When Does Land Cease to Be ‘Land’ for Tax? Entry 49 vs GST

Sarthak Mishra & Manyata

When Does Land Cease to be Land for Taxation? A Constitutional Analysis of Entry 49 and GST

Introduction

Indeed, the structure of any economic system that is current requires proper taxation structures to support the same. Taxation can be defined as the division of taxes into two broad categories; the direct tax and indirect tax.[1] The direct tax refers to the tax charged directly on a taxpayer, whether it be a natural or juristic person, who is responsible for the ultimate economic cost of paying the tax directly to the state.[2] On the other hand, the indirect tax refers to the tax charged indirectly by an intermediary party on some form of transactions where the ultimate economic cost is borne by the consumer.[3] In essence, any taxation structure should define well the difference between the property tax and activity tax.

The position of land in relation to taxation is that the land occupies a special place in terms of its significance. Contrary to such sources of taxable income as income, commodities, or services, which have temporary, extremely mobile, and absolutely dependent on human action nature, land is something that exists in an objective reality.[4] As an object of taxation, land has been recognized from ancient agricultural taxation up until now because of its stability and immobility and visibility.

Distribution of Taxing Powers in the Constitution:

Entry 49 vs GST: The Constitution of India takes into account such importance of land as one of the sources of tax revenues through distribution of legislative powers. The division is stipulated in Article 246[5] in connection with the Seventh Schedule, which consists of three exhaustive lists of matters falling within legislative competence. In this regard, Entry 49 of List II (State List)[6] allocates the power “to impose taxes on lands and buildings.”

Nevertheless, the emergence of the 101st Constitutional Amendment Act[7] heralded a sea change in the realm of taxation by providing for GST legislation. By adding the Article 246A[8], both the Union and the States have been provided with concurrent powers to impose taxes on “supply of goods and services.” The introduction of the GST regime has completely transformed the Indian system of indirect taxation. GST brought into the fold of its purview almost all types of taxation related to business transactions, while Entry 49 of List II was left untouched intentionally.[9]

Problem Statement: Conflict Between Land-Based and Activity-Based Taxation

This being the case, it raises a fundamental question on the boundary that lies between property and economic exploitation. This relates to the issue of the tax on land versus the tax on its use. It might be relatively easy to assign ownership of “lands and buildings” to the States. But the identity of the land itself is put under severe pressure as soon as it begins to yield economic value through leasing, mining, development, or other forms of exploitation.

This leads to a very intricate and delicate issue of jurisdictional friction. While states rely greatly on property taxes as their sources of local revenues, the Union has extended its jurisdiction gradually into more and more spheres of economic activities, transactions, and even services, all of which, by nature, are land-related. It is here that the core constitutional dilemma becomes evident in deciding whether or not the tax in question can be considered to be a genuine tax on the land itself, or if it is, in fact, an economic activity disguised as a land tax because of its nexus to the property. With the advent of GST, wherein the renting, leasing, and building of immovable property are explicitly defined as a “supply of services,” there has been great ambiguity in the distinction between the State’s property taxes, listed under Entry 49, and the Union’s GST “service.”

Research Question

1. When does land cease being land for taxation?

Research Objectives

In order to answer this question in its entirety, the following research objectives have been laid down for this study:

Chapter’s Roadmap

In order to meet these objectives, the present research paper is divided into five major chapters:

1. The Chapter I (Introduction) serves as an introduction.

2. In Chapter II, there is a detailed discussion on the methodological approach adopted by this study for classifying taxes on land. It explains the differentiation between actual land taxes and those that are based on activities carried out by the taxpayer.

3. In Chapter III, the scope of Entry 49 is discussed in positive terms; that is, the interpretation made by the judiciary of the meaning of tax on lands and building under the doctrine of ‘Pith and Substance’.

