Constitutional Provisions Related To Taxation Law

Vincy Chanchal 

Introduction:

Tax has been defined in Section 2 (43) of the Income Tax Act as [1]“[tax in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [2][and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA]”

Tax has also been defined in Article 366 (28)[3] of the Constitution of India as “taxation includes the imposition of any tax or impost, whether general, local or special, and “tax” shall be construed accordingly.”

A tax can be described as a financial obligation imposed on individuals or property owners to contribute to the government’s income. It is obligatory and not a voluntary choice, as mandated by the Legislations. Taxes can either be direct or indirect. By effectively implementing a tax system and measures, revenue collection can potentially grow slightly faster than the Gross Domestic Product (GDP), contributing to overall fiscal growth.

Tax is employed by the government to support various functions, including:

• Social welfare initiatives for low – income individuals.
• Infrastructure development, encompassing roads, bridges, flyovers, railways, ports, etc.
• Strengthening nations’ security infrastructure, including military equipment.
• Providing pensions for senior citizens and implementing benefit programs for the unemployed or those living below the poverty line.

Taxation System in India

India’s taxation system is a three – tier federal structure, consisting of the following elements:

“The Union List within the 7^th Schedule of the Indian Constitution, encompasses subjects over which the Central Government possesses the authority to enact laws.”[4]

Entry 41 – “Trade and commerce with foreign countries; import and export across customs frontiers; definition of customs frontiers”

Entry 42 – “Inter – State trade and commerce”

Entry 82 – “Taxes on income other than agricultural income”

Entry 83 – “Duties of customs including export duties” 

“The State List exclusively includes subjects on which the State Government has the jurisdiction to formulate laws.”[5]

Entry 46 – “Taxes on agricultural income”

Entry 49 – “Taxes on lands and buildings”

Entry 51 – “Duties of excise on alcoholic liquors and opium etc., manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India”

Entry 52 – “Taxes on entry of goods in local areas for consumption, use or sale therein”

“The Concurrent List comprises matters over which both the Central and State Government possess the authority to legislate.”[6]

Entry 44 – “Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty”

In cases of conflict between the Union and State Governments regarding entries within the List III, laws enacted by the Union Government take precedence.[7] However, if any provision within a state’s legislation contradicts a prior law enacted by the Parliament, it can prevail if it receives President of India’s assent.[8]

Constitutional Provisions Regarding Taxation in India

Constitution is the “Grundnorm” in India. There are some constitutional provisions related to the taxation in India.

Article 265

Under this provision only the authorized authorities can levy taxes. This article conveys that taxes cannot be gathered unless they are authorized by a legal framework. In this context, “law” refers specifically to statutory laws or acts passed by the Legislature. Furthermore, these laws must comply with the broader provisions of the Constitution. Essentially, this Article serves as a protective measure against the arbitrary collection of taxes.

In Tangkhul v. Simirei Shailei[9], all villagers were remitting Rs. 50 per day to the village headman instead of following the customary practice of providing a day’s labor for free. This tradition had persisted for generations on an annual basis. In this particular case, the Court ruled that the Rs. 50 resembled a form of tax collection, and since there was no legal basis, it contravened Article 265.

In another case of Lord Krishna Sugar Mills v. UOI[10] the sugar merchants were required to achieve specific export goals as part of a government – initiated promotional program. However, if they failed to meet these targets, an extra excise duty would be imposed on the deficit. In this situation, the Court stepped in and declared that the government lacked the legal authority to impose this additional excise tax. In practical terms, this means that the government cannot unilaterally impose this tax without it first being approved by the Parliament.

Article 266

This Article contains provisions pertaining to the “Consolidated Funds and the Public Accounts of India and the individual States.” In this regard, it is legally established that, subject to the provisions outlined in Article 267 and the provisions detailed in “Chapter 1 (Part XII)”, the entirety or a portion of the net proceeds derived from specific taxes and duties allocated to the States, all loans acquired by the Government through the issuance of treasury bills, all funds received by the Government as loan repayments, all revenues collected by the Central Government, and loans or ways and means of advances shall collectively constitute a unified fund, designated as the “Consolidated Fund of India.” Similarly, this principle applies to the revenues received by a State Government, where it is referred to as the “Consolidated Fund of the State.” Withdrawals from the “Consolidated Fund of India or State” can only occur in accordance with the legal provisions and must align with the objectives and principles enshrined in the Constitution of India.

