An Analysis of Constitutional Provisions Regarding Tax in India

By | January 10, 2022
An analysis of Constitutional Provisions regarding Tax in India

Last Updated on by Admin LB

I. Introduction

A nation’s economy is strengthened by its taxation system, which ensures that revenues are stable, regulates economic development, and stimulates industrial activity. The authority to levy the tax comes from the Constitution which distributes the power to levy various taxes between the Union and the States. An important restriction on this power is Article 265 of the Constitution which states that “No tax shall be levied or collected except by the authority of law.” This means that no tax can be levied if it is not backed by legislation passed by either Parliament or the State Legislature.

II. Objective of Taxation

The primary purpose of taxation is to raise revenue and to fund government expenditure. The government collects this tax to further the goal of developmental activities like building schools, hospitals, highways, flyovers, bridges, ports, housing projects for the underprivileged, etc. Further, in order to discourage the production and use of certain harmful commodities, the government imposes a heavy tax on the production of such commodities. Taxation can also be used by governments as a weapon to reduce income inequality.

A progressive tax system takes away extra money from the wealthy section and the proceeds are used in providing goods and services whose marginal utilities are greater for the poor than the rich.

The other aspects of taxation include the protection of infant and domestic industries in a country. In order to protect these industries governments, impose high duties on certain products so that a balance can be achieved between the consumption of foreign and domestic goods. High import duties are also imposed to prevent the dumping of relatively cheap products, for example from China, in the developing economies by the more technologically advanced countries.

III. Taxation Power of Union and State Governments

Article 246 of the Constitution deals with the division of powers between Union and State Governments. It provides for the division of power into three lists, namely, Union List, State List, and Concurrent List.

  • Union List- Article 246(1) of the Indian Constitution states that Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule.
  • State List- Article 246(3) of the Indian Constitution states that State Government has exclusive power to make laws with respect to any of the matters enumerated in List II in the Seventh Schedule.
  • Concurrent List- Article 246(2) of the Indian Constitution states that the Parliament and State Government both have the jurisdiction to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule.

If there is a conflict between the laws passed by Parliament and state legislatures on the same subject matter, the Constitution provides for a Union law to override State law. Also, the residuary powers are left for the Parliament to make laws.

Power of taxes is distributed among the several taxing authorities in India. Central Government powers are enumerated in Entries 82-92B, 92 & 96 in List I of the 7th Schedule to the Constitution. For example- Income (except tax on agricultural income), Corporation Tax & Service Tax Currency, Coinage, legal tender, Foreign Exchange Custom duties (except export duties) Excise on tobacco and other goods, Property of Union, etc. falls within the domain of Central governments.

List II of the 7th Schedule mentions the powers of the state government to levy taxes. (Entry- 45-63 and 66). For example- Taxes and duties related to agricultural lands, Capitation Taxes, Excise on liquors, opium, Fees on matters related to state list except for court fee, Land Revenue, Land and buildings related taxes, etc. falls within the domain of state governments.

In List III (Entry- 35, 44 & 47), Union and the State Governments have the concurrent powers to fix the principles on which taxes on motor vehicles shall be levied and to impose stamp duties on non-judicial stamps. The property of the Union is exempted from State Taxation, and the property of the states is exempted from the Union Taxation. But the parliament of India can pass legislation for taxation by the Union Government of any business activities/trade of the state which are not the ordinary functions of the state.

In the 7th Schedule, Entry 97 List 1 provides residuary powers of taxation that belong solely to the central government.

IV. Important Constitutional Provisions Related to Taxation

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the States. An important restriction on this power is Article 265 of the Constitution which states that “No tax shall be levied or collected except by the authority of law”.  Therefore, each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.

Article 266 states that all the government revenue generated from taxes, asset sale, earnings from state-run companies, etc. goes into the Consolidated Fund of India. The fund gets money from:

  • Revenue earned indirect taxes such as income tax, corporate tax, etc.
  • Revenue earned in indirect taxes such as GST
  • Dividends and profits from PSUs
  • Money earned through the government’s general services
  • Disinvestment receipts
  • Debt repayments
  • Loan recoveries

Provided that no money can be withdrawn from the Consolidated Fund of India, without the government securing the approval of the Parliament.

