Compensatory tax, a working test for deciding whether a tax is compensatory or not is to enquire whether the trades people are having the use of certain facilities for the better conduct of their business and paying not patently much more than what is required for providing the facilities. It would be impossible to judge the compensatory nature or a tax by a meticulous test, and in the nature of things that cannot be done, Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, AIR 1962 SC 1406 (1425). (Constitution of India, Art. 301)
Means taxes which would otherwise interfere with the unfettered freedom under Art. 301 will be protected from the vice of unconstitutionality if they are compensatory, Jindal Stainless Ltd. (2) v. State of Haryana, (2006) 7 SCC 241.
Compensatory tax, is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse, Jindal Stainless Ltd. v. State of Haryana (SC), (2006) STC 544.