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FREEDOM OF TRADE COMMERCE AND INTERCOURSE
Part XIII of the constitution contains provisions relating to the freedom of trade, commerce and intercourse within the territory of India. The provisions are laid down in articles 301-307. While the general rule of freedom of trade and intercourse is enunciated in article 301, it may be subjected to restrictions laid down in articles 302-305.
The union control is predominant, as the union government can impose reasonable restrictions in the public interest, thus restricting the freedom of trade or commerce. a state legislature too can impose reasonable restrictions, but requires president’s sanction for it. Thus the union possesses a control over the state legislature. Part 13 seeks to make indie a single economic unit for the purposes of trade and commerce under the overall control of the union.
Article 301: Freedom of Trade & Commerce etc.
Article 301 reads: “subject to the other provisions of this part, trade, commerce and intercourse throughout the territory of India shall be free.”
The “freedom” declared under article. 301 may be defined as a right to free movement of persons or things (goods), tangible or intangible, commercial or non-commercial, unobstructed by barriers, inter-state or intra-state or any other impediment operating as such barriers. Thus, ‘freedom of trade, commerce and intercourse’ means the free movement/transport and exchange of goods. It means that there shall be no prior restraint upon trade and commerce.
Article 301 is an adaptation from section 92 of the Australian constitution, which reads: “…trade, commerce and intercourse among the states, whether by means of internal carriage or ocean navigation, shall be absolutely free.” it may be noted that, while section 92 guarantees the freedom among the states i.e. at inter-state level, article 301 guarantee it throughout the territory of India, inter-state as well as infra-state (within a state). Further, section 92 declares the freedom “absolutely free” leaving it for the courts to import certain restrictions/limitations on the freedom as dictated by common sense and the exigencies of changing society. Article 301, on the other hand, secure the freedom subjected to restrictions/limitations which may be imposed under other provisions of part 13.
The “commerce clause” contained in the American constitution gives power to the congress to regulate commerce with foreign nations and among the several states. it has been held that where the subject-matter is national in character or requires uniform legislation, the power to regulate that matter is with the congress and the state regulation will not be permitted.
The word ‘trade under article 301, would mean some real, substantial and systematic or organized course of activity or conduct with a set purpose. It simply means buying and selling of goods. But it also includes other activities which may be regarded as integral parts of the transaction of buying and selling, such as transport of goods or merchandise from one place to another, the interchange or exchange of commodities. The word ‘commerce’ is wider than ‘trade.’ technically, it also means buying and selling of goods. But, what are essential for ‘commerce’ is transmission and not the profit-making as is there in ‘trade.’ it includes transportation of not only goods but also men or animals.
It has been held that the protection offered by article 301 is confined to such activities as may be regarded a lawful trading activity and does not extend to activities which are res extra commercial i.e. activities which could not be said to be trade or commerce or business (State of Bombay verses RMDC). In this case, the Bombay lotteries and Prize Competitions Control and Tax (amendment) Act, 1952, imposing restrictions on prize competition was upheld as not violative of article 301 for, being of gambling nature, holding of lotteries and prize competitions, could not be regarded as trade or commerce.
In ‘lottery’, there is no skill but only an element of chance, it falls outside the realm of res commercial. The right of sale of lottery tickets is not a right under article. 301. Even state lotteries cannot be said to constitute “trade” as contemplated by article. 301. since state lotteries cannot be construed to be trade and commerce within the meaning of article. 301, there could possibly be no question of any discrimination or violation of article. 303. Therefore, the central lotteries (regulation) act under which power is conferred on states to ban sale of lotteries of other states does not violate articles 301-303 of the constitution and is, thus, valid.
Thus, ‘unlawful’ trading activities example drug-trafficking, flesh trade, smuggling, liquor trade, hiring of goondas for committing crimes, gambling (holding of lotteries, etc.), rural money lending by unscrupulous persons etc., are not protected by article 301.
