Constitutional Provisions Relating to Taxation in India

The constitutional provisions relating to taxation in India are designed to ensure that both the Union and the States have the resources they need to function effectively, while also protecting the interests of taxpayers. Taxation is one of the most important sources of revenue for the government. It is used to fund essential services such as education, healthcare, and infrastructure.

In this article, we will discuss the constitutional provisions relating to taxation in India. We will explore the division of taxation powers between the Union and the States, as well as the restrictions on taxation powers. We will also discuss the importance of these provisions for the smooth functioning of the Indian economy.

Need for Constitutional Provisions Relating to Taxation

The Constitution divides taxation powers between the Union and the States in a way that gives the Union government the power to levy taxes on a wider range of items than the States. This is because the Union government has a wider range of responsibilities, such as national defence and foreign affairs. The States, on the other hand, have a more limited range of responsibilities, such as education and healthcare.

The Constitution also places some restrictions on the taxation powers of both the Union and the States. For example, the Constitution prohibits the Union government from taxing agricultural income and it prohibits the States from taxing inter-State trade and commerce. These restrictions are designed to protect the interests of taxpayers and to ensure that the taxation system is fair.

The constitutional provisions relating to taxation are complex and have been interpreted by the courts in a number of cases. However, the basic principles underlying these provisions are clear: to ensure that both the Union and the States have the resources they need to function effectively, while also protecting the interests of taxpayers.

What are the Constitutional Provisions Relating to 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.

Some of the key constitutional provisions relating to taxation include:

• Article 265: This article 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.
• Articles 268 to 270: These articles deal with the levy of duties of customs, excise and other taxes on goods imported into or exported out of India. These taxes are levied by the Union government and the proceeds are shared between the Union and the States.
• Article 286: This article restricts the power of the States to levy taxes on goods and services that are imported into or exported out of India. This is to prevent States from taxing goods that are in transit between different States.
• Articles 276 and 277: These articles deal with taxes that can be levied by the States for the benefit of the State or for the benefit of a municipality, district board or other local authority. These taxes are known as “cess” taxes and they can be levied on a variety of subjects, such as professions, trades, callings and employment.
• Articles 271 and 279: These articles deal with taxes that can be levied by the Union and the States concurrently. This means that both the Union and the States can levy taxes on the same subject, but the Union government has the power to override any State law that conflicts with a Union law.
• Articles 273, 275, 274 and 282: These articles deal with grants-in-aid that can be given by the Union government to the States. These grants are given to help the States meet their financial needs and they can be used for a variety of purposes, such as education, health and infrastructure development.

The constitutional provisions relating to taxation are complex and have been interpreted by the courts in a number of cases. However, these provisions provide the basic framework for the taxation system in India.

Article 265

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 Tangkhul v. Simerei Shailei, the Supreme Court held that the practice of villagers paying Rs. 50 a day to the headman in place of a custom to render free a day’s labour was a collection of tax and that no law had authorised it. Therefore, it violated Article 265.

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.

These cases illustrate the importance of Article 265 in protecting citizens from arbitrary taxation. This article ensures that taxes can only be levied by a valid law and that no tax can be levied without the authority of law. This helps to prevent the government from imposing excessive or unfair taxes on citizens.

Article 266

Article 266 of the Constitution of India deals with the Consolidated Funds and Public Accounts of India and the States. It states that the following shall form one consolidated fund to be entitled the Consolidated Fund of India:

• The whole or part of the net proceeds of certain taxes and duties to States
• All loans raised by the Government by the issue of treasury bills
• All money received by the Government in repayment of loans
• All revenues received by the Government of India
• Loans or ways and means of advances

The same holds for the revenues received by the Government of a State which it is called the Consolidated Fund of the State. Money out of the Consolidated Fund of India or a State can be taken only in agreement with the law and for the purposes and of the Constitution.

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 of the Constitution of India 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. These taxes include taxes on income other than agricultural income, taxes on corporation tax and duties of customs.

The taxes mentioned in Article 269 are levied and collected by the Union government, but the proceeds are assigned to the 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 their citizens.

The case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others is an example of how Article 269 has been interpreted by the courts. In this case, 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.

Article 269(A)

Article 269(A) of the Constitution of India was inserted by the 122nd Amendment of the Constitution in 2017. 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 GST Council is a body that is constituted by the Union and the States to recommend the principles that should be followed in determining the rates of GST, the exemptions from GST and the distribution of the proceeds of GST between the Union and the States.

