Article 304 of the Constitution of India: Balancing State Legislative Powers and Freedom of Trade

Article 304 of the Constitution of India: Balancing State Legislative Powers and Freedom of Trade

Introduction

Part XIII of the Constitution of India, encompassing Articles 301 to 307, is dedicated to fostering economic unity and ensuring the unhindered flow of trade, commerce, and intercourse throughout the territory of India. Article 301 lays down the foundational principle: "Subject to the other provisions of this Part, trade, commerce and intercourse throughout the territory of India shall be free."[1] However, this freedom is not absolute and is subject to permissible restrictions outlined in subsequent articles. Article 304 stands as a crucial provision within this framework, delineating the powers of State Legislatures to impose certain taxes and restrictions on trade and commerce, thereby seeking a balance between the imperative of national economic integration and the fiscal and regulatory autonomy of the States. This article aims to provide a comprehensive analysis of Article 304, its constituent clauses, and its interpretation by the Indian judiciary, particularly in light of landmark pronouncements that have shaped its contemporary understanding.

Understanding Article 304: Text and Purpose

Article 304 of the Constitution of India reads as follows:

"304. Restrictions on trade, commerce and intercourse among States.— Notwithstanding anything in article 301 or article 303, the Legislature of a State 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 purposes of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President."[2]

Article 304 thus serves a dual purpose. Clause (a) permits States to levy taxes on goods imported from other States or Union Territories, provided such taxation does not discriminate against imported goods in favour of locally manufactured or produced goods. Clause (b) empowers State Legislatures to impose reasonable restrictions on the freedom of trade, commerce, and intercourse, both interstate and intrastate, if such restrictions are required in the public interest and the Bill for such purpose has received the prior sanction of the President.

Judicial Interpretation of Article 304(a): The Non-Discrimination Principle

The core tenet of Article 304(a) is the prevention of fiscal discrimination by States against goods originating from outside their borders. The judiciary has consistently scrutinized State taxation measures to ensure they do not create protectionist barriers. In Kalyani Stores v. State of Orissa and Others[3], the Supreme Court invalidated an enhanced duty on imported foreign liquor, noting that since no foreign liquor was manufactured in Orissa, the State could not impose a countervailing duty under Article 304(a) as there were no similar local goods against which the tax on imported goods could be benchmarked for non-discrimination. This implies that the very applicability of Article 304(a) hinges on the existence of "similar goods manufactured or produced in that State."

The Supreme Court in Video Electronics Pvt. Ltd. And Another v. State Of Punjab And Another[4] reiterated that Article 301, read with Article 304(a), prevents imposing on goods imported from other States a tax to which similar goods in the State are not subject so as to discriminate between them. Similarly, in Shree Mahavir Oil Mills And Another v. State Of J&K And Others[5], the Court emphasized that States cannot subject imported goods to a discriminatory rate of taxation, i.e., a higher rate vis-à-vis similar goods manufactured or produced within that State. The prohibition is against discriminatory taxation, irrespective of how it is brought about. The Kerala High Court in Asst Commissioner v. Associated Cement Companies Ltd.[6] described Article 304(a) as a provision prohibiting discrimination against imported goods. This principle was also at the heart of the dispute in Mohammad Siddiq Gautamlal v. State Of Madhya Bharat[7], where the taxation of pugrees imported from other states was challenged in light of exemptions for similar locally manufactured goods.

The landmark nine-judge bench decision in Jindal Stainless Limited And Another v. State Of Haryana And Others (2017)[8] (hereinafter Jindal Stainless 2017), affirming and clarifying its earlier 2006 ruling[9], definitively stated that only such taxes as are discriminatory in nature are prohibited by Article 304(a). This underscores that the focus of Article 304(a) is squarely on preventing differential tax treatment that disadvantages goods imported from other states compared to local goods.

Judicial Interpretation of Article 304(b): Reasonable Restrictions and Presidential Sanction

Article 304(b) allows State Legislatures to impose "reasonable restrictions" on the freedom of trade, commerce, and intercourse "in the public interest," subject to the crucial procedural safeguard of prior Presidential sanction for the introduction of the Bill.

Reasonable Restrictions in Public Interest

The concept of "reasonable restrictions" and "public interest" under Article 304(b) has been a subject of judicial scrutiny. In the seminal case of Atiabari Tea Co., Ltd. v. State Of Assam And Others[1], the Supreme Court struck down the Assam Taxation (on Goods carried by Roads or Inland Waterways) Act, 1954, inter alia, because it did not comply with the procedural and substantive requirements of Article 304(b). The Court held that any restriction imposed by a State Legislature must be reasonable and in the public interest. The determination of reasonableness involves a balancing act between the extent of the restriction and the public good it seeks to achieve. As observed by the Allahabad High Court in Suresh Chandra And Others v. State Of Uttar Pradesh And Another[10], unless it is shown that the restrictions imposed are not reasonable, the law cannot be held void under Article 301. The Supreme Court in State Of Karnataka And Another v. Hansa Corporation[11] upheld the Karnataka Tax on Entry of Goods Act, finding its provisions, including those affecting petty dealers, to be reasonable and compliant with Article 304.

