Entry Tax: Hauntings of the Past

[pooja jajwni]

A legal fight is worth fighting if the remains of the war are buried forever. However, the fight is not worth it if the ghosts of the war come back to haunt. Similar is the story of challenges pertaining to Entry tax.

In the erstwhile tax regime, when the states levied entry tax, businesses challenged the constitutional validity of the law before various high courts. The matter finally reached the Apex Court and in one of its kind order dated 11 November 2016 issued in JINDAL STAINLESS LTD. AND ANR. VERSUS STATE OF HARYANA AND ORS. - 2016 (11) TMI 545 - SUPREME COURT (LB), the Apex Court upheld the validity of such tax.

However, somehow, it took eight long years for the Haryana Government to realise that they monetized no gains pursuant to the favourable judgement.

As a result, out of thin air, in December of 2024, the Haryana Government issued a Removal of Difficulty Order No. 40/GST-2 dated 11 December 2024 wherein, assuming powers under Section 174(1)(ii) of the Haryana SGST Act, they have provided a detailed procedure for dealers to get registered under entry tax statute, pay entry tax and for the department to assess such dealers.

In light of the above factual background, in this article, an attempt has been made to understand the dispute involved, the legal remedies available, and strategies to be implemented in the near future;

The challenge before the Hon’ble Supreme Court

The Hon’ble Supreme Court in Jindal’s case framed three questions to test the validity of the Entry tax statute. Such questions were;

1. Can the levy of a non-discriminatory tax per se constitute an infraction of Article 301 of the Constitution of India?

2. If the answer to question No. 1 is in the affirmative, can a compensatory tax also fall foul of Article 301 of the Constitution of India?

3. What are the tests for determining whether the tax or levy is compensatory in nature?

In light of the above questions, the Hon’ble Apex Court held that Article 301 of the Constitution was inserted for barring the princely states to put any restriction on inter state trade and commerce in the process of forming of independent India. Consequently, restrictions to trade and commerce per such an article cannot include tax aspects. Having said so, the Apex Court upheld the validity of Entry taxes.

Whether the State can recover such tax now?

Although the State, after sleeping for eight years on the above order, has initiated demand and recovery proceedings, however, it needs to be analyzed whether they have any power to do so?

It is apposite to note that Entry II of List II of the Constitution empowered States to levy Entry taxes. Such entry was omitted by the 101^st Constitutional Amendment Act thereby subsuming the same under GST.

As a result, the Entry tax stood repealed under Section 174(1) of the Haryana SGST Act and per Section 174(2) of the said act, the repeal will not revive anything not in existence or affect any right, liabilities, proceedings already initiated and so on and so forth.

This takes us to the transitional provisions wherein Section 142 provides that every proceeding of appeal, revision, review, or reference relating to any output tax liability initiated whether before, on, or after the appointed day under the existing law, shall be disposed of in accordance with the provisions of the existing law.

On a conjoint reading of the above, it transpires that whatever arrears pertain to erstwhile laws is liable to be recovered as per the provisions of erstwhile laws only.

In light of the above, reference is drawn to Section 9 of the Entry Tax Act which provides that an assessment has to be concluded within 3 years and a reassessment has to be concluded within 3 years from the date of original assessment.

Consequently, in this case, since eight long years have elapsed, the State is not eligible to assess or reassess the taxpayers for demand and recovery of entry tax.

Validity of ROD issued by State

The State, vide Haryana Goods and Services Tax (Amendment) Act, 2020 amended Section 174 to empower the Government to extend deadlines notified in repealed acts for actions which could not be completed due to force majeure such as war, epidemic, flood, drought, fire, cyclone, or any calamity caused by nature of otherwise.

Taking powers from such provision, the State has now issued Removal of Difficulty Order No. 40/GST-2 to provide procedure for registration, filing of returns, assessments, measures for levy of tax, procedure for payment of tax, payment of tax in installments, etc. w.r.t. levy of entry tax.

A bare reading of the above would make it clear that the law only allowed extension in due dates owing to the COVID-19 pandemic. But the State has assumed full jurisdiction to write a whole new law by exercising such powers, which contravenes not only the repealed law but also the provisions of the GST Act. This, in itself, is grossly erroneous and devoid of any legality. In light of the above, any proceedings initiated by the State basis such as ROD is grossly illegal.

