Article 304

Article 304 of the Constitution of India delineates the circumstances under which State Legislatures may impose restrictions on trade, commerce, and intercourse within or across their territorial boundaries. It serves as an important exception to the general principle of free trade and economic movement guaranteed by Article 301, and functions as a constitutional balance between national economic unity and State autonomy.

Constitutional Objective and Context

While Article 301 establishes the freedom of trade, commerce, and intercourse throughout India, the framers of the Constitution recognised that this freedom could not be absolute. States needed limited powers to regulate trade for purposes such as public interest, revenue generation, and equitable economic development.
Accordingly, Article 304 empowers States to enact laws regulating trade and commerce, provided such laws comply with specific constitutional safeguards. This ensures that India’s internal market remains unified and non-discriminatory, while allowing States to respond to local economic conditions.

Structure of Article 304

Article 304 contains two distinct clauses—Article 304(a) and Article 304(b)—each addressing different aspects of State power over trade and commerce.

Article 304(a): Taxation on Goods Imported from Other States

Article 304(a) authorises a State Legislature to impose taxes on goods imported from other States or Union territories, subject to a key condition—non-discrimination.
Key provisions include:

• States may levy taxes on imported goods, but the tax must not discriminate between imported goods and similar goods produced within the State.
• The clause ensures fiscal equality between local and out-of-State goods, preventing States from adopting protectionist taxation policies.
• The intent is to preserve free competition among States while allowing them to collect revenue.

In effect, a State cannot impose higher taxes on goods merely because they are brought from another State. For example, if a State taxes locally manufactured goods at 5%, it cannot tax similar goods imported from another State at 10%.

Article 304(b): Reasonable Restrictions in the Public Interest

Article 304(b) extends beyond taxation to permit States to impose reasonable restrictions on trade, commerce, or intercourse with or within the State.
However, such restrictions are subject to strict constitutional conditions:

• The restrictions must be reasonable and imposed in the public interest.
• The previous sanction of the President is mandatory before any Bill or amendment containing such restrictions is introduced in the State Legislature.
• This Presidential approval serves as a constitutional safeguard, ensuring that States do not enact arbitrary or protectionist measures.

Restrictions permissible under Article 304(b) may include laws relating to environmental protection, public safety, health regulations, or fair market control, provided they are proportionate and serve legitimate public purposes.

Key Features and Distinction Between Clauses

Together, these clauses enable States to legislate responsibly while maintaining the economic unity of India.

Judicial Interpretation and Key Supreme Court Judgments

Indian courts have elaborated on the scope and constitutional limits of Article 304 through several landmark rulings:

• Atiabari Tea Co. Ltd. v. State of Assam (1961): The Supreme Court held that States could impose taxes on goods imported from other States only if similar local goods were taxed equally, upholding the principle of non-discrimination under Article 304(a).
• Kalyani Stores v. State of Orissa (1966): Declared that any restriction on inter-State trade imposed by a State without Presidential sanction was invalid under Article 304(b).
• State of Kerala v. Abdul Kadir (1970): Reaffirmed the validity of non-discriminatory taxation, provided the same rate applied to both local and imported goods.
• State of Karnataka v. Hansa Corporation (1980): Emphasised that a State cannot disguise protectionist measures as taxation; taxes must serve legitimate fiscal purposes.
• Jindal Stainless Ltd. v. State of Haryana (2016): A landmark judgment by a nine-judge bench which clarified that non-discriminatory taxes under Article 304(a) are constitutionally valid, but restrictions under Article 304(b) must be reasonable, public-oriented, and subject to Presidential sanction.

These decisions collectively assert that Article 304 strikes a balance between State sovereignty in taxation and national economic integration, preventing fiscal fragmentation.

Conditions for Valid State Legislation

For any law enacted under Article 304 to be constitutionally valid, it must meet the following criteria:

1. Equality in Taxation: Taxes under Article 304(a) must apply uniformly to both local and imported goods.
2. Public Interest Justification: Restrictions under Article 304(b) must demonstrably serve a legitimate public purpose.
3. Reasonableness: The restrictions must not be arbitrary, excessive, or disproportionate to the intended objective.
4. Presidential Sanction: Prior approval of the President is mandatory before introduction of a Bill imposing restrictions under Article 304(b).
5. Judicial Review: Courts retain the power to review the reasonableness and constitutionality of restrictions to ensure compliance with Articles 301 and 304.

Relationship with Other Constitutional Provisions

Article 304 must be read in harmony with related provisions in Part XIII:

• Article 301: Guarantees freedom of trade and commerce across India.
• Article 302: Empowers Parliament to impose restrictions on trade and commerce in the public interest.
• Article 303: Prohibits both Parliament and States from discriminating between States in trade matters, except in cases of scarcity as provided under Clause (2).

Together, Articles 301 to 304 provide a comprehensive constitutional framework ensuring both the freedom and regulation of trade, balancing national unity with federal flexibility.

Significance and Contemporary Relevance

Article 304 continues to hold great importance in the context of India’s evolving federal economy and taxation framework. With the advent of the Goods and Services Tax (GST), which subsumes most inter-State taxes, the principles of non-discrimination and economic unity enshrined in Article 304 remain constitutionally significant.