Compensatory Or Complementary tax doctrine - Definition / Legal Terminology - Income Tax

Expression Compensatory Or Complementary tax doctrine Oregon Waste Systems V. Department of Environmental Quality of the State of Oregon 511 U.S. 93 (1994) . The U.S. Supreme Court noticed that compensatory tax doctrine has been recognised at least since 1869. Following was stated by the U.S. Supreme Court: At least since our decision in Hinson V. Lott, 8 Wall. 148 (1869), these principles have found expression in the compensatory or complementary tax doctrine. Though our cases sometimes discuss the concept of the compensatory tax as if it were a doctrine unto itself, it is merely a specific way of justifying a facially discriminatory tax as achieving a legitimate local purpose that cannot be achieved through nondiscriminatory means. See Chemical Waste, supra, at 346, n. 9 (referring to the compensatory tax doctrine as a justification for a facially discriminatory tax). Under that doctrine, a facially discriminatory tax that imposes on interstate commerce the rough equivalent of an identifiable and substantially similar tax on intrastate commerce does not offend the negative Commerce Clause. Maryland, supra, at 758759. See also Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, MANU/USSC/0058/1987: 483 U.S. 232, 242243( 1987); Armco, U.S., AT 643. To justify a charge on interstate commerce as a compensatory tax, a State must, as a threshold matter, identify... the [intrastate tax] burden for which the State is attempting to compensate. Maryland, supra, at 758. Once that burden has been identified, the tax on interstate commerce must be shown roughly to approximate but not exceed the amount of the tax on intrastate commerce. See. e.g., Alaska v. Arctic Maid, MANU/USSC/0062/1961 : 366 U.S. 199, 204205 (1961). Finally, the events on which the interstate and intrastate taxes are imposed must be substantially equivalent ; that is, they must be sufficiently similar in substance to serve as mutually exclusive proxies for each other. Armco, supra, at 643. As Justice Cardozo explained for the Court in Henneford, under a truly compensatory tax scheme, the stranger from afar is subject to no greater burdens as a consequence of ownership than the dweller within the gates. Another judgment which needs to be noted is Fulton Corporation V. Jenice H. Folkner, Secretary of Revenue of North Carolina 516 US 325, 133 L Ed 2d 796 . For valid compensatory tax three conditions were noticed by the U.S. Supreme Court in following words: Since Silas Mason, our cases have distiled three conditions necessary for a valid compensatory tax. First, a State must, as a threshold matter, 'identify the [intrastate tax] burden for which the State is attempting to compensate.' Oregon Waste, supra, at 103, 128 L Ed 2d 13, 114 S Ct 1345 (quoting Maryland v Louisiana, 451 US 725, 758, 68 L Ed 2d 576, 101 S Ct 2114 (1981). Second, the tax on interstate commerce must be shown roughly to approximate but not exceed the amount of the tax on intrastate [516 US 333] commerce. Oregon Waste, 511 US, at 1103, 128 L Ed 2d 13, 114 S Ct 1345. Finally, the events on which the interstate and intrastate taxes are imposed must be 'substantially equivalent'; that is, they must be sufficiently similar in substance to serve as mutually exclusive 'proxies' for each other. The above cases of Supreme Court give different concept of compensatory tax as compared to cases in Australia as well as in Automobile Transport . In U.S., The compensatory tax doctrine was invoked to save facially discriminatory taxes imposed on interstate trade, to make interstate commerce bear a burden already borne by intrastate commerce. In Automobile Transport compensatory tax has been referred to a tax or charge to provide for trade facilities like construction of road, bridges etc. which was treated as recompense to the traders who were required to pay tax. Law of compensatory charge as developed in Australia was due to the fact that Section 92 did not contain any qualification to the absolute freedom of trade and commerce granted therein. Various qualifications and restrictions to the above freedom were culled out by judicial decisions of the High Court of Australia and Privy Council to justify the said qualifications and restrictions. The ratio contained in various judgments of the High Court of Australia and the Privy Council on Section 92 of the Constitution of Australia cannot be a guiding factor for interpreting Part XIII of the Constitution of India. The Constitution Bench of this Court in State of Bombay v. R.M.D. Chamarbaugwala and another, 1957 (4) TMI 55 - Supreme Court, had sounded a caution in paragraph 35: 35. In construing the provisions of our Constitution the decisions of the American Supreme Court on the commerce clause and the decisions of the Australian High Court and of the Privy Council on Section 92 of the Australian Constitution should, for reasons pointed out by this Court in State of Travancore Cochin v. Bombay Co. Ltd. be used with caution and circumspection. Our Constitution differs from both American and Australian Constitutions. There is nothing in the American Constitution corresponding to our Article 19(1)(g) or Article 301. In the United States the problem was that if gambling did not come within the commerce clause, then neither the Congress nor any State Legislature could interfere with or regulate inter State gambling. Our Constitution, however, has provided adequate safeguards in clause (6) of Article 19 and in Articles 302305. The scheme of the Australian Constitution also is different from that of ours, for in the Australian Constitution there is no such provision as we have in Article 19(6) or Articles 302304 of our Constitution. The provision of Section 92 of the Australian Constitution being in terms unlimited and unqualified the judicial authorities interpreting the same had to import certain restrictions and limitations dictated by common sense and the exigencies of modern society. This they did, in some cases, by holding that certain activities did not amount to trade, commerce or intercourse and, in other cases, by applying the doctrine of pith and substance and holding that the impugned law was not a law with respect to trade, commerce or intercourse. The difficulty which faced the judicial authorities interpreting Section 92 of the Australian Constitution cannot arise under our Constitution, for our Constitution did not stop at declaring by Article 19(1)(g) a