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.

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.

The constitution has supreme power it sets the structure that democrates political
code, fundamental right, procedures, powers, duties of government , duties of
citizens , directive principles, Constitution has power to authorize all the laws in India.
Parliament and state legislature get power to execute various law from constitution.

Whereas tax is the sum imposed by the government on citizens and enterprises and
taxation law deals with the rules and regulations that set down that when and how
much tax should be paid to local, state and federal authorities.

It is the most important ingredient for the country which keeps the revenue consistent
and helps in growth of economy.

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.

Article 265 of the Constitution of India says that "No tax shall be levied or collected
except by authority of law".

2. The Article 13(3) says, "law includes any ordinance, order, by-law, rule, regulation,
notification, customs or usage having in the territory of India, the force of law".

3. Further, Article 366(10) says that "existing law" means any law, any ordinance,
order, by-law, rule or regulation passed or made (before the commencement of the
Constitution) by any legislative authority or person having power to make such law,
any ordinance, order, by-law, rule or regulation.

4. Article 245 enables the Parliament to make laws.

5. Article 246 sets out matters on which laws can be made by Parliament, State
legislature or both, by enumerating various matters in three lists- namely, Union list,
(ii) State List, and (iii) concurrent List. These lists are contained as List I (Union List),
List II (State List) and List III (Concurrent List) in the Seventh Schedule 7 in this
constitution.

6. Entries 41, 83, 84, 92C and 97 of List I in the Seventh Schedule are as under:- Entry
41. Trade and commerce with foreign countries; import and export across customs
frontiers; definition of customs frontiers. Entry 83: Duties of Customs including
export duties Entry 84: Duties of Excise on tobacco and other goods manufactured or
produced in India except, – (a) alcoholic liquors for human consumption For
Departmental Use Training Material Developed by RTI, NACEN, Kanpur Page 3 (b)
opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal
and toilet preparations containing alcohol or any substance included in sub-para (b) of
this entry. Entry No.92C: Tax on Services [Entry Inserted in the Constitution of India
vide 88th Constitutional Amendment Act, 2003 (with effect from 15.1.2004)] [Note:
Prior to 15.1.2004, the Service tax was levied by the Parliament under Entry No. 97 of
the List I in the Seventh Schedule in the Constitution of India]. Entry No. 97. Any
other matter not enumerated in List II or List III including any tax not mentioned in
either of those Lists.

7. State List: Entries relating to State Taxes are as under:- Entry No. 51. Duties of
excise on the following goods manufactured or produced in the State and
countervailing duties at the same or lower rates on similar goods manufactured or
produced elsewhere in India:— (a) alcoholic liquors for human consumption; (b)
opium, Indian hemp and other narcotic drugs and narcotics, but not including
medicinal and toilet preparations containing alcohol or any substance included in sub-
paragraph (b) of this entry. Entry No. 54: Taxes on the sale or purchase of goods other
than newspapers, subject to the provisions of entry 92A of List I. Entry No. 60: Taxes
on professions, trades, callings and employments. Entry No. 62. Taxes on luxuries,
including taxes on entertainments, amusements, betting and gambling.

8. Article 112: This articles deals with Annual financial statement and it provides as
under:- (1) The President shall in respect of every financial year cause to be laid
before both the Houses of Parliament a statement of the estimated receipts and
expenditure of the Government of India for that year, in this Part referred to as the
"annual financial statement''. Budget is the Annual Financial Statement containing
details of Govt’s expenditure and estimated revenue receipts.

9. Article 366-Definitions (29A) “tax on the sale or purchase of goods‖ includes— (a)
a tax on the transfer, otherwise than in pursuance of a contract, of property in any
goods for cash, deferred payment or other valuable consideration; (b) a tax on the
transfer of property in goods (whether as goods or in some other form) involved in the
execution of a works contract; (c) a tax on the delivery of goods on hire-purchase or
any system of payment by instalments; (d) a tax on the transfer of the right to use any
goods for any purpose (whether or not for a specified period) for cash, deferred
payment or other valuable consideration; (e) a tax on the supply of goods by any
unincorporated association or body of persons to a member thereof for cash, deferred
payment or other valuable consideration; (f) a tax on the supply, by way of or as part
of any service or in any other manner whatsoever, of goods, being food or any other
article for human consumption or any drink (whether or not intoxicating), where such
supply or service, is for cash, deferred payment or other valuable consideration, and
such transfer, delivery or supply of any goods shall be deemed to be a sale of those
goods by the person making the transfer, delivery or supply and a purchase of those
goods by the person to whom such transfer, delivery or supply is made;

Some of the key constitutional provisions relating to taxation include (Detailed

Explanation):

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 2689

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.

