This article has been written by Ashutosh Singh, a student of BA.LLB(H) at Amity Law School, Amity University, Kolkata. The article attempts to give an overview of the taxation laws in the Constitution of India, 1949.
The system of taxation is the backbone of a nation’s economy which keeps revenue consistent, manages growth in the economy, and fuels its industrial activity. India’s three-tier federal structure consists of Union Government, the State Governments, and the Local Bodies which are empowered with the responsibility of the different taxes and duties, which are applicable in the country. The local bodies would include local councils and the municipalities. The government of India is authorized to levy taxes on individuals and organisations according to the Constitution. However, Article 265 of the Indian constitution states that the right to levy/charge taxes hasn’t been given to any except the authority of law. The 7th schedule of the constitution has defined the subjects on which Union/State or both can levy taxes. As per the 73rd and 74th amendments of the constitution, limited financial powers have been given to the local governments which are enshrined in Part IX and IX-A of the constitution.
Definition of Tax
A tax may be defined as a monetary burden rested upon individuals or people with property to help add to the government’s revenue. Tax is, therefore, a mandatory contribution and not a voluntary payment or donation which one decides on one’s own. It is a payment exacted by the legislative authority. It may be direct tax or indirect tax. Revenue growth which may be a little faster than GDP (Gross Domestic Product) can result from revenue mobilization with an effective tax system and measures.
The government uses this tax to carry out functions such as:
- Social welfare projects like schools, hospitals, housing projects for the poor, etc.
- Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
- Security infrastructure of the country such as military equipment
- Enforcement of law and order
- Pensions for the elderly and benefits schemes to the unemployed or the ones below the poverty line.
Characteristics of a good tax structure
- A good tax system as a whole should be equitable and be fairly leading to equal distribution of wealth in the community.
- It should be effective and yield the required revenue for the government.
- The collection of taxes is a major task and it should be economical.
- The development of trade and industry should not be hampered by the burden of taxes.
- The taxes levied should give a clear picture to the government of its revenue.
- The tax system should be based on comprehensive and up-to-date statistical information enabling accurate forecasting.
- The tax system should also be simple and elastic so that it can respond to the new needs of the State.
- While distributing the burden of taxes, the ability of the tax-payers should be considered.
Taxation system in India
India’s tax system is a three-tier federal structure which is made up of the following:
- Union List (List 1 of the 7th schedule to the Constitution of India) contains those matters on which the Central Government has the power to make laws [Article 246(1)].
- The State List has only those matters on which the State Government has the power to make laws [Article 246(3)].
- The Concurrent List has those matters on which both the Central and State Governments have the power to make laws [Article 246(2)].
Law made by Union Government prevails whenever there is a conflict between the Centre and state concerning entries in the concurrent list. But if any provision repugnant to earlier law made by parliament is part of law made by the state, if the law made by the state government gets the assent of the President of India, it prevails.
Distribution of powers of taxation
- List 1 in the 7th schedule to the constitution has the powers of the Central Government listed in Entries 82-92B.
- List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
- As regards list 3, it doesn’t deal with taxation and hence both centre and state do not have any concurrent powers of taxation.
- Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to the centre.
Types of Taxes in India
The two types of taxes in India are Direct and Indirect taxes. One of the biggest and most successful tax reforms in India is the GST(Goods and Services Tax). It assists as a comprehensive indirect tax which helps in eliminating the flowing effect of tax as a whole.
It is a tax imposed on corporate units and individual people. It is a type of tax that can’t be moved or accepted by anyone else. Direct tax examples are wealth tax, income tax, gift tax, etc. In the Ministry of Finance, the Central Board of Direct Tax (CBDT) is a part of the revenue department. This board has a two-fold role that gives important ideas, significant inputs of planning, and policies to be implemented regarding direct tax in India. The management of direct taxes which is done by the Income Tax department is helped by the Central Board of Direct Taxes in doing so.
Taxes that are indirectly imposed on the public through goods and services are called indirect taxes. The government bodies collect taxes from people who sell goods and services. When a good or product is sold in a state, then a sales tax is levied on it and its rate is decided by the government, this is called Value Added Tax (VAT).
- Formulation of the policy regarding duty, collection of custom excise duty and service tax is dealt with by the Central Board of Excise and Custom (CEBC)
- The Central Board of Excise and Custom was given a new name which was the Central Board of Indirect tax and Custom (CBIC) after GST came into force. Its key role is to help the government in formulating policies related to GST.
