may impose reasonable restrictions in the public interest, but no Bill for that purpose may be introduced without the previous sanction of the President |
| Art.305 | Saving | Saves existing laws and laws providing for State monopolies, as amended by the 4th Amendment, 1955 |
| Art.307 | Authority | Parliament may appoint an authority to carry out the purposes of Arts.301 to 304. No such authority has ever been appointed |
The architecture of Part XIII. Article 301 states the freedom in absolute terms. Articles 302 to 305 then cut it down. The critical asymmetry is between the Union and the States. Parliament may restrict in the public interest under Art.302 without any procedural precondition. A State may restrict under Art.304(b) only if the restriction is reasonable, in the public interest, and the Bill has received the President's previous sanction. Article 303(1) binds both against preference and discrimination between States, and only Parliament has an escape from it, and then only for scarcity of goods.
The Development of the Test
Facts: The Assam Taxation (on Goods Carried by Roads or Inland Waterways) Act, 1954 imposed a tax on goods, principally tea and jute, carried by road or inland waterway in Assam. The petitioner carried tea from Assam through West Bengal to Calcutta for sale and export, and challenged the levy as an impediment to the free movement of goods.
Issue: Whether a tax on the carriage of goods infringes the freedom declared by Art.301.
Held: The Act was void. The freedom in Art.301 is a freedom from restrictions on the movement or transport of goods, which is an essential part of trade. A law which imposes a tax that directly and immediately restricts or impedes the free flow of trade falls within Art.301 and must be justified under Art.302 or Art.304. Since the Act was a State law restricting trade and had not received the previous sanction of the President required by Art.304(b), it could not be saved. The Court was careful to add that laws which affect trade only indirectly or remotely are outside Art.301 altogether.
Relevance: The origin of the direct and immediate restriction test. Note the procedural point on which the case actually turned, which is a common examination trap: the defect was the absence of the President's previous sanction.
Facts: Rajasthan levied a tax on motor vehicles used in the State. Transport operators challenged it on the strength of Atiabari, contending that a tax on vehicles directly impeded the movement of goods and passengers.
Issue: Whether every tax that touches the movement of trade falls within Art.301, or whether some measures fall outside it altogether.
Held: The levy was upheld. The Court accepted the Atiabari test but added an important qualification. Regulatory measures, and compensatory taxes levied for the use of trading facilities, do not come within the purview of Art.301 at all, and therefore need no justification under Art.302 or Art.304. Such levies do not hamper trade; they facilitate it, since the money is spent on the very roads and facilities the trader uses. A tax on motor vehicles, whose proceeds went towards the construction and maintenance of roads, was compensatory in character.
Relevance: The case that governed this branch of law for over half a century, and the source of the regulatory and compensatory exception. Its compensatory limb has since been discarded.
Facts: Entry taxes levied by several States on goods brought into a local area were challenged as violating Art.301, the States defending them as compensatory. Because the compensatory tax doctrine had generated persistent difficulty, particularly over how closely the proceeds had to be traced to a facility provided, the matter was placed before a Bench of nine Judges.
Issue: Whether taxes as such fall within Art.301, and whether the doctrine of compensatory tax forms part of the constitutional scheme.
Held: By a majority of seven to two, the Court held that the concept of compensatory tax has no basis in the Constitution and must be discarded. It was a judicial construct with no textual foundation, and its application had proved unworkable. Further, a tax simpliciter is not a restriction on the freedom guaranteed by Art.301: the freedom is from discriminatory and unduly burdensome impositions, not from taxation as such. The proper enquiry under Part XIII in the case of a State tax is therefore whether it discriminates within the meaning of Art.304(a), that is whether goods imported from other States are treated less favourably than similar goods produced locally. The entry taxes were accordingly upheld, subject to individual examination for discrimination.
Relevance: The current law, and essential to any modern answer. State the two holdings separately: compensatory tax is gone, and the operative test for a State tax is discrimination under Art.304(a).
