The taxation structure in India is deeply rooted in the Constitution, which establishes the legal authority, distribution of taxing powers, procedural safeguards, and limitations on the State’s fiscal authority. At the heart of this framework lies the constitutional principle that no tax can be imposed or collected except through a validly enacted law. Taxation, therefore, is not simply an economic tool but a constitutionally regulated mechanism that ensures accountability, federal balance, and protection of individual rights. The Supreme Court has consistently emphasized that constitutional limitations form the backbone of India’s fiscal system, ensuring that taxes are imposed fairly, rationally, and by competent authorities.
Article 265: The Fundamental Rule of Taxation
Article 265 of the Constitution lays down the core principle: “No tax shall be levied or collected except by authority of law.” This provision has been interpreted strictly by courts to prevent arbitrary fiscal impositions by the government. In A.V. Fernandez v. State of Kerala, the Supreme Court held that taxation statutes must be express and cannot be derived from implied authority. The Court also stated that the State must clearly define the nature, rate, and procedure of taxation to avoid violating constitutional guarantees.
Similarly, in Kunnathat Thathunni Moopil Nair v. State of Kerala, a case concerning land tax, the Court struck down an arbitrary tax system for violating Articles 14 and 265, holding that taxation must adhere to principles of equal protection and legal authority. These judgments form the foundational guarantee that taxation must be legal, non-arbitrary, and transparent.
Distribution of Taxing Powers Under the Seventh Schedule
Union Powers Under List I
The Constitution distributes taxing powers between the Union and the States through Articles 246 and the Seventh Schedule. List I grants Parliament exclusive authority to impose taxes that require national uniformity, such as customs duties, excise duties on manufactured goods, corporation tax, income tax (excluding agricultural income), and GST on inter-state trade. In Synthetics and Chemicals Ltd. v. State of U.P., the Supreme Court clarified that only Parliament may impose duties of excise on non-alcoholic goods, reaffirming the rigid separation of fiscal powers.
State Powers Under List II
States are empowered to levy taxes on matters of local and regional importance, including agricultural income tax, land revenue, excise duty on alcoholic liquor, stamp duty, and taxes on goods and passengers. The decision in State of Kerala v. Gwalior Rayon Silk Mfg. Co. emphasized that state taxing powers must strictly adhere to entries assigned under List II and must not encroach upon the Union List.
Role of List III (Concurrent List)
Taxation entries are intentionally absent from the Concurrent List to ensure fiscal clarity and prevent legislative conflict. This constitutional design underscores the federal balance by providing exclusive taxing powers to both levels of government.
Article 246 and Legislative Competence
Article 246 outlines the hierarchy of legislative competence: Parliament has exclusive power over List I matters, States have exclusive authority over List II, and both can legislate on List III subjects. Courts have held that in case of conflict between Union and State taxation laws, the Union law prevails. In Hoechst Pharmaceuticals Ltd. v. State of Bihar, the Supreme Court confirmed that fiscal powers must be interpreted strictly with respect to the constitutional lists, ensuring that each government acts only within its jurisdiction.
Article 248 and Residuary Taxing Power
Article 248 grants Parliament exclusive authority to legislate on matters not included in any of the lists, including taxation. This ensures that emerging financial developments—such as digital economic activities or new financial instruments—fall within parliamentary competence unless expressly provided otherwise. The Court in Union of India v. H.S. Dhillon explained that residuary taxing power rests solely with Parliament, safeguarding central control over unforeseen fiscal matters.
Article 366: Constitutional Definitions of Key Tax Terms
Article 366 defines crucial terms like “taxation,” “tax on income,” “goods,” and “services,” which guide legislative interpretation. These definitions ensure uniform understanding across all statutes. In Navinchandra Mafatlal v. CIT, the Supreme Court held that the definition of “income” under Article 366(29) is wide enough to include all receipts unless specifically excluded. This interpretation supports a comprehensive taxation regime aligned with constitutional principles.
Financial Relationship Between Union and States
Article 268 to 281: The Fiscal Federal Structure
These provisions govern duties levied by the Union but collected by the States, distribution of income tax proceeds, GST Council, and the role of the Finance Commission. The Finance Commission (Article 280) plays a key role in balancing fiscal needs by recommending how central taxes should be distributed among states. The Supreme Court in Union of India v. State of Punjab noted that fiscal federalism operates through cooperative principles, ensuring accountability and equitable sharing.
GST and the Constitutional Amendment
The 101st Constitutional Amendment introduced the Goods and Services Tax, creating a unified indirect tax structure. GST operates through Article 246A, granting concurrent powers to both Parliament and States to legislate on GST. In Union of India v. Mohit Minerals Pvt. Ltd., the Supreme Court reaffirmed that the GST Council’s recommendations, though influential, are not binding, preserving the federal nature of the Constitution.
Constitutional Limitations on Taxation
Even after establishing authority and competence, taxation laws must comply with fundamental rights and constitutional limitations.
The Supreme Court in State of West Bengal v. Kesoram Industries Ltd. emphasized that:
- taxes must be reasonable and non-arbitrary,
- classification must meet Article 14 standards, and
- taxation must not violate freedoms under Article 19 unless justified in public interest.
These safeguards ensure balance between revenue collection and protection of individual liberties.
Judicial Review of Taxation Laws
Courts exercise judicial review to ensure that taxing statutes adhere to constitutional boundaries. While courts generally show restraint in economic matters, they intervene when taxation violates constitutional principles. In R.K. Garg v. Union of India, the Court held that tax laws enjoy a presumption of constitutionality but remain subject to scrutiny if arbitrary, discriminatory, or beyond legislative competence.
Thus, judiciary plays a vital role in maintaining the constitutional integrity of India’s fiscal framework.
Conclusion
The constitutional basis of taxation in India reflects a carefully crafted structure ensuring legality, federal balance, fairness, and judicial oversight. By defining authority, distributing fiscal powers, and imposing limitations, the Constitution establishes a robust and transparent taxation system. Understanding these principles is essential for law students and practitioners, as taxation law is deeply intertwined with constitutional governance and federalism in India.
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