State’s Authority to Tax Imported Goods Post-Customs Clearance: Non-Applicability of International Trade Agreements to Intra-State Sales Tax

1. Introduction

This commentary examines the judgment delivered on 15 April 2025 by the Madras High Court in the case of M/S. Tai Industries Ltd v. State of Tamil Nadu (W.A. No. 474 of 2021). The appellant, a registered dealer importing food products from the Kingdom of Bhutan, challenged the validity of amendments to the Tamil Nadu General Sales Tax Act, 1959 that imposed differential sales-tax rates on imported goods at the point of first sale within the State. The appellant relied on the India-Bhutan Trade and Commerce Agreement (1995) and constitutional provisions to claim immunity from state taxation. The respondents comprised the State of Tamil Nadu, the Commercial Tax Officer, and the Union of India.

2. Summary of the Judgment

The High Court dismissed the appeal, holding:

• Articles I and V of the India-Bhutan Agreement guarantee duty-free crossing at the border but do not preclude state sales tax once goods clear customs.
• The Protocol to the Agreement, specifying entry/exit points, regulates border formalities and does not limit a State’s power to tax post-clearance sales.
• The Supreme Court decision in State of Kerala & ors v. Fr. William Fernandez (2021 11 SCC 705) confirms that imported goods lose any immunity from state taxation after release from customs barriers.
• Article 304 of the Constitution applies only to inter-State commerce and does not extend to imports from foreign countries.

3. Analysis

3.1 Precedents Cited

The court relied primarily on State of Kerala & ors v. Fr. William Fernandez, where the Supreme Court held (at para. 125) that goods imported into India and released from customs are subject to state taxation on par with domestic goods. This principle rests on Entry 54 of List II (State List) empowering States to levy sales tax on goods.

The appellant also invoked Article 304 of the Constitution (restraining discriminatory State laws affecting inter-State trade), but the court clarified that its scope is confined to commerce within India’s federal borders.

3.2 Legal Reasoning

1. Interpretation of the Trade Agreement: Articles I (free trade at the border) and V (duty exemption for Bhutanese exports and third-country imports) govern customs duties and border controls only. Once goods clear customs, they enter the domestic market and fall under State taxation powers.
2. Application of Supreme Court Authority: Citing Fernandez, the court held that post-customs imports lose any special immunity, consistent with the constitutional division of taxing powers (Entries 54/82, Seventh Schedule).
3. Scope of Article 304: The provision applies solely to prevent unreasonable restrictions between Indian States and Union Territories. It does not constrain State taxation of imported goods from abroad.

3.3 Impact

This judgment clarifies that international trade agreements providing for duty-free imports do not preclude subsequent State-level sales taxation once goods enter the domestic market. It reaffirms States’ constitutional autonomy to tax imported goods equally with domestically produced goods. Future disputes between taxpayers and tax authorities will rest on this delineation between customs duties and State sales tax powers.

4. Complex Concepts Simplified

• Customs Barrier: The checkpoint at which imported goods clear federal import duties before entering domestic circulation.
• State Sales Tax: A levy imposed by State governments on the sale or first transfer of goods within the State’s territory.
• Trade Agreement Protocol: Annexure specifying border posts and procedures for implementing an international trade pact.
• Article 304 of the Constitution: Prohibits unreasonable or discriminatory State laws affecting trade between Indian States; does not cover imports from foreign nations.
• Entry 54, List II: Constitutional head empowering States to impose taxes on the sale or purchase of goods.

5. Conclusion

The Madras High Court’s decision in M/S. Tai Industries Ltd v. State of Tamil Nadu establishes a clear boundary between international customs duties and domestic sales taxation. It confirms that once imported goods are released from customs, they become subject to State sales tax, notwithstanding duty-free import concessions under bilateral treaties. The judgment reinforces the constitutional distribution of taxing powers and will serve as a guiding precedent for assessing the interplay between international trade agreements and State tax regulations.