4. Chapter IV focuses on defining the boundaries of Entry 49 from the perspective of Constitution.

5. Chapter V discusses Entry 49 in the context of GST regime.

2. Why Classification is Necessary

In an advanced system of federalism such as that of India, the process of classifying the taxes cannot be considered a mere academic endeavor. The allocation of legislative functions under Article 246 along with Schedule VII of the Constitution of India lays down precisely who is authorized to levy which taxes.[10] Since land plays a crucial role both at the level of administration as well as national economic pursuits, it usually acts as the place of imposition of several taxes.

• The classification of taxes fulfills three essential roles:
  • Prevention of Overlapping: It prevents the encroachment upon each other by different fields of legislation. The Supreme Court, while emphasizing this point, has held that within the federal setup where legislative subjects have been distributed but residuary powers have been vested with the Parliament, it should always be borne in mind that such an exercise must not lead to the destruction or belittlement of the State’s autonomy under the pretext of exercising such powers.[11]
  • Clarification of Doctrine: It enables one to classify the tax according to the very nature and character of it (i.e., its pith and substance).[12]
  • Upholding Fiscal Federalism: Correct classification ensures the financial autonomy of the states. Land and buildings provide the basis for municipal and state income; the erroneous classification of a true property tax as an occupation tax—and vice versa—is an infringement on the fragile balance maintained through the Constitution.[13]

3. Position of Entry 49 within the Broader Tax System

The phrase “Taxes on lands and buildings” appearing in Entry 49 in List II[14] is not an entity unto itself but forms a part of a larger cluster of constitutional Entries dealing with land and the economics associated with it. From a broad reading of the Seventh Schedule of the Constitution, it becomes clear that the constitution makers purposely scattered the subject of taxation on land among a number of Entries.

To illustrate, Entry 46 in List II deals with “Taxes on the agricultural income,” whereas the Union takes care of Entry 82 in List I, concerning the income from sources other than agriculture. Taxes on the capital value of property find their place in Entry 86 of List I, but it specifically excludes “agricultural land.” Similarly, estate and succession duties find their places in both Lists on the basis of being either agricultural or non-agricultural. The result is that Entry 49 of List II is just one of several categories pertaining to land and related matters.

4. Methodology of Classification

In assessing the validity of a levy and for purposes of classification, the court employs an approach that entails an inquiry into the true character of the tax. The approach is based on four guiding principles:

• Subject of the Tax: Subject of the tax is the underlying object upon which the tax operates. For the levy to qualify as a tax under Article 49 of List II, the subject of the tax should be the land or building as a whole.
• Taxable Event: Taxable event is that occurrence that occasions the liability to pay the tax. In property tax, the taxable event is the mere fact of ownership or occupancy of the property. However, activity tax arises in respect of events like accruing of income, undertaking of services, or carrying out business transactions.
• Incidence: Incidence is the person upon whom the tax liability directly rests. With respect to land tax, the incidence should be upon the owner qua owner, and the same should have a definite relation to the property.
• The Measure and Subject of Tax Delineation: This is arguably the most important criterion of all. It is a consistent rule in the Supreme Court[15] that whatever standard or measure is employed in determining the taxable value of the levy (for instance, the annual rental value, capital value, or agricultural produce) cannot be confused with the subject matter of the tax. For instance, calculating the tax based on the annual rental value of a structure does not change the fact that a property tax is being imposed on property rather than income.

5. Core Classification

Taxes pertaining to the use of land may be grouped into three different types based on the above methodology:

1. Taxes Directly Levied on Land (Entry 49):

Conventional and real property-related taxes, wherein the asset in question is directly taxed purely on the basis of possession or occupation.

• Levied directly by the State or the municipality on the market value of the property. The Supreme Court ruling in Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co. Ltd.[16] established that a State can levy taxes on urban land by direct assessment under Entry 49 since it pertains to direct imposition on the land.
• Taxes levied on the ownership of land regardless of its utilization for economic gains.
• Static in nature and strictly based on ownership.