In support, reference can be drawn to the fact that the judiciary has already criticized usage of COVID related notifications for extension of time limits provided under Section 73 of the GST Act for reasons other than force majure. See M/S. BARKATAKI PRINT AND MEDIA SERVICES, DHRUBAJYOTI BARKOTOKY AND OTHERS VERSUS UNION OF INDIA AND 4 ORS., THE CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS, THE GOODS AND SERVICES TAX COUNCIL, THE PRINCIPAL COMMISSIONER STATE TAX, THE ASSISTANT COMMISSIONER STATE TAX AND OTHERS - 2024 (9) TMI 1398 - GAUHATI HIGH COURT.

Moreover, it is apposite to note that the Telangana High Court in M/S. ABB INDIA LIMITED VERSUS COMMERCIAL TAX OFFICER AND ANOTHER, STATE OF TELANGANA - 2024 (6) TMI 901 - TELANGANA HIGH COURT has held that the states cannot carry out assessments under Entry tax after the expiry of limitation under the guise of Supreme Court’s judgement in the case of Jindal Steels supra.

Consequently, it could be easily construed that by taking refuge of limited powers, rewriting a whole new law to demand and recover entry taxes is illegal.

What is entry tax anyways?

While the judiciary may, in time, condemn the illegal practices, however, in order to face on ground assessments, it is essential to understand as to what is the levy is all about.

As per Section 3 of the Entry Tax Act, entry tax shall be levied [1] on entry of all goods into the state from another state/country, [2] for consumption, use or sale within the state.

In line with the levy provisions, the valuation mechanism is provided under Section 8 of the Entry Tax Act. As per the said provision, the entry tax liability would be calculated and paid in the following manner;

N	Particular	Detail
A	Gross turnover	Turnover means the aggregate value of goods brought into the state by the assessee.
B	Less: Value of goods specified in Schedule A	Some goods such as cattle feed, bajra, wheat, etc. are exempted from entry tax thus, their value is to be reduced from gross turnover.
C	Less: - Value of goods sent on Form F, Form C basis	Value of goods which have been delivered outside the state without use or consumption in the state
D	Less: - Goods already taxed on entry once will not be taxed again	Value of goods which have been subjected to tax once under this Act, either as such or in some other form;
E	Less: - Goods on the sales of which, VAT has been paid.	Value of goods on which sales tax has been paid or has become payable to the State
F	Less: - Plant and machinery	Value of plant, machinery, equipment, and tools, brought or received on lease for use in the manufacture or processing of goods.

After calculating the gross turnover in the above manner, entry tax at the rate of 2% is payable as per Notification No. S.O. 56/H.A. 8/2008/S.3/2008 dated 03 July 2008.

Procedure for demand and recovery of entry tax

Now that the State has started knocking doors of the dealers for demand and recovery of entry tax, apart from the writ remedies, it is pertinent to understand the appellate remedies as per the law.

The state has been sending notices for assessment under Section 9 of the Entry Tax laws wherein based on the VAT data, dealers have been asked to pay an Entry tax of a particular amount and have been provided an opportunity to be heard.

In response to such notices, one may need to undergo the assessment proceedings which may involve providing factual clarifications, documentary evidences, legal submissions, etc.

If the officer confirms a demand then, as per Section 15 of the Entry Tax Act, appeal remedies as provided under the Haryana VAT Act, can be availed.

Strategies

Now, down to business, once you have received an assessment notice from the VAT department, the following should be the order of actions which you may have to take;

1. If your business is a trading concern, it is likely that you may not be liable to pay entry tax, unless you were specifically exempt under VAT. In this scenario, it is prudent to participate in assessment proceedings and get the matter dropped on a factual basis;
2. If your business is a manufacturing concern producing goods which were taxable under VAT then, subject to the documentation availability, you may participate in assessment proceedings and get the matter dropped on a factual basis;
3. However, in all other cases, one may need to test the waters in the high courts by availing writ remedies.

Conclusion

Now that we have been haunted by the ghosts of dead taxes, let’s brace ourselves with all the possible weapons to ensure a victorious battle!