The Proviso: Prior Sanction of the President

The proviso to Article 304(b) mandates that no Bill or amendment imposing such restrictions shall be introduced or moved in the State Legislature without the previous sanction of the President. This is a significant constitutional check on the power of States to restrict trade and commerce. The Supreme Court in Atiabari Tea Co.[1] highlighted the absence of prior Presidential sanction as a fatal flaw. Various High Courts have consistently underscored the mandatory nature of this requirement. The Madras High Court in D. Sivakumar v. Govt. Of T.N.[12] and M. Palanisamy v. State Of Tamil Nadu[13] explicitly noted this prerequisite. The Jharkhand High Court in Tata Steel Limited v. The State Of Jharkhand & Ors.[14] reiterated that legislation under Article 304(b) is subject to the prior sanction of the President. The Karnataka High Court in J.S Ramesh & Ors. v. State Of Karnataka[15] discussed the necessity of prior sanction or subsequent assent (under Article 255, which can cure the defect of prior sanction in some cases, though Article 304(b) specifically mentions "previous sanction") for amendments imposing additional restrictions.

The Patna High Court in Bihar Chamber Of Commerce And Etc. v. State Of Bihar And Others[16] drew a distinction between Parliament's power under Article 302 and a State's power under Article 304(b), noting that the latter is subject to the test of reasonableness and the requirement of prior Presidential sanction, unlike restrictions under Article 302.

The Interplay between Article 301 and Article 304

The relationship between Article 301 (guaranteeing free trade) and Article 304 (permitting certain State actions) has evolved through judicial interpretation.

The early view, articulated in Atiabari Tea Co.[1], was that Article 301 cast a wide net, potentially covering even fiscal measures if they directly and immediately restricted trade. This made compliance with Article 304(b) critical for many State laws. Subsequently, in Automobile Transport (Rajasthan) Ltd., Etc. v. State Of Rajasthan And Others[17], the Supreme Court carved out an exception for "compensatory taxes," holding that such taxes, being regulatory in nature and aimed at facilitating trade (e.g., by maintaining roads), do not violate Article 301 and thus do not require validation under Article 304(b). This doctrine was followed in cases like G.K Krishnan And Others v. State Of Tamil Nadu And Others[18].

However, the nine-judge bench in Jindal Stainless 2017[8] significantly re-calibrated this understanding. The Court held that:

  • Taxes simpliciter are not within the contemplation of Part XIII. The word 'Free' in Article 301 does not mean "free from taxation."
  • Only such taxes as are discriminatory in nature are prohibited by Article 304(a).
  • The compensatory tax theory, as propounded in Automobile Transport, is not compatible with the constitutional scheme delineated in Part XIII.

Despite overturning the compensatory tax theory as an independent exception, the Court in Jindal Stainless 2017[8] affirmed that the doctrine of 'direct and immediate effect' of the impugned law on trade and commerce under Article 301, as propounded in Atiabari, continues to apply. Therefore, if a State law, fiscal or otherwise, directly and immediately restricts the freedom guaranteed under Article 301, it must satisfy the conditions of Article 304. As held in State Of Kerala v. A.B Abdul Kadir And Others[19], only those taxes that directly and immediately impede trade, commerce, and intercourse fall within the prohibitive ambit of Article 301. If a law is found to be restrictive in this sense, then the saving provisions of Article 304, including the non-discrimination test of clause (a) for taxes on imported goods or the reasonableness and Presidential sanction requirements of clause (b) for other restrictions, become applicable.

Furthermore, restrictions that go beyond mere regulation can infringe Article 301. In State Of Mysore v. H. Sanjeeviah[20], provisos to Forest Transit Rules were invalidated as they were deemed restrictive and not merely regulatory, and Article 305 did not shield them as they were executive rules lacking demonstration of reasonableness or public interest, considerations analogous to those under Article 304(b).

Procedural Aspects and Legislative Competence

The power of State Legislatures to enact laws is derived from Articles 245 and 246 of the Constitution, read with the legislative lists in the Seventh Schedule. However, this power, when it concerns matters affecting trade, commerce, and intercourse, is circumscribed by Part XIII. Article 304 acts as a specific enabling provision for States, subject to its conditions. The requirement of Presidential sanction under Article 304(b) is a significant procedural check, ensuring that State laws imposing restrictions on trade are vetted at the Union level, thereby safeguarding the national interest in maintaining free trade across the country.