FUNDAMENTAL RIGHTS AND TAXATION

All the tax imposed, levied or collected must be in adherence to the fundamental
rights guaranteed under the Constitution of India. All tax formed must be by
Legislative actions only, which is specified under Article 265 of the Indian
Constitution. The Fundamental rights also acts as remedies against taxation which are
Article 13, 14, 19(1)(g) and 27.

1).Article 13 states that " The state shall not make any law which takes away or
abridges the rights conferred by this part and any law made in contravention of this
clause shall, to the extent of the contravention, be void." Article 13, seeks to assert the
supremacy of the constitutional provisions over laws made by the parliament. It brings
a sense of clarity with regard to the fate of legislation which violates the constitution.
Any law made regarding taxation must be according to the legislative provisions.
Therefore, Article 13 gives the people the right to seek remedy for any law violating
the provisions of the constitution or the fundamental rights of the people.

2).Article 14 states, about equality before law and equal protection of the law within
the territory of India6. In literal sense the word Equality is used which means equal
treatment to all. But in practical sense the word Equity is brought into use, which
basically means equal treatment to equals based on their capacity and capabilities.
Therefore, when any tax is levied on the people for their general welfare, it must be
kept in mind and their capacity to pay keeping in aside their basic necessities. For
example – All people must not be taxed equally but they must be categorized based on
their income and then taxed accordingly.

Article 14 of the Constitution of India - “ The state shall not deny to any person
equality before law or the equal protection of laws within the territory of India.” The
source of this article lies in American as well as Irish Constitution. The preamble of
the Constitution of India itself talks about equality of status and opportunity. The
desire to enjoy the same rights and freedom as enjoyed by British was implicit in
formation of Indian national Congress 1885. The Commonwealth of India in its clause
8, demanded inter alia equality before law and the committee under the chairmanship
of Motilal Nahru recommended the same. Equality before law is a negative concept
and have certain limitation. It is also mentioned by Dicey as second corollary of Rule
of law would rule out any special privileges to authority or person. But our
Constitution provides certain privilege to the president, governor, member of
parliament and state legislature etc. Tax and Article 14 of the Constitution of India • •

In determining the validity of statutory provision, the Indian Court followed the
principle of equal protection of law which means right to equal treatment in similar
circumstances. The court uphold legislation consisting apparently discriminatory
provisions where discrimination is based on reasonable basis. Reasonable means
rational not arbitrary. The classical test enunciated by judiciary requires fulfilment of
two following conditions –

1. The Classification must be founded on an intelligible differentia which distinguish

those that are grouped together from others ,

2. The differentia must have rational relation to the object sought to be achieved by
the law under challenge. Taxing statutes are also not exempted from the test consisting
in article 14 of the Constitution of India and for its application in the territory of India
need to pass the test. The taxing statutes enjoy more judicial indulgence because
picking and choosing within limit is inevitable in taxation. The Court adopted more
tolerant attitude in matter of tax due to adverse impact of economy of Government.
Tax and Article 14 of the Constitution of India • • The State have permitted a large
discretion in matter of clasification for taxing purpose keeping the view of inherent
complexity of fiscal adjustment of diverse element.

Meenakshi Vs State of Karnataka AIR 1983 SC 1283 – The rate of tax and objects to
be taxed are to be determined by the legislature and unless it is found to be so
unreasonable, the court does not interfere with the latitude enjoyed by the legislature
in this behalf. Tax and Article 14 of the Constitution of India •

ITO Vs N. Takin Roy Rymbai (1976)103 ITR 82 - While it is true that a taxation law,
cannot claim immunity from the equality clause in Article 14 of the Constitution, and
has to pass like any other law, the equality test of that Article, it must be remembered
that the State has in view of the intrinsic complexity of fiscal adjustments of diverse
elements, a considerably wide discretion in the matter of classification for taxation
purposes. Given legislative competence, the legislature has ample freedom to select
and classify persons, districts, goods, properties, incomes and objects which it would
tax, and which it would not tax. So long as the classification made within this wide
and flexible range by a taxing statute does not transgress the fundamental principles
underlying the doctrine of equality, it is not vulnerable on the ground of
discrimination merely because it taxes or exempts from tax some incomes or objects
and not others Nor the mere fact that tax falls more heavily on some in the same
category, is by itself a ground to render the law invalid. It is only when within the
range of its selection, the law operates unequally and cannot be justified on the basis
of a valid classification, that there would be a violation of Article. Tax and Article 14
of the Constitution of India •

