The public generally perceives taxes, which are the government’s main source of income, as a hardship. Tax stands on three pillars in a broad prospectus; i.e., progressive, regressive and proportional. This broad spectrum of tax varies from person to person even though the efforts of legislature is to equate it for everyone. Yet, the government is lining the wallets of the general populace with money from taxes, but it argues that this is necessary for the provision of services to the populace.
The category of compensatory and confiscatory apply to this discussion. When the government spends tax revenues on public benefits, the income from taxes is categorized as compensatory. On the other side, the government’s taxation policies become confiscatory when it overcharges, uses unfair approaches, or operates arbitrarily. People elects a leader who will work in their favor for their benefit but the problem here is that the legislatures after being empowered thinks of their sole benefit. However, the go on to exploit their expectation by enacting unreasonable legislations. This article highlights important decisions of the judiciary in order to understand the ‘confiscatory nature of taxation’.
Judicial Aspect
Confiscation in generic sense implies unfairness. The confiscatory nature of tax is contemplated from the legislation which is colorable exercise of the government and arbitrary in nature. The tax legislation is so unreasonable in nature that the owners are forced to leave their properties and allow the government to take over without any consideration. The confiscatory nature of tax can be identified only by microscopic view. The tax nature cannot be said to be confiscatory only when the tax imposed is high. The nature of tax can be categorized as confiscatory only under two of the following circumstances:
a. The legislature is arbitrary in nature; and
b. The tax is imposed with the intent to confiscate the property.
There has been a lot of judgments where the confiscatory nature of taxation can be understood. The tabular representation below briefly discusses judicial discussion on confiscatory nature of taxation.
CASE NOTE: CONFISCATORY NATURE OF TAX
|
S.NO. |
CASE NAME | OBSERVATION |
| 1. | Kunnathat Thathunni Moopil Nair v. The State of Kerala; MANU/SC/0042/1960 | In this case, Hon’ble bench was of the opinion that the taxation imposed by the said legislation is not only arbitrary and imposing unreasonable restriction but is also confiscatory in nature as the ultimate purpose of the legislature was to eliminate private owners from the forest imposing tax without proper mechanism.
The Hon’ble bench note the following four points to call the Act confiscatory: a. The procedure to be adopted does not requires a notice to be given to the proposed assessed; b. There is no procedure for rectification of mistakes committed by the Assessing Authority; c. There is no procedure prescribed for obtaining the opinion of a superior Civil Court on questions of law, as is generally found in all taxing statutes, and d. No duty is cast upon the Assessing Authority to act judicially in the matter of assessment proceedings. Nor is there any right of appeal provided to such assesses as may feel aggrieved by the order of assessment. |
| 2. | Jagannath Baksh Singh v. The State of Uttar Pradesh; MANU/SC/0184/1962 | In the particular case, the Hon’ble Bench opined that the validity of a legislation cannot be challenged on the sole ground that the legislation imposes unreasonable amount of taxation. In furtherance, to which the bench said that if a legislation had to be challenged on the ground that it is the colorable act of the legislation then this sole ground will be sufficient to challenge its validity.
Hon’ble bench by referring to Kunnathat Thathunni Moopil Nair v. The State of Kerala stated that in order to classify tax to be confiscatory in nature the circumstances need to be similar to the case of K.T.M. Nair case. Hon’ble bench dismissed the petition by stating that the circumstances of the present case did not qualify the tax as confiscatory in nature. Hon’ble bench also turned down the argument that the legislation is colorable activity of the legislature. |
| 3. | The Assistant Commissioner of Urban Land Tax v. The Buckingham and Carnatic Co. Ltd.; MANU/SC/0068/1969 | Hon’ble bench relied on the case of Rai Rama Krishnan v. State of Bihar, to clarify when the tax can be said to be confiscatory in nature and when it cannot. The bench of Rai Rama case relied on Jagannath Baksh Singh case and K.T.M. Nair case to provide a clarity on ‘confiscatory nature of taxation’.
To which, Hon’ble Bench in the Buckingham case concluded that consider that the tax levy at 0.4% of the market value of the urban land is by no means confiscatory in effect. |
| 4. | Bhawani Cotton Mills Ltd. v. State of Punjab; MANU/SC/0301/1967 | The Hon’ble Bench in this case stated that the arguments put forth by the state counsel that; at first instance the person has to pay the tax and then file for the refund of the amount at the later stage of which he never had the liability pay at the first place.
The bench said, “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; because, if particular sales or purchase are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax.” |
| 5. | Monoranjan Chakraborty v. State of Tripura; MANU/GH/0046/1989 | The Hon’ble bench formulated a mechanism to determine if the corrective measure was taken before imposing of the tax or not. Hon’ble bench said, “One of the relevant factors to be considered as indicated above is whether the absence of an appeal is likely to make the whole procedure oppressive and arbitrary or render the statutory provisions confiscatory in character and effect.”
Hon’ble bench in the present case held that the tax imposed is confiscatory in nature as the tax has been imposed without any corrective measure. Hon’ble bench reasoned: “the power to levy tax or impose penalty conferred on the Superintendent of Taxes without any corrective machinery is most unreasonable. Very wide powers have been granted without any check or control on the exercise thereof. There is a great chance of its being abused. If abused, it can cause havoc to the dealer concerned.” |
| 6. | Indian Express Newspapers (Bombay) Private Ltd. v. Union of India (UOI); MANU/SC/0412/1988 | Hon’ble bench said:
“The tests for determining the vires of a statute taxing newsprint have, therefore, to be different from the tests usually adopted for testing the vires of other taxing statutes. In the case of ordinary taxing statutes, the laws may be questioned only if they are either openly confiscatory or a colorable device to confiscate.” |
Conclusion
Confiscatory nature of tax has been directly linked to the mischief behavior of the authorities. K.T.M. Nair the judgment where for the first time the concept, ‘confiscatory nature of tax’ was used, it was used to demonstrate the unleashing power of the police authorities. Tax has been seen as a burden due to the authorities involved in, who are using tax as an exploitation tool. There are nations where people consider tax to be a contribution towards the government in order to get best services from the government. The mechanism of the legislation needs to pass the corrective measure test as it is the only way to ensure fairness of the legislation.
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