Constitution and a non-compensatory tax

A division bench of the Punjab & Haryana High Court has held the Haryana Tax on Entry of Goods into Local Areas Act, 2008, as unconstitutional. An assessee had challenged the constitutional validity of the Act under Articles 301 and 304 of the Constitution, arguing that the tax levied was non-compensatory in nature.

A compensatory tax must have some link between the quantum of tax and the facility/services to be created by using such tax amount. The levy of entry tax in the relevant case was for the purpose of development of trade, commerce and industry and for the creation and maintenance of infrastructure.

The assessee contended that the tax in actual was only for augmenting the general revenue of the state without any facility or special benefits to the taxpayers and that no special service, benefit or facility was rendered to the assessee. The department argued that the amount collected was to be credited to a special fund and was to be utilised for infrastructure development for free flow of trade and commerce.

The court observed that the state failed to prove that the levy was compensatory in nature. The court further observed that mere mentioning of words ���exclusively for development or facilitating trade, commerce and industry��� are not enough to satisfy the test laid down for holding the levy to be compensatory in character.