K T Moopil Nair Vs State of Kerala AIR 1961 SC 552 – A land was taxed at a flate
rate rs. 2 per acre whether or not there was any income from the property. The Court
declared such statutory provision discriminatory and violative of Article 14 of the
Constitution of India. Here there is no classification between productive or non
productive land. The object of taxation is to acquire money from gains not from
losses. If any tax is imposed on land having less income than tax or nothing, is against
the objectivity of taxing statute. Tax and Article 14 of the Constitution of India • •

M. Match Works Vs Assistt. Collector, AIR 1974 SC 497 – The classification has
been done between mechanised and non machanised matches industry for taxing
purpose has been held valid because principle of classification linked to the
productivity process. The Mechanised industry required less labour force than non
mechanised industry and more production which generates more income. Here it is
reasonable to impose different taxing rate upon different destination. A classification
on the basis of capacity to pay for purpose of taxation is valid. It is therefore
permissible to levy higher tax on those who are economically stronger than those who
are weaker. Tax and Article 14 of the Constitution of India • •

S. Kodar Vs State of Kerala Air 1974 SC 2272 - It can be said that a legislative
classification making the burden of the tax heavier in proportion to the increase in
turnover would be reasonable. A flat rate is thought to be less efficient than the graded
one as an instrument of social justice. The economic wisdom of a tax is within the
exclusive province of legislature. The only question for the Court to consider it
whether there is rationality in the belief of the legislature that capacity to pay the tax
increases, by and large with an increase of receipts. An attempt to proportion the
payment to capacity to pay and thus bring about a real and factual equality cannot be
ruled out as irrelevant in levy of tax on the sale of purchase of goods. The object of a
tax is not only to raise revenue but also to regulate the economic life of the society. In
India there exits a great economically difference amongst the person or society and on
the other hand the more poorest person or society to whom two times meal is not
available. So it is necessary to impose more tax upon higher income group for the
purpose of enhancing the living standard of depressed society and after nourishment
they will become a taxpayer in future.

3).Article 19(1)(g) states, the freedom of trade, occupation, profession and business.
Trade means any commercial activity which includes exchange of goods and services
for its value with the intention of profit making. Any tax imposed on the people must
be done keeping in mind that it does not restrain or infringe the freedom of right to
trade and business of a person. Therefore, Article 19 allows the people to seek relief if
any tax is restricting the people to conduct the trade and business. Even if the tax
implied is a compensatory tax or not, if it is causing an immediate threat or burden of
carrying on a business or trade, then it can be invoked by seeking remedy under
Article 19 of the constitution of India.
4).Article 27 states that, tax collected by the state shall not be used for promoting any
specific religion and no specific tax can be collected to promote any religion. Article
27 guarantees the right to live in a secular nation, which allows every person to enjoy
their own religion or religious practices. But the state cannot promote any religion or
religious activities by the means of imposing tax on all people. Fee can be collected
but not tax.

Nature and Scope of the Power of Taxation

NATURE OF THE POWER OF TAXATION

1.Legislative- this power can only be exercised by the law making body (Congress)
not the executive or the judicial branch of the government, except when delegated by
the national legislative body to a local legislative body or to the executive branch,
subject to limitations as may be provided by law;

2.Inherent in sovereignty- the power exists as an incident or attribute of sovereignty,

as it is essential to the existence of every government. The power can therefore be
exercised even without the constitution or any law expressly conferring such power.

Scope of the Power of Taxation

It is comprehensive, unlimited, supreme and plenary, but subject to constitutional and

inherent limitations.

Limitations on The Power of Taxation:-

The power of taxation, is however, subject to constitutional and inherent limitations.

Constitutional limitations are those provided for in the constitution or implied from its
provisions, while

inherent limitations are restrictions to the power to tax attached to its nature.
The following are the inherent limitations.

1.Purpose. Taxes may be levied only for public purpose;

2.Territoriality. The State may tax persons and properties under its jurisdiction;

3.International Comity. the property of a foreign State may not be taxed by another.