The word ‘intercourse’ is used to give the freedom declared by article 301 the largest import. It thus includes the freedom to import things for personal (non-commercial) or commercial use. It would thus mean the freedom of an individual to travel across the barriers and have dealings with the citizens of another part of the country. Thus, intercourse between citizens involving movement of property from one place to another is covered by article. 301. It may be noted that article. 301 guarantees freedom not only from geographical barriers but also from restrictions imposed upon the individual to carry on trade or business.
Object behind article 301
The main objective of article 301 is to break down the border barriers between the states and to create one economic unit with a view to encouraging the free movement and exchange of goods, which may be utilized to the common advantage of the entire nation. The object behind this all is to create and preserve a national economic fabric; at the same time, state or regional interests must not altogether be ignored.
In a federation, it is necessary to minimize the inter-state barriers as much as possible, so as to inculcate in the minds of the people the feeling that they are members of one nation, though residing in different geographical divisions of the country.
Regulatory measures or Compensatory Taxes
A regulation is not a restriction’, the former applies to incidental or non-essential transactions of a trade (viz. matters relating to hours, equipment, weight/size of load, lights, which form the incidents of transportation), the latter applies to direct or essential transactions of a trade (viz. a total prohibition on movement of certain goods during a specified period, or prohibition of any class of commercial or financial transactions relating to any goods, such as forward contracts). The object of a regulation is to ensure the orderly conduct of a trade. Though such regulation may involve some restraints and such restraints do not restrict the flow of a trade, but rather facilitate such flow.
Regulations like rules of traffic facilitate freedom of trade and commerce, whereas restrictions impede that freedom. Requirement of export permit pass for the removal of timber from the forest, the authorities being bound to permit transportation of timber covered by the pass, was held to be valid as regulatory and not restrictive in nature.
However, it is not that regulatory measures cannot, in any case, be challenged as interfering with the freedom guaranteed by article. 301. these can be challenged when they are colourable measures to restrict the flow of trade, commerce and intercourse. thus, if the amount of a compensatory tax is unduly high or the regulatory measure is too burdensome or is discriminatory, it certainly would hamper trade.
Compensatory Taxes
It is only such taxes as directly and immediately restricts trade that fall within the purview of article 301. In determining whether a tax directly offends against article 301, it is the movement of the goods which are the subject of the trade that has to be borne in mind. If a tax is imposed solely on the basis that the goods are carried or transported, that directly affects the freedom of trade. On the other hand, a tax on ‘luxuries’ enjoyed by a person in a hotel cannot have a direct and immediate effect impeding the freedom of intercourse.
The very idea of a ‘compensatory tax’ is service more or less commensurate with the tax levied. Trade, commerce and intercourse must pay for the facilities provided by the state by way of constructing, maintaining and regulating roads, bridges and other means of transportation necessary for such trade, commerce or intercourse. All that is necessary to uphold a tax as compensatory is the ‘existence of a specific, identifiable object behind the levy and a nexus between the subject and object of levy’, though the exact determination of benefit received and expenditure incurred and levying the tax accordingly is not necessary. Once the nexus between the levy and service is seen, the levy must be upheld, unless the compensatory character is shown to be wholly or partly, a mere mockery and in truth restrictive of the freedom of trade.
So long as there is some correlation between the tax recovered and the cost incurred by the state, the tax cannot be challenged as expropriator, even though there may be a marginal excess over the cost. Merely because the budget estimates indicated that the income raised by imposition of the tax was more than the expenditure incurred on roads/bridges, the tax cannot be said to be not compensatory in character. It is not necessary to show that the whole or a substantial part of collected is utilized. Once it is held that the tax is either compensatory or regulatory in character that would form the guideline for the state government to be kept in view to determine the rate at which the tax be levied.