2. Taxes Related to Land but NOT Entry 49:

This form of tax includes taxes where there is a mere incidence of land involved, and land merely acts as the situs of the transaction and does not form part of the true taxing event. Taxes on income arising from the rental of land are, therefore, not taxes on the land but income tax. This was made clear by the Supreme Court in the case of Bhagwan Dass Jain vs Union of India[17], where it was held that tax on rent from house property would be income tax and not tax imposed under Entry 49 of List II. Similarly, in cases where the property is leased out, it will be the leasing out of the property and not the ownership of land that forms the taxable event.

This same rationale would apply to taxes generated due to dealings in land such as stamp duty on sale/conveyance, where the tax is imposed on the deed itself and not on land directly. In the case of mining, although the States have powers to levy taxes on mineral rights through Entry 50 of List II, the royalty cannot be termed as a tax on land but a contractual sum payable in terms of a lease as was held recently by a Constitution Bench of the Supreme Court. Common to all these cases is the fact that these are taxes that arise dynamically due to certain actions and are not static in nature like those contemplated in Entry 49.

3. Grey Areas and Constitutional Tension

The most heated controversies pertaining to the constitution occur in the circumstances where the line between the property ownership rights and the exploitation of that property for business purposes gets blurred, thus resulting in issues regarding legislative power. One of the typical examples in which the clash occurs concerns leasing and renting, where GST is levied by the Union upon the service aspect of renting, as it is considered commercial, whereas at the same time the states try to impose taxes on land or property itself. Here, the controversy lies in the case where the state not only uses the rental value for assessing the tax but also makes it the taxable object per se, thus crossing its limits of jurisdiction over income and services. Another case in point would be when the land is utilized commercially, such as the case of land being used as a market, as seen in Ajoy Kumar Mukherjee v. Local Board of Barpeta.[18]

Similar controversies have been faced in relation to telecom towers when determining whether such structures would fall into the category of “buildings” covered by Entry 49 so as to attract taxes by the State, or whether they constitute infrastructure that facilitates the delivery of telecom services, placing the same within the regulatory ambit of the Union. Such questions become all the more relevant in relation to matters pertaining to mining where there is an attempt by the State to levy taxes on mineral bearing land based on the quantity of minerals produced. In State of W.B. v. Kesoram Industries[19], the Supreme Court held that although the uses made of the land could lead to categorization of the tax as one relating to Entry 49, such tax should nevertheless maintain a “direct and definite connection with the land.” When the assessment or incidence of the tax completely rests upon the amount of minerals taken out of the land, it cannot any longer be treated as a tax on the land but would intrude upon the Union’s sphere of excise or mineral rights.

4. Tabular Representation for Clarity

 The above categorization model ensures that the simple existence of any land in the fiscal transaction does not necessarily mean that the State has legislative authority pursuant to Entry 49 of List II. For any meaningful understanding of the Indian fiscal federal structure, it becomes essential for one to separate genuine property tax laws from those based on activities carried out within such properties. In defining the approach of distinguishing such tax laws and classifying their respective types, the next chapter will delve into an analysis of the positive ambit of Entry 49 through the judicial principle of pith and substance.

On the basis of the classifications outlined in the previous chapter, it becomes necessary to identify the constitutional scope of Entry 49 under List II. While the Seventh Schedule contains the allocation of the legislative subjects, “taxes on lands and buildings” is not explicitly defined in the constitution itself.[20] It has, therefore, become important for the Indian Supreme Court to outline the scope of this entry. In all the cases dealing with Entry 49, the main focus of the judicial exercise has been the definition of what constitutes a “tax on land”.

“Tax on Land” and Meaning of Ownership-based Taxation:  The first basic requirement for such a tax to come under Entry 49 of List II would be that it should be a tax levied on lands and buildings as distinct entities. The decision of the Supreme Court in the matter is categorical – such tax does not mean a tax payable by persons or a composite tax on the aggregate value of all the possessions of the assessee. In fact, it amounts to taxing the property as such because it is taxable by reason of ownership thereof.[21]

For such tax to come under Entry 49, there should be some relation between the tax and the land. This relation is constitutional as well as definitional. It has been held by the Supreme Court that it does not matter whether there is any division of interest or some other commercial feature involved in connection with the utilization of the property. What matters is that the charge should fall on the owner qua owner.