4.Exemption. Government agencies performing governmental functions are exempt

from taxation

5.Non-delegation. The power to tax being legislative in nature may not be delegated.
(subject to exceptions)

Constitutional limitations.

1.Observance of due process of law and equal protection of the laws.(sec, 1, Art. 3)
Any deprivation of life , liberty or property is with due process if it is done under the
authority of a valid law and after compliance with fair and reasonable methods or
procedure prescribed. The power to tax, can be exercised only for a constitutionally
valid public purpose and the subject of taxation must be within the taxing jurisdiction
of the state. The government may not utilize any form of assessment or review which
is arbitrary,unjust and which denies the taxpayer a fair opportunity to assert his rights
before a competent tribunal. All persons subject to legislation shall be treated alike
under like circumstances and conditions, both in the privileges conferred in liabilities
imposed. Persons and properties to be taxed shall be group, and all the same class
shall be subject to the same rate and the tax shall be administered impartially upon
them.

2.Rule of uniformity and equity in taxation (sec 28(1)Art VI) All taxable articles or
properties of the same class shall be taxed at the same rate. Uniformity implies
equality in burden not in amount. Equity requires that the apportionment of the tax
burden be more or less just in the light of the taxpayers ability to bear the tax burden.

3. No imprisonment for non-payment of poll tax (sec. 20, Art III) A person cannot be
imprisoned for non-payment of community tax, but may be imprisoned for other
violations of the community tax law, such as falsification of the community tax
certificate, or for failure to pay other taxes.

4.Non-impairment of obligations and contracts, sec 10, Art III . the obligation of a
contract is impaired when its terms and conditions are changed by law or by a party
without the consent of the other, thereby weakening the position or the rights of the
latter. IF a tax exemption granted by law and of the nature of a contract between the
taxpayer and the government is revoked by a later taxing law, the said law shall not
be valid, because it will impair the obligation of contract.

5.Prohibition against infringement of religious freedom Sec 5, Art III, it has been said
that the constitutional guarantee of the free exercise and enjoyment of religious
profession and worship, which carries the right to disseminate religious belief and
information, is violated by the imposition of a license fee on the distribution and sale
of bibles and other religious literatures not for profit by a non-stock, non-profit
religious corporation.6.

Prohibition against appropriations for religious purposes, sec 29, (2)Art. VI, Congress
cannot appropriate funds for a private purpose, or for the benefit of any priest,
preacher or minister or for the support of any sect, church except when such priest,
preacher, is assigned to the armed forces or to any penal institutions, orphanage or
leprosarium.

7. exemption of all revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for

educational purposes from income, property and donor’s taxes and

custom duties (sec. 4 (3 and 4) art. XIV.

8.Concurrence by a majority of all members of Congress in the passage of a law

granting tax exemptions. Sec. 28 (4) Art. VI.

9.Congress may not deprive the Supreme Court of its jurisdiction to review, revise,
reverse, modify or affirm on appeal or certiorari, final judgments and orders of lower
courts in all cases involving the legality of any tax, impost, assessment or any penalty
imposed in the relation thereto.

PRINCIPLES AND DOCTRINES ON TAXATION:-

PRINCIPLE OF NECESSITY The existence of the government is a necessity; the

main source of revenue of the government is taxes. These are the life-blood of the
government. The primary purpose of taxation is to generate funds for the State to
finance the needs of the citizenry and to advance the common wealth. The government
chiefly relies on taxation to obtain the means to carry on its operation .

Cases:

Commissioner vs. Pineda, 21 SCRA 105- Taxes are the lifeblood of the government
and their prompt and certain availability are an imperious need. CIR vs. Algue, 158
SCRA 8- The government will not be able to survive and continue to perform its
functions without taxes.

II. TAXATION IS INHERENTLY LEGISLATIVE

Along with police power ( for public good and welfare ) and eminent domain ( for
public use ), taxation ( for revenue ) is an inherent power of the sovereignty.

Cases: National Power Corporation vs. Albay, 186 SCRA 198- Power of taxation is
legislative in character and is a legislative prerogative.

Petro vs. Petilla, 198 SCRA 82- The legislative taxing power includes the authority:
a. to determine the nature, object, extent, coverage, and situs of the tax imposition, b.
to grant tax exemptions or condonations, and c. to specify or provide for the
administrative, as well as judicial remedies that either the government or the taxpayers
may avail themselves of in the proper implementation of the tax measure.