The direct apportionment of 50% of the proceeds of GST to the States is intended to ensure that the States have a fair share of the revenue generated by GST. The distribution of the remaining 50% of the proceeds through the CFI is intended to take into account the relative needs of the States.

The introduction of Article 269(A) has had a significant impact on the taxation system in India. It 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.

 Article 270

Article 270 of the Constitution of India deals with the taxes levied and distributed between the Union and the States. It states that the following taxes are levied and collected by the Union government and the proceeds are distributed between the Union and the States in the following manner:

• All taxes and duties mentioned in the Union List, except the duties and taxes mentioned in Articles 268, 269 and 269A.
• Taxes and surcharges on taxes, duties and cess on particular functions are specified in Article 271 under any law created by Parliament.

The proceeds from these taxes are distributed between the Union and the States in the following manner:

• The proceeds of taxes levied on the sale or purchase of goods and services in the course of inter-state trade or commerce are distributed to the States in the ratio of their population.
• The proceeds of other taxes are distributed to the States in such manner as may be prescribed by the Parliament.

The distribution of the proceeds of taxes between the Union and the States is determined by the Finance Commission, which is a body constituted by the Parliament every five years. The Finance Commission takes into account a number of factors, including the needs of the States, the resources of the States and the overall economic situation of the country, in determining the distribution of the proceeds of taxes between the Union and the States.

The introduction of Article 270 has had a significant impact on the taxation system in India. It has simplified the taxation system by removing the need for multiple taxes on the same subject. It has also helped to ensure that the States have a fair share of the revenue generated by taxes.

The Supreme Court of India has set a famous judicial precedent under Article 270 of the Constitution of India in the case T.M. Kanniyan v. I.T.O. In this case, the Supreme Court held that the income tax collected forms a part of the Consolidated Fund of India. The income tax thus collected cannot be distributed between the centre, union territories and states which are under the presidential rule.

Article 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.

Cess and Surcharge

The surcharge is collected by the Union government and the States have no role to play in its collection. The surcharge is an exception to Articles 269 and 270, which specify the taxes and duties that are levied and collected by the Union and the States.

The surcharge is similar to a cess, which is a tax levied for a specific purpose. However, the surcharge is an additional tax on an existing tax, while a cess is a separate tax.

The Supreme Court in the case of M/s SRD Nutrients Private Limited v. Commissioner of Central Excise, Guwahati has ruled that the education cess and the higher education cess are surcharges, not cess. This is because they are additional taxes on existing taxes and they are not levied for a specific purpose.

Grants-In-Aid

The Constitution also provides for grants-in-aid to the States. Grants-in-aid are financial assistance provided by the Union government to the States to help them meet their financial needs. Grants-in-aid are charged to the Consolidated Fund of India and the Parliament has the authority to grant them.

The grants-in-aid are intended to help the States to provide essential services to their citizens, such as education, health and infrastructure. They also help to reduce disparities between the rich and poor States.

The grants-in-aid are an important part of the fiscal federalism system in India. They help to ensure that all States have the resources they need to provide essential services to their citizens.

Article 273

This article provides for grants to the States of Assam, Bihar Orissa and West Bengal in lieu of any share of the net proceeds of the export duty on jute and jute products. The grants are charged to the Consolidated Fund of India and are to be made for a period of ten years from the commencement of the Constitution.

Article 275

This article provides for grants-in-aid to the States by the Union government. The grants are to be made on the recommendation of the Finance Commission. The grants are to be used for the development of the States and for the welfare of the people.

Article 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.

Article 277

Article 277 of the Constitution of India provides that cesses, fees, duties or taxes which were levied immediately before the commencement of the Constitution by any municipality or other local authority for the purposes of the State, despite being mentioned in the Union List, can continue to be levied and applied for the same purposes until a new law contradicting it has been passed by the Parliament.

This article was enacted to protect the interests of the States and the local authorities. It ensures that the States and the local authorities can continue to raise revenue from taxes that were already being levied before the commencement of the Constitution. This revenue can then be used for the benefit of the people of the State or the local area.

The case of Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh is an example of how Article 277 has been interpreted by the courts. In this case, the Supreme Court 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”.

Article 277 is an important article that protects the interests of the States and the local authorities. It ensures that they can continue to raise revenue from taxes that were already being levied before the commencement of the Constitution. This revenue can then be used for the benefit of the people of the State or the local area.

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.

Article 282 

Article 282 of the Constitution of India provides for grants by the Union government to the States for any public purpose. The grants can be made for special, temporary or ad hoc schemes. The power to grant sanctions under Article 282 is not restricted.