The Doctrine of Pith and Substance

Since legislative competence depends on the very nature of the law being enacted rather than its language, courts apply the doctrine of pith and substance to control the scope of Entry 49. According to the doctrine, should a state legislature enact any statutory tax which, though ostensibly a tax on lands, is in actual fact, aimed at some other event outside the purview of competence, such legislation shall be declared invalid.

For assessing whether or not a tax fits the definition of the taxing power conferred upon States by virtue of Entry 49, one must consider the “taxable event“. As soon as a statutory tax is imposed upon an act, a transfer of title or a service performed rather than on lands and buildings as units of taxation, it loses the character of a tax on land. In other words, since the pith and substance of gift tax legislation makes it a tax upon the transfer of title and not upon property itself, gift tax cannot be considered as falling under Entry 49 of List II.[22]

The Distinction Between the Subject and the Measure of Taxation

The most important doctrinal device in the definition of the ambit of Entry 49 is the distinction between the subject of the tax and its measure made by the courts. It may be defined as the essence of the tax, while the measure refers to the criteria for ascertaining its amount. In fact, the Supreme Court has clearly indicated that the criterion chosen by the state legislature for measuring the amount of the tax does not influence the very nature of the levy as a charge of a certain nature. Thus, so long as there is an ascertainable connection between the tax and land, the state legislature is absolutely at liberty to employ any traditional methods for measuring the value of the latter – annual letting value, capital value, or even its productivity and produce. Nevertheless, one should remember that the measure of the tax must be distinguished from the subject of the tax. Therefore, although the tax on land may be based on its annual income or productivity, it remains the same tax on land.

Judicial Application: Key Case Laws

The Supreme Court has applied these core principles across decades of fiscal litigation to carefully define what falls within Entry 49:[23]

• Ajoy Kumar Mukherjee v. Local Board of Barpeta[24]: In this historic decision, a local board made an annual charge on the use of land for a market. The respondents questioned the validity of such a charge on the grounds that it is essentially a tax on business or activity, in this instance the business of having a market, rather than land. In applying the rule of law pertaining to subject-measure test, the apex court validated the imposition of tax under Entry 49. This is because, although the basis of the imposition was the use of the land for a particular purpose, namely the market, the tax itself was levied solely on land. The incidence of the tax was on the person who was obliged to pay for the license and did not extend to the commercial activity of the traders.
• Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co. Ltd.[25]: In this case, the Court examined whether the State had the authority to levy tax on urban lands on the basis of the capital value of the land. It was claimed that the imposition of such a tax on the capital value of lands would constitute an encroachment on the legislative power of the Parliament in respect of Entry 86 of List I, which provides for taxation “of the capital value of the assets”. The Constitution Bench of the Court disagreed with this view and explained the essential distinction between the two Entries. While Entry 86 assumes an approach based on aggregation of the net wealth of a person (assets minus liabilities), Entry 49 assumes a tax on lands and buildings per se without taking into account the liabilities of the person owning those lands or buildings.
• Ahmedabad Municipal Corporation v. GTL Infrastructure Ltd.[26]: In line with the changing face of property in modern times, this case concerned itself with whether telecom towers that had been installed on the earth were taxable as “buildings.” The Supreme Court took up a progressive approach whereby the tangible aspect of telecom towers was included under the protection of Entry 49. Nevertheless, the Court stuck firmly to the constitutional boundary, noting that while the municipality could impose taxes on the tangible aspect of the towers, it had no constitutional authority to levy taxes on telecom services performed using these installations.

