The Constitution of India being grundnorm of our country limits the powers of the Government, Institutions and individuals in power positions thereby, introducing accountability in the system. The constitution has 3 organs namely, legislature, executive, judiciary, and the separation of powers among all the organs is the Basic Structure of the Constitution as declared by the Hon’ble Supreme Court of India. Taxation is a domain where the government enjoys more autonomy than other areas of Legislation. Ordinarily, the scope of interference in the Legislative domain of Taxation is narrow and the Hon’ble Supreme Court had always been cautious while interpreting the provisions of Taxation and interfering or striking down taxation laws.
Taxation Law lays down statutory provisions related to direct and indirect taxation, rules, and regulations governing tax regimen in India. Tax is a mandatory contribution to be made by the assessee in favor of the government and it is imposed to meet the government’s expenditure and welfare schemes Government. Taxation is one of the most important components of the Government’s income, it keeps the economy of the country robust and the government’s revenues consistent with the growth of the economy. The correct measures on taxation and economic policy of the Governments boost up economies all over the world. Taxation is the inherent power of the Union or State Government in consonance with the Seventh Schedule or other provisions of the Constitution.
TAXATION LAWS ARE BROADLY CLASSIFIED INTO TWO CATEGORIES
A direct tax is one that is paid directly to the entity that levied it by an individual or organisation. It can be inferred that the impact of the tax burden falls directly on the person who is liable to pay and it cannot be shifted to another person. Examples of direct taxes include income tax, corporate tax, real estate property tax, personal property tax, etc. and asset taxes, all of which are paid directly to the government by an individual taxpayer.
Indirect taxation is the imposition of a tax on another individual or corporation. Generally, indirect taxes are imposed on suppliers or manufacturers, who then pass them on to the final customer. It can be inferred that the impact or tax burden can fall on different people, it can be shifted from one person to another person. Examples of Indirect taxes include excise duty, customs duty, value-added tax (VAT), & GST, etc.
AIM OF TAXATION
- To generate revenue for financing the expenditure on various projects, the government needs revenue to carry on its expenses like construction of roads, dams, etc. and to meet such expenses, the government needs revenue from the public in form of taxes;
- To prevent the gap between rich and poor by imposing a high tax on high-income groups through progressive tax system;
- To provide basic facilities to common people like subsidies and welfare schemes impacting the daily life of common people.
VITAL CONSTITUTIONAL PROVISIONS RELATED TO TAXATION
This article contemplates the freedom from taxation for the purpose of promoting a particular religion. It states that no one shall be compelled to pay taxes whose proceeds are clearly designated for the purpose of promoting or maintaining a particular religion or religion’s denomination.
It mandates the scope of legislation enacted by Parliament and State legislatures.
(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of India’s territory, and state legislatures may make laws for the whole or any part of their respective states;
(2) No law passed by Parliament shall be deemed unlawful because it has an extraterritorial application.
The following are the subjects of laws enacted by Parliament and State legislatures:
(1) Notwithstanding paragraphs (2) and (3), Parliament has exclusive legislative jurisdiction over any of the topics included in List I of the Seventh Schedule (referred to as the Union List in the Constitution);
(2) Notwithstanding clause (3), Parliament and, subject to clause (1), the Legislature of any State, have the right to pass laws relating to any of the issues included in List III of the Seventh Schedule (referred to as the Concurrent List in the Constitution);
(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for that State or any part of it on any of the issues listed in List II of the Seventh Schedule (referred to as the “State List” in the Constitution).
(4) Regardless of whether a matter is included in the State List, Parliament has the ability to make laws for any part of India’s territory that is not included (in a State).
Seventh Schedule is divided into 3 categories:
- List I (Union List): It has 97 entries (Entry 82 taxes on income except for agriculture income). The Union Legislature has exclusive jurisdiction to legislate on the entries in Union List;
- List-II (State List): It has 66 entries (Entry 46 taxes on agriculture income). The State Legislature has exclusive jurisdiction to legislate on the entries in the State List;
- List III (Concurrent List): It has 47 entries. The Union & State Legislature can concurrently legislate on the subject matters enumerated in the entries of Concurrent List. However, if there would be conflicts, the Union Legislature would prevail.
How can a conflict between Union and State Laws be resolved?
In case of conflict between Union and State Laws, the Union laws will prevail. For example, a matter is being investigated by CBI and the State Police, the State Police must yield the investigation to CBI. If state legislation relating to an entry in List 3 is repugnant to a Union legislation qua that entry, the Union law shall prevail, and the State law shall, to the extent of such repugnancy, be void.
This article points out the fate in case of repugnancy between legislation enacted by Parliament and legislation enacted by state legislatures:
(1) If any provision of a law enacted by the Legislature of a State is repugnant with any provision of a law enacted by Parliament that Parliament is competent to enact, or with any provision of an existing law relating to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law enacted by Parliament shall prevail, whether passed before or after the law enacted by the Legislature of such State or, as the case may be, the existing law of the State is void to the extent of repugnancy.
