Unveiling the Fundamental Principle – No Tax Without Legal Authority

Introduction

Article 265 of the Indian Constitution states that no tax shall be levied or collected except by authority of law[1]. The authority of law, Law to be valid, tax, levy and collection are the primary components of this article.

Authority of law

In the intricate web of taxation laws, Parliament stands as the pivotal authority vested with the power of enactment. It is crucial to emphasize that this authority must be exercised exclusively through the formal channels of legislation; informal avenues are deemed insufficient. Within this legal framework, Parliament wields the capacity to gather and impose taxes by means of meticulously crafted statutes. This legislative process ensures the legitimacy and adherence to established legal principles in the realm of taxation.

In a landmark decision by the New Delhi Municipal Committee versus The State of Punjab[2], it was established that the prerogative to levy or collect taxes is exclusive to sovereign states. In instances where a country is under the control of another nation, the power to impose or gather taxes is not conferred. The crux of the matter lies in the essence of sovereignty.

A subsequent case, Balaji versus Income Tax Officer[3], underscored the necessity of a valid and in-force enactment or statute for the lawful collection of taxes. It was firmly asserted that tax collection hinges on the existence of a legitimate legal framework.

The State of West Bengal versus Keshoram Industries case[4], as ruled by the Supreme Court, emphasized the need for clarity in the authority bestowed to levy or collect taxes. The subject matter of taxation should be explicitly defined, leaving no room for ambiguity. The court stipulated that there is no implied power to tax, and therefore, the authority, procedure, and parties involved in tax collection should be expressly outlined.

Law to be valid law

The omission of this element in explicit terms was a result of judicial interpretation. Nevertheless, over time, it has evolved into a crucial and unavoidable component within the legal framework. Judicial scrutiny and interpretation have elevated its significance, making it an integral and indispensable element in the legal context.

The Kunnathat Thathunni Moophil Nair versus State of Kerala case[5] marked a pivotal moment, with the Supreme Court resolutely affirming that no tax law has the prerogative to infringe upon the fundamental rights enshrined in the constitution, irrespective of its originator. A parallel instance, the Sainik Motors versus State of Rajasthan case[6], spotlighted specific articles in the constitution, extending beyond fundamental rights to encompass matters such as interstate trade and commerce, particularly covered under Article 301 to 307. The court, in its wisdom, decreed that any tax implicated in these provisions, especially in the realm of indirect taxation, must not transgress the boundaries set forth. Shifting the focus to the Chhota Jeta Patel versus Union of India case[7], the Supreme Court underscored the imperative for a law’s validity to be ascertained at the point of enactment, ensuring its compliance and preventing any overstepping of legal bounds. Lastly, the Madhura Agarwal versus State of Madhya Pradesh case[8] articulated a fundamental principle, stipulating that for a tax law to stand as valid, it must encompass three elemental pillars: the identification of the taxed entity, the delineation of the subject matter, and a clear determination of the tax rate. Failure to incorporate these pillars renders the tax law inherently flawed and void.

Tax

As articulated by Adam Smith, taxation is characterized as the “compulsory acquisition of money by the state, without any quid pro quo”. The term “quid pro quo” denotes a favor or advantage granted in return for something. In the context of taxation, this implies that individuals contribute funds to the state through taxes without necessarily receiving a specific, direct equivalent benefit or favor in return. Smith’s perspective highlights the obligatory nature of taxation, emphasizing its role as a financial means for the state to fulfill its functions and obligations without a precise one-to-one exchange of value between the taxpayer and the government. Smith’s definition faced criticism over time. Critics argue that this definition oversimplifies the multifaceted nature of taxation and its role in modern societies.

In the landmark case of Mafatlal Industries versus Union of India[9], a critical legal issue arose regarding the interpretation of Article 265 of the Indian Constitution. This provision delineates the term “tax” and its scope, specifically whether it encompasses only direct taxes or also includes indirect taxes. The Supreme Court, in its judgment, decisively ruled that the term “tax” encompasses both direct and indirect taxes, expanding its purview beyond what was previously understood.

In another significant case, Indian Medical Association versus UP Shanti, the court elucidated the essential components of tax law. It underscored that taxation involves several fundamental principles: firstly, it is imposed without the taxpayer’s consent and is backed by legal enforcement. Secondly, taxation is a compulsory levy devoid of any direct correlation to special benefits conferred upon the taxpayer. Lastly, taxation is contingent upon the taxpayer’s capacity to pay, emphasizing the principle of ability to bear the imposed burden.

Levy and collection

In the intricate realm of taxation, the act of levying entails the imposition of tax obligations and the assignment of tax liabilities to individuals or entities. Conversely, the process of collection involves the actual retrieval of the taxed amount from the pockets of taxpayers. Within the framework of a tax statute, it is imperative that the manner in which taxes are levied, imposed, and collected be explicitly elucidated within the legislative text. This principle finds expression in Article 265 of the Indian Constitution, which underscores the importance of clarity and transparency in taxation laws, ensuring that taxpayers are well-informed and that tax collection procedures adhere to established legal frameworks.

Critical Analysis of the Article

In safeguarding citizens against arbitrary taxation, Article 265 of the constitution plays a pivotal role, ensuring a lawful basis for tax imposition. However, it’s crucial to note that while this article provides protection against arbitrary taxation, it doesn’t inherently guarantee the reasonability of the imposed tax. The legislature retains the discretion to determine the extent and rate of taxation, as long as it adheres to the legal framework.

Nevertheless, the power to tax is not boundless and is constrained by the fundamental rights of the citizens. The Kunnathat Thathunni Moopil Nair case underscores the importance of aligning taxation laws with the principles of equality enshrined in Article 14 of the constitution. This precedent establishes that taxation should not be discriminatory or arbitrary; it should respect the fundamental right to equality, ensuring fair treatment for all citizens under the purview of tax laws.

Conclusion

Article 265 plays a crucial role in maintaining a just and balanced taxation system, safeguarding citizen’s rights and ensuring fiscal accountability.

[1] India Const. art. 265.

[2] New Delhi Municipal Committee v. State of Punjab, 1995 AIR 3, 1994 SCC (6) 619.

[3] Balaji v. Income-Tax Officer, Special Investigation Circle, 1962 AIR 123, 1962 SCR (2) 983.

[4] State of West Bengal v. Kesoram Industries Ltd., 1962 AIR 123, 1962 SCR (2) 983.

[5] Kunnathat Thathunni Moophil Nair v. State of Kerala, AIR 1961 SC 552 (1961)

[6] M/s. Sainik Motors, Jodhpur And Others v. The State of Rajasthan, 1961 AIR 1480 (1962 SCR (1) 517).

[7] Chhotabhai Jethabhai Patel And Co. v. The Union of India And Another, 1962 AIR 1006 (1962 SCR Supl.).

[8] Mathuram Agrawal v. State Of Madhya Pradesh, AIR 2000 SC 109 (1999 (8) SCC 667)

[9] Mafatlal Industries Ltd. v. Union of India, 1997 SCC 536 (1989 ELT 247 SC) / 1998 111 STC 467.