Consequently, Entry 49 Is Relevant to Ownership but Not to Activity The legal principle of constitutional law in relation to Entry 49 can be summarized in one distinct and definite rule, namely, that Entry 49 pertains exclusively to the taxation of property ownership and cannot be extended to taxation of activities.

All that the Constitution has accorded the power of legislation to the States pertains solely to the tax imposed on the immovable unit as such. Once the incidence of a tax ceases to depend simply on the status of ownership or occupation and turns to depend on an economic activity like service rendered, income accruing or business dealings effected, then it ceases to come within the purview of Entry 49. In other words, the constitutional identity of land comes to an end the very moment when taxation is no longer focused on the property but on the business activity carried out on the property.         

After having defined the ambit of Entry 49 of List II in the previous chapter, it becomes equally imperative that its strict constitutional limits be defined. The Constitution of India’s Seventh Schedule draws a very precise distinction between taxes on property and taxes on business transactions. Merely by virtue of being present in land, it does not necessarily vest legislative powers in the states under Entry 49. If the legislative attention and the incidence of tax move away from merely being owners of property and towards business transactions, the tax exceeds the constitutional limits of Entry 49.

Principle of No Overlap of Entries: The constitution regarding taxation operates on the principle of non-overlap of entries.[27] Though it is settled law that legislative entries are to be liberally construed by the courts, it has equally been stated that the listing of certain taxable acts in separate entries makes the other entries less comprehensive. There cannot be any overlapping in areas of taxation in the federal system; if an entry specifies a tax in relation to one activity, then this tax cannot be included in another entry. Consequently, Entry 49 cannot be extended to cover taxes on independent economic activities just because such activities are connected to land/buildings.

Distinction Between Land and Economic Activity: The Constitutional Exclusions The principles of Indian constitution relating to Entry 49 are unambiguous regarding the distinction between taxation of property in itself and economic transactions connected to the property. As a result, the following exclusions are carved out from Entry 49 absolutely:

• Income from Land: It must be observed that there exists a constitutional division of powers between taxing property and taxing the gains or incomes realized from its possession. The validity of including the annual value of a self-occupied residential house in the total income of the assessee as per the Income Tax Act was brought before the Supreme Court in the case of Bhagwan Dass Jain v. Union of India.[28] It was claimed that the imposition of tax on this hypothetical annual value is essentially a tax on lands and buildings, which is enumerated under Entry 49 of List II of the Seventh Schedule to the Constitution. The Supreme Court has ruled against this contention, declaring that it is a tax on ‘income’, albeit calculated on an artificial basis, rather than a tax on the property.
• Transactions: Taxation on transfer of title or the making of business transactions occurs as an incident. Although Entry 49 speaks about a tax to be paid continuously depending upon the overall possession or occupation of land, taxes relating to transactions (like stamp duty on sale of immovable properties) occur due to some one-off occurrence. This means that the tax arises out of an act and not out of property.[29]
• Goods: Like this, taxes on goods such as manufacture, transportation, or shipment of goods will be entirely different from taxing the land where the said goods are manufactured or held. Simply having the physical presence of goods or machinery in a particular land will not give the state the right to tax such goods in the name of property tax.
• Services: The rendering of a service in respect of land itself amounts to economic activity, separate and distinct from the issue of ownership of the property. Insofar as the activity concerns itself with either the rental, lease, or license of commercial property, the rationale behind imposing taxes through legislation is that such a tax should amount to the service provided and the agreement between the two parties. It is always true, in light of judicial interpretation, that a service tax imposes a tax on the happening of a service.
• Mining: One of the most extensively argued dividing lines in Indian fiscal federalism has been the line drawn between the tax on land and tax on the extraction of minerals. In India Cement Ltd. v. State of Tamil Nadu[30], the Supreme Court, while making a traditional distinction between mineral rights and land tax, had held that a cess levied on the basis of royalty would be basically a tax on royalty (mining activity) and would hence exceed the ambit of a State to levy such tax under Entry 49. This dividing line was then further explained and examined comprehensively in State of West Bengal v. Kesoram Industries Ltd. The Supreme Court in Kesoram made it clear that “the word ‘land’ as used in Entry 49 should be interpreted very liberally because even land that can be used as tea garden could not be considered any other than land.” Nevertheless, there are some boundaries set by the Constitution on how taxes on minerals can be charged. First, while taxes imposed on land with minerals through Entry 49 can be imposed in totality, the imposition of a tax on the act of extracting, the process of extraction, or the amount of mineral extracted is no longer a tax on land because the act of extracting minerals constitutes an economic activity.

