Report No. 61

Importance of foreign trade in the interests of federal finance and of sales tax in the interests of State economy.- Export and import trade, that is foreign trade has all along been under the exclusive power and jurisdiction of the Centre (entry 41 of the Union List). This was so even under the Government of India Act, 1935 (entry 19 of the Federal List in the Seventh Schedule); but in that Act there was no provision corresponding to Article 286 of the Constitution. I need not stop here to consider section 297 of the Government of India Act, 1935 as that section cannot be of much help in grasping the scope of Article 286 except that section prohibited under sub-section (1)(a), a Provincial Legislature or a Provincial Government from enacting any law or taking any executive action prohibiting or restricting the entry into or export from the Province of goods of any class or description.

It should be noted that in view of the language used, this prohibition or restriction was operative not only in relation to other Provinces but also as regards foreign countries. Foreign trade being thus within the exclusive competence of Parliament, Parliament has the power to impose by law, and has in exercise of that power actually imposed by law, customs duties on imports and exports under the Sea Customs Act, 1878 (now under the Customs Act, 1962) read with the Indian Tariff Act, 1934 (entry 83 of the Union List corresponding to entry 44 of the Federal List in the Seventh Schedule to the Government of India Act, 1935).

Importance of import and export and customs duties on import and export in the interests of federal finance and economy cannot be over-emphasised. Therefore, the framers of the Constitution were anxious that our foreign trade should not be subjected to the power of the States to impose by law taxes on sales or purchases of goods if such sales or purchases could be regarded as sales or purchases of goods taking place in the course of import or export.

At the same time, in the interests of State finance and economy, the makers of the Constitution did not like to curtail unnecessarily the power of the States to impose taxes on the sales or purchases of goods because perhaps the most important source of revenue for the States was the taxation of sales or purchase of goods under entry 54 of the State List. They, therefore, proceeded on the view that only those sales or purchases should be taken out of the States' power to impose taxes which were in a strict sense sales or purchase taking place in the course of import and export and no more. And this objective was sought to be achieved by Article 286(1)(b).

In the absence of the bar of Article 286(1)(b), sales and purchases taking place in the course of import or export might be subjected to taxes under the sales tax laws of the States. The result in that case would be not only reduction of the volume of foreign trade but also double taxation. This was noted by the Supreme Court in the first Travancore case in 1952 and also in the second Travancore case in 1953. Thus, Patanjali Sastri, C.J., in the first Travancore case observed in paragraph 12 of the judgment as reported in AIR as follows:-

"It might well be argued, in the absence of a provision like clause (b) prohibiting in terms the levy of tax on the sale or purchase of goods where such sales or purchases are effected through the machinery of export and import, that both the powers of taxation, though exclusively vested in the Union and the States respectively, could be exercised in respect of the same sale by export or purchase by import, the sales tax and the export duty being regarded as essentially of a different character.

A similar argument induced the Federal Court to hold in Province of Madras v. Boddu Paidanna and Sons, 1942 FCR 90, that both Central excise duty and provincial sales tax could be validly imposed on the first sale of groundnut oil and cake by the manufacturer or producer as 'the two taxes are economically two separate and distinct imposts'. Lest similar reasoning should lead to the imposition of such cumulative burden on the export-import trade of this country which is of great importance to the nation's economy, the Constituent Assembly may well have thought it necessary to exempt in terms sales by export and purchases by import from sales tax by inserting Article 286(1)(b) in the Constitution."

Then in the second Travancore case in 1953, while explaining and further clarifying the decision in the first Travancore case, the same Chief Justice (Patanjali Sastri, C.J.) observed in paragraph (14) of the judgment as reported in AIR- "It is true, as pointed out in the previous decision, that the export-import trade is important to our national economy, but it is no less true that the State-power of taxation is essential for carrying on its administration, and it must be as much the constitutional purpose to protect the one as not unduly to curtail the other.

The question really is, how far did the Constitution makers want to go in protecting the foreign trade by restricting the power of taxing sales or purchases of goods which they conferred on the States under entry 54 of List II. The problem before them was one of balancing and reconciling the rival claims of foreign trade in the interests of our national economy and of the States' power of taxation in the interests of the expanding social welfare needs of the people committed to its charge and we have their solution as expressed in the terms of clause (1)(b).

It is for the Court to interpret the true meaning and scope of those terms without assuming that the one constitutional purpose was regarded as more important than the other. This Court has already held in the previous decision that clause (1)(b) protects the export-import trade of this country from double taxation by prohibiting the imposition of sales tax by the State on export sales or import purchases, and we find no warrant in the language employed to extend the protection to cover the last purchase before export or first sale after import."

In the above analysis of the constitutional position I have tried to show that the implication of Article 286 even before 1956 was that there might be some sales or purchases in the twilight zone of foreign trade which could legitimately be regarded as part and parcel of foreign trade itself and therefore be regarded as sales or purchases in the course of import or export so as to take them out of the States' power and competence. It is therefore, the essential job of all concerned to find out and pinpoint as correctly as possible, sales and purchases in that twilight zone so that such sales and purchases may be excluded from the power and competence of the States.

Before 1956, there was no specific provision in the Constitution on this aspect of the matter. Naturally therefore it was left to be decided and determined by the Courts and in final analysis by the Supreme Court itself. And as we have already indicated, Supreme Court, did decide and determine this thorny question although, as we shall presently see, the decisions of the Supreme Court could not set at rest all the doubts and misgivings as to the scope and meaning of the expression 'sale or purchase of goods taking place in the course of import of the goods into, or export of the goods out of, the territory of India'.