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Saturday, Aug 31, 2002

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Joseph Prabakar

Joseph Prabakar on the irrelevance of entry tax

TILL 2000, entry tax on goods was prevalent in a few States and, in certain others, it was levied only on motor vehicles. The simple reason for adopting the tax was to prevent goods, especially FMCGs and automobiles, from being purchased from neighbouring Union Territories/States at nil or lower rates of tax.

In the last one year or so, most of the States have introduced entry tax. As regards uniformity, except for the definition of `import' (bringing goods from a place outside the State), all other provisions, items included for levy and rates are unique to each State. States thought it convenient to adopt the words "brought from a place outside the State" to include within the purview of entry tax imports from abroad as well. Gujarat is an exception though, where imports from abroad are expressly excluded from the levy.

Would entry tax be in the larger interests of the economy? To get a comprehensive picture of the tax, one needs to look at the Karnataka Tax on Entry of Goods Act, 1979; the State was one of the first to impose the tax.

In Karnataka, the municipal laws of different areas provided for octroi until it was abolished — for impeding the free-flow of trade — with effect from April 1, 1979. To make good the loss in revenue following the abolition, the Karnataka Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Act, 1979 was passed in 1979. Originally, entry tax was levied on three items — textiles, tobacco and its products and sugar. Also, the Act provided that the maximum rate of entry tax should not exceed 2 per cent.

The constitutional validity of the tax was challenged in the Karnataka High Court in the Hansa Corporation case. As many as 24 different contentions were canvassed before the court. After consideration, the court rejected 22 of them and ruled that the Act was unconstitutional on two grounds. The State took up the matter to the Supreme Court, which held that the levy was valid. The Hansa Corporation verdict, it must be noted, has been followed in a number of Supreme Court and High Courts cases, as it is considered the guiding factor for deciding on the validity of levying entry tax.

Now, would the decision be relevant even in the current situation? The Hansa decision (AIR 1981 SC 463) was rendered in 1980, taking into consideration certain basic factors which prevailed at that point of time.

The foremost factor is the historical context in which the levy was imposed. The apex court decided to introduce entry tax in Karnataka, barely a month after the abolition of octroi in 1979. Today, in addition to sales tax, most of the States levy surcharge, additional surcharge, resale tax, additional tax, turnover tax, luxury tax, and so on.

The second factor is the items covered. The Karnataka Entry Tax Act covered only three items against over 40 items at present and an average of 20-plus items in other States.

Next comes the nature of goods. The Act covered only fully finished products such as sugar, tobacco and textiles. Compare this with the current scene in most States, where basic raw materials and industrial consumables such as iron and steel, aluminium, furnace oil, lubricants, and so on, have been brought under entry tax. The inclusion of basic raw materials and industrial consumables meant for use in the manufacture of products, is enough ground to hold that the levy is not on use and consumption in the local area, but a tax on purchase and sale outside the State.

And finally, the rate of entry tax. Under the Karnataka Entry Tax Act, all three items attracted the maximum prescribed rate of 2 per cent. Compare this with the maximum prescribed rate of 30 per cent under the Tamil Nadu Entry Tax Act, 2001 and the 4-20 per cent levied in other States. It would be extremely difficult to justify rates as high as 16 per cent for industrial consumables used in further manufacture of industrial products.

A look now at certain other factors which are relevant in the current context and which are likely to be brought to the notice of the apex court, if and when the issue is examined.

  • One of the reasons for the imposing entry tax was the differences in the rates, especially among neighbouring States. Most of the States now adopt uniform floor rates and, hence, entry tax can no longer be justified on the ground of difference in rates.

  • Consequent to the amendment to Section 8(5) of the CST Act with effect from May 13, 2002, `nil' or lower rates of tax would not apply to sale to an end-consumer being a non-dealer. The amendment has practically ended the practice of consumers purchasing FMCGs from other States at lower rates of tax. Therefore, a deterrent in the form of entry tax would not serve any useful purpose now.

  • With the implementation of VAT from April 2003, both VAT and entry tax cannot coexist and, hence, the latter should be dropped.

  • It would be ironical if States create trade barriers by introducing entry tax at a time when nations are striving to remove them and when the country itself, under the GATT dispensation, has committed to reducing import duties progressively.

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