Entry 49’s constitutional boundary lies in the basic distinction that exists between the nature of property and its use. Entry 49 has expended its scope when it comes to taxing the immovable property as such in relation to its general ownership or possession. As soon as the triggering clause in the legislation shifts its focus from the nature of the property to an economic event involving the generation of income, making transactions, providing services, or mining minerals, the tax needs to be justified by an independent constitutional provision.                                                                          

With the implementation of the Goods and Services Tax (GST), the largest reform of India’s fiscal federal system has been witnessed since the Constitution became operational. With the enactment of the Constitution (101st Amendment) Act, 2016[31], which inserted Article 246A[32], a concurrent tax power was provided to both Parliament and State Legislatures for the purposes of taxing goods and services. The GST system thus managed to unify and centralize the taxation system of business dealings. Notably exempt from the impact of the GST system is Entry 49 in List II, “taxes on lands and buildings,” which remains solely under the jurisdiction of States.

Classification of Services in GST: It would seem that keeping Entry 49 alive within the new GST system has been a source of great constitutional tension. The Central GST Act classifies the renting, leasing, and construction of immovable property as constituting the “supply of services,” but excludes from this classification the sale of undeveloped land and fully constructed structures. By legislative fiat, Parliament decided that such transactions represent a taxable value-added service. Thus, while the actual property continues to be taxable under State legislation within Entry 49, the use of the property as a business through rent or lease is subject to GST.[33]

Areas of Dispute: Renting, Commercial Use, and Infrastructures: In their efforts to offset the loss of powers to generate independent revenues due to the establishment of the GST Council, the States have often pushed the limits of Entry 49 to include economic activities involving the land itself. These disputes have become most heated in the following areas:

• Renting vs. Property Tax: Since renting has been classified as a service taxable under GST, the State has sometimes contended that the property tax levied based on the rent value is essentially the same as the tax on the act of renting. However, the courts have always held that even though the rental income may be used as an indicator to determine the value of the land, the tax on the service of renting is completely different from a tax on ownership.
• Commercial Use: The municipal authorities, which now rely heavily on property tax, have tried out new means of assessing the revenue generated through commercial activity carried out on the land, including the assessment of shopping malls and hoardings. The judicial concern with these methods is due to the constitutional requirement that Entry 49 should not be used for taxing the economic benefit from the land.
• Infrastructure Usage: A lot of controversies have erupted because of the municipality’s right to impose taxes on modern infrastructure facilities such as telecommunication towers and data centers. According to the Supreme Court, although the facility itself may be treated as a “building” taxable through Entry 49, it cannot be used as a basis for taxing the telecommunication services being provided.[34]

A Limited Comparison of Fiscal Concepts

In order to fully understand the dual existence of these taxes, one must make a clear distinction between taxes based on property and taxes based on activities. (Note: They are not exactly the same but are only illustrative examples.)

• Property Tax v/s GST on Renting: The former is a static tax on lands and buildings as entities based on the simple fact that they belong or are used for occupancy, while the latter is a dynamic tax on the business service of renting out property.
• Land Tax v/s Income Tax: In a land tax, the assessment is made on the tangible asset that is the land. On the other hand, income tax is imposed on income earned from the exploitation of land.

