A

PROJECT REPORT

ON

“STATE’S POWER TO REGULATE TRADE AND COMMERCE”

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

PRESCRIBED FOR

B.A. LLB (HONS.) SEMESTER-IV

Submitted To: Submitted By;

Mr. Ajay Kumar Barnwal Name: Tanay Khandelwal

Assistant Professor Registration No. : 161401106

MANIPAL UNIVERSITY, JAIPUR

(Dehmi Kalan, Jaipur-Ajmer Highway, Jaipur-303007)

2017

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 ACKNOWLEDGEMENT

I hereby acknowledge the help and support of the teachers, who helped me in compiling this
project. I thank the faculty and management of Manipal University Jaipur, School of Law, as
the resources that were necessary to complete the project were provided by them.
I am highly indebted to my teacher “Mr. Mr. Ajay Kumar Barnwal” for his guidance and
constant supervision as well as for providing necessary knowledge regarding the subject at
hand and also for his support in completing the project.
I would like to express my gratitude towards my parents and friends for their kind
cooperation and encouragement which help me in completion of this project.

_______________
TANAY KHANDELWAL

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 CERTIFICATE

This is to certify that Mr. Tanay khandelwal, student of B.A. LL.B. (hons.) semester IV,
School of Law Manipal University Jaipur has completed his CONSTITUTION project work
entitled “STATE’S POWER TO REGULATE TRADE AND COMMERCE” under my
supervision and guidance.
It is further certified that the candidate has made sincere efforts for the completion of this
project.

DATE: 30/01/2018
_______________

MR. AJAY KUMAR BARNWAL

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Contents
INTRODUCTION .................................................................................................................................. 5

STATE’S POWER TO REGULATE TRADE AND COMMERCE ..................................................... 6

CONCLUSION AND SUGGESTION ................................................................................................... 9

BIBLIOGRAPHY ................................................................................................................................. 11

WEBLIOGRAPHY............................................................................................................................... 11

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 INTRODUCTION

Trade & commerce may be domestic or foreign or international. Indian Constitution deals
with domestic trade and commerce, i.e. within the territory of India. Such commerce may be
of two types:-

1.Intra-state, i.e. commerce which is confined within the territory of a State;

2. Inter-State, i.e. trade and commerce which overflows the boundary of one state and which
extends to two or more States.

No federal country has an even economy. Some of its constituent units may be agricultural
while others may be industrial. Some states may produce raw materials while the processing
and manufacturing industries may be located in other States because of several factors, like
availability of cheap labour or electric energy. The circumstance creates the possibility that
the constituent units which have legislative powers of their own may, to serve their own
narrow and parochial interests, seek to create trade barriers by restricting the flow of
commodities either from outside or to other units.

Free flow of trade and commerce and intercourse within a federal country having a two-tier
polity is a pre-requisite for promoting economic unity of the country. An attempt has,
therefore, been made in all federations, through adopting of suitable constitutional formulae,
to create and preserve a national economic fabric, transcending State boundaries, to minimize
the possibility of emergence of local economic barriers, to remove impediments in the way of
inter-State trade and commerce and thus helping in welding the whole country into one single
economic unit so that the economic resources of all the various regions may be exploited,
harnessed and pooled to the common advantage and prosperity of the country as a whole.

Most federal constitutions contain special provisions to protect this freedom. The
Indian Constitution also contains provisions guaranteeing freedom of commerce, trade and
intercourse throughout the territory of India. The whole field of freedom of trade, commerce
and intercourse bristles with complex questions not only in regard to constitutional aspects
but also in respect of the working of the arrangements on account of impact of legislation of
the Union on the powers of the States and the effect of legislation of both the Union and the
States on free conduct of trade, commerce and intercourse.

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However, no freedom can be absolute. Limitations for the common good are inherent in such
freedom, lest it should degenerate into a self-defeating license.

STATE’S POWER TO REGULATE TRADE AND COMMERCE

Article 303(1) imposes limitation on State Legislatures, also Article 304 provides two
exceptions in favour of State Legislatures:-

Limitations imposed by Article 303(1) on the legislative power of Parliament apply to that of
the State Legislatures also. But, the State Legislatures do not have the exceptional power to
enact discriminatory laws, which is available to Parliament by virtue of
Article 303(2). Article 304 carves out two exceptions in favor of the State Legislatures, to the
freedom guaranteed under Article 301:

1. A State legislature may by law 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, not to discriminate between goods so imported and goods so
manufactured or produced. [Clause (a) of Article 304].

2. The legislature of a State may by law impose such reasonable restrictions on the freedom
of trade, commerce and intercourse with or within that State as may be required in the public
interest [Clause (b) of Article 304]. But, the exercise of this power is subject to the proviso
that no Bill or amendment for the purposes of Article 304(b) shall be introduced or moved in
the State Legislature without obtaining the previous sanction of the President.