The customs duty is collected on all goods entering the country to ensure that they are taxed and paid for. It is levied on both export and import of goods and is important in regulating trade as well as being a source of revenue to the government.
This is a commodity tax in the true sense as it is levied on the production of goods and not on its sales. It is levied by the Central Government but for alcohol/liquor and narcotics/drugs. Unlike custom duty, this applies only to goods produced in India. It is also called the Central Value Added Tax (CENVAT).
Here the product taxed is a service. In India, service tax was initially on the services of telephone, share broking, and general insurance. This circle includes far more services since then and now it has been replaced by a consolidated Goods and Service tax.
Value Added Tax
This tax was introduced because of India’s indirect tax structure being weak that created quite a stir. Value Added tax has a self-monitoring means which makes the administration of this tax simple. VAT is applicable in India in All-Union Territories and States except for the Union Territories of Andaman and Nicobar and Lakshadweep.
After GST came into force, direct and indirect taxes were collected by the three bodies of the government until 1 July 2017. Various indirect taxes which were imposed by the central and state government are incorporated by GST. Both the central and state government collect indirect tax through the intrastate supply of goods and services.
Constitutional Provisions Regarding Taxation in India
The roots of every law in India lie in the Constitution, therefore understanding the provisions of the Constitution is foremost to have a clear understanding of any law. The Constitutional provisions regarding taxation in India can be divided into the following categories:
- Only by the authority of law can taxes be levied. (Article 265)
- Levy of duty on tax and its distribution between centre and states (Article 268, Article 269, and Article 270)
- Restriction on power of the states to levy taxes (Article 286)
- Sale/purchase of goods which take place outside the respective state
- Sale/purchase of goods which take place during the import and export of the goods
- Taxes imposed by the state or purpose of the state (Article 276, and Article 277)
- Taxes imposed by the state or purpose of the union (Article 271, Article 279, and Article 284)
- Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)
Without the ‘authority of law,’ no taxes can be collected is what this article means in simple terms. The law here means only a statute law or an act of the legislature. The law when applied should not violate any other constitutional provision. This article acts as an armour instrument for arbitrary tax extraction.
In the case Tangkhul v. Simirei Shailei, all the villagers were paying Rs 50 a day to the head man in place of a custom to render free a day’s labour. This was done every year and the practice had been continuing for generations. The Court, in this case, held that the amount of Rs. 50 was like a collection of tax and no law had authorized it, and therefore it violated Art 265. Article 265 is infringed every time the law does not authorize the tax imposed.
In the case, Lord Krishna Sugar Mills v. UOI, sugar merchants had to meet some export targets in a promotion scheme started by the government but if they fell short of the targets then an additional excise duty was to be levied on the shortfall. The court intervened here and said that the government had no authority of law to collect this additional excise tax. What this means in effect is that the government on its own cannot levy this tax by itself because it has not been passed by the Parliament.
This article has provisions for the Consolidated Funds and Public Accounts of India and the States. In this matter, the law is that subject to the provisions of Article 267 and provisions of Chapter 1 (part XII), the whole or part of the net proceeds of certain taxes and duties to States, all loans raised by the Government by the issue of treasury bills, all money received by the Government in repayment of loans, all revenues received by the Government of India, and loans or ways and means of advances shall form one consolidated fund to be entitled the Consolidated Fund of India. The same holds for the revenues received by the Government of a State where it is called the Consolidated Fund of the State. Money out of the Consolidated Fund of India or a State can be taken only in agreement with the law and for the purposes and as per the Constitution.
This gives the duties levied by the Union government but are collected and claimed by the State governments such as stamp duties, excise on medicinal and toilet preparations which although are mentioned in the Union List and levied by the Government of India but collected by the state (these duties collected by states do not form a part of the Consolidated Fund of India but are with the state only) within which these duties are eligible for levy except in union territories which are collected by the Government of India.
Article 269 provides the list of various taxes that are levied and collected by the Union and the manner of distribution and assignment of Tax to States. In the case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others, placing faith in a judgement of the Apex Court in the case of Gannon Dunkerley & Co. and others v. State of Rajasthan and others, the advocate from the appellant side submitted that to arrive at a Taxable Turnover, turnover relating to inter-State transactions, export, import under the CST Act are to be excluded. Thus, the provision of the State Sales Tax Act is always subject to the provisions of Sections 3 and 5 of the CST Act. Sale or purchase in the course of interstate trade or commerce and levy and collection of tax thereon is prohibited by Article 269 of the Constitution of India.