Cooperative Federalism: Union of India v. Mohit Minerals Pvt. Ltd. [35]This intricate balance has been examined in detail by the Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd. The Court reiterated the position that the very structure of the entire GST regime is premised on the doctrine of cooperative federalism and the spirit of financial reticence. There is an important takeaway from this case with respect to interpreting Entry 49, which is that strict adherence to the boundaries of the legislative field is necessary within the constitutional scheme after GST.

So, the GST Strengthens Scope of Entry 49: The onset of the GST regime does not narrow the scope of Entry 49; it rather strengthens its scope. By incorporating the imposition of taxes on services, trade, and transactions within the ambit of GST, the Constitution requires that Entry 49 should strictly adhere to its true scope – imposition of taxes on immovable property as units of ownership. The efficiency of GST relies on total exclusion of fiscal interferences beyond constitutional boundaries. Hence, the constitutional status of Entry 49 ensures fiscal autonomy for States but requires adherence to principles to prevent land taxation from becoming a backdoor for taxing economic activities.                                        

The constitutional place occupied by Entry 49 of List II of the Seventh Schedule may thus be viewed as a rigorously defined one. The power of levying “taxes on lands and buildings” is certainly not an open and uncertain power but rather a power which is circumscribed within strict limits, based as it is on a coherent conception of the Constitution’s broader scheme for dividing taxing powers between Centre and States.

Summary of Major Conclusions It is clear from a careful examination of Indian fiscal jurisprudence that there exists a firm doctrine underlying it with regard to Entry 49. This is that Entry 49 grants the power to levy taxes on lands and buildings directly on account of their general ownership or occupation. The Supreme Court’s decisions are to the effect that a levy can be categorized as a tax under Entry 49 only if it is levied on the land as such. It cannot be an excise tax or any other type of direct tax except a land revenue tax.

The Importance of Classification: The survival of India’s fiscal federalism rests wholly upon the proper classification of taxes. The judicial use of the doctrine of pith and substance guarantees that the real essence of a tax is known, and that jurisdictions cannot be created artificially through deft statutory drafting.

An integral part of the classification process involves the clear distinction between the “subject” of a tax and its “measure.” The courts have allowed States to exercise considerable latitude in determining the measure of a property tax. It could be the annual letting value, or the capital value, or even the produce from agriculture of such property. But this measure cannot be mistaken to be the subject of the tax, for the measure can use the economic value of the property whereas the subject remains immovable property alone. This distinction between the subject and the measure is constitutionally significant in that it safeguards the property tax against any overlap with matters within the exclusive domain of Parliament.

Core Thesis: Land Stops Being Land When Taxation Shifts to Activity:

The basic premise of this study is the notion that there is a definite cut-off point of constitutional identity of the land in relation to taxation whenever the legislative attention moves from being merely one on passive possession to that of an active economic transaction. The simple existence of land as a geographical site or physical setting does not automatically mean that such confers legislative jurisdiction upon the State. The fact that the tax is imposed because of the economic event itself, whether it be a receipt of rent, a gift of ownership, or even a provision of service such as the renting out of an immovable thing commercially, means that the tax is no longer on the land but the transaction, the service, or the income derived from such an economic activity. In all these cases, the tax is on an economic activity which requires an independent constitutional source other than Entry 49. It must be understood that the constitutionality of taxes depends upon concepts and not economic considerations.

Normative Recommendations: The introduction of the GST has ensured that taxes for goods and services were collected centrally while the tax on properties remained one of the few major sources of income from which the State and local governments can draw. Given this situation, there is an increasing likelihood of States stretching the definition of Entry 49 so as to include business services and transactions. In light of this, the following normative suggestions are made:

• Ensure Constitutional Integrity: The judiciary and legislature should be cautious about the priority given to fidelity in structure over fiscal flexibility. Giving States discretion to interpret activity-based levies as property tax would disrupt the very structure of the GST scheme and jeopardize cooperative federalism. Strict respect for the boundaries of Entry 49 is imperative to avoid cross-fiscal effects and prevent misuse of the power to levy land tax as an indirect tax on business activities.
• Reform Administration: States need not compromise constitutional integrity for boosting revenue collection. Rather, efforts should completely be directed at reforming the entire administration of property tax system. With proper digitization of land records and regularization of the assessment process, local authorities will be able to eliminate any tax evasion to a considerable extent.
• Valuation System: Enhancement of revenue should be pursued by making the municipal system more dynamic and rationalized. States need to evolve improved valuation methods that do not impose indirect burden on the business turnover or capacity of the person occupying the property, but only assess its real capital or letting value.

