power of taxation and constitutional limitations

Tuesday, December 3, 2024 12:13 PM

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. The government uses this tax to carry out functions such as Social welfare,
Infrastructure, Security infrastructure, Enforcement of law and order, pensions for the elderly etc.

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 [art 246(1)]
• Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to the
centre.
• List 2 in the schedule has the powers of the State Government listed in Entries 45-63. [art. 246(3)]
• As regards list 3, it doesn’t deal with taxation and hence both centre and state do not have any
concurrent powers of taxation.

The Constitution of India is the supreme law of the land and all laws in India must be consistent with its
provisions. The constitutional provisions relating to taxation in India are contained in Articles 265 to 289
of the Constitution of India. These articles outline the powers of the Union and the States to levy taxes,
as well as the procedures for assessing and collecting taxes.

Only by the authority of law can taxes be levied:

Article 265 and Art.266
Article 265 of the Constitution of India states that no tax can be levied or collected except by the
authority of law. This means that all taxes must be imposed by a valid law and that no tax can be levied
or collected without the authority of law. 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 against arbitrary tax extraction.
In the case of Lord Krishna Sugar Mills v. UOI, the Supreme Court held that the government had no
authority of law to collect additional excise duty on sugar merchants who fell short of export targets in a
promotion scheme started by the government. This is because the government had not passed a law to
authorise the collection of this tax.

Article 266 of the Indian Constitution governs the Consolidated Funds and Public Accounts of India and
the States. It states that, subject to Article 267 and Chapter 1 (Part XII), the Consolidated Fund of India
includes net tax proceeds, loans raised via treasury bills, repayment of loans, revenues received by the
Government, and advances. Similarly, the Consolidated Fund of the State comprises the revenues
received by the State Government. Withdrawal from these funds is permitted only in accordance with
the law and for constitutional purposes.

Levy of duty on tax and its distribution between centre and states art. 268, 269, 269A and 270
Article 268
Article 268 of the Constitution of India deals with duties levied by the Union government but collected
and claimed by the State governments. These duties include stamp duties, excise on medicinal and toilet
preparations, etc. These duties collected by states do not form a part of the Consolidated Fund of India
but are with the state only.
Article 269
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. This is done to ensure that the States have a fair share of
the tax revenue and that they are able to raise the resources they need to provide essential services to

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the tax revenue and that they are able to raise the resources they need to provide essential services to
their citizens. The case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others,
the Supreme Court held that the State Sales Tax Act was not applicable to sale or purchase in the course
of interstate trade or commerce. This is because Article 269 prohibits the levy and collection of tax on
sale or purchase in the course of interstate trade or commerce.
Art. 269A
This article was inserted by the 122nd Amendment. This article gives the power to collect goods and
services tax (GST) on supplies in the course of inter-state trade or commerce to the Government of
India. The proceeds of this tax are then apportioned between the Union and the States in the following
manner:
• 50% of the proceeds are directly apportioned to the States.
• The remaining 50% is credited to the Consolidated Fund of India (CFI). Out of this amount, a
prescribed percentage is then distributed to the States.
The percentage of the proceeds that are distributed to the States through the CFI is determined by the
Goods and Services Tax Council (GST Council). The introduction of Article 269(A) has simplified the
taxation system by removing the need for multiple taxes on goods and services that are in transit
between different States. It has also helped to ensure that the States have a fair share of the revenue
generated by GST
Art.270
Article 270 governs the distribution of taxes between the Union and the States. Taxes in the Union List,
except those under Articles 268, 269, and 269A, are levied and collected by the Union, along with
surcharges and cesses under Article 271.

Proceeds from inter-state trade taxes are distributed among States based on population, while other
taxes are allocated as prescribed by Parliament. The Finance Commission, determines the tax
distribution considering factors like State needs, resources, and the country's economic condition.

Restriction on power of the states to levy taxes art.286

Article 286 restricts the power of the States to tax. It states that the States cannot:
• Impose taxes on imports or exports.
• Impose taxes on sales or purchases that take place outside the territory of the State.
• Impose taxes on goods that are of special importance, unless the Parliament has authorised them
to do so.
The Parliament has the power to lay down principles to determine when a sale or purchase takes place
during import or export or outside the territory of the State. The Parliament can also restrict the power
of the States to tax goods of special importance.

The case of K. Gopinath v. the State of Kerala, the Supreme Court held that the sale of cashew nuts by
the Cashew Corporation of India to local users 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.

Taxes imposed by the state or purpose of the state

Art.276
This article provides for taxes that are levied by the States. The taxes are to be levied and collected by
the States. The taxes that can be levied by the States include sales tax, value-added tax (VAT),
professional tax and stamp duty.
Art.277
Article 277 of the Indian Constitution allows municipalities and local authorities to continue levying
taxes, cesses, duties, or fees imposed before the Constitution's commencement, even if listed in the
Union List, until Parliament enacts a contradicting law. This ensures States and local authorities retain
their revenue sources for public benefit.

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their revenue sources for public benefit.
In Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh, held that the State
government could continue to levy a fee on the appellant for the supervision of the use of alcohol in the
manufacture of medicines, even though the Parliament had passed a law that prohibited the levy of fees
on the manufacture of medicines. The Court held that the fee levied by the State government was a
“cess” and not a “tax”. A “cess” is a tax that is levied for a specific purpose, while a “tax” is a tax that is
levied for general revenue. The Court held that the fee levied by the State government was for the
specific purpose of supervising the use of alcohol in the manufacture of medicines and therefore it was a
“cess” and not a “tax”

Taxes imposed by the state or purpose of the union art. 271, 279 and 284
Art. 271
Article 271 of the Constitution of India allows the Parliament to increase any of the taxes or duties
mentioned in Articles 269 and 270 by levying an additional surcharge for a particular purpose. The
proceeds from the surcharge are credited to the Consolidated Fund of India
Article 279
Article 279 of the Constitution of India deals with the calculation of “net proceeds”. Net proceeds are
the proceeds of a tax or duty after deducting the cost of collection, as ascertained and certified by the
Comptroller and Auditor-General of India.

Grant-in-aid art. 273, 275, 274, 282

Grants-In-Aid
The Constitution provides for grants-in-aid, which are financial assistance by the Union government to
States for meeting financial needs, charged to the Consolidated Fund of India. These grants support
essential services like education, health, and infrastructure while reducing disparities between rich and
poor States. They are vital for fiscal federalism.

Article 273
Grants are provided to Assam, Bihar, Odisha, and West Bengal in lieu of export duties on jute for ten
years from the Constitution’s commencement.

Article 275
Union grants-in-aid to States are recommended by the Finance Commission for development and
welfare.

Article 282
Allows Union grants to States for any public purpose, including special or ad hoc schemes. In Bhim Singh
v. Union of India & Ors, the Supreme Court held that the MPLAD scheme serves a public purpose by
funding development in constituencies. In Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State
of Madras, the Court ruled that religious donations are private unless managed for public welfare.
Proper use of Article 282 is essential to prevent misuse for political or personal gain.

Conclusion:

The Indian Constitution establishes a balanced framework for taxation, ensuring equitable distribution
of powers between the Union and States while safeguarding against arbitrary taxation.

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