State level entry tax is still a menace for those selling to consumers in Bihar, Assam, J&K, Gujarat, Rajasthan, Uttarakhand and Uttar Pradesh. They claim there is a need for entry tax to protect local traders from the competition created by goods bought from other states. This is mostly the case for goods purchased over the internet. Some would say it’s just the state’s way of collecting its cut from online retail.

Whatever the state’s reasons are (for implementing entry tax on online purchases), the Patna high court says this tax is not legal. It quashed the Bihar government’s notification imposing entry tax on goods ordered over the internet, saying it is not only illegal but unconstitutional.

Why is entry tax illegal in Bihar?

Entry tax cannot be levied on goods entering into a local area specifically if they are purchased online, the court said. The government however, stuck to its defense sating that this tax is compensatory in nature. It also stated that it has the necessary power to impose discriminatory taxes like this. The court firmly rejected this argument.

The court order read, “The impugned provisions for the Bihar Finance Act, 2015 amending the Bihar tax on entry of goods into local areas for consumption, use or sale therein…..are declared as ultravires to the constitution and accordingly quashed.”

This kind of a tax is a discrimination against the dealers from different states. It is also a violation of provisions in the constitution, stated the Patna high court.

Entry tax takes away the benefits of ecommerce

“The additional entry tax was an anti-consumer move, leading to price inflation and depriving users of full benefits of online shopping. The HC order will not only benefit existing Flipkart users, but also bring lakhs of additional customers to take benefit of the goodness of ecommerce,” mentioned a Flipkart spokesperson in response to the entry tax issue in numerous states.

With entry tax in the picture, sellers have to pay a tax to the state in which they are making a sale and also central sales tax to their state of origin. This makes online retail an expensive business to be in. As for those selling within the state itself they have pay value added tax only. In an attempt to even out the playing field; state governments have made it difficult for external competition and ecommerce as a whole to flourish. Some etailers stopped delivering goods to these states altogether and challenged state governments in court. With the introduction of GST in 2017, online sellers will no longer have to deal with state entry taxes of any kind.