How to state the position today. For a State tax, ask whether it discriminates between imported and locally produced goods under Art.304(a); if it does not, it does not offend Part XIII. For a State non-tax restriction, ask whether it directly and immediately impedes trade, and if so whether it is a reasonable restriction in the public interest with the President's previous sanction under Art.304(b). For a Union measure, ask whether it is required in the public interest under Art.302 and whether it offends the bar on preference and discrimination in Art.303(1). Purely regulatory measures, such as traffic rules and licensing for safety, remain outside Art.301 altogether, that limb of Automobile Transport being unaffected.
Illustrations
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Tax on carriage of goods: A State taxes goods carried through it by road, and the Bill received no presidential sanction. Applying Atiabari (1961), the levy directly and immediately impedes movement and is void for want of sanction under Art.304(b).
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Motor vehicles tax: A State taxes vehicles using its roads. This is a regulatory levy on the use of a facility and, on the surviving limb of Automobile Transport (1962), does not attract Art.301.
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Entry tax at a uniform rate: A State levies entry tax on all goods entering a local area, whether produced within or outside the State, at the same rate. Applying Jindal Stainless (2016), the tax is not discriminatory and does not offend Art.304(a), and it need not be shown to be compensatory.
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Discriminatory entry tax: A State levies entry tax only on goods brought from other States, exempting local produce. This discriminates within Art.304(a) and is void, and no plea of public interest will save it.
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Higher rate on imported goods: A State taxes cement produced outside the State at twelve per cent and cement produced within it at six per cent. This is precisely the discrimination Art.304(a) forbids.
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Restriction without presidential sanction: A State prohibits the movement of foodgrain out of the State by a law introduced without the President's previous sanction. The restriction falls within Art.301 and is void for want of sanction under Art.304(b).
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Parliament restricting in the public interest: Parliament restricts the movement of a commodity nationwide to control inflation. This is within Art.302 and needs no sanction, but must not offend Art.303(1).
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Parliament preferring one State: Parliament gives one State preferential access to a scarce commodity, declaring by law that it is necessary to deal with a scarcity. This is saved by Art.303(2), which is available to Parliament alone.
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State preferring itself: A State law gives its own producers preference over those of a neighbouring State. This offends Art.303(1) and there is no exception available to a State corresponding to Art.303(2).
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State monopoly: A State law reserves the trade in liquor to a State corporation. Article 305, as amended by the 4th Amendment, 1955, saves laws providing for State monopolies from the operation of Arts.301 and 303.
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Traffic regulation: A State requires goods vehicles to observe load limits and speed restrictions. This is regulatory in the true sense and outside Art.301.
Recall Check
- State the asymmetry between Art.302 and Art.304(b) as to the conditions on which the Union and a State may restrict trade.
- What test did Atiabari lay down, and on what procedural ground did the Act actually fail?
- What two propositions did Jindal Stainless (2016) establish?
Key Cases
Atiabari Tea Co Ltd v State of Assam (1961) Atiabari Tea Co v State of Assam 1961
Issue: Whether a tax on the carriage of goods infringes Art.301.
Rule: A law which directly and immediately restricts the movement of trade falls within Art.301 and must be justified under Art.302 or Art.304; laws affecting trade only indirectly are outside it.
Held: The Assam Act was void, being a State restriction introduced without the President's previous sanction under Art.304(b).
Automobile Transport (Rajasthan) Ltd v State of Rajasthan (1962) Automobile Transport Rajasthan v State of Rajasthan 1962
Issue: Whether every tax touching the movement of trade attracts Art.301.
Rule: Regulatory measures and compensatory taxes for the use of trading facilities fall outside Art.301 altogether.
Held: The motor vehicles tax was upheld as compensatory, its proceeds being applied to roads.
Jindal Stainless Ltd v State of Haryana (2016) Jindal Stainless Ltd v State of Haryana 2016
Issue: Whether compensatory tax is part of the constitutional scheme and whether a tax as such restricts Art.301.
