Constitution is the foundation and source of powers to legislate all laws in India. Parliament, as well as State Legislatures gets the power to legislate various laws from the Constitution only and therefore every law has to be within the vires of the Constitution.
Talking about the taxation laws and the interpretation of taxation laws, every lawyer or a tax professional practicing taxation laws must understand the basic provisions of Constitution relating to taxation including the powers of Parliament and State Legislatures to legislate regarding levy and collection of tax, the restrictions imposed by our Constitution on such powers, entries concerning taxation in Central List i.e List-1 and State List i.e List-2 of Seventh Schedule to Constitution of India.
All laws and executive actions are subordinate to the Constitution. To form clear understanding of the basic concepts relating to taxation laws one must understand the relevant provisions of the Constitution, as the power to levy and collect tax by State Governments or Union Government comes from the Constitution only.
One thing must be kept in mind that there is always an object behind every law and that object ultimately exists to achieve the objects enumerated in the Preamble of our Constitution, which runs as under:
WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political; LIBERTY, of thought, expression, belief, faith and worship; EQUALITY of status and of opportunity; and to promote among them all FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation; IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949,DO HEREBY ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.
While interpreting every law one has to keep in mind the object behind the law, if any provision of the law or any administrative action or any interpretation of the law defeats the object of such law for which it is being legislated and consequently is not in accordance with the Constitution then it is illegal, void and ultra vires of the Constitution.
Therefore it is important to understand the powers and scheme of taxation under Constitution before understanding the taxation laws. Whenever I try to understand any complicated provision of law, I refer to the object of the law for which it has been legislated and also the power of the Parliament or State legislature under the Constitution to legislate such law for better understanding of the subject.
For example State VAT Acts have been legislated by State Legislatures under Entry 54 of List-II of the Seventh Schedule to the Constitution, which runs as under:
“Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.”
Hence every law legislated under Entry 54 of State List must levy tax only on the sale or purchase of goods other than newspapers within the State Jurisdiction. If a State law legislated under entry 54 levies tax on the inter-state sale or purchase of goods, it has to be struck down as ultra vires of the Constitution.
The roots of every law in India lies in the Constitution, therefore understanding the provisions of Constitution is foremost to have clear understanding of any law.
Now, Let us go through some of the relevant provisions of our Constitution relating to taxation:
Article 246(1) of Constitution of India states that Parliament has exclusive powers to make laws with respect to any of matters enumerated in List I in Seventh Schedule to Constitution(i.e. Union list). Article 246(3) provides that State Government has exclusive powers to make laws for State with respect to any matter enumerated in List II of Seventh Schedule to Constitution(i.e. State List).
Parliament has exclusive powers to make laws in respect of matters given in Union List and State Government has the exclusive jurisdiction to legislate on the matters containing in State List.
There is yet another list i.e. List III (called concurrent list) in the Seventh Schedule to the Constitution. In respect of the matters contained in List III both the Central Government and State Governments can exercise powers to legislate. In case of Union Territories Union Government can make laws in respect of all the entries in all the three lists.
List III of Seventh Schedule(i.e. Concurrent list) includes entries like Criminal law and Procedure, Trust and Trustees, Civil Procedures, economic and social