The power to tax in India flows from the Constitution. No tax can be levied or collected except by authority of law (Art.265). The taxing power is distributed between the Union and States through the Seventh Schedule, with Parliament holding exclusive power over income tax on non-agricultural income.
Legal Framework
| Provision | Content |
|---|---|
| Art.265 | No tax shall be levied or collected except by authority of law |
| Art.245 | Parliament may make laws for whole or any part of India |
| Art.246 | Distribution of legislative powers (Union List, State List, Concurrent List) |
| Art.246A | Power to make laws with respect to GST (inserted by 101st Amendment) |
| Art.248 | Residuary powers of legislation vest in Parliament |
| Art.270 | Taxes levied and distributed between Union and States |
| Art.271 | Surcharge on certain duties and taxes for purposes of the Union |
| Entry 82, List I | Taxes on income other than agricultural income |
| Entry 46, List II | Taxes on agricultural income (State subject) |
Essentials of a Valid Tax
A valid tax under Indian constitutional law requires four components:
| Essential | Meaning |
|---|---|
| Competent legislature | Union or State as per Seventh Schedule |
| Authority of law | Must be imposed by a statute, not executive order |
| Charging section | Statute must identify the taxable event |
| Machinery provisions | Statute must provide mechanism for collection |
Why: Art.265 exists because taxation without legislative sanction is arbitrary and violates the rule of law. The colonial experience of taxation without representation drove this safeguard.
Tax vs Fee vs Cess
| Element | Tax | Fee | Cess |
|---|---|---|---|
| Quid pro quo | No direct benefit to payer | Specific service rendered | Earmarked for specific purpose |
| Authority | Art.265 | Art.265 read with relevant entry | Art.265 |
| Compulsory | Yes | Yes | Yes |
| General revenue | Goes to Consolidated Fund | Not necessarily | Separate fund |
| Proportionality | Not required | Broadly proportionate to service | Not required |
Why: The distinction matters because the legislative entry under which a levy falls determines which legislature is competent to impose it. A fee disguised as a tax (or vice versa) can be struck down for lack of legislative competence.
Limitations on Taxing Power
- Art.265: No tax without authority of law
- Art.14: Tax law must not be arbitrary or discriminatory
- Art.19(1)(g): Taxation must not be so excessive as to destroy the right to carry on business
- Art.301: Freedom of trade, commerce, and intercourse (restrictions on inter-state taxes)
- Art.286: Restrictions on tax on sale or purchase of goods (now subsumed under GST)
- Art.289: Property and income of a State exempt from Union taxation
Recall Check
- What does Art.265 mandate regarding the levy of taxes?
- Under which entry of the Seventh Schedule does Parliament derive power to tax income?
- What are the four essentials of a valid tax under Indian constitutional law?
Key Cases
Kunnathat Thathunni Moopil Nair v. State of Kerala (1961) Kunnathat-Thathunni-Moopil-Nair-v-State-of-Kerala-1961 Issue: Whether a tax so excessive that it amounts to confiscation violates fundamental rights. Rule: A tax must not be so unreasonable as to amount to confiscation of property; Art.19(1)(f) (then existing) read with Art.265. Held: Tax amounting to confiscation is unconstitutional. Taxation power, though plenary, is subject to constitutional limitations.
Commissioner Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar (1954) Commissioner-Hindu-Religious-Endowments-v-Sri-Lakshmindra-Thirtha-Swamiar-1954 Issue: Whether a levy is a tax or a fee. Rule: A tax is a compulsory exaction for public purposes without reference to any special benefit; a fee is a charge for special services rendered. Held: The distinction between tax and fee lies in the element of quid pro quo. A fee requires a correlationship between the levy and services rendered.
GVK Industries v. ITO (2011) GVK-Industries-v-ITO-2011 Issue: Whether the legislature has unfettered power to impose retrospective taxation. Rule: Art.265 read with Art.14; retrospective tax legislation must satisfy the test of reasonableness. Held: Legislature has power to enact retrospective tax laws, but such power is not unlimited. Retrospective taxation that creates impossible compliance or is confiscatory may be struck down.
Distinctions
| Feature | Direct Tax | Indirect Tax |
|---|---|---|
| Incidence and impact | Falls on the same person | Shifted to consumer |
| Examples | Income tax, wealth tax | GST, customs duty |
| Constitutional entry | Entry 82-92B, List I | Entry 83-92C, List I (pre-GST) |
| Progressive | Yes (higher income = higher rate) | Generally regressive |
| Administration | CBDT | CBIC |
| Evasion | Higher possibility | Lower (collected at source) |
Flashcards
Q: What does Article 265 of the Constitution provide? A: No tax shall be levied or collected except by authority of law.
Q: Under which List and Entry does Parliament derive power to levy income tax? A: Union List (List I), Entry 82: Taxes on income other than agricultural income.
Q: What is the essential difference between a tax and a fee? A: A tax has no quid pro quo (no direct benefit to payer); a fee requires a correlationship with services rendered.
Q: Which constitutional amendment introduced Art.246A for GST? A: 101st Constitutional Amendment Act, 2016.
Q: Can the Union tax agricultural income? A: No. Agricultural income is a State subject under Entry 46, List II.
Q: What are the four essentials of a valid tax? A: Competent legislature, authority of law (statute), charging section, machinery provisions.
Q: What limitation does Art.14 place on taxing power? A: Tax law must not be arbitrary or discriminatory; reasonable classification is permissible.
Exam Scenario
Ram, a businessman, receives a notice demanding payment of a "development charge" imposed by an executive circular of the District Collector, without any supporting statute. He challenges it. Advise Ram on the constitutional validity of this levy.
Approach: Art.265 mandates that no tax/charge shall be levied except by authority of law. An executive circular is not "law" within the meaning of Art.265. Cite Kunnathat Thathunni Moopil Nair. The levy is unconstitutional and void. Ram is entitled to refuse payment and seek a writ under Art.226.