The grounds on which Entry Tax in Punjab is stayed by P&H High Court-Analysis of the Judgment in Bhushan Steel case

[AMIT BAJAJ ADVOCATE]

Punjab & Haryana High Court in Bhushan Power & Steel Limited v State of Punjab & others has granted interim stay to the petitioners on the levy of entry tax u/s 3-A of Punjab Tax on Entry of Goods into Local areas Act 2000 (hereinafter called as the Act), by considering it to be as ultravires of the State Government’s power to levy tax under the Constitution of India. Here the grounds on which stay has been granted are being discussed and an attempt has been made to make readers understand the order of the High Court in the said case.

Before proceeding with the matter it is necessary to understand certain provisions of the Act and of Constitution of India. First of all one should be clear that wherefrom the power to levy entry tax comes with the State Government. Entry 52 of list II of the Seventh Schedule of the Constitution of India authorizes State Governments to levy tax on entry of goods into the local area which runs as under:

52. Taxes on the entry of goods into a local area for consumption, use or sale therein.

Thus State Government can levy tax on entry of Goods into Local Areas for consumption, use or sale in the state.

Entry 54 of List II of Schedule seven runs as under:

54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.

Persuant to entry 52 Punjab Tax on Entry of goods into Local Area Act 2000 has been enacted: The charging provisions in the said Act are contained under section 3 which provides for levy of tax on the entry of scheduled goods into a local area for consumption, use or sale therein. Scheduled goods have been defined in the Act to means as the goods mentioned in the schedule appended to the Act.

But it is to be noted here that no goods have been mentioned in the schedule appended to the said Act. Moreover sub section 2 of section 3 of the said Act states that “Notwithstanding anything contained in sub-section (1), no tax shall be levied on the scheduled goods under this Act, if the tax is payable under the provisions of the Punjab Value Added Tax Act, 2005 by a registered dealer”

Thus no tax has been levied by the Punjab Govt u/s 3 of the Act. But instead entry tax has been imposed u/s 3-A of the Act which provides that “notwithstanding anything contained in sub-sections (1), (2) and (3) of Section 3, there shall be levied a tax under the Act on such goods at such rates as may be specified by the State Government by notification in the official gazette, but not exceeding the rates as specified in the Punjab Value Added Tax Act, 2005”

From above it is clear that section 3 is the main charging section in view of the entry 52 of list II but the tax has been imposed u/s 3-A which contains non-abstante clause and is applicable irrespective of anything contained under sub section 1,2,3 of section 3 of the said Act. Moreover since there are no goods mentioned in the schedule appended to the Act hence no tax can be levied on the dealers or importers u/s 3-A of the Act, since the dealer has been defined under the said Act to mean as a person who brings the scheduled goods in the state.

Contention of the petitioners in Bushan Steel case: In the Bhushan Steel case it has been contended by the petitioners that in terms of the provisions of Section 3A of the Entry Tax Act, it was made to pay the tax under the aforesaid Act immediately when the goods entered into the State at the Information & Collection Centre. The levy is sought to be challenged on the ground that the State Legislature is not competent to enact the Entry Tax Act in terms of the powers conferred under Entry 52 of List II of Seventh Schedule of the Constitution of India. A similar Act enacted by the State of Haryana named as Haryana Tax on Entry of Goods into Local Areas Act, 2008 was struck down by this court in Jindal Strips Ltd. v State of Haryana and others, (2007) 29 PHT 385 (P&H) = (2008) 12 VST 149 (P&H).

 What was decided in Jindal Strips case: In Jindal Strips case(supra) it was held by the Punjab & Haryana High court while examining the provisions of Haryana Tax on Entry of Goods into Local Areas Act that the entry tax levied under the said act is violative of Article 301 of constitution of India which provides  ‘Freedom of trade, commerce and intercourse Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free.”

If a tax is levied as reasonable restriction on the freedom as contained under  article 301 of constitution of India then such tax should be utilised in such a way that it compensate directly to those from whom it has been collected, for it to be intravires of Article 301.

 Since the Haryana entry Tax was used by Local bodies for general development such as providing infrasturucture, hygine facilities, construction of roads, water sewerage facilities etc, it was held by the High Court that such utilization of entry tax was not benefiting or compensating those on whom the tax has been levied and such tax cannot be considered as compensating directly the trades on which the tax has been levied.

Thus the entry tax in Haryana was declared as ultra vires.

What happened in Bhushan Steels case: In the Bhushan steel case the entry tax in Punjab was challenged on the similar ground as that of in Jindal Strips case. Additional grounds  taken in this case, were that tax has not been levied under the charging section 3 but instead u/s 3-A which doesnot even prescribe the taxable event i.e it doesnot even state that tax is to be imposed  on entry of goods into local areas in view of entry 52 of list II. It simply prescribes levy of tax by State Government in the manner and on the goods and at rates as may be specified.

