Compensatory Taxes - Bharti Airtel Judgement in West Bengal

Bharti Airtel Limited v. State of West Bengal and others (W.P.No.464 of 2012) is a judgement delivered by Indira Banerjee. This judgement held that the West Bengal Tax on Entry of Goods into Local Areas Act, 2012 (“the Act”) is unconstitutional. The object of the impugned act was to provide for the levy and collection of taxes on the entry of certain goods into local areas of West Bengal for consumption, use or sale.

The Act  was challenged as being violative of Article. 304(b) of the Constitution of India which provides that notwithstanding anything in Article 301 or 303, the legislature of a State may by law “impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest: Provided that no Bill or amendment for the purposes of clause shall be introduced or moved in the Legislature of a State without the previous sanction of the President.” The Act in question had not received Presidential assent.

The concept of “compensatory taxes” was introduced in The Automobile Transport (Rajasthan) Limited v.The State of Rajasthan and Others (1962 AIR 1406) as taxes imposed for the purpose of providing trading facilities and not as measures impeding the freedom of trade and commerce.  It was held that “a working test for deciding whether a tax is a compensatory or not is to enquire whether the trade is having the use of certain facilities for the better conduct of its business and paying not patently much more than what is required for providing the facilities.”  Compensatory taxes will be an exception to Article 304 of the Constitution. The guidelines for determining whether a tax comes within the ambit of compensatory taxes or not are given in Jindal Stainless Steel Limited v. State of Haryana and Others (Civil appeal 3453 of 2002). Briefly, the guidelines are as follows:

1. The payment of compensatory tax is not for revenue but as reimbursement/re-compense for the special services/facility provided by the State;
2. The Act must facially indicate the benefits to the payers which should be quantifiable and measurable;
3. The Act must facially or patently indicate quantifiable data on the basis of which the compensatory taxes ought to be levied;
4. The Act must indicate proportionality between the levied tax and the benefit;
5. If the Act does not indicate the above features facially then the burden is on the State to establish by placing full data and material before the Court that the levy of the tax is a reimbursement or recompense for the quantifiable/measurable benefit provided to is payers;
6. The Court has to examine the pith and substance of the levy to see its effect and operation. In other words, the Court has to see, what is the scope of the operation of law;
7. It is not enough to say that the levy can be shown to have "some connection" with the facilities provided to the payers;
8. The rule is that "direct and immediate effect" has to be established in respect of the levy, otherwise it will fail on the question of constitutional validity.

It was held that the Act did not satisfy the criteria for compensatory tax and hence the Act was unconstitutional.