Article 304 consists of two clauses, and each clause operates as a proviso to Article 301 and
303.
Article 304 empowers the States, notwithstanding anything in Article 301 and 303, to make
laws and regulate and restrict the freedom of trade and commerce to some extent. A
restriction imposed by a State law on freedom of trade and commerce declared by Article 301
cannot be valid unless it falls within Article 304.

Article 304(a) imposes no ban, but lifts the ban imposed by Article 301 and 303, subject to
one condition. Article 304(a) is thus enabling and prospective. According to Article 304(a), a
State legislature may by law impose on goods imported from other States any tax to which

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similar goods manufactured or produced within that State are subject, so, however, as not to
discriminate between goods so imported and goods so manufactured or produced.

In Guruviah1, the Court explained the purport of Article 304(a) as follows:

“Article 304(a) does not prevent levy of tax on goods; what it prohibits is such levy of tax on
goods as would result in discrimination between goods imported from other States and
similar goods manufactured or produced within the State. The object is to prevent
discrimination against imported goods by imposing tax on such goods at a rate higher than
that borne by local goods since the difference between the two rates would constitute a tariff
wall or fiscal barrier and thus impede the free flow of inter-State trade and commerce. The
question as to when the levy of tax would constitute discrimination would depend upon a
variety of factors including rate of tax and the item of goods in respect of the sale of which it
is levied”.

In State of Karnataka V. Hansa corporation2, the Supreme Court said that a tax levied
within the constraints of Article 304(a) would not be violative of Article 301. If a State tax
law accords identical treatment in the matter of levy and collection of tax on the goods on the
goods manufactured within the State and identical goods imported from outside the State,
Article 304(a) will be complied with. The effect of Article 304(a) is to treat imported goods
on the same basis as goods manufactured or produced within the State. The State tax was
held valid in the instant case under Article 304(a) as it was levied both on manufactured
goods and similar goods imported from outside in a local area.

Notwithstanding anything in Article301 to 303, Article 304(b) authorizes a State legislature

to impose by law such reasonable restrictions on the freedom of trade, commerce or
intercourse with or within the State as may be required in public interest.

The proviso to Article 304(b) says that no bill or amendment for this purpose shall be
introduced in the State legislature without the previous sanction of the President.

For application of Article 304(b) to a tax on trade, three conditions need to be fulfilled:
1. The Bill has to be introduced or moved in the State legislature with the prior sanction of
the president. Or that the bill has been assented to by the President.

1
V. Guruviah Naidu & Sons V. State of Tamil Nadu, AIR 1977 SC 548
2
AIR 1981 SC 463

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2. The tax in question constitutes a reasonable restriction.

3. The tax has been levied in public interest.

In Automobile Transport3, the Supreme Court compared Article 304(b) with Article 302 in
the following words:

“This provision [Article 304(b)] appears to the State analogue to the Union Parliament’s
authority defined by Article 302. Leaving aside the pre-requisite of presidential sanction for
the validity of State legislation under clause (b) provided in the proviso thereto, there are two
important differences between Article 302 & Article 304(b). The first is that while the power
of Parliament under Article 302 is subject to the prohibition of preferences and
discriminations decreed by Article 303(1) unless Parliament makes the declaration contained
in Article 303(2), the State’s power contained in Article 304(b) is made expressly free from
the prohibition contained in Article 303(1), because the opening words of Article 304 contain
a non-obstanate clause both to Article 301 and Article 303. The second difference springs
from the fact that while Parliament’s power to impose restrictions upon Art 302 upon
freedom of commerce in the public interest is not subject to the requirement of
reasonableness, the power of the States to impose restrictions on the freedom of commerce in
the public interest under Article 304 are subject to the condition that they are reasonable”.

Omission of 'Reasonable' from Article 302, effect of The suggestion of insertion of the word
'reasonable' as a pre-fix to the expression 'restriction' in Article 302 postulates that the
omission to qualify the expression 'restriction' by the word 'reasonable' in Article 302 not
only amounts to denial of parity of powers to Parliament and the State Legislatures in regard
to trade and commerce, but also enables Parliament to negate the freedom guaranteed
under Article 301 and the fundamental right guaranteed under Article 19(1)(g) by imposing
unreasonable restrictions thereon. This proposition is not based on an empirical analysis of
any laws affecting freedom of trade, passed by Parliament under Article 302. No instance of
any such law made under Article 302, which tends to nullify Article 301, or which under
colour of 'public interest', makes unreasonable incursion into the exclusive State field has
been brought to our notice. In Atiabari Case, , there is an obiter by one of the learned Judges4
that “where Parliament exercises its power under Article 302 and passes a law imposing
restrictions on the freedom of trade in public interest, whether or not the given law is in the

3
Automobile Transport v. State of Rajasthan, AIR 1962 SC 1406

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public interest, may not be Justiciable”. As against this, another learned Judge in Automobile
Transport Case, observed that

“It is impossible that the freedom granted in Article 301 was to be mocked at by making
unreasonable restrictions permissible at the hands of Parliament. Normally, Parliament is the
best judge of the 'public interest'. The word 'required' in Article 302 limits the restrictions to
the necessities of the situation so that the Article may not be liberally construed as a free
Charter”.