III. TAXATION INCLUDES THE POWER TO DESTROY

The power of taxation is sometime also called the power to destroy. Therefore, it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the ‘hen that lays the golden egg.’ And,in order
to maintain the general public’s trust and confidence in the

government, this power must be used justly and not treacherously. Cases:Roxas vs.
CTA, 23 SCRA 276- The power of taxation includes the power to destroy if it is used
validly as an implement of the police power of the state.If it is used solely for the
purpose of raising revenue, it does not include the power to destroy. Standard Oil Co.
vs. Posadas, 55 Phil 715- While ordinarily the government does not tax its own
political subdivisions or its other entities, it may, however, do so by providing for it
explicitly.

IV. TAXATION IS FOR A PUBLIC PURPOSE

The proceeds of the tax must be used a. for the support of the State or b. for some
recognized objects of government or directly to promote the welfare of the
community.

Cases:Pascual vs. Sec. of Public Works, 110 Phil 331- The legislature is without
power to appropriate public revenues for anything but a public purpose. Valentin Tio
vs. Videogram Regulatory Board, 151 SCRA 208- The public purpose of a tax may
legally exist even if the motive which impelled the legislature to impose the tax was to
favor one industry over another.

V. TAXPAYER SUIT

It is the remedy available to a taxpayer when taxes are used for illegal activities or
when the public funs are used by the government for projects which are not intended
for a public purpose.

Cases:Pascual vs. Sec. of Public Works, 110 Phil 331- It is only when an act
complained of, which may include a legislative enactment, directly involves illegal
disbursement of public funds derived from taxation. Maceda vs. Macaraig, 197 SCRA
771- When the issue involve the legality of expenditure of tax money, a taxpayer suit
could be filed.
DISTINCTION: THE STATE’S POWER OF TAXATION FROM THE POLICE
POWER.

The power to tax is an incident of sovereignty and is unlimited in its range,

acknowledging in its very nature no limits, so that security against its abuse is to be
found only in the responsibility of the legislature which imposes the

tax on the constituency that is to pay it. (Mactan Cebu Int’l. Airport

Authority v. Marcos, 330 Phil. 392 (1996)).It is based on the principle that taxes are
the lifeblood of the government, and their prompt and certain availability is an
imperious need. (ProtonPilipinas Corp. v. Republic of the Philippines, G.R. No.
165027, October 16,2006, citing Province of Tarlac v. Alcantara, 216 SCRA 790, 798
(1992)). Thus, the theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of promoting the
general welfare and well-being of the people. (NPC v. City of Cabanatuan,449 Phil.
233 (2003)).On the other hand, police power is the power of the state to
promotepublic welfare by restraining and regulating the use of liberty and property.It
is the most pervasive, the least limitable, and the most demanding of thethree
fundamental powers of the State.The justification is found in the Latin maxims salus
populi est suprema lex (thewelfare of the people is the supreme law) and sic utere tuo
ut alienum nonlaedas (so use your property as not to injure the property of others). As
an inherent attribute of sovereignty which virtually extends to all public needs, police
power grants a wide panoply of instruments through which the State, as parens
patriae, gives effect to a host of its regulatory powers. (JMMPromotions & Mgt. Inc.
v. CA, G.R. No. 120095, August 5, 1996, 260 SCRA319).

The power to “regulate” means the power to protect, foster, promote, preserve, and
control, with due regard for the interests, first and foremost, of the public, then of the
utility and of its patrons.

(Phil. Assn. of theService Exporters, Inc. v. Torres, G.R. No. 101279, August 6,
1992, 212 SCRA298).The conservative and pivotal distinction between these two
powers restsin the purpose for which the charge is made.
If generation of revenue is the primary purpose and regulation is merely incidental, the
imposition is atax; but if regulation is the primary purpose, the fact that revenue
isincidentally raised does not make the imposition a tax.

(Progressive Dev.Corp. v. Quezon City, G.R. No. 36081, April 24, 1989, 172 SCRA
629; Gerochi,et al. v. Dept. of Energy, et al., G.R. No. 159769, July 17, 2007,
Nachura, J).