Article 268

This Article pertains to the duties imposed by the Central Government but administered and asserted by the State Governments, such as Stamp Duty, and Excise taxes on medicinal and toilet preparations. Although, these duties are specified in the Union List and imposed by the Central Government, they are actually collected by the respective State Governments. It is important to note that these duties, when collected by the States, do not become part of the Consolidated Fund of India, rather, they remain within the jurisdiction of the respective State Governments, expect for the Union Territories, where they are collected by the Government of India.

Article 269

This Article outlines the inventory of diverse taxes imposed and gathered by the Union, along with the method of allocation and apportionment of these taxes to the States. The attorney representing the appellant in M/S Kalpana Glass Fiber Pvt. Ltd. versus State of Orissa & ors.[11] relied on M/s Gannon Dunkerley & Co. and ors. versus State of Rajasthan and ors.,[12] contended that in the calculation of taxable turnover, it is necessary to exclude turnover associated with inter – state transactions, exports, and imports as outlined in the CST Act. Consequently, the State Sales Tax Act’s provisions are consistently subjected to the provisions articulated in Ss. 3 and 5 of the CST Act. It should be noted that Article 269 of the Constitution expressly prohibits the sale or purchase during interstate trade or commerce and the imposition and collection of taxes thereon.

Article 269 (A)

This newly incorporated article confers authority upon the Government of India, or the Centre, to collect Good and Services Tax (GST) on inter – state trade or commerce, denoted as IGST in the Model Draft Law. Among the various methods by which the Centre collects GST, two channels exist for States to obtain their share of these collections:

1. Direct Apportionment: A portion, specifically 42% of the total net proceeds, is directly allocated to the States.

2. Consolidated Fund of India: A predetermined percentage of the overall amount in the Consolidated Fund of India is designated to be distribution among the States.

Article 270

This Article contains provisions regarding the imposition and distribution of taxes between the Union and the States, encompassing following aspects:

1. All taxes and duties specified in the Union List, excluding those delineated in Articles 268, 269, and 269A, are considered separately.

2. The Central Government collect taxes, surcharge on taxes, duties, and cess related to specific functions specified in Article 271 through Legislation enacted by the Parliament.

3. The allocation of these tax proceeds between the Union and the State as stipulated in clause (2).

4. The revenue generated from any tax or duty imposed in a given fiscal year is allocated to the States where the tax or duty is collected in that year. However, it does not constitute a part of the Consolidated Fund of India.

5. Any tax collected by the Central Government is distributed between the Central Government and the States as per provisions in clause (2).

6. It’s noteworthy that the two additional sub – clauses, Article 270 (1A) and Article 270 (1B7), were incorporated into this article with the advent of the Goods and Services Tax (GST).

SC in T. M. Kanniyan v. I. T.O.[13] observed that the income – tax revenues collected are included in the “Consolidated Fund of India.” Consequently, the income – tax funds collected in this manner cannot be apportioned among the Central, States and UT subject to the Presidential rule.

Article 271

On occasion, Parliament may opt to augment any of the taxes or duties enumerated in Articles 269 and 270 by imposing an additional surcharge, and the revenue generated from this surcharge becomes an integral component of the “Consolidated Fund of India.” Article 271 constitutes an exception to the provisions laid out in Articles 269 and 270. The imposition and collection of the surcharge are exclusively carried out by the Union, with no involvement of the State.

Article 273

Annually, this allocation is debited to the Consolidated Fund of India, substituting any portion of the net proceeds derived from the export duty on jute products assigned to the States of Assam, Bihar, Odisha, and West Bengal. This allocation shall persist and be debited to the Constituted Fund of India for as long as the Union continues to impose export duties on jute and its products or until the stipulated 10 – year term elapses from its initiation.