The Kerala High Court in Prakash Nayak v. District Collector[2] explicitly quoted Article 304 and its proviso, highlighting its relevance in challenges to state laws affecting trade. The failure to obtain prior Presidential sanction can render a statute enacted under Article 304(b) unconstitutional, as suggested by the challenge in D. Sivakumar[12] concerning the Tamil Nadu Minor Minerals Concession Rules.

Conclusion

Article 304 of the Constitution of India plays a pivotal role in mediating the complex relationship between the constitutional guarantee of free trade and commerce under Article 301 and the legitimate fiscal and regulatory powers of the State Legislatures. Clause (a) of Article 304 ensures a level playing field by prohibiting discriminatory taxation against goods imported from other States, a principle strongly reinforced by the Supreme Court in Jindal Stainless 2017[8]. Clause (b), with its twin requirements of "reasonable restrictions in the public interest" and "prior Presidential sanction," provides a constitutionally sanctioned pathway for States to regulate trade and commerce within their jurisdictions, provided such regulations are justified and procedurally sound.

The judicial interpretation of Article 304, particularly the shift heralded by Jindal Stainless 2017[8], has clarified that non-discriminatory taxes simpliciter do not fall foul of Article 301. However, any State law, whether fiscal or regulatory, that directly and immediately restricts the freedom of trade, commerce, and intercourse must pass the tests laid down in Article 304. This provision thus remains central to maintaining the delicate constitutional balance necessary for India's economic federalism, ensuring that while States retain necessary legislative powers, the overarching goal of a unified national market is not undermined.

References

  1. Atiabari Tea Co., Ltd. v. State Of Assam And Others (And Connected Petition And Appeals), (1961 AIR SC 232, Supreme Court Of India, 1960).
  2. Prakash Nayak v. District Collector, (Kerala High Court, 2016), quoting Article 304 of the Constitution of India. Also see M. Palanisamy v. State Of Tamil Nadu, (Madras High Court, 2012).
  3. Kalyani Stores v. State Of Orissa And Others, (1966 AIR SC 1686, Supreme Court Of India, 1965).
  4. Video Electronics Pvt. Ltd. And Another v. State Of Punjab And Another, (Supreme Court Of India, 1989).
  5. Shree Mahavir Oil Mills And Another v. State Of J&K And Others, (Supreme Court Of India, 1996).
  6. Asst Commissioner v. Associated Cement Companies Ltd., (Kerala High Court, 1997).
  7. Mohammad Siddiq Gautamlal v. State Of Madhya Bharat, (1956 SCC ONLINE MP 46, Madhya Pradesh High Court, 1956).
  8. Jindal Stainless Limited And Another v. State Of Haryana And Others, (2017 SCC 12 1, Supreme Court Of India, 2016).
  9. Jindal Stainless Ltd. (2) And Another v. State Of Haryana And Others, (Supreme Court Of India, 2006), also referred to as Jindal Stainless Ltd. v. State of Haryana, (2006) 7 SCC 241, as cited in Nand Kishore & Company v. State Of Punjab & Another, (Punjab & Haryana High Court, 2008).
  10. Suresh Chandra And Others v. State Of Uttar Pradesh And Another, (Allahabad High Court, 1977).
  11. State Of Karnataka And Another v. Hansa Corporation, (1980 SCC 4 697, Supreme Court Of India, 1980).
  12. D. Sivakumar v. Govt. Of T.N., (Madras High Court, 2009).
  13. M. Palanisamy v. State Of Tamil Nadu, (Madras High Court, 2012).
  14. Tata Steel Limited v. The State Of Jharkhand & Ors., (2012 SCC ONLINE JHAR 427, Jharkhand High Court, 2012).
  15. J.S Ramesh & Ors. v. State Of Karnataka, (Karnataka High Court, 1996).
  16. Bihar Chamber Of Commerce And Etc. v. State Of Bihar And Others, (Patna High Court, 1995).
  17. Automobile Transport (Rajasthan) Ltd., Etc. v. State Of Rajasthan And Others,(In All The Three Appeals), (1962 AIR SC 1406, Supreme Court Of India, 1962).
  18. G.K Krishnan And Others v. State Of Tamil Nadu And Others, (1975 SCC 1 375, Supreme Court Of India, 1974).
  19. State Of Kerala v. A.B Abdul Kadir And Others, (1969 SCC 2 363, Supreme Court Of India, 1969).
  20. State Of Mysore v. H. Sanjeeviah ., (1967 AIR SC 1189, Supreme Court Of India, 1967).
  21. Other references consulted include: M/S. Loharn & Steel Industries Ltd., Hyderabad v. The Govt. Of A.P Rep. By Its Secretary, Commercial Taxes Deptt., Hyderabad And Another, (1990 SCC ONLINE AP 363, Andhra Pradesh High Court, 1990); State Of Kerala v. Lifestyle International Pvt. Ltd., (Kerala High Court, 2020).