Nature of the power of taxation as an inherent power

Power to tax, being inherent in an independent state for its existence andsurvival by
the furtherance of its multifarious functions, the same does notrequire delegation from
the supreme law of the land. However, exercise ofsuch power upon the inhabitants is
subject to limitations imposed by thepower, by its very nature, or by the Supreme law
of the land, the PhilippineConstitution. To tax a subject matter, person, property or
excise, there mustbe a valid law imposing the same. Validity of a tax measure
presupposes thefact that it has overcome the test and scrutiny against it. Tax measures
dulypassed by the legislative department, the Congress or the local legislativeunder its
delegated power, enjoy the presumption of validity and he whocontroverts has the
duty of proving that the same is otherwise.By nature, power to tax is inherent in a
sovereign estate so that the grant ofwhich is not necessary but the exercise is provided
safeguards andlimitations. This means that the state needs not be empowered by
itsconstitution or any mandate for it to be allowed to tax. Such power co-existswith
the state and thus, grant is not necessary. What are being provided bythe supreme law
of the land, the Constitution, are the guidelines and thelimit on the exercise of the
power. It wishes to curtail the exercise in such away as not to abuse and misuse said
power to the detriment of the majorityand to the advantage of the selected few.Under
our tax system, compliance is initially voluntary on the part of thetaxpayers.
Nevertheless, the government through the administrative agencyempowered to
administer the tax, the BIR , is clothed with such remedies,under proper procedures, to
imposed correct amount of taxes due to thegovernment upon finding that the
compliance based on the declarations inthe return is insufficient. It can issue
deficiency assessment and impose suchmeasures provided under the law within the
prescribed period to see to itthat taxes are paid and that tax measures are complied
with. This does nothowever follow that a taxpayer being assessed is doing an illegal
businessbecause non-payment of the tax does not make the business illegal.

Scope of the taxing power

To give a more meaningful power, power of taxation is essentially unlimited and

plenary. This means that the state can tax on anything, anytime, anywhere, and at any
amount. Example is the issue on taxing short messaging(SMS or commonly known as
text message through mobile phones)

This follows however, that the limitations and guidelines for the said purpose had
been properly observed.

Doctrine of Immunity of Instrumentalities :-

Initially, the judiciary leaned toward an expansive interpretation of this doctrine,

extending its protection not only to government instrumentalities but also to private
individuals engaged in various capacities with the government, such as suppliers,
contractors or creditors.

For example, a manufacturer of motorcycles would not be subject to federal excise tax
on sales to a municipality. However, over time, the courts recognised that such a
broad interpretation primarily benefited private individuals at the expense of the
government, effectively creating a privileged class exempt from taxation.

As a result, the doctrine of immunity of instrumentalities was reevaluated and its

broad scope was narrowed. Presently, the doctrine signifies that a discriminatory tax
imposed by one government on the activities of another is considered invalid. In this
way, it has evolved to protect the autonomy of both National and State Governments
within their respective spheres, preventing undue encroachments by each other.

Why Doctrine of Immunity of Instrumentalities is Needed?

The need for the doctrine of immunity of instrumentalities arises from the fact that in
a federal system of government, two tiers of government coexist within the same
geographical boundaries and hold authority over the same population. Each of these
tiers, namely the Union and State Governments, is responsible for carrying out various
functions and possesses the power to levy taxes. As a result, their operations
inevitably intersect and overlap in several areas.

In such a dual government system established by a federal constitution, the smooth

functioning of both levels of government requires that the property of one government
is immune from taxation by the other. This is especially crucial because both the
Union and State Governments possess autonomous taxing powers and some of these
taxes may be applied to governmental properties.

The underlying idea behind doctrine of immunity of instrumentalities is that granting

mutual immunity from taxation streamlines administrative processes. It prevents the
need for redundant efforts in assessing and calculating taxes, as well as complex
cross-accounting of taxes between the two governments. By exempting the property of
one government from taxation by the other, it simplifies the tax landscape and avoids
potential conflicts over tax liabilities.

It’s worth noting that the application of this doctrine in India is narrower compared to
the concept of “Immunity of Instrumentalities” as established in the United States. In
India, the doctrine primarily exempts “property” from taxation, whereas in the United
States, it also extends to the functions and instrumentalities of the government. This
distinction reflects the specific legal and constitutional framework of each country.

Doctrine of Immunity of Instrumentalities: Position in India

In India, the scope of inter-governmental tax immunities or doctrine of immunity of

instrumentalities is quite limited. These immunities are primarily addressed in Articles
285, 287, 288 and 289 of the Indian Constitution.

Unlike the United States, the Indian Constitution does not incorporate the broad and
general doctrine of immunity of instrumentalities, beyond what can be derived from
these specific constitutional provisions.