It was also contended by the petitioners that definition of term "dealer" as provided for under Section 2(1)(c) of the Entry Tax Act provides that he should be a person, who deals in any scheduled goods. In similar line is the definition of "importer" as provided for under Section 2(1)(e) of the Entry Tax Act in terms of which he would be a person who brings scheduled goods into a local area. The term "scheduled goods" has been defined in Section 2(1)(k) to mean the goods specified in the Schedule appended to the Entry Tax Act. It was pointed out that there are no goods mentioned in the Schedule attached to the Entry Tax Act, Section 3, which provides for levy of tax on the entry of scheduled goods into a local area is, in fact, the charging section. However, the same can be said to be inoperative considering the fact that there are no goods specified in the Schedule.

Contention of the State Govt.: It was contended on behalf of the State Government that the entry tax has been levied under entry 54 of List II of seventh schedule of the constitution instead of under entry 52 of the same, as an advance tax of VAT under PVAT Act which is given adjustment by way of Input tax credit u/s 13-A of Punjab VAT act 2005.

This contention of the State was contested by the petitioners by further submitting that the amount of tax is being collected in the form of advance tax to be refunded later to the dealer will not be tenable in view of the judgment of a Division Bench of this Court in CWP No. 19355 of 2010 - KRBL Limited v State of Punjab and others, decided on 14.1.2011, wherein it was held that recovery can be effected only if it is within the competence of the State Legislature. It cannot be recovered initially providing the remedy of refund later on.

Observation of High Court: In this regard the High Court observed that “The stand sought to be taken is that it is a tax relatable to Entry 54 of List II of Seventh Schedule to the Constitution of India providing for levy of tax on sale and purchase of goods. However, prima facie, we do not find any merit in the submissions made by learned counsel for the State in that regard. Once there is already substantive enactment providing for levy of tax on sale or purchase of goods relatable to Entry 54 providing for the same, addition of machinery provision in another  enactment which apparently does not have any relation with levy of tax on sale or purchase of goods cannot be justified. In case, the effort of the State is to plug the loopholes and check evasion of taxes, they have ample power to add provisions in the substantive Act framed for the purpose. Even if there could be multiple legislations on same subject, the impugned legislation is not on the subject of sale or purchase of goods in absence of any charging provision to that effect.”

Comments: The substantive enactment referred to in the above observation is the Punjab VAT Act 2005. Tax under entry 54 of List II i.e tax on sale and purchase of goods within the state has already been levied under PVAT Act 2005. Claiming entry tax to be a levy on sale and purchase of goods under entry 54 of list II is considered as untenable by the High Court since there is no sale or purchase involved within the State at the time of entry of goods into the State.

So far the contention of the State that entry tax has been levied to plug in the loopholes and check the tax evasion, ample powers are with the State to add provisions under the substantive enactment i.e PVAT act 2005.

Finally it was held by the High Court as Under:

  “In view of our aforesaid discussion, we are of the prima facie view that though the Act proposes to levy entry tax, the same has not been justified as entry tax. The same cannot be held to be valid as advance collection of value-added tax in absence of a charging provision to that effect.

In the circumstances, in our opinion, the petitioner is certainly entitled to the interim relief in line with what has been granted by Hon'ble the Supreme Court in cases pertaining to entry tax from different States. The interim order similar to what has been passed in the appeal filed by the State of Haryana challenging the judgment of this court declaring the Haryana Act to be ultra vires can very well be granted to the petitioner in the present case.”

“Considering the fact that in the Entry Tax Act in question, the collection of tax is at ICC barrier and there is no provision for filing of returns or framing of assessments, we direct that information regarding entry of all the goods into the State of Punjab shall be furnished at the point of entry in the State of Punjab so that the same could be compiled to enable the State to recover the amount of tax due from the concerned persons in case of dismissal of the writ petition. However, they shall file an undertaking to the State and also in this court that in the event of the writ petitions being dismissed, they shall be liable to pay the amount of tax due alongwith interest at such rate, as may be fixed by this court at the time of final disposal of the matter. The undertaking shall be furnished within four weeks. It is made clear that this order will not affect the liabilities of the petitioner under the relevant provisions of the VAT Act.”

Comments: Thus interim stay has been given by the High Court on the entry tax in Punjab.  The State in this case contested the petition by saying that the entry tax has been levied as advance tax on sale or purchase of goods  in view of entry 54 of List II of seventh schedule of the Constitution, which contention did not find any merit in the order of High Court, hence no test of  entry tax in Punjab was made on merits as to whether it is compensatory or not i.e whether it is  intra or ultra vires of article 301 of Constitution of India and the Powers of the State Govt to levy tax in view of entry 52 of List II of seventh schedule of the Constitution of India,  as was done in Jindal strips case.  

Whereas in Jindal Strips case Entry Tax in Haryana was contested by the State on the ground that the said tax was a compensatory one and is intravires of the power of the State Govt to levy tax under entry 52 of list II of seventh schedule of the constitution, which contention also did not find any place in the judgment of the hon’ble High court.

 The interim stay has been granted by the HC now on the entry tax in Punjab and consequently a general circular has also been issued by the Punjab Govt allowing all similar placed dealers as in Bhushan Steel case to apply for deferment from the payment of entry tax until the final orders of the court. The thing remains to be seen whether entry tax in Punjab will stand the test of constitutionality or will be struck down as unconstitutional.