To conclude, Entry 49 in List II embodies the conscious decision to use the taxation of immovable property for establishing jurisdictional authority. Its future does not lie in unrestricted extension but in rational usage. While used strictly within its constitutional function of taxation of ownership of immovable property, Entry 49 is an embodiment of fiscal federalism; however, once its scope of operation extends to include activity, it disturbs the delicate balance enshrined within the Constitution of India.

[1] M P Jain, Indian Constitutional Law (8th edn, LexisNexis 2018).

[2] Girish Ahuja and Ravi Gupta, Systematic Approach to Income Tax (Bharat Law House, New Delhi 2022).

[3] ibid

[4] H M Seervai, Constitutional Law of India (4th edn, Universal Law Publishing 1996).

[5] Constitution of India 1950, art 246.

[6] Constitution of India 1950, sch VII, List II, Entry 49.

[7] Constitution (101st Amendment) Act 2016.

[8] Constitution of India 1950, art 246A (inserted by Constitution (101st Amendment) Act 2016).

[9] Union of India v Mohit Minerals Pvt Ltd (2022) 4 SCC 481.

[10] Constitution of India 1950, art 246.

[11] M P Jain, Indian Constitutional Law (8th edn, LexisNexis 2018).

[12] Kanga, Palkhivala and Vyas, The Law and Practice of Income Tax (10th edn, LexisNexis, Mumbai 2014).

[13] V S Datey, Indirect Taxes: Law and Practice (Taxmann, New Delhi 2021).

[14] Constitution of India 1950, sch VII, List II, Entry 49.

[15] Constitution of India 1950, sch VII, List II, Entry 49.

[16] Assistant Commissioner of Urban Land Tax v Buckingham and Carnatic Co Ltd (1970) 1 SCC 321.

[17] Bhagwan Dass Jain v Union of India (1981) 2 SCC 135.

[18] Ajoy Kumar Mukherjee v Local Board of Barpeta AIR 1965 SC 1561.

[19] State of West Bengal v Kesoram Industries Ltd (2004) 10 SCC 201.

[20] H M Seervai, Constitutional Law of India (4th edn, Universal Law Publishing 1996).

[21] ibid

[22] M P Jain, Indian Constitutional Law (8th edn, LexisNexis 2018).

[23] ibid

[24] Ajoy Kumar Mukherjee v Local Board of Barpeta AIR 1965 SC 1561.

[25] Buckingham and Carnatic Co Ltd (n 13).

[26] Ahmedabad Municipal Corporation v GTL Infrastructure Ltd (2017) 3 SCC 545.

[27] M P Jain, Indian Constitutional Law (8th edn, LexisNexis 2018).

[28] Bhagwan Dass Jain v Union of India (1981) 2 SCC 135.

[29] Ahuja & Gupta, GST and Customs Law (Bharat Law House, New Delhi 2022).

[30] State of West Bengal v Kesoram Industries Ltd (2004) 10 SCC 201.

[31] Constitution (101st Amendment) Act 2016.

[32] Constitution of India 1950, art 246A.

[33] M P Jain, Indian Constitutional Law (8th edn, LexisNexis 2018).

[34] ibid

[35] Union of India v Mohit Minerals Pvt Ltd (2022) 4 SCC 481.

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Authors: Sarthak Mishra and Manyata – 4th Year Student at DNLU Jabalpur