(2) Where a law passed by the Legislature of a State contains any provision that conflicts with the provisions of an earlier law passed by Parliament or an existing law on that subject, the law passed by the Legislature of that State shall prevail in that State if it has been reserved for the President’s consideration and has received his assent: Provided, however, that nothing in this section precludes Parliament from making a law on the same subject at any time, including a bill supplementing, amending, altering, or repealing the law enacted by the State Legislature.
In a nutshell, if state legislation relating to an entry in List 3 is repugnant to a Union legislation qua that entry, the Union law shall prevail, and the State law shall, to the extent of such repugnancy, be void.
One of the most important provisions of the Constitution to limit taxation is Article 265. It states that no tax shall be levied or collected except the authority of law. This provision mandates that taxes must not be levied by the Government except by the authority of law and the taxes imposed must be within the legislative domain of the Government. Not only levy of the taxes but also, the collection of taxes must be under the authority of law, any act of the Union or State that seeks to impose a tax without the legislative authority within the constitutional limits will be void.
Requirement of valid tax law under Article 265
- The law must be passed by the legislature that has legislative competence, as mentioned in Lists of the Seventh Schedule, and the law should not violate article 13, 27, 276, 287 of the Constitution;
- The levy and the collection of taxes should be in accordance with the law.
This article enumerates two funds i.e. consolidated fund and public fund for the Union and State Governments. It further states:
- All revenues received by the Government of India or the State, all loans raised by that government by the issue of the treasury bills, all the money received by that government in repayment of loans shall form one consolidated fund to be entitled as ‘the Consolidated fund of India’ or ‘the Consolidated fund of the State’;
- All other public money received on behalf of the Government of India or the government of State shall be credited to the Public account of India or the Public Accounts of the State;
- No money out of the consolidated fund of India or the consolidated fund of a State shall be appropriated except in accordance with law and for the purpose and in the manner provided in this constitution.
This article explains the provisions related to contingency funds of the Union and State.
- The parliament is empowered by law to establish a contingency fund in the nature of an imprest to be entitled, ‘the contingency funds of India’ and such funds can be allocated by the President in case of unexpected expenditure and it can be authorized by the Parliament under Article 115 & 116 later on.
- The state assembly is empowered by law to establish a contingency fund in the nature of an imprest to be entitled, ‘the contingency funds of the State’ and such funds can be allocated by the Governor in case of unexpected expenditure and it can be authorized by the State Legislature under Article 205 & 206 later on.
These are duties levied by the Union but collected and appropriated by the States/UTs. For example stamp duties, duties on medicinal and toilet preparation.
Taxes are levied and collected by the central government but assigned to the states. According to clause (2), these taxes are namely:
- Duties on succession to property other than agriculture land;
- Estate duty on property other than agriculture land;
- Terminal taxes on products and people transported by rail, port, or air;
- Railway tariffs and freight taxes;
- Taxes other than stamp duties in stock exchanges & futures;
- Newspaper sales and purchase taxes, as well as newspaper advertisements;
- Taxes on the sale or acquisition of items other than newspapers that take place in the course of interstate trade or commerce;
- Taxes on goods consignment.
ARTICLE 269 (A)
(101st Amendment act in 2016)
The Government of India shall levy and collect goods and services tax on supplies made in the course of Inter-State trade or commerce, and such tax shall be apportioned between the Union and the States in the manner determined by Parliament by law based on the recommendations of the Goods and Services Tax Commission.
(1) In the manner prescribed in clause (2), the Government of India shall levy and collect taxes on except the categories of Article 268, 269, 269A and surcharge on taxes and duties referred to in Article 271 and cess levied for specific purposes under any law made by the parliament.
(2) Except in so far as those proceeds represent proceeds attributable to Union territories or taxes payable in respect of Union emoluments, such percentage of the net proceeds in any financial year of any such tax, as may be prescribed, shall not form part of the Consolidated Fund of India, but shall be assigned to the States within which that tax is leviable in that year, and shall be distributed among those States in such manner and form such time as may be prescribed.
For Union purposes, there is a surcharge on various customs and taxes. Regardless of what is stated in Articles 269 and 270, the parliament may levy a surcharge on any of the duties or taxes mentioned in those articles for the purposes of the Union, and the entire profits of any such surcharge shall be deposited in the Consolidated Fund of India. A cess is imposed by the Union government for a specific purpose, for example, Education cess, Swach Bharat cess, etc.
The provision of grants in lieu of export duty on jute and jute products.
(1) In lieu of assigning any share of the net proceeds of export duty on jute and jute products to those States, such sums as may be prescribed shall be charged on the Consolidated Fund of India in each year as grants in aid of the revenues of the States of Assam, Bihar, Orissa, and West Bengal.
(2) The sums so prescribed shall be charged on the Consolidated Fund of India for as long as the Government of India levies an export tariff on jute or jute products, or until the expiration of ten years from the commencement of this Constitution, whichever comes first.
(3) The term ‘prescribed’ has the same meaning in this article as it does in Article 270.
Bills affecting taxation in which states have an interest must have the President’s prior approval.
