In a major setback for the Mamata Banerjee government, Calcutta high court on Monday struck down the entry tax on commodities imported from other states, which has been showcased as one of the achievements of the Trinamool Congress government since it was imposed in April 2012.

The order will have serious repercussions on the state's finances - cash-strapped Bengal stands to lose Rs 1,200 crore a year. The court has granted a six-week stay, allowing the government to move a division bench. The Mamata government had faced similar embarrassment a year ago when a division bench of the high court called the Singur Land Act "unconstitutional and void."

In her 100-page order Justice Indira Banerji said on Monday that the 'West Bengal Tax on Entry of Goods into Local Areas Act, 2012' is unconstitutional because the state Act doesn't have the President's assent. The preceding Left Front government had sent the entry tax proposal for the President's assent in 2003 but didn't pursue it after 2010.

With Bengal's treasury in a desperate condition, finance minister Amit Mitra introduced entry tax in 2012. He hailed its contribution to the state's revenue but a group of business houses and traders moved high court, challenging the validity of the Act. While presenting his 2013-14 budget on March 15, Mitra had assured the assembly that there was no need to obtain presidential assent for compensatory entry tax. But the high court has ruled otherwise.

The Left Front government had scrapped entry tax 17 years before Mitra introduced it as a 1% levy on consignments from outside valued above Rs 25,000. During the passage of the entry tax bill in the House on March 31, 2012, Mitra had said the levy was designed to be "compensatory in nature", and that the entire tax shall go to a "dedicated fund" to boost infrastructure - building of roads, bridges, linking of markets, setting up storage facilities and supply of electricity and water to industries and commercial complex.

But during its submission in court, the state government couldn't quantify the benefits to local area trade and commerce as mentioned in the purpose of the Bill. Justice Banerji held that the tax wasn't compensatory in nature. The Supreme Court had laid down the guidelines for introducing such a compensatory entry tax (Jindal Stainless Ltd Vs the State of Haryana) to make the government accountable for beefing up infrastructure.

The SC guidelines provide that entry tax should be a compensatory tax till such time as it is required to improve infrastructure such as roads, markets and power, and the proceeds of the tax have to be utilized exclusively for the development of trade, commerce and industry and the activities specified. The fund cannot be utilised for other purposes, the apex court held.

Sensing the legal implication, Mitra took care to set up a "Compensatory Entry Tax Fund" for upgrading infrastructure. He also named the fund carefully because the Karnataka high court had struck down a plea of imposing entry tax in Bangalore on the ground it was restricting free movement of commodities. The same plea was taken in the court while contesting the Entry Tax Act.

Legal setbacks for govt in Calcutta high court

1. June 22, 2012: Singur Land Act struck down as 'unconstitutional and void'

2. Feb 19, 2013: CBI probe ordered into the Gurap rehab home rape-murders

3. May 10, June 13, 2013: Primacy of State Election Commission upheld in the conduct of panchayat polls

4. May 13, 2013: CBI inquiry ordered into Dhaniakhali custodial death