This article is written by Mounica Kasturi and the article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).


The legislative competence of the Centre and States in India is demarcated in the Constitution of India through the three lists under Schedule VII. The power to levy tax or fee is not coextensive with each other and different meanings have been ascribed to the term ‘fee’ and ‘tax’. Initial judgments of the Hon’ble Supreme Court have carved ‘quid pro quo test’ between the fees collected and the services rendered to identify fees from tax. Tax was considered to be a general burden for public welfare whereas levy of fee corelates to expenses incurred by the government in rendering a service. The fees collected were to be kept in a separate funds and not to be added to the Consolidated Fund. 

Case laws

The first major case to discuss the difference between a tax and a fee was Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, AIR 1963 SC 966. In this case, the Supreme Court held that a levy is a fee when, firstly, the amount raised through the levy correlates to expenses incurred by the government in rendering a service. Hence, there must be an element of quid pro quo. Secondly, the funds collected must not be merged with the Consolidated Fund and must be earmarked specifically for the expenditure incurred by the government in rendering the services. 

These two elements were further solidified by the Supreme Court in the case of Mahant Sri Jagannath Ramanuj Das v. State of Orissa, AIR 1954 SC 400 where it was held that the fee must be the consideration for certain services which the individuals received, and it must not be merged in the general revenue of the State to be spent for general public purposes. The two above mentioned principles of a fee have undergone a substantial change through later judicial pronouncements, and the strict necessity of both has been diluted. 

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In the case of Sreenivasa General Traders v. State of A.P., 1983 4 SCC 353, it was held that Co Relationship between the levy and the services rendered/expected is one of general character and not of mathematical exactitude. It is only necessary that a ‘reasonable relationship’ exists between the levy of the fee and the services rendered.

In the case of Krishi Upaj Mandi Samiti & Ors. v. Orient Paper & Industries Ltd., (1995) 1 SCC 655, the validity of market fees levied by market committees on the sale and purchase of bamboos was in question. The Court in para 21 of this judgment summarised the jurisprudence on the distinction between tax and fee, inter alia, on the following counts:

  1. The subjects on which fees can be imposed has been separately covered under Schedule VII of the Constitution, 
  2. Public interest seems to be at the basis of all imposition but in a fee, the reason for the imposition of the levy is some special benefit that is conferred and accruing to the person on whom the fee is levied. 
  3. In determining whether the levy is a fee, the true test must be whether its primary and essential purpose is to render specific services to a specific area or classes.
  4. It is not a postulate of a fee that it must have relation to the actual service rendered. However, the rendering of service has to be established and the service so rendered cannot be remote.
  5. To satisfy the test of quid pro quo, a good and substantial portion of the fee must be shown to be expended for the purpose for which the fee is levied.
  6. Further, while it is not necessary to confer the whole of the benefit on the payers of the fee but some special benefit must be conferred on them which has a direct and reasonable correlation to the fee.

The requirement of a ‘reasonable relationship’ between the levy of fee and services rendered was also observed in State of Gujarat v. Akhil Gujarat Pravasi V.S. Mahamandal, (2004) 5 SCC 155. Further, in the case of Jindal Stainless v. Haryana, (2006) 7 SCC 241 as well as the Jindal Stainless Ltd. v. State of Haryana, (2017) 12 SCC 1 cursory observations noted that while a tax has no element of quid pro quo, a fee cannot be validly levied without a quid pro quo.

There has undoubtedly been a dilution of this distinction over the years as evidenced through multiple pronouncements by the Apex Court on this issue. However, a recent judgment by the Hon’ble Supreme Court further waters down this distinction. 

A recent judgment of the Hon’ble Supreme Court in the case of Jalkal Vibhag Nagar Nigam & Ors v. Pradeshiya Industrial and Investment Corporation & Anr., Civil Appeal No. 6107 of 2021 further waters down this distinction. In the said case, the court upheld the validity of water tax under the Uttar Pradesh Water Supply and Sewerage Act. 1975. Under the said Act, the tax was levied on the area covered by the water supply services of UP Jal Sansthan. It was argued that such tax was actually in the nature of fees and therefore, cannot be levied by the state government under Entry 49, List II. The Hon’ble Supreme clarified that quid pro quo criteria lack any practical or constitutional significance. Taxes and fees could both carry elements of compulsory extraction. It is also emphasised that the exact correlation between the expenditure incurred and the service provided is no longer to be demanded. 

The Bench comprising of Justice D.Y. Chandrachud, Justice Vikram Nath and Justice BV Nagarathna, further observed that the element of quid pro quo might not be necessarily absent in the case of every tax. Therefore, the present judgment renders the quid protest obsolete. Rather, the court considered the nature of the levy and held that since water tax in the present case is levied on the premises through which water is made available, and not on the actual consumption of water by the owner of the occupier, it is a valid taxon land and buildings.


While it is true that an element of service might not be totally absent in the case of a provision imposing the tax, the present judgment fails to consider the decisions of the Apex Court which have clarified that a broad co-relationship between expenses and service is necessary. The present judgment does away with the quid protest but does not provide light as to which other criteria are to be used in its absence. Further, the judgment of the Hon’ble Supreme Court is also confusing as they observe that compulsory exaction can be present in both tax as well as fee and also simultaneously hold that levy under Section 52 of the UP Act is a compulsory exaction and therefore, in the nature of the tax. 

This debate has wide spread ramifications even today. The validity of many levies is dependent on their classification as a tax or a fee. We are to see which shape the present debate takes in future. 

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