Most of the States of the country have framed law with a view to levy tax on the entry of the goods into a local area of the State for consumption, use and sell therein. It is pertinent to mention that Clause (3) of Article 246 of Constitution confers power to make laws for such State or any part thereof with respect to any of the matter enumerated in List II of the Seventh Schedule of the Constitution of India. The power of the State Legislature in enacting the Entry Tax Act has to be traced to Entry 52 enumerated in List II of the Seventh Schedule of the Constitution of India. However, recently such laws have been amended to provide for that entry tax shall also be leviable on the entry of goods imported into a local area from any place outside the local area including a place outside the country. The issue that arises is as to whether the State Legislature is competent to enact a law levying entry tax on the entry of goods imported in the local area of the State from outside the country.

The Constitution of India is unique in the sense that it contains an exhaustive enumeration and division of the legislative powers of taxation between the Centre and the States. A scrutiny of Lists I and II of the VIIth Schedule to the Constitution of India would show that there is no overlapping anywhere in the taxing power and the Constitution gives independent source of powers to the Union and the States. Under the three lists of the VIIth Schedule to the Constitution, a taxation entry in a legislative list may be in respect to an object or an event or may be with respect to both. Article 246 makes it clear that the exclusive powers conferred on the Parliament or State to legislate on a particular matter includes the power to legislate with respect to that matter. Hence, where the entry describes an object of tax, all taxable events pertaining to the object are within that field of legislation unless the event is specifically provided for elsewhere under a different legislative head. The logical corollary of holding that taxes are imposed only on taxable event is that even when an entry speaks of a levy of tax on goods, it does not include the right to impose taxes on taxable event which have been separately provided for in other taxation entries.

The tax in respect of goods has sometimes been referred to as a tax on an aspect of goods, and sometimes a taxable event. But there can be no overlapping in the field of taxation and if such a tax is specifically provided for in a legislative entry, the same effectively narrows the field of taxation available under other related entries. The State therefore cannot, under the guise of levying tax under any of the entries of the State List, impinge on the exclusive power of the Union under any of the entries of the Union List. The State, therefore, while exercising the power under Entry 52 of the State List i.e. while levying tax on the entry of the goods into a local area for consumption, sale or use therein, cannot levy tax on the fields covered by the Union List or cannot impinge the exclusive power of the Union to levy tax or duties under the Union List. Therefore, the State while levying tax under Entry 52 of List II cannot entrench upon the power of the Union to levy tax or duties on certain transactions and/or events which fall within the exclusive domain of the Union by virtue of the specific entry in List I of the VIIth Schedule to the Constitution of India.

Articles 245 and 246 distribute legislative powers between Parliament and the State Legislature as per the three lists set forth in the VIIth Schedule to the Constitution of India. Entry 41 deals with trade and commerce with foreign countries, import and export across customs frontiers, definition of customs frontiers. Entry 83 deals with duties of custom including export duties. Thus, Union is empowered to make any law with regard to trade and commerce with foreign countries as well as the levy of the duties of custom. The duty of customs is leviable on the import of the goods into India. All levy connected or related to the import of the goods is within the exclusive domain of the Union.

The object of insertion of Entries 41 and 83 in the Union List is to place the import as well as the foreign trade beyond the taxing powers of the State. It is Parliament alone which can make laws with respect to foreign trade. If the import or export transactions are to be subjected to any duties or taxation, it is only the Union which can impose such a tax. A transaction which amounts to import of goods into the territory of India cannot be converted into entry of goods into a local area so as to empower the State to levy entry tax on such import from outside the country. If such an interpretation is given to Entry 52 of List II of the VIIth Schedule to the Constitution of India, the very purpose of Entries 41 and 83 of the List I of the Constitution of India shall become otiose.

When a field of taxation is specifically covered under the Union List, the same must be deemed to be excluded from the State List and the State shall have no power to levy tax on the subjects which falls within the purview of any of the entry of List I. When goods are imported from abroad, the transaction is a single transaction commencing with agreement of sale with overseas suppliers and terminating when the act of importation is for use in the local area of the State. It is the entry into a local area for use or consumption that gives rise to a levy. Entry 52 of the State List does not contemplate levy of entry tax on goods imported from outside the country inasmuch as the same would amount to levy of tax on import of goods into the country which is a subject matter covered by Entry 83 of List I of VIIth Schedule to the Constitution of India.

Further Article 286 of the Constitution of India also puts restrictions upon the imposition of tax on the sale or purchase of goods where such sale and purchase
inter alia takes place in course of import into the territory of India or export of the goods outside the territory of India. The object and purpose of putting such restriction on the power of the State to impose tax in course of import into the territory of India or export of the goods outside the territory of India is in conformity with entry 41 of List I of Seventh Schedule of Constitution of India by which trade and commerce with foreign country in the course of import and export of goods has been kept within the exclusive domain of the Union. The intention of framers of the Constitution, while distributing the legislative powers between State and Union, was to keep import into the territory of India or export of the goods outside the territory of India to be solely within the domain of Union. Levy of any tax or duty on the import into the territory of India or export of the goods outside the territory of India is solely within the domain of Union. In case, the State is permitted to levy entry tax on import into the territory of India under the guise of Entry 52 of list II of Seventh Schedule of Constitution of India, the same would amount to levy of tax on import of goods into the territory of India which will go against the spirit and intent of the Constitutional provisions to keep the foreign trade outside the purview of the State and would also amount to entrenching upon the power specifically reserved for the Union.