Although Article 302 does not speak of reasonable restrictions yet it is evident that the
restrictions contemplated by it must bear a reasonable nexus with the need to serve public
interest. In several recent decisions where the constitutional validity of a law imposing
restrictions under Article 302 was challenged, the Supreme Court did apply the test of
reasonableness to uphold the validity of those ‘restrictions’.

Be that as it may, the point is merely of academic significance. From a practical stand-point,
the non-qualification of the 'restriction' by 'reasonable' in the text of Article 302 has lost much
of its importance, for almost in every case wherein the Constitutional validity of such law is
questioned on the ground of Article 301, the challenge is buttressed by additional grounds
of Articles 14 and 19 (1)(g) and the question of reasonableness of the restriction always arises
under these additional grounds. The proposal for insertion of the word 'reasonable' before the
word 'restriction' in the Article 302 is thus merely of theoretical significance and we cannot
support it.

CONCLUSION AND SUGGESTION

Free flow of trade, commerce and intercourse within and across inter-State borders is an
important pre-requisite for ensuing economic unity, stability and prosperity of a country
having a two-tier polity. Limitations for the common good are inherent in such freedom, least
it should de-generate into a self-defeating license.

Notwithstanding the fact that the word 'reasonable' is not used in Article 302, a low imposing
restrictions under Article 302 would be open to judicial review on the ground that it has no
reasonable nexus with the public interest alleged. The proposal for insertion of the word

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'reasonable' before the world 'restriction' in Article 302 is thus merely of theoretical
significance and cannot be supported.

Intra-State trading activities often have a close and substantial relation to inter-State trade and
commerce. State laws though purporting to regulate intra-State trade may have implications
for inter-State trade and commerce. These may impose discriminatory taxes or unreasonable
restrictions impeding the freedom of inter-State trade and commerce. If clause (b)
of Article 304 is deleted, the commercial and economic unity of the country may be broken
up by State laws setting up barriers to free flow of trade and intercourse through parochial or
discriminatory use of their powers.

The scheme of the Articles in Part XIII, considered as a whole, is well-balanced. It reconciles
the imperative of economic unity of the Nation with interests of State autonomy by carving
out in clauses (a) and (b) of Article 304, two exceptions in favour of State legislatures to the
freedom guaranteed under Article 301.

The whole field of freedom of trade, commerce and intercourse bristles with complex
questions not only in regard to constitutional aspects but also in respect of the working of the
arrangements on account of impact of legislation of the Union on the powers of the States and
the effect of legislation of both the Union and the States on free conduct of trade, commerce
and intercourse. Considering the intricate nature and the need for objective examination of
the wide-ranging issue connected with the freedom of trade, commerce and intercourse, it is
recommended, that an expert authority should be constituted under Article 307. Among other
things, such an authority may be enabled to:

(a) Survey and bring out periodically a report on the restrictions imposed on intra-State and
inter-State trade and commerce by different governments and their agencies;

(b) Recommend measures to rationalize or modify the restrictions imposed to facilitate free
trade and commerce;

(c) Examine complaints from the public and the trade in this regard; and

(d) Suggest reforms in the matter of imposition, levying and sharing of taxes for purposes of
Part XIII of the Constitution.

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The ambit of Article 307 is wide enough to bring all matters relevant to freedom and
regulation of trade, commerce and intercourse within the purview of such an authority 'for
carrying out the purposes of Articles 301, 302, 303 and 304'. It is entirely left to the judgment
of parliament to clothe the 'authority' under Article 307 with such powers and duties as may
be considered necessary. Such an 'authority' may have both an advisory and executive, role
with decision-making powers. To begin with such an authority may be assigned an advisory
role. In course of time in the light of experience gained, such additional powers as may be
found necessary can be conferred on it.

BIBLIOGRAPHY
1. Dr. J.N.Pandey; Constitutional Law of India; Central Law Agency; 54th Edition 2017

WEBLIOGRAPHY
1. http://www.legalservicesindia.com/article/article/indian-parliament-&-states-
powering-regulation-in-the-trade-&-commerce-industry-98-1.html ON 28/01/2018 @
9:45 P.M.
2. https://www.legalbites.in/freedom-trade-commerce-intercourse/ ON 28/01/2018 @
10:30 P.M.

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