A compensatory tax, however, becomes “confiscatory” and thus violative of the freedom contemplated by article 301, if:
(1) it is so excessive or heavy and prohibitive as to become an impediment in the free flow of trade and commerce example an excise duty on foreign liquor, or
(2) the burden imposed disproportionately exceeds the cost of the facilities, or
(3) no facilities are provided by the taxing state and the tax is purely fiscal in its object, or
(4) where no machinery is provided by the taxing state for the assessment and levy of tax, or
(5) the tax is discriminatory i.e. discriminates between the goods produced within the taxing state and the similar goods brought from other states within the taxing state (see article 304).
But, a compensatory tax cannot be struck down as confiscatory merely because the tax, once imposed, is enhanced, and that, retrospectively. further, sales-tax as such, or a mere increase of a tax on the sale of particular commodity in a state at a rate higher than in a neighboring state, cannot be held to violate article 301.
Still further, an Octroi duty (i.e. a tax on the entry of goods in the corporate area) is not clearly a tax on any trade. The basis of such duty is not the movement or transport or the carriage of goods, thus, it is not violative of the freedom conferred by article 301. Similarly, a toll tax (a charge for the use of roads, bridges, market-place, etc.) cannot be equated with a general tax for the use of certain facilities, thus, not violative of article 301.
Restrictions upon the freedom of trade and commerce
The freedom granted under article 301 is not absolute freedom but freedom from all restrictions except those which are provided in other articles of part 13 (article 301 is subject to the other provisions of this part), as well as regulatory and compensatory measures. The power of the union or the state to exercise legitimate regulatory control is independent of the restrictions imposed by articles 302-305.
On the other hand, ‘restriction’ would not be valid if it does not come under articles. 302-305. now, since restrictions under the latter provisions can be imposed only by ‘law’ the freedom under article. 301 cannot be taken away by mere executive action (Dy. Collector verses Ibrahim & Co. ). However, restrictions may be imposed by an executive action if taken in the exercise of power delegated by the parliament (Government of Tamilnadu verses Salem Association). The limitations imposed upon inter-state freedom of trade, commerce and intercourse, by the other provisions of part 13 are:
(1) it is subject to non-discriminatory restriction imposed by parliament, in the public interest [article. 302].
(2) even discriminatory or preferential provisions may be made by parliament, for the purpose of dealing with a scarcity of goods arising in any part of India [article 303(2)].
(3) non-discriminatory taxes may be imposed by states on goods imported from other states similarly as on goods produced within the state [article. 304(a)].
(4) reasonable restriction may be imposed by a state “in the public interest” [article 304(b)].
(5) restrictions imposed by “existing law” (an act passed before the commencement of the constitution) and laws providing for state monopolies to continue except in so far as provided otherwise by an order of the president [article 305].
(6) Article 307 empower parliament to appoint by law such authority, as it considers appropriate for carrying out the purposes of articles 301-304.
(a) restrictions on freedom of trade under parliamentary law [articles 302-303]
Article 302 reads: “parliament may by law impose such restrictions on the freedom of trade, commerce or intercourse between one state and another or within any part of the territory of India as may be required in the public interest.”
Article 303 reads:
(1) “Notwithstanding anything in article. 302, neither parliament nor a state legislature shall have power to make any law giving any preference to one state over another, or making any discrimination between one state over another, by virtue of any entry relating to trade and commerce in any of the lists in the seventh schedule.
(2) nothing in clause (1) shall prevent parliament from making any law giving any preference or making any discrimination if it is declared by such law that it is necessary to do so for the purpose of dealing with a situation arising from scarcity of goods in any part of the territory of India”.
Article 302 is, thus, subject to the condition that union law should not be discriminatory as between different states [article 303(1)] except where it is necessary for dealing with a situation of scarcity of goods [article 303(2)]. Article 303(2) was enacted with a view that it would be in the national interest as a whole that “the economy of the country will be balanced and everybody will be supplied with his necessities.”