(1) No bill or amendment imposing or varying any tax or duty in which States are interested, or varying the meaning of the expression agricultural income as defined for the purposes of the enactments relating to Indian income tax, or affecting the principles on which any of the foregoing is distributable to States, or imposing any surcharge for the Union as is mentioned in the foregoing provisions of this Chapter;
(2) In this article, the term “tax or duty in which States are interested” refers to the following:
(a) A tax or duty, the net earnings of which are apportioned to any State in whole or in part; or
(b) A tax or duty based on the net proceeds of which sums are currently payable to any State from the Consolidated Fund of India.
Grants-in-aid are a 100 percent annual grant from the Government of India to States under the Proviso to Article 275(1) of the Indian Constitution. It is charged to the Consolidated Fund of India (except for grants to the NE States, which are a voted item) and is a supplement to state-led tribal development programs and efforts. These subjects could be:
- Schemes of development in Tribal areas;
- The welfare of Scheduled Tribes;
- Administration and development of the autonomous district of Assam.
Taxes on occupations, professions, trades, and callings:
(1) Notwithstanding anything in Article 246, no law enacted by the Legislature of a State relating to taxes for the benefit of the State or a municipality, district board, local board, or other local authority therein in respect of professions, trades, callings, or employments is invalid because it is a tax on income;
(2) The total amount payable to the State or any municipality, district board, local board, or other local authority in the State by way of taxes on professions, trades, callings, and employments in respect of any one individual shall not exceed two hundred and fifty rupees per year;
(3) The power of a State’s Legislature to enact laws relating to taxes on professions, trades, callings, and employments shall not be construed in any way as limiting Parliament’s power to enact laws relating to taxes on income derived from or arising from professions, trades, callings, and employments.
Except for the cesses, fees, duties, or taxes which were levied immediately before the commencement of the constitution by any municipality or the other local body for the purpose of State, despite being mentioned in the Union List can continue to be levied for the same purposes until the new law contradicting it has been passed by the Parliament.
The net proceeds of any tax or duty, or any part of any tax or duty, in or attributable to any area shall be ascertained and certified by the Comptroller and Auditor General of India, whose certificate shall be final, and for the purposes of those provisions, the net proceeds of any tax or duty, or any part of any tax or duty, in or attributable to any area shall be ascertained and certified by the Comptroller and Auditor General of India, whose certificate shall be final.
This article explains the GST Council and as per clause 1 of this article, after 101st is passed, the president will make a council named as GST council. The chairperson of that council will be the union finance minister and the union revenue ministers of the State are the members, the ministers in charge of finance or taxation or any other ministers nominated by each state government are the members.
Expenditure that the Union or a State can defray with its revenues. The Union or a State may provide any grants for any public purpose, even if the purpose is not one that Parliament or the State Legislature, as the case may be, can legislate about.
There are constitutional restrictions so as to the imposition of tax on the sale or purchase of goods.
(1) No state law may impose or authorize the imposition of a tax on the sale or purchase of goods when the sale or purchase occurs: (a) outside the state; or (b) during the importation or exportation of goods into or out of India’s territory;
(2) By law, the Parliament may establish standards for determining whether a sale or purchase of goods occurs in any of the ways described in subsection (1);
(3) Any state law, to the extent that it imposes or authorizes the imposition of,
(a) a tax on the sale or purchase of goods declared by Parliament by law to be of exceptional importance in interstate trade or commerce; or (b) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in interstate trade or commerce.
(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in subclause (b), subclause (c), or subclause (d) of clause 29 A of Article 366, be subject to such restrictions and conditions as Parliament may by law specify in regard to the levy system, rates, and other incidents of the tax.
There are exemption of a State’s property and income from Union taxes.
(1) A State’s property and income are exempt from Union taxation;
(2) Nothing in clause (1) prevents the Union from imposing, or authorising the imposition of, any tax to the extent that Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, a State’s government, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith;
(3) Clause (2) does not apply to any trade or industry, or any class of trade or business, that Parliament may declare incidental to government’s regular activities by legislation.
TEST OF CONSTITUTIONALITY ON TAXATION LAWS
The role of the Hon’ble Supreme Court is that of the final interpreter of laws and the provisions related to the Constitution. The parliament makes the laws and division benches of the Hon’ble Supreme Court declare laws. Under Article 145 of the Constitution, five judges of the Supreme Court are the final interpreters of the Constitution. All the legislations within the meaning of ‘law’ under Article 13 shall be in consonance with the Constitution. A challenge to the legislation and its provisions can be made in case of violation of fundamental rights and it has to pass the test of Constitutionality.
Apart from fundamental rights, the taxation laws shall also pass the test laid down by the various provisions of the Constitution, out of which some of the provisions are discussed in this article. The constitution has express provisions, implied limitations, constitutional conventions, larger constitutional principles, and silences within the constitution. The constitution limits the power of legislation to go beyond the confines of fundamental rights and constitutional provisions, whereby it nurtures the societal change in a positive direction through policymaking or introducing legislation or other measures, by ensuring individual rights and public interest at large are intact, which in turn, ensures justice to the people of our great nation.