fundamental right to carry on trade or business or at declaring by Article 301 the freedom of trade, commerce and intercourse but proceeded to make provision by Article 19(6) and Articles 302305 for imposing in the interest of the general public reasonable restrictions on the exercise of the rights guaranteed and declared by Article 19(l)(g) and Article 301. Hidayatullah, J. in Automobile Transport- 1962 (4) TMI 91 - Supreme Court itself held that the technique justifying laws as regulatory as evolved in Australia is not applicable while interpreting Article 301 of Constitution. Following observations were made by Hidayatullah, J. at page 639: The technique of justifying laws as regulatory was evolved in Australia in view of the intractable language of s.92 without any indication of the circumstances in which the absolute freedom could be curtailed. The detailed provisions contained in Part XIII render such a construction of Art.301 at once unnecessary and impermissible. Gajendragadkar, J. in Khyerbari Tea Company Ltd.- 1963 (12) TMI 24 - Supreme Court, had also expressed opinion that compensatory or regulatory tax theory as introduced in the Australian decisions is not to be made applicable in Part XIII. Following was observed: The majority view in the Atiabari case proceeded on the basis that the Australian decisions which dealt with the scope and effect of s.92 of the Australian Constitution would be of no assistance in constructing the effect of the provisions in Part XIII of our Constitution, because the legislative, historical and political background, the structure and the effect of the relevant provisions contained in Part XIII were in material particulars different from those of s. 92 of the Australian Constitution; s.92 is absolute in terms and on its literal construction, admits of no exceptions. The Australian decisions, therefore, had to introduce distinctions, such as compensatory or regulatory tax laws in order to take laws answering the said description out of the purview of s.92. In our Constitution, however, though Art. 301 is worded substantially in the same way as s.92, Art.302 and 304 provide for reasonable restrictions being imposed on the freedom of trade subject to the requirements of the said two Articles, and so, the problem facing of the said two Articles, and so, the problem facing judicial decisions in Australia and in this country in regard to the freedom of trade and the restrictions which it may be permissible to impose on it, is not exactly the same. The answer to the question as to whether a compensatory tax is out of reach of Article 301 has to be found out from the Scheme of Part XIII of the Constitution itself and not from the theory of compensatory charge as evolved in Australia or United States of America. Two fundamental principles of taxes are: (i) that it is an imposition made for public purpose, (ii) without reference to any special benefit to be conferred on the payer of the tax. The compensatory doctrine evolved in Automobile Transport is that compensatory tax is to compensate for facility extended, for example, wear and tear of the Road. The compensatory tax can be imposed only for public purpose which fact is not denied by any of the parties before us. Can it be said that a tax which is a compensatory in nature need not to be subject to restriction as contained in part XIII ? If it is accepted that once a tax is held compensatory tax it goes out of reach of Part XIII, it will be carving a new exception to Article 301 which is not contemplated in the constitutional scheme. The framers of the Constitution after providing for freedom of trade, commerce and intercourse in Article 301 laid down exceptions to the said freedom in Article 302 to 306. The exceptions laid down in the constitutional scheme are self contained and no new exception can be added by judicial interpretation. Can a compensatory tax not impede trade, commerce and intercourse even if it is a nondiscriminatory tax ? We take an example to illustrate the point. Entry Tax is imposed on vehicles carrying goods in a local area to the extent of 50% of the value of goods, the statute further declares that entire amount received from tax will be expended for providing facilities to the entrants in the local area, i.e., on roads, lights, free fooding, free lodging, facility for free servicing, repairs of the vehicles, etc. Can the mere fact that entire amount collected is expended for providing facilities shall take out the statute from the scrutiny of Part XIII ? Answer has to be in negative. The fact that a tax statute compensates the payer of the tax does not take out the statute beyond Part XIII, all taxes, being for one or other public purposes. The tax legislation which professes to compensate the payer cannot take the tax legislation on a higher pedestal beyond the reach of Part XIII, making such legislation not subject to Constitution . When all legislative power is subject to Constitution as per Article 245 and 246 of the Constitution, a legislation, namely, compensatory tax legislation cannot be said to be beyond Part XIII. Any such interpretation is clearly against the constitutional scheme. Thus the judgments of the High Court of Australia and the Privy Council relied in Automobile Transport did not furnish a foundation for evaluation of compensatory tax theory in part XIII of the Constitution. The scheme of Constitution of India indicates that wherever it was contemplated to insulate any provision from challenge, expressed provisions have been made to provide for such insulation. Article 31B is one of such examples which provides that none of the Acts and Regulations specified in IXth Schedule shall be deemed to be void or ever to have become void on the ground of such Act, Regulation or provision is inconsistent with or takes away or abridges any of the rights conferred by Part III. The Constitutional Scheme as delineated by Part XIII does not indicate that a particular type of legislation, i.e., compensatory tax is out of Part XIII. Reading any such protection to compensatory tax legislation is against the constitutional provision. We, thus, are of the opinion that the compensatory theory as evolved in Automobile Transport (supra) is not compatible to the constitutional scheme and a compensatory tax legislation cannot be insulated from challenge under Part XIII of the Constitution. Reference - Jindal Stainless Ltd. And Anr. Vs . State of Haryana And Ors.- 2016 (11) TMI 545 - Supreme Court (LB)