Sovereign Taxing Power Is Subject to Constitutional Limits Under Articles 14, 246 and 265

Sovereign Imperative and Constitutional Discipline: Critical Reflections on the Legitimacy of the Indian Taxing State

Summary: India’s power to levy and collect taxes is an essential attribute of sovereignty, but sovereign authority by itself does not make a tax constitutionally legitimate. The Constitution subjects taxation to legislative competence, statutory authority, fundamental rights, federal distribution of powers and restrictions designed to protect free trade and prevent discrimination. Article 265 requires every levy and collection of tax to have authority of law, while Article 246 and the Seventh Schedule determine whether Parliament or a State Legislature possesses competence over the relevant taxing field. Judicial decisions have also emphasised the distinct character of taxation entries and the need for certainty in charging and assessment provisions. Tax legislation remains subject to fundamental rights, including Article 14, although courts traditionally grant legislatures substantial latitude in matters of economic and fiscal policy. Part XIII adds another constitutional dimension by protecting freedom of trade while permitting non-discriminatory taxation within the constitutional framework. The Supreme Court’s decision in Jindal Stainless Ltd. v. State of Haryana clarified the relationship between State taxation and Articles 301 and 304(a), rejecting the compensatory tax theory and focusing on discriminatory treatment of imported goods. Taxation may legitimately serve wider economic, redistributive and regulatory purposes, but its exercise remains governed by constitutional discipline. The constitutional scheme therefore treats taxation not as unrestricted sovereign command but as public power whose legitimacy depends upon legislative competence, authority of law, equality, federal balance and adherence to the Rule of Law.

Introduction: The Paradox of Sovereign Power and Constitutional Restraint

The proposition that “taxation is an exercise of sovereign power, but sovereignty alone cannot justify a tax” captures the central tension in constitutional democracies. In the Indian constitutional order, the power to levy and collect taxes has been universally acknowledged as an essential, plenary, and inherent attribute of sovereignty, belonging as a matter of right to every independent government to defray public expenses. In Raja Jagannath Baksh Singh v. State of U.P.¹, the Supreme Court echoed Chief Justice Marshall’s famous dictum in M’Culloch v. Maryland² that the power of taxing is essential to the very existence of government.³

However, under a written constitution, sovereignty is not a license for absolute or endless power; rather, it is a “responsibility”. The legitimacy of the State’s exercise of taxing power is not self-justifying through raw sovereign assertion. Instead, the domestic exercise of tax sovereignty is strictly amenable to judicial review and must pass through the filters of “constitutional trust”, federal balance, and express constitutional limitations.⁴

The Jurisdictional Anchors of Legitimacy: Articles 265 and 246

The constitutional framework provides a dual-key system to ensure that sovereign power is translated into legitimate taxation: procedural authorization (Article 265) and substantive competence (Article 246).

Article 265 – The Constitutional Guardrail:

Article 265 mandates that “No tax shall be levied or collected except by authority of law”. This protection guards against arbitrary executive action and unilateral administrative exactions. As established in Chottabhai v. Union of India⁵, the term “authority of law” refers strictly to valid statutory law enacted by a competent legislature, and the expression “levy” is not merely the charge but encompasses the entire assessment and collection process carried out by the executive. In Asstt. CCE v. National Tobacco Co. of India Ltd. ⁶, the Court held that the charging provisions must be accompanied by a robust machinery for computation, as the character of assessment provisions bears a direct relationship to the nature of the charge.

Furthermore, because Article 265 prohibits the State from extracting taxes without clear statutory authorization, the Supreme Court in Commissioner of Customs v. Dilip Kumar & Co.⁷ endorsed the strict construction of taxing statutes. The citizen’s liability to pay tax must be certain and predictable. There is no scope for equity, presumption, or intendment. Every step of the taxation process, substantive and procedural, must adhere strictly to the law.

Article 246 and the Mutual Exclusivity of Taxing Fields:

Legitimacy is further conditioned upon the legislative competence of the imposing legislature. The Constitution distributes legislative fields between Parliament and the State Legislatures under the Seventh Schedule. In Hoechst Pharmaceuticals Ltd. v. State of Bihar⁸ and State of West Bengal v. Kesoram Industries Ltd.⁹, the Supreme Court articulated a fundamental structural principle i.e. the power to tax cannot be derived from a general legislative entry. General subjects of legislation and taxation are treated as separate, mutually exclusive groups.

As elucidated in M.P. V. Sundararamier & Co. v. State of A.P. ¹⁰, this mutual exclusivity prevents overlapping and federal conflict. If a taxing statute transgresses into a forbidden field or attempts to deduce a tax from a general entry, the levy is struck down as legislatively incompetent.