This article is newly inserted which gives the power of collection of GST on inter-state trade or commerce to the Government of India i.e. the Centre and is named IGST by the Model Draft Law. But out of all the collecting by Centre, there are two ways within which states get their share out of such collection
- Direct Apportionment (let say out of total net proceeds 42% is directly apportioned to states).
- Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a selected prescribed percentage goes to the States.
This Article gives provision for the taxes levied and distributed between the Union and the States:
- All taxes and duties named within the Union List, except the duties and taxes named in articles 268, 269 and 269A, separately.
- Taxes and surcharges on taxes, duties, and cess on particular functions which are specified in Article 271 under any law created by Parliament are extracted by the Union Government.
- It is distributed between the Union and the States as mentioned in clause (2).
- The proceeds from any tax/duty levied in any financial year, is assigned to the states where this tax/duty is extractable in that year but it doesn’t form a part of the Consolidated Fund of India.
- Any tax collected by the centre should also be divided among the centre and states as provided in clause (2).
- With the introduction of GST 2 sub-clauses having been added to this Article- Article 270(1A) and Article 20(1B7).
The Supreme Court of India has set a famous judicial precedent under Article 270 of the Constitution of India in the case T.M. Kanniyan v. I.T.O. The SC, in this case, propounded that the Income-tax collected forms a part of the Consolidated Fund of India. The Income-tax thus extracted cannot be distributed between the centre, union territories, and states which are under Presidential rule.
At times the Parliament for the Union Government (only when such a requirement arises), decides to increase any of the taxes /duties mentioned in article 269 and Article 270 by levying an additional surcharge on them and the proceeds from them form a part of the Consolidated Fund of India. Article 271 is an exception to Article 269 and Article 270. The collection of the surcharge is also done by the Union and the State has no role to play in it.
Cess and surcharge
There seems to be a lot of confusion between cess and surcharge. Cess is described in Article 270 of the Constitution of India. Cess is like a fee imposed for a particular purpose that the legislation charging it decides. Article 271 deals with a surcharge which is nothing but an additional tax on the existing tax collected by the union for a particular purpose. Proceeds from both the cess and surcharge form part of the Consolidated Fund of India In the case of m/s SRD Nutrients Private Limited v. Commissioner of Central Excise, Guwahati, the Supreme Court was presented with the question: If on excisable goods an education cess can be levied before the imposition of cess on goods manufactured but cleared after imposition of such cess. The judgement given in this case was in favour of the manufacturer but the judges, Justice A K Sikri and Justice Ashok Bhushan observed that education and higher education cess are surcharges.
The constitution has provisions for sanctioning grants to the states or other federating units. It is Central Government financial assistance to the states to balance/correct/adjust the financial requirements of the units when the revenue proceeds go to the centre but the welfare measures and functions are entrusted to the states. These are charged to the Consolidated Fund of India and the authority to grant is with the Parliament.
This grant is charged to the Consolidated Fund of India every year in place of any share of the net proceeds, export duty on products of jute to the states of Assam, Bihar, Orissa, and West Bengal. This grant will continue and will be charged to the Consolidated Fund of India as long as the Union government continues to levy export duty on jute, or products of jute or the time of expiration which is 10 years from its commencement.
These grants are sanctioned as the parliament by law decides to give to those states which are in dire need of funds and assistance in procuring these funds. These funds /grants are mainly used for the development of the state and for the widening of the welfare measures/schemes undertaken by the state government. It is also used for social welfare work for the Scheduled tribes in their areas.
This article talks about the taxes that are levied by the state government, governed by the state government and the taxes are collected also by the state government. But the taxes levied are not uniform across the different states and may vary. These are sales tax and VAT, professional tax and stamp duty to name a few.
Except for cesses, fees, duties or taxes which were levied immediately before the commencement of the constitution by any municipality or other local body for the purposes of the State, despite being mentioned in the Union List can continue to be levied and applied for the same purposes until a new law contradicting it has been passed by the parliament.
In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh, the appellant was manufacturing medicines for making which they had to use alcohol, the licenses for which were procured under the Hyderabad Abkari Act and had to pay some fees to the State Government for the supervision. But the parliament passed the Medicinal and Toilet Preparations Act, 1955 under which no fee had to be paid but the petitioner challenged the levy of taxes by the state after the passing of the Medicinal and Toilet Preparations Act, 1955 because according to Article 277, entry 84 of list 1 in the 7th schedule, the state could not levy any fee. The difference between tax and fee was explained. Proceeds from tax collection are used for the benefit of all the taxpayers but a fee collected is used only for a specific purpose.
