• Legis Scriptor

Compensatory Tax and Freedom of Trade

Authored By- Divya Surana

Key Words: #Article_301 #Freedom_of_Trade #Compensatory_Tax #Regulatory_Tax #Chapter_32_of_the_Constitution

Abstract: This article deals with the Constitutional provision relating to freedom of trade and its restrictions. Whether the compensatory and regulatory tax levied by the government of India is hindering the freedom provided by the Constitution of India.


This topic is covered under the Constitution of India. To maintain the economic unity in the diverse country the freedom of trade, commerce and intercourse was much necessary. To maintain the national economic fabric the framers of the Constitution were well versed with the importance of freedom of trade, commerce, and intercourse. Hence, Chapter 32 consisting of Article 301-Article 307 deals with the topic of freedom of trade and its restrictions.

What is Compensatory Tax?

There is no specific definition or particular legislature for the same but it is understood in the sense that the tax levied for facilitating the trade and commerce. The taxes come under the purview of compensatory tax are taxes levied on toll for enabling the free flow of trade by improving and maintaining the conditions of roads. The compensatory taxes are never for creating hindrance in freedom of trade. It is subject to reasonableness.

Freedom of Trade:

Trade is necessary because no individual or no individual state is self-sufficient for the production. Each and everyone is dependent on each other for their needs. This freedom is enshrined in Article 301 of the Constitution of India. Article 302 to 305 tells about the restriction on freedom of trade and these restrictions are very much necessary because absolute freedom is always harmful.

Article 301 has its roots from the Australian Constitution; section 92 of the Australian Constitution freedom of trade has been guaranteed. Although, the freedom of trade in India is different from freedom of trade in Australia in the Australian Constitution allows only inter-state trade, whereas the Indian Constitution allows intra-state trade. Freedom in Australia is absolute but at the same time, it created many problems so now it is regulated and relative. In India it is restrictive.

Article 19(1) (g) under part 3 of the constitution of India provides the freedom to practice any occupation, trade, or business in the interest of the general public. But, Article 301 is a constitutional right and it can be claimed by persons whereas, Article 19(1)(g) is a Fundamental Right and can only be claimed by the citizens.

Important Precedents:

The landmark case relating to the topic is Atiabari Tea Co. Ltd. V. State of Assam,[1] the facts of the case are- A tax levied by the State of Assam on the carriage of tea by road or inland waterways was held bad for "the transport or movement of goods is taxed solely on the basis that the goods are thus carried or transported, and thus "directly affects the freedom of trade as contemplated by Art. 301."The Supreme Court took the view that the freedom guaranteed by Art. 301 would become illusory if the movement, transport, or the carrying of goods were allowed to be impeded, obstructed, or hampered by the taxation without satisfying the requirements of Article 302 to 304. The court did not take into consideration the quantum .of tax burden, which by no means was excessive. Simply because the tax was levied on 'movement' of goods, from one place to another, it was held to offend Art. 301.

The same case was reconsidered in the case of Automobile Transport Ltd. V. State of Rajasthan[2]. The main issue, in this case, was to deduce a working test to decide whether a tax is compensatory or not because it was to enquire whether the trading people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. Then the court decided that regulatory measures imposing compensatory tax do not come within the purview of the restrictions contemplated in this part.

In State of M.P. v. Bhailal Bhai[3], a tax was imposed under Madhya Bharat Sales Tax Act, 1950 on sales of tobacco leaves, manufactured tobacco, and tobacco used for bidi manufacturing and it was payable at the point of sales by the importer in Madhya Bharat. The petitioners contended that the tax was unconstitutional as it was violative of Article 301. Das Gupta, J., held that the tax was violative of Article 301 as it was directly impeding the freedom of trade and commerce. This case was not considered as the exception under Article 304(a), because similar goods manufactured in taxing State were not subjected to the impugned tax. And hence the final verdict went into the favor of petitioners.

In G.K. Krishna v. State of Tamil Nadu[4] the petitioner challenged the validity of government notification under the Madras Motor Vehicles Taxation Act, 1931, enhancing Tax on omnibuses from Rs. 30 per seat per quarter to Rs. 100, on the ground, that it is violative of Article 301.

The Supreme Court held that the tax levied was compensatory and was for avoiding unhealthy competition and hence, not violative of freedom of trade.

The court kept on dealing with such matters but some of the common obiter dicta from these precedents are:

The collection of toll for the use of roads, bridges, aerodromes, etc. do not operate as barriers or hindrance of trade. For, tax to become a prohibited tax, it has to be a direct tax, the effect of which is to hinder the movement part of a trade. If a tax is compensatory then it cannot be operated as restriction of freedom of trade.


Compensatory tax is levied for the smooth functioning and working of the trade. The resources of the state are used by the traders and, to maintain these resources the state levies the tax in the name of compensatory tax. It is a myth that has been levied to increase the barriers of trade.

[1] AIR 1951 SC 232 [2] AIR 1962 SC 1406 [3] AIR 1964 SC I006 [4] AIR 1975SC 583


1. Constitutional Law of India, Dr. JN Pandey, 56th edition.