Article 268 of the Constitution of India states that stamp duties covered in Union List shall be levied by the Government of India but collected by States.

Article 269 of the Constitution of India enumerates taxes and duties which are levied and collected by the Government of India but assigned to States. This cover:

(a) tax on sale or purchase of goods in inter-state trade or commerce

(b) tax on consignment of goods in inter-state trade or commerce.

Article 246A gives the Parliament the exclusive power to make laws with respect to inter-state supplies, the manner of distribution of revenue from such supplies between the Centre and the State is covered in Article 269A. It allows the GST Council to frame rules in this regard. Import of goods or services will also be called inter-state supplies. This gives the Central Government the power to levy IGST on import transactions.

Article 270 of the Constitution of India provides that net proceeds of all taxes and duties referred to in Union List, except the specified taxes, shall be levied and collected by Centre and shall be distributed between Centre and States. Thus, revenue from taxes like income tax and Central Excise are distributed between Centre and States as per the recommendation of Finance Commission, which is constituted under Article 280 of Constitution of India.

Surcharge on certain taxes (Article 271): The Parliament is, authorized to levy a surcharge on the taxes mentioned in the above two categories (Article 269 and 270) and the proceeds of such surcharges go to the Centre exclusively and are not shareable.

Grants-in-Aid: The Parliament may make grants-in-aid from the Consolidated Fund of India to such States as are in need of assistance (Article 275), particularly for the promotion of the welfare of tribal areas, including special grants to Assam. These are called statutory grants and are made on the recommendation of the Finance Commission. Apart from this, Article 282 provides for discretionary grants by the Centre and States both, for any public purposes.

Provision has been made for the constitution of a Finance Commission to recommend to the President certain measures for the distribution of financial resources between the Union and the States (Article 280).

V. Additional Provisions

  • Article 285 makes it illegal for a state legislature or other internal body to tax the Union’s property.
  • Article 289 expressly bans the alliance from taxing the property or revenue of a state.
  • These are the two articles that protect the Union’s and State’s interests. Article 285 safeguards the Union’s interests, while Article 289 safeguards the State’s.
  • Article 286 limits the state’s authority to charge taxes on the sale or purchase of goods.
  • Article 287 outlines how, unless as permitted by law, a state may not charge for the usage or sale of electricity in certain circumstances.

VI. Conclusion

India is a country with a diverse population, socioeconomic classes, and income levels. It’s impossible to impose the same level of taxation on everyone. The fact that the Indian taxation system has been complicated is the major reason for its persistence. India’s tax structure appears to be being eroded by tax evasion, which has been a matter of concern for the nation for some time. In India, a high-income tax rate is offset by low revenue. As a result, over time, the government has attempted to cut taxes.

Furthermore, even if income taxes are modest, if a country’s tax collection system is poor and inefficient, its coffers will be empty and development projects will be cut short. The government’s power to make retroactive changes to tax statutes is a major flaw in India’s tax system. A modified statute was passed after the Supreme Court’s judgment in Chhotabhai Jethabhai Patel & Co v. UOI & Others [1962 AIR 1006, 1962 SCR Supl. (2)], enabling excise duty to be charged retroactively.

The implementation of a GST, a potential lead tax, has benefited efforts to avoid a cascading effect. The 7th Schedule of the Indian Constitution distributes monetary capacity through the Federal, States, and Concurrent Lists. According to the Indian Constitution, the powers of the Indian Parliament are either limited, rigorous, or uniform. In this sense, several clauses allow for future revisions in legislative standards. Taxes are essential for the progress of infrastructures that we all encounter in everyday life, even if they aren’t always stimulating.


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Author: Mayank Shekhar

LLM, Faculty of Law, University of Delhi, UGC NET (Law) qualified. Under Mayank's leadership, Legal Bites has been researching and developing resources through blogging, educational resources, competitions, and seminars.

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