This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the proceeds which are left after deducting the cost of collection of the tax, ascertained and certified by the Comptroller and Auditor-General of India.
It is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is not restricted. In the case Bhim Singh v. Union of India & Ors the Supreme Court said that from the time of the applicability of the Constitution of India, welfare schemes have been there intending to advance public welfare and for public purposes by grants which have been disbursed by the Union Government. In this case, the Scheme was MPLAD (Member of Parliament Local Area Development Scheme) and it falls within the meaning of ‘public purpose’ to fulfil the development and welfare projects undertaken by the state as reflected in the Directive Principles of State Policy but subject to fulfilling the constitutional requirements. Articles 275 and 282 are sources of granting funds under the Constitution. Article 282 is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is not restricted. In the case Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State of Madras, the Supreme Court held that the practice of religion is a private purpose. And donations and endowments made are therefore not a state affair unless the state takes the responsibility of the management of such religious endowment for a public purpose and uses the funds for public welfare measures. So it can be seen that Article 282 can be used for a public purpose but at times in the name of public purpose it can even be misused.
This article restricts the power of the State to tax
1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the territory of the state.
2) Only parliament can lay down principles to ascertain when a sale/purchase takes place during export or import or outside the state. (Sections 3, 4, 5 of the Central Sales Tax Act, 1956 have been constituted with these powers)
3) Taxes on sale/purchase of goods that are of special importance can be restricted by the parliament and the State Government can levy taxes on these goods of special importance subject to these restrictions (Section 14 and Section 15 of Central Sales Act, 1956 have been constituted to impose restrictions on the state Government to levy taxes on these goods of special importance). In the case of K. Gopinath v. the State of Kerala, Cashew nuts were purchased and imported by the Cashew Corporation of India from African suppliers and sold by it to local users after processing it. The apex court held that this sale was not in the course of import and did not come under an exemption of the Central Sales Tax Act, 1956. The issue before the court was to decide whether the purchases of raw cashew nuts from African suppliers made by the appellants from the cashew corporation of India) fall under the nature of import and, therefore protected from liability to tax under Kerala General Sales Tax Act, 1963. The judgement here went against the appellants.
State Governments are exempted from Union taxation as regards their property and income but if there is any law made by the parliament in this regard then the Union can impose the tax to such extent.
Some other tax-related provisions
- Article 301 which states that trade, commerce and inter-course are exempted from any taxation throughout India except for the provisions mentioned in Article 302, 303, and 304 of the Indian Constitution, 1949.
- Article 302 empowers the parliament to impose restrictions on trade and commerce in view of public interest.
- Article 303– Whenever there is the scarcity of goods this article comes in play. Discrimination against the different State Governments is not permitted under the law except when there is a scarcity of goods in a particular state and this preference to that state can be made only by the Parliament and in keeping with the law.
- Article 304– permits a State Government to impose taxes on goods imported from other States and Union Territories but it cannot discriminate between goods from within the State and goods from outside the State. The State can also exercise the power to impose some restrictions on freedom of trade and commerce within its territory.
Apart from all these provisions, there are other provisions also that require mention such as Article 366 which gives the definition of:
- Taxes that are levied on the sale/purchase of goods;
- Goods and service tax etc.
India is a big country with people belonging to different communities and different wealth groups and income. Taxation to all cannot be the same. This is the reason for the tax system in India being a complicated one for long. India has been grappling with the problem of tax evasion which seems to be making our taxation system hollow from the core. India has a high tax rate but a low yield of direct taxes. So, over the years the government has made an attempt to reduce the taxes. Also, for a nation to prosper its tax collection system has to be strong and efficient even if the tax rates are not high else its coffers will be depleted and developmental programmes truncated. One of the biggest problems faced by India’s taxation system is the power of the government to make retrospective amendments regarding the tax statues. The practice began with the judgement given by the supreme court in the case of Chhotabhai Jethamal Patel & Co v. UOI & Others after which an amendment bill was passed for retrospective levy of excise duties.
After the implementation of the GST which is an all-inclusive indirect tax, the process has become smoother and helped prevent the cascading effect it had earlier. The Constitution of India has provisions with respect to the distribution of financial resources under chapter two of part twelfth which is in rhythm with the Federal, State and Concurrent list under 7th Schedule. To sum up, the Parliament rights are not bound and the Indian Constitution gives wide powers to the Parliament and it is neither rigid nor the same. So, according to future needs, there are provisions that can change the said rules of law. Paying taxes may not be the best task, however, it pays for all the development and infrastructure that one enjoys.
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