Constitutional Limitations: Part III, Part XIII, and the Refusal of Arbitrariness

The sovereign power to tax is also bounded by express constitutional limitations:

Part III – Fundamental Rights and Rationality:

A taxing statute is subject to Article 13 and can be invalidated if it violates the Fundamental Rights. In R.K. Garg v. Union of India¹¹, the Court recognized that while the legislature has wide latitude in classifying persons and objects for taxation, it must remain subject to the discipline of rationality under Article 14. Discretionary, unequal, or palpably arbitrary tax measures are struck down.

However, the Court has consistently held that the mere excessiveness of a tax, or its negative impact on profitability, does not per se violate Part III in Serum Institute of India (P.) Ltd. v. UOI¹².

Part XIII – The Freedom of Trade and the Entry Tax Resolution:

The most contentious reconciliation between state tax sovereignty and national economic unity occurred under Part XIII. For decades, the judiciary struggled to balance Article 301’s guarantee of free trade with the States’ power to levy entry taxes under Entry 52 of List II.

In the landmark Nine-Judge Bench decision in Jindal Stainless Ltd. v. State of Haryana¹³, the Supreme Court overrode the judicially created “Compensatory Tax Theory”. The Court held that the power to tax is a sovereign right essential to a state’s existence and federal character. A non-discriminatory tax per se does not violate Article 301.

To be legitimate, State fiscal levies on imported goods need only satisfy the “twin tests” of Article 304(a):

1. Similar goods produced locally must be subject to a similar tax.

2. The state action must not discriminate between imported and local goods. Accommodating Contemporary Purposes of Taxation

The constitutional framework successfully accommodates the modern, multi­dimensional purposes of taxation:

• Economic Regulation and Fiscal Policy: In K. Garg (Supra), the Court noted that fiscal laws are instruments of financial governance and economic planning. The judiciary exercises extreme restraint, deferring to legislative wisdom on economic policies and classifications, recognizing that “trial and error” is inherent in tax legislation.
• Redistribution: In Serum Institute (Supra), the Court upheld taxing subsidies and government incentives under Section 2(24)(xviii), demonstrating that tax is a recognized fiscal tool to achieve equity and resource balance.
• The Recompense of Good Government: Legitimacy is a bilateral covenant. If a tax is collected in excess, the State has a constitutional obligation to return it with interest. As reasoned in Tata Chemicals¹⁴ and Aluminium Corporation of India Ltd. v. UOI¹⁵, “good government involves not only diligent collection of taxes, but also ready refunds of excess levies”.

Conclusion

The Indian constitutional framework provides an exceptionally convincing and robust basis for deciding when the State’s taxing power is legitimate. It rejects the Hobbesian notion of absolute, unbridled tax sovereignty. Instead, it binds the sovereign power to tax to the Rule of Law. Under this framework, a tax is legitimate only when it is traceable to a clear, competent legislative entry under Article 246, respects the cooperative mandates of Article 246A¹⁶, conforms to the non-discriminatory disciplines of Part XIII, and honors the rational and procedural limits established by Articles 14 and 265.

Notes:

¹ MANU/SC/0184/1962 : AIR 1962 SC 1563

² 4 Law Edn. 579 p. 607

³Directorate General of Goods and Services Tax Intelligence (HQS) vs. Gameskraft Technologies (P.) Ltd. [2026] 186 taxmann.com 1232 (SC)/[2026] 116 GST 164 (SC)/[2026] 110 GSTL 97 (SC)[27-05-2026]

⁴ Authority for Advance Rulings (Income-tax) vs. Tiger Global International II Holdings [2026] 182 taxmann.com

375 (SC)/[2026] 485 ITR 214 (SC)[15-01-2026]

⁵ 1962 SCR Suppl..2 1006

⁶ [1972] 2 SCC 560

⁷ [2018] 95 taxmann.com 327 (SC)

⁸ [1983] 4 SCC 45

⁹ [2004] 10 SCC 201

¹⁰ AIR 1958 SC 468 : 1958 SCR 1422 : (1958) 9 STC 298

¹¹ [1982] 1982 taxmann.com 240 (SC)

¹² [2023] 157 taxmann.com 107 (Bombay)

¹³ [2016] 75 taxmann.com 137 (SC)

¹⁴ 363 ITR 658 (SC)

¹⁵ 1978 (2) ELT 452 (SC)

¹⁶ [2022] 138 taxmann.com 331 (SC)

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