In the case of Bhim Singh v. Union of India & Ors, the Supreme Court held that the Member of Parliament Local Area Development Scheme (MPLAD) falls within the meaning of “public purpose”. The MPLAD scheme is a scheme by which Members of Parliament can use funds to undertake development projects in their constituencies. The Supreme Court held that the MPLAD scheme is a public purpose because it helps to improve the lives of people in the constituencies of Members of Parliament.

In the case of Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State of Madras, the Supreme Court held that the practice of religion is a private purpose. Donations and endowments made for religious purposes are therefore not a state affair unless the state takes over the management of the religious endowment for a public purpose and uses the funds for public welfare measures.

Article 282 can be used for a public purpose, but it can also be misused. It is important that the grants made under Article 282 are used for genuine public purposes and not for political or personal gain.

Article 286

Article 286 of the Constitution of India 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 is an example of how Article 286 has been interpreted by the courts. In this case, 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.

Article 286 is an important article that protects the interests of the Union government. It ensures that the States cannot impose taxes on goods that are of national importance and that they cannot tax imports or exports. This helps to create a level playing field for businesses across the country and it helps to promote economic growth.

Article 289

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Article 289 of the Constitution of India states that the property and income of the States are not liable to taxation by the Union government, except in the following cases:

• If the Parliament makes a law to that effect.
• If the State government consents to such taxation.

The Parliament can make a law to tax the property and income of the States if it is necessary for the purpose of implementing a constitutional provision. For example, the Parliament can make a law to tax the property and income of the States in order to raise revenue for the Union government.

The State government can also consent to the taxation of its property and income by the Union government. For example, a State government may consent to the taxation of its property and income in order to receive financial assistance from the Union government.

Article 289 is an important article that protects the interests of the States. It ensures that the Union government cannot tax the property and income of the States without their consent, except in cases where it is necessary for the purpose of implementing a constitutional provision. This helps to maintain the financial autonomy of the States.

Some Other Tax-Related Provisions in the Constitution of India

Article 301 of the Constitution of India guarantees freedom of trade, commerce and intercourse throughout the territory of India. This means that goods and services can be freely transported and sold across the country, without any restrictions.

Article 302 empowers the Parliament to impose restrictions on trade, commerce and intercourse in the interest of the general public. For example, the Parliament can impose restrictions on the import of goods that are harmful to public health or safety.

Article 303 allows the Parliament to give preference to one State over another in the matter of trade, commerce and intercourse if there is a scarcity of goods in that State. For example, the Parliament can give preference to a State that is facing a drought, so that the people of that State can get foodgrains at a cheaper price.

Article 304 allows a State government to impose taxes on goods imported from other States and Union Territories. However, the State government cannot discriminate between goods from within the State and goods from outside the State. The State government can also impose some restrictions on freedom of trade and commerce within its territory, but these restrictions must be reasonable and in the interest of the general public.

Article 366 defines the following terms:

• Goods: This includes all movable property, including animals and birds.
• Services: This includes any activity that is not the sale of goods.
• Taxation: This includes the imposition of taxes, duties, cess and tolls.
• State: This includes a Union territory, but does not include a Union territory that is a part of a State.

Taxes that are levied on the sale/purchase of goods: This includes all taxes that are levied on the sale or purchase of goods, including value-added tax (VAT).

Goods and service tax (GST): This is a single tax that is levied on the sale or purchase of goods and services.

Conclusion

The constitutional provisions relating to taxation in India are complex and have been interpreted by the courts in a number of cases. However, the basic principles underlying these provisions are clear: to ensure that both the Union and the States have the resources they need to function effectively, while also protecting the interests of taxpayers.

The Constitution divides taxation powers between the Union and the States in a way that gives the Union government the power to levy taxes on a wider range of items than the States. This is because the Union government has a wider range of responsibilities, such as national defence and foreign affairs. The States, on the other hand, have a more limited range of responsibilities, such as education and healthcare.

The Constitution also places some restrictions on the taxation powers of both the Union and the States. For example, the Constitution prohibits the Union government from taxing agricultural income and it prohibits the States from taxing inter-State trade and commerce. These restrictions are designed to protect the interests of taxpayers and to ensure that the taxation system is fair.

The constitutional provisions relating to taxation are essential for the smooth functioning of the Indian economy. They ensure that the government has the resources it needs to provide essential services, while also protecting the interests of taxpayers.