Article 274

A safeguard has been laid down in this Article that no Bill or Amendment which imposes or varies any tax or duty in which the States are interested or which affects the principles of duties or taxes amongst the States as laid down in Arts. 268 – 273 shall be introduced or moved in either House of Parliament except on the recommendation of the President.

Article 275

This article authorizes Parliament, through legislation, to allocate grants to the States facing significant financial challenges and requiring assistance in securing these funds. These grants are primarily earmarked for the State’s development initiatives and the expansion of welfare programs administered by the State government. They are also directed towards social welfare initiatives for Scheduled Tribes within their respective jurisdiction.

Article 276

This article lays down the taxes levied, governed, and collected by the State Government. However, taxes imposed does not exhibit uniformity among the States and can exhibit variations. These taxes include Sales Tax, Value Added Tax, Professional Tax, Stamp duty, etc.

Article 277

This article lays down that except cesses, fees, duties, or taxes that were imposed by any municipality or other local authority for the State purposes just before the commencement of the Constitution of India, although listed in the Union List, they can persist in their imposition and utilization for the same objectives until and unless the Parliament enacts a new law that contravenes these arrangements.

In Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh[14] the appellant was engaged in the production of pharmaceuticals that necessitated the use of alcohol. Licenses for the alcohol procurement were obtained under the Hyderabad Akbari Act, and certain fees were remitted to the State Government for the regulatory oversight. However, the Parliament enacted the Medicinal and Toilet Preparations Act of 1955, under which no fees were necessary. Subsequently, the Petitioner contested the State’s imposition of taxes followed by the enactment of the Medicinal and Toilet Preparations Act, 1955. The challenge was rooted in Article 277, coupled with Entry 84 of the Union List in the 7^th Schedule of the Constitution of India, asserting State do not have any authority to impose any fees.

Besides, the distinction between tax and fee was elucidated. Tax proceeds are employed for the collective benefit of all taxpayers, whereas fees collected serve a specific and designated purpose.

Conclusion

India comprises of diverse communities and varying different income levels, necessitates a nuanced approach towards taxation. This complexity has historically characterized India’s taxation system. The country grapples with issue of tax evasion, which threatens the integrity of its taxation framework. Nevertheless, India maintains a relatively high taxation rate, its direct tax yield remains modest. Consequently, government both in the Centre and the State has endeavored to reduce tax burden over the years.

For a nation to prosper, it is imperative that its tax collection mechanism operates with strength and efficiency, regardless of whether tax rates are exceptionally elevated. An insufficient tax collection system has potential to drain government resources and impede progress of development. The taxation system in India encounters noteworthy obstacle in retrospective amendments to tax statutes.

The implementation of GST which is comprehensive indirect tax, has streamlined taxation and reduced the previously observed cascading effects. Constitution of India contains provisions for distribution of financial resources given in Chapter II, Part XII, in harmony with delineation of powers between the “Union List (List I), State List (List II), and Concurrent List (List III) in the 7^th Schedule.”

Summarizing, the Indian Parliament wields significant authority, and the Constitution of India exhibits adaptability and responsiveness to evolving requirements. Although paying taxes may not be a popular tax, it serves as the essential foundation for funding crucial developments and infrastructures that benefit society as whole.

Notes

[1] Subs. by Act 10 of 1965, s. 4, for clause (43) (w.e.f. 1-4-1965).

[2] Subs. by Act 18 of 2005, s. 3, for “the aforesaid date” (w.e.f. 1-4-2006).

[3] Indian Constitution, Article 366 (28).

[4] Indian Constitution, Article 246 (1).

[5] Indian Constitution, Article 246 (2).

[6] Indian Constitution, Article 246 (3).

[7] Indian Constitution, Article 246.

[8] Hoechst Pharmaceutical Ltd v. State of Bihar, (1983) 4 SCC 45.

[9] AIR 1961 Manipur 1.

[10] 1959 AIR 1124.

[11] 2012 SCC OnLine Ori 228

[12] (1993) 1 SCC 364.

[13] 1968 AIR 637.

[14] AIR 1964 SC 1870.