The essence of taxation is compulsion. Where tax is leviable, person made liable for payment of tax falls under obligation of payment of tax and where such person fails in making payment of tax, law is enforced against him for collection of tax. Where any tax is leviable under any law, person made liable for payment of such tax cannot take liberty of not paying the tax. Where any amount is not leviable as tax, the same can neither be assessed, nor be collected, as tax.

The Constitution Bench of the Honorable Supreme Court of India, in its judgment in the Commissioner, Hindu Religious Endowments vs. Sri Lakshmi Thirtha Swamiar of Sri Shirpur Mutt., Judgment dated: 16/04/1954, with approval, after quoting famous saying of Chief Justice of High Court of Australia, has made following observations about the word “tax”, namely─

‘”A neat definition of what “tax” means has been given by Latham C. J. of the High Court of Australia, in Matthews v. Chicory Marketing Board(1). A tax”, according to the learned Chief Justice, “is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered”. This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.”‘

Article 265 of Constitution of India runs as follows:–

“Taxes not to be imposed save by authority of law.

  1. No tax shall be levied or collected except by authority of law.”

According to the definition of word “tax”, essential characteristics of tax are to be understood as follows:–

(i) Tax is compulsory exaction of money. – The essence of taxation is compulsion. Where tax is leviable, person made liable for payment of tax falls under obligation of payment of tax and where such person fails in making payment of tax, law is enforced against him for collecting amount of tax. Where tax is leviable, person made liable for payment of tax neither can be given, nor can take, liberty of not paying the tax.

(ii) Tax is compulsory exaction of money by public authority. – Tax is levied and collected by the Government.

(iii) Tax is levied for public purposes. – When tax is paid or collected it becomes revenue of the State and tax collected can only be spent by the Government for public purposes. Benefit of tax cannot be given to the taxpayer or any other individual. For this reason, where any amount is leviable as tax under any law, amount collected towards satisfaction of liability of tax cannot be refunded to the taxpayer.

(iv) Tax levy is enforced at law. – Tax is levied under authority of law without consent of the taxpayer and the payment of tax is enforced by law.

(v) Tax is part of common burden. – Tax is a part of the common burden, the quantum of imposition upon the tax-payer depending generally upon the capacity of the tax payer to pay.

The Government cannot collect any money as tax if such amount is not leviable as tax under the provisions of the tax law.  The Constitution Bench of the Honorable Supreme Court, in M/s Bhawani Cotton Mills Ltd. vs. State of Punjab & Anr., Judgment Dated: April 10, 1067, has held as follows:

“If a person is not liable for payment of tax at all, at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid.”

The said principle has continuously been followed by the Honorable Supreme Court in other cases, like Steel Authority of India Ltd. vs. State of Orissa & Ors. Etc. Etc., Judgment dated: February 26, 2000, M/s Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh & Ors., Judgment Dated: March 14, 2000.

In my opinion, if policy is of not collecting any tax (revenue) for the State, it is wrong on part of law drafters to propose provisions for payment of tax first and to claim refund later. Such provision not only affects the interests of the taxpayers adversely but it also increases workload of the Government officials.  Main objects of progressive system of VAT or GST may be listed as follows:–

(i) Input Tax Credit system of VAT or GST can be used for stopping export of tax from one State to another or from one country to another country. In the system, the consumer pays tax to its own Government. Their Government uses tax receipts for development of its own people. Under old system of Sales Tax, it had not been possible to make goods and services tax free where supplies of goods or services were made in the course of inter-State trade or commerce or in the course of export out of the goods out of the territory of India.

(ii) Under VAT or GST system, after some time, stocks held by traders and manufacturers in form of inputs, semi-finished goods and finished goods become tax free and tax paid by traders and manufacturers paid for procuring inputs gets released. As a result, the traders and manufacturers can do more business with the same working capital.

(iii) Input Tax Credit system of VAT or GST provides mechanism for making supply of any goods or services tax free. This property can be used to provide relief from tax to needy persons.

Under GST, tax is leviable on supply of goods or services or both. Tax liability accrues at the time when supply takes place. Agreement of supply is not supply. It is supply of goods or services which can be taxed. Tax can be levied on completed supply of goods or services or both. Where bills or invoices are raised in advance, persons making the supply should be expected to report the supply in the month in which goods or services are supplied. Where supply involves movement of goods, supplier should be expected to report the supply in its return of the month in which movement of goods starts.  From the persons who make zero rated supplies, instead of accepting Bank Guarantee along with Letter of Undertaking, multi-purpose single security, in desired cases, should be accepted. Traders and entrepreneurs should not be compelled for submitting Bank Guarantee.

Process of levy of tax. –

In Govind Saran Ganga Saran vs. Commissioner Of Sales Tax And Ors, Judgment Dated: April 26, 1985, the Honorable Supreme Court of India has held as follows:

“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”

Thus we see that in a tax law, the provision which provides levy of tax, declares the following:–

(i) event or property on which tax is being levied;

(ii) measure or value to which rate of tax shall be applied for computing amount of tax;

(iii) rate of tax at which the tax shall be imposed; and

(iv) person who shall be under obligation of payment of the tax.

Where in the charging section of a tax law, any component, out of the above quoted four components, is missing, it cannot be said that tax levy exists. Another important thing about fiscal statute is that tax levy provision, tax exemption provision, tax refund or rebate provision and provision relating to exemption from payment of tax to the person made liable for payment of tax, all constitute a single scheme of levy of tax. Tax levy provision should be read with all such provisions. The Constitution Bench of the Honorable Supreme Court, in A. V. Fernandez, vs. State of Kerala, Judgment Dated: 02/04/1957 has held as follows:–

“There is a broad distinction between the provisions contained in the statute in regard to the exemptions of tax or refund or rebate of tax on the one hand and in regard to the non-liability to tax or non-imposition of tax on the other. In the former case, but for the provisions as regards the exemptions or refund or rebate of tax, the sales or purchases would have to be included in the gross turnover of the dealer because they are prima facie liable to tax and the only thing which the dealer is entitled to in respect thereof is the deduction from the gross turnover in order to arrive at the net turnover on which the tax can be imposed. In the latter case, the sales or purchases are exempted from taxation altogether. The Legislature cannot enact a law imposing or authorising the imposition of a tax thereupon and they are not liable to any such imposition of tax. If they are thus not liable to tax, no tax can be levied or imposed on them and they do not come within the purview of the Act at all. The very fact of their non- liability to tax is sufficient to exclude them from the calculation of the gross turnover as well as the net turnover on which sales tax can be levied or imposed.”

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Disclaimer: Except the quoted versions, interpretation of laws and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to obey the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.

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Location: NOIDA, Uttar Pradesh, IN
Member Since: 11 Jul 2019 | Total Posts: 38
I am retired Government Servant. Prior to my retirement I had been working as Member Tribunal, Uttar Pradesh Commercial Taxes. Presently, residing in Noida, U.P. & enjoying fully my retired life. View Full Profile

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