Constitutional Provisions for Doctrine of Immunity of Instrumentalities

In the Indian Constitution, the provisions governing inter-governmental tax

immunities are outlined in a limited scope, primarily within Articles 285, 287, 288 and
289.

Article 285, Clause 1, of the Indian Constitution establishes that property owned by
the Union is immune from taxation imposed by a State or any authority within a State.
However, Clause 2 introduces an exception, allowing a State to impose taxes on
Union properties that were previously liable for taxation by the State before the
Constitution’s commencement, as long as such taxes continue to be levied by the State
and no contrary legislation is enacted by Parliament.
Articles 287 and 288 partially incorporate the doctrine of immunity of
instrumentalities concerning the Union. They grant immunity to specific activities
conducted by the Union, rather than its property. These articles specifically exempt
the consumption or sale of electricity or water by Union agencies from any State
taxation.

Article 289, under Clause 1, restricts the Union’s taxing authority by exempting State
property and income from its taxation. Nevertheless, Article 289(2) introduces an
exception, allowing for the taxation of business operations of the State, State property
used for trade or business or income generated from such activities if authorised by
Parliament. Article 289(3) further stipulates that if a trade or business is declared
incidental to the ordinary governmental functions, it would be exempted from
taxation.

Exception to Doctrine of Immunity of Instrumentalities

The phrase “Save in so far as Parliament may by law otherwise provide” within
Article 285 of the Indian Constitution indicates that Parliament has the authority to
enact laws allowing a State or any authority within a State to impose taxes on Union
property. The primary purpose of Clause (1) in Article 285 is not to completely
prevent State or local taxation of Union Property, but rather to bring such taxation
under the control and regulation of Parliament.

Similarly, Clause 2 of Article 285 empowers local bodies to tax Union properties that
were previously liable for or treated as liable to taxation before the commencement of
the Constitution, unless Parliament legislates otherwise. These provisions create
exceptions to the doctrine of immunity of instrumentalities, allowing for specific
circumstances under which Union property may be subject to State or local taxation.
To benefit from Clause 2, local authorities, such as municipal bodies, must meet two
conditions:

The tax they seek to impose must be the same as the tax that was previously being
levied on Union property.

The local authority making this claim must be within the same State where it is
asserting the right to continue the tax levy.

The application of Clause 2 can be better understood through an analysis of a decided

legal case, the “Governor-General of India in Council v. Corporation of Calcutta,”
which is explained as follows:

In this case, the Calcutta Corporation, operating under Section 141 of the Calcutta
Municipal Act, assessed the value of premises, including land and buildings, for the
purpose of taxation. The central issue in the case revolved around whether additional
buildings constructed on the premises after April 1, 1937 (when Part III of the Act
came into effect), were exempt from taxation.

The court’s decision in this case established that, for assessment purposes, the
valuation of the property in question should be based on its composition as of March
1, 1937. Any buildings constructed after that date should be entirely excluded from
the assessment. The proviso attached to Section 154 of the Government of India Act,
1935, clarified that properties treated as liable immediately before April 1937 would
not enjoy the exemption provided by the main provision of the section.
However, this proviso did not affect new buildings that did not exist on March 31,
1937 and were therefore not subject to taxation on that date. Consequently, any
additional building was to be excluded from the subsequent valuation, treated as non-
existent and the valuation conducted based on the land and buildings as they existed
prior to April 1937.

Conclusion

The Doctrine of Immunity of Instrumentalities is a fundamental principle in

federations like India, where both the federal government (Centre) and state
governments (States/Provinces) coexist, each with its sphere of authority. This
doctrine ensures that one sovereign entity does not tax another sovereign entity,
preserving their respective powers and autonomy.

In India, Articles 285 and 289 of the Constitution embody this principle, albeit with
some distinctions. Article 285 provides an absolute immunity to Union property from
state taxation, with the exception being if Parliament itself permits such taxation.
Article 285(2) allows for existing taxes to continue temporarily until Parliament
decides otherwise.

Article 289, on the other hand, deals with the taxation of State property. Clause (1)
exempts State property and income from Union taxation. However, Clause (2)
introduces a qualification, permitting taxation if State property is used for commercial
purposes related to trade and commerce, subject to Parliament’s decision. Clause (3)
grants Parliament the authority to determine whether a function carried out through
trade and commerce is incidental or not, highlighting the federal nature of the Indian
Constitution with a unitary bias.