Rule: Compensatory tax has no constitutional basis and is discarded; a tax simpliciter is not a restriction, and the enquiry for a State tax is discrimination under Art.304(a).
Held: By seven to two the entry taxes were upheld, subject to examination of each for discrimination.
Distinctions
| Basis | Art.302, Parliament | Art.304(b), a State |
|---|---|---|
| Who may act | Parliament | A State Legislature |
| Test | Required in the public interest | Reasonable restrictions required in the public interest |
| Procedural condition | None | Previous sanction of the President for the Bill |
| Discrimination between States | Barred by Art.303(1) | Barred by Art.303(1) |
| Escape from Art.303(1) | Available under Art.303(2) for scarcity of goods | Not available |
| Basis | Position before 2016 | Position after Jindal Stainless |
|---|---|---|
| Compensatory tax | A recognised exception outside Art.301 | Discarded as having no constitutional basis |
| Tax simpliciter | Could be a restriction on Art.301 | Not a restriction on Art.301 |
| Operative test for a State tax | Whether compensatory, or else justified under Art.304 | Whether it discriminates under Art.304(a) |
| Burden on the State | To show a quantifiable measurable benefit | To show absence of discrimination |
| Regulatory measures | Outside Art.301 | Still outside Art.301 |
| Basis | Art.304(a) | Art.304(b) |
|---|---|---|
| Subject | Taxation of imported goods | Non-tax restrictions on trade |
| Test | Non-discrimination between imported and locally produced similar goods | Reasonableness and public interest |
| Presidential sanction | Not required | Required, as previous sanction for the Bill |
| Relation to Art.301 | Permits taxation on the stated condition | Permits restriction on the stated conditions |
Flashcards
What does Art.301 declare?
That subject to the other provisions of Part XIII, trade, commerce and intercourse throughout the territory of India shall be free.
On what condition may Parliament restrict that freedom?
If the restriction is required in the public interest (Art.302). No presidential sanction is needed.
On what conditions may a State restrict it?
The restriction must be reasonable and required in the public interest, and the Bill must have the previous sanction of the President (Art.304(b)).
What does Art.303(1) forbid?
Any law giving preference to one State over another, or making discrimination between States, by virtue of a trade and commerce entry in the Lists.
Who may escape Art.303(1) and on what ground?
Parliament alone, and only by declaring by law that it is necessary to deal with a situation arising from scarcity of goods (Art.303(2)).
What does Art.304(a) permit and prohibit?
It permits a State to tax goods imported from other States, but prohibits discrimination between such goods and similar goods produced within the State.
What test did *Atiabari* lay down?
That a law imposing a direct and immediate restriction on the movement of trade falls within Art.301.
Why did the Assam Act fail in *Atiabari*?
Because it was a State restriction on trade introduced without the previous sanction of the President under Art.304(b).
What exception did *Automobile Transport* add?
That regulatory measures and compensatory taxes for the use of trading facilities fall outside Art.301 altogether.
What did *Jindal Stainless* (2016) decide about compensatory tax?
That the doctrine has no basis in the Constitution and must be discarded.
What is the test for a State tax after 2016?
Whether it discriminates between imported goods and similar goods produced within the State, under Art.304(a).
Is a tax simpliciter a restriction on Art.301?
No. Jindal Stainless held the freedom is from discriminatory and unduly burdensome impositions, not from taxation as such.
What does Art.305 save?
Existing laws, and laws providing for State monopolies, as amended by the 4th Amendment, 1955.
Has an authority been appointed under Art.307?
No. The power has never been exercised.
Exam Scenario
Problem: State P enacts three measures. First, an entry tax of eight per cent on all cement entering any local area in the State, applying equally to cement produced inside and outside the State. Second, an additional levy of four per cent on cement produced outside State P, described in the statute as a "development surcharge" to fund roads used by inter-State carriers. Third, a complete prohibition on the movement of raw cotton out of State P, enacted to protect local mills, the Bill having been introduced without the President's sanction. Parliament separately enacts a law giving State Q preferential allotment of fertiliser, declaring in the statute that this is necessary because of a severe shortage in State Q. Advise on the validity of each measure.
