Article 286

Article 286 of the Constitution of India places restrictions on the powers of State legislatures to levy taxes on the sale or purchase of goods. It ensures the free flow of trade, commerce, and intercourse across State boundaries and safeguards international trade from multiple or conflicting layers of taxation. By delineating the limits of State taxation authority, the article upholds the principle of economic unity and fiscal harmony within India’s federal structure.

Constitutional Context and Objective

Article 286 was incorporated to prevent the fragmentation of India’s internal market through overlapping taxation powers of States. Before the Constitution came into force, Provinces under the Government of India Act, 1935, often imposed taxes on transactions that occurred partly or wholly outside their territories, resulting in double taxation and hindrances to inter-State commerce.
To eliminate such fiscal barriers and maintain a national common market, Article 286 defines clear boundaries for the exercise of State taxing powers, especially regarding inter-State, export, and import transactions.

Prohibition on Certain State Taxes

Under Article 286(1), no State law can impose or authorise a tax on:

• Sales or purchases taking place outside the State, and
• Sales or purchases taking place during the import into or export out of India.

This means that the power to tax such transactions lies exclusively with the Union, ensuring uniformity in taxation policies affecting inter-State and international trade.
The provision ensures that:

• A State cannot claim taxation rights merely because goods pass through its territory.
• Goods imported from or exported to foreign countries are not subjected to additional State taxes.
• Only intra-State transactions, occurring wholly within the boundaries of a State, fall under the State’s taxation domain.

Determination of the Location of a Sale or Purchase

Since the movement of goods and services often transcends State boundaries, Article 286(2) entrusts Parliament with the power to formulate principles to determine:

• When a sale or purchase takes place outside a State;
• When it takes place during import into or export out of India.

This clause provides a uniform legal framework to identify the jurisdiction of taxation, preventing disputes and overlapping claims among States. Parliament exercises this power through statutes such as the Central Sales Tax Act, 1956, which lays down criteria for determining whether a sale is inter-State, outside a State, or related to import/export.

Goods of Special Importance in Inter-State Trade

Under Article 286(3), Parliament is empowered to declare certain goods as being of special importance in inter-State trade or commerce. These goods, often essential commodities such as petroleum, iron and steel, and cotton, form the backbone of the national economy.
When such goods are declared to be of special importance, States must adhere to restrictions and conditions prescribed by Parliament regarding:

• Modes of taxation,
• Rates of tax, and
• Other conditions related to their sale or purchase.

This ensures uniformity of taxation policies across India and prevents individual States from imposing excessive or discriminatory taxes that could disrupt inter-State trade.

Evolution and Amendments

Over the years, Article 286 has undergone significant amendments to reflect changing economic realities:

• The Sixth Constitutional Amendment (1956) redefined the scope of inter-State trade and empowered Parliament to lay down principles for determining the situs of a sale.
• The 101st Constitutional Amendment (2016), which introduced the Goods and Services Tax (GST), further altered the taxation framework by subsuming most indirect taxes under a unified GST regime. While the structural framework of Article 286 remains, the implementation of GST now governs inter-State and cross-border supply of goods and services through centralised mechanisms.

Key Terms Explained

• Sale or Purchase of Goods: Refers to the transfer of ownership in goods from one person to another for consideration.
• Outside the State: A transaction that, by virtue of its nature or movement, occurs beyond the territorial jurisdiction of the State legislature.
• Import and Export: “Import” refers to goods brought into India from foreign countries, while “export” refers to goods sent out of India.
• Special Importance Goods: Commodities essential for the national economy, declared by Parliament under Article 286(3).

Judicial Interpretation and Case Law

The Supreme Court has clarified the constitutional scope of Article 286 through several landmark decisions:

• State of Travancore-Cochin v. Shanmugha Vilas Cashewnut Factory (1953): The Court held that sales taking place during import or export are beyond the taxing power of States, as such transactions are integral to foreign trade.
• Bengal Immunity Company Ltd. v. State of Bihar (1955): The Court emphasised that States cannot impose taxes on inter-State sales, reaffirming the need for national economic integration.
• State of West Bengal v. Kesoram Industries Ltd. (2004): The Court explained that Article 286 acts as a safeguard against the misuse of State taxation powers and that Parliament has overriding authority to determine the situs and nature of transactions.
• Gannon Dunkerley & Co. v. State of Rajasthan (1993): The Court observed that the principles of Article 286 continue to regulate taxation even under modern fiscal systems like VAT and, subsequently, GST, ensuring consistency with the constitutional division of powers.

These judicial interpretations collectively reinforce the constitutional balance between Union control and State fiscal autonomy, preventing conflicting taxation and promoting nationwide economic coherence.

Relationship with Other Constitutional Provisions

Article 286 interacts closely with several other constitutional provisions that together shape India’s fiscal framework:

• Article 245–246: Define the legislative competence of Parliament and State Legislatures.
• Article 269: Empowers the Union to levy and collect certain taxes on inter-State trade, with proceeds assigned to the States.
• Article 301: Guarantees freedom of trade, commerce, and intercourse throughout India.
• Article 307: Authorises Parliament to appoint authorities to ensure the smooth implementation of inter-State trade provisions.

This interconnection ensures that taxation policies respect both federal division of powers and the economic unity of the nation.

Practical Implications

In practical terms, Article 286 has several implications for India’s taxation and trade systems:

• States cannot levy tax on goods sold or purchased in the course of import or export.
• Inter-State trade is regulated by Parliament through central legislation like the Central Sales Tax Act and now by the Integrated Goods and Services Tax (IGST) under the GST framework.
• Goods of special importance remain under central oversight, ensuring consistency in tax treatment across States.
• Economic uniformity is maintained by restricting States from enacting laws that may fragment the domestic market.