ISSUE:
Is the application of an entrance tax on goods imported from outside the local area constitutes a violation of Article 301 of the Constitution of India?
Whether the power to tax infringes upon the sovereignty of States and affects the federal structure of governance?
RULE:
The court applied principles regarding freedom of trade, commerce, and intercourse as enshrined in Article 301, emphasizing that such freedom is subject to reasonable restrictions in public interest as outlined in Articles 302 and 304.
The court examined the nature of taxes, distinguishing between those that directly impede trade versus those that are compensatory or regulatory in nature.
The compensatory tax theory was scrutinized, with the court concluding that it is difficult to apply in practice, especially when determining if taxes collected are used for the intended public services.