Step 1: Dispose of the entry tax under Jindal Stainless
Apply Jindal Stainless Ltd v State of Haryana (2016). Two propositions dispose of it. A tax simpliciter is not a restriction on the freedom in Art.301, and the doctrine of compensatory tax is discarded.
The State need therefore neither justify the levy under Art.304(b) nor demonstrate any quantifiable benefit. The only question is discrimination under Art.304(a), and since the tax applies at the same rate to cement produced inside and outside the State, there is none.
The tax is valid.
Step 2: Strike the development surcharge under Art.304(a)
The label is irrelevant and the substance is fatal. The levy falls only on cement produced outside State P, so imported goods bear a total burden of twelve per cent against six per cent for local goods.
| Cement | Levies borne | Total burden on the figures given |
|---|---|---|
| Produced in State P | Entry tax only | Six per cent |
| Produced outside State P | Entry tax plus the four per cent surcharge | Twelve per cent |
This is exactly the discrimination Art.304(a) forbids. The stated purpose of funding roads cannot save it: after Jindal Stainless a compensatory justification is no longer available at all, and in any event Art.304(a) contains no public interest exception. The levy also independently offends Art.303(1) as discrimination between States.
The levy is void.
Step 3: Test the cotton prohibition in this sequence
Apply Atiabari Tea Co Ltd v State of Assam (1961). A complete ban on the movement of goods out of the State is the clearest possible direct and immediate restriction on trade.
- Art.301 is engaged, since the restriction is direct and immediate on the Atiabari test.
- The State must therefore justify under Art.304(b), which requires the restriction to be reasonable and in the public interest.
- Art.304(b) also requires the previous sanction of the President for the Bill. The sanction is absent, and on that ground alone the law is void, exactly as in Atiabari.
- Even with sanction, reasonableness would be difficult: a total ban imposed to advantage local mills is protectionist, the very evil Part XIII was designed to prevent, and would also attract Art.303(1).
Step 4: Apply Art.303 to the parliamentary allotment law
Preferring one State over another would ordinarily be barred by Art.303(1), which binds Parliament as much as a State Legislature. But Art.303(2) provides an escape available to Parliament alone.
| Legislature | Preference between States | Escape route |
|---|---|---|
| Parliament | Barred by Art.303(1) | Art.303(2), on a declaration by law that the preference is necessary to deal with a situation arising from scarcity of goods in any part of India |
| State Legislature | Barred by Art.303(1) | None available |
The statute contains exactly such a declaration and the facts disclose a genuine shortage in State Q. The measure is valid. Had State P attempted the same preference, no exception would have been available to it.
Do not run compensatory tax arguments. Jindal Stainless discarded the doctrine, so the older cases must be handled with care. On the pre-2016 law the State would have had to establish a compensatory character; it no longer needs to, and cannot rely on it either.
The label on the surcharge is worthless. Calling it a "development surcharge" for roads used by inter-State carriers does not answer Art.304(a), which has no public interest exception.
The missing sanction is decisive by itself. Under Art.304(b) the absence of the President's previous sanction voids the cotton ban without any inquiry into reasonableness.
Note the asymmetry in Art.303. Art.303(2) is available to Parliament alone. A State can never justify a preference between States on scarcity of goods.
Conclusion. The entry tax and the parliamentary allotment law are valid. The development surcharge is void for discrimination under Art.304(a) and Art.303(1), and the cotton prohibition is void for want of the President's previous sanction under Art.304(b).
See Also
- Financial Relations : Art.286 and the other constitutional limits on State taxing power.
- Liability of the State in Contracts : Art.14 as the other principal restraint on State economic action.
- Federalism under the Indian Constitution : economic unity as an aspect of the federal design.