However, article. 302 is restrictive of the freedom guaranteed under article. 301. This means that even where a restriction imposed by law imposes a direct burden on the freedom of trade under article. 301, it may be constitutionally valid, if it is required in the ‘public interest’ example to prevent evasion of tax, to canalize inter-state trade through registered or licensed dealers (State of T.N. verses Seetalakshmi Mills), or levying of terminal tax on all goods carried by railway/road into the territory of Delhi from any place outside.
In order to be protected by article 302, the nexus of the law with public interest must be ‘reasonable’, even though that word is not used in article 302. If the condition of public interest’ is satisfied, article 302 would authorize both inter-state and intra-state restrictions. Some of the instances of legislation under article 302 are – essential commodities act, 1955 and orders made there under, defence of India act, 1962 and rules made there under, central sales tax act, 1956, mines & minerals (regulation & development) act, 1957.
In automobile co. case, the court observed that the expression “trade and commerce” in article 303(1) was capable of a liberal interpretation as to include any law made under any entry in the seventh schedule, if such law directly and immediately impeded the free flow of trade and commerce. Thus, the prohibition in article 303(1) did extend to taxing laws made by parliament.
it may be noted that a law applied uniformly in all parts of the country, in effect, may result in differential treatment of the states owing to economic conditions prevailing therein. Such a law, however, will not be hit by article 303(1).
(b) Restrictions on freedom of trade under a state law (article 304)
Article 304 reads: “notwithstanding anything in article 301 or article 303, the state legislature may by law:
(a) impose on goods imported from other states or the union territories any tax to which similar goods manufactured or produced in that state are subject, so, however, as .not to discriminate between goods so imported and goods so manufactured or produced; and
(b) 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 purpose of clause (b) shall be introduced or moved in the state legislature without the previous sanction of the president.”
Article304 (a): non-discriminatory taxation of import
Article 304 (a) enabled a state legislature to impose taxes on goods from other states, provided similar goods as are produced within the state are subjected to similar taxes. In other words, it validates a taxation which undoubtedly fetters inter-state trade or commerce (i.e. a taxation which is violative of article 301), provided such taxation is non-discriminatory. If such tax is ‘discriminatory’, it will be hit by article 303(1).
Thus, article 304(a) has to be read with article 303(1). While article 303(1) prohibits discriminatory legislation in general being made by a state legislature, article. 304(a) strikes at discriminatory tax laws being made by state legislature.
Whether there has been discrimination between the imported goods and the local goods would depend upon a variety of factors, including the rate of tax and the item of goods in respect of the sale of which it is levied. Thus, discrimination takes place if tax at the same rate is imposed on differently priced goods or tax at a higher rate is imposed on the higher priced goods. Further, discrimination takes place if different rates of tax are imposed by a state on goods imported into the state and goods produced in that state. There is no discrimination unless the rate imposed is higher in respect of the imported goods.
Article 304(b): Reasonable restrictions
Article 304(b) empowers a state legislature to impose such “reasonable restrictions” on the freedom of trade, etc., as may be required in the “public interest”. The word ‘reasonable’ enables the court to interfere where the state, under the pretense of preventing injury to the welfare of the citizens, intends to prevent the flow of legitimate articles of inter-state commerce or to impose needlessly burdensome conditions so as to substantially obstruct the commerce. The restrictions which may be validly imposed under article 304(b) are those which seek to protect public health, safety, morals and property within the territory of state.
Any restriction which does not impede the movement of goods but only facilitates their passage cannot be held to be unreasonable merely because they cause some inconvenience example insisting on a transit pass the requirement of permit was intended to prevent evasion and to facilitate assessment of sales tax. Similarly, a tax, which is regulatory or compensatory in nature, cannot be held to constitute an ‘unreasonable’ restriction, merely because a business rendered uneconomical by reason of the imposition.
Proviso to Article 304(b): president’s sanction
The proviso says that though a state legislature is empowered by cl. (b) to impose reasonable restrictions on the freedom of trade in the public interest, no law or amendment for this purpose may be introduced in the state legislature without the previous assent of the president.
Unless the presidential assent has been obtained, a law restricting trade or commerce cannot be upheld even if it imposes reasonable restriction or restriction which is merely regulatory with a view to facilitating trade. However, if the imposition of tax is compensatory or regulatory in nature, it will not be hit by article 301 or article 303, and thus, article 304 will not come into picture at all. In that case, there would be no question of obtaining the assent of the president under article 304(b)
The defect owing to want of previous assent may, however, be cured if the bill subsequently receives the president’s assent, by reason of article 255. Where the original act received the president’s sanction under article 304(b), no fresh sanction is required where the amending act, without imposing any additional restriction, merely varied the form of restriction. also, sanction for the rules framed under the act is not necessary.
Articles 301/304 vis-a-vis compensatory tax
Article 304(b) confers a power upon the state legislature similar to that conferred upon parliament by article 302 subject to the following differences:
(1) while the power of parliament under article 302 is subject to the prohibition of preference and discrimination decreed by article 303(1) unless parliament makes the declaration under article 303(2), the state power contained in article 304(b) is made expressly free from the prohibition contained in article 303(1) because the opening words of article 304 contain a non obstante clause both to article 301 and article 303.
(2) while parliament’s power to impose restrictions under article 302 is not subject to the requirement of reasonableness, the power of the state to impose restrictions under article 304 is subject to the condition that they are reasonable.
(3) an additional requisite for the exercise of the power under article 304(b) by the state legislature is that previous presidential sanction is required for such legislation.
Broadly, the above analysis of the scheme of articles 301 to 304 shows that article 304 relates to the state legislature while article 302 relates to parliament in the matter of lifting of limitation, which flows from the freedom of trade and commerce guaranteed under article 301.]
Article 305: Saving of Existing Laws
Article 305 reads: “nothing in articles. 301 and 303 shall affect the provisions of any existing law except in so far as the president may by order otherwise direct, and nothing in article 301 shall affect the operation of any law made before the commencement of the constitution (4th amendment) act, 1955, in so far as it relates to, or prevent parliament or a state legislature from making any law providing for state monopoly in a particular sphere of trade or commerce [i.e. a law under article 19(6)(2)].”
An act passed before the commencement of the constitution is included within the expression “existing law” even though the act has been brought into force after the commencement of the constitution. it has been held that where an “existing law” authorized the imposition of a tax, a resolution passed after the commencement of the constitution to levy such tax would be covered by the expression “existing law” (Bangalore woolen mills verses corporation. of Bangalore ).
but if a bye-law, rule, order, notification or resolution made after the commencement of the constitution enhances or alters the rate of tax or duty authorized by the existing law, such subsequent bye-law, rule, etc. would not be “existing law”. Such ‘subordinate legislation’ (i.e. rules, regulations or notifications) would not be covered by article 305.
Where under an “existing law”, power was vested with an authority to impose a tax, the tax so levied by such authority would be saved by article 305 even though such a levy could not be imposed after the commencement of the constitution. If, by an amendment of “existing law” enacted after the commencement of the constitution, the character of the “existing law” is not changed, the amended law would be protected by article 305 (Lila Vati Bai verses State of Bombay).
Article 305 also lay down that laws creating state monopolies in a sphere of trade or commerce may not be declared invalid as infringing article 301. Article 19(6) (2) also provides for such state monopoly.
Article 307: Authority for carrying out purposes of articles 301-304
Article 307 empowers parliament to appoint by law such authority as it considers appropriate for carrying out the purposes of articles. 301-304. the exact composition of the authority to be established is left to the parliament.
Since the matters relating to trade, commerce and intercourse are more economic in content than legal, a body consisting of experts such as economists, businessmen and lawyers, may do a much better job in this area than a court having merely legal expertise.
Part 13: Difficulties in textual constructions
Text of the articles is a vital consideration in interpreting them. But, the text of-articles 301-307 are rather ambiguous. The expression ‘subject to’ and ‘notwithstanding anything in article… (i.e. non-obstante clause) are used inappropriately and indiscriminately.
Article 302 makes a relaxation in the favour of parliament, but art. 303 impose a restriction on that. Article 303 relates both to the parliament and state legislatures, though article 302 makes no relaxation in favour of the state legislature [(clause 1) relates to both, but (clause 2) only to the parliament]. Article 304 again begins with a non-obstante clause mentioning both the article 301 and article 303, though article. 304 relates only to the state legislature.
Freedom of trade and taxation
Part 12 of the constitution relates to ‘taxation’, while part 13 to ‘freedom of trade, commerce and intercourse’. Part 13 of the constitution presents a number of problems in its interpretation. Two types of interpretation -wide and narrow, have been adopted by the courts in a number of cases.
Wider view – according to the wide view, article. 301 imposes a general restriction on the legislative power and grants a freedom of trade, commerce and intercourse in all its series of operations, from all barriers, from all regulations, and the only qualification (or restriction) that is to be found in the article is the opening clause, namely, ‘subject to the other provisions of part 13’. The above view has two implications: firstly, article. 301 is not confined to the entries relating to ‘trade and commerce’. Any law made under any entry in any of the three lists (under the seventh schedule), including taxing laws, May, accordingly interfere with the freedom guaranteed by article 301.
Secondly, regulatory measures or measures imposing compensatory taxes for the use of trading facilities also come within the purview of the restrictions contemplated by article. 301. this will mean that if a state legislature wishes to regulate trade or commerce, it cannot do so without obtaining the president’s sanction as required by the proviso to article 304(b). the practical effect would be to stop or delay effective legislation which may be urgently necessary example in the interest of public health, and this would curb the autonomy of states (as the legislative powers of a state legislature has been held to be plenary with regard to subjects in list ii, which also includes imposition of taxes).
Narrower view – According to the narrow view, taxing laws are governed by part 12 provisions, and except article. 304(a) none of the other provisions of part 13 extend to the taxing laws. also, the provisions of part 13 apply only to such legislation as is made under the entries relating to ‘trade and commerce’. this will mean that the prohibition in article 301 or article 303(1) did not extend to taxing laws, for, the taxing power was distinct from the entries relating to ‘trade and commerce’. therefore, the freedom guaranteed by article 301 does not mean freedom from taxation, because taxation is not a restriction within the meaning of relevant articles in part 13. thus, taxation simpliciter is not within the terms of article 301.
In Atiabari case, the Supreme Court (dissenting opinion) adopted a narrower view of article 301 but not that narrows as discussed above. The majority, however, adopted a wider view of article. 301, as discussed above.
In Automobile ltd. case, the Supreme Court observed that neither the wide interpretation nor the narrow view is correct. “In our view, the concept of freedom of trade and commerce postulated by article 301 must be understood in the context of an orderly society and as part of a constitution which envisages a distribution of powers between states and union, and if so understood, the concept must recognize the need and legitimacy of some degree of regulatory control, whether by the union or the states; this is irrespective of the restrictions imposed by other articles in part 13”. Thus, the Supreme Court in automobile case held that tax laws are not outside the comprehension of article 301 but regulatory/compensatory taxes do not come within the purview of the restrictions contemplated by article 301. Only the taxes which directly impede the flow of trade or commerce are violative of the freedom guaranteed under article 301.
Conclusions
(1) Taxes have been held to be generally outside the purview of art. 301 (viz. compensatory/regulatory taxes) unless the tax is shown to be a mere pretext designed to injure inter-state trade, commerce, etc., i.e. directly impedes the flow of trade.
(2) Every state has power under entry 56 and entry 57 of list ii to impose taxes to compensate it for the services, benefits and facilities provided by it. Thus, courts have rejected a construction of article 304 which would have rendered entries 56 and 57 otiose or inoperative without the consent of union executive.
(3) The word ‘restriction’ in article 304(b) has been held not to include regulation. Therefore, taxes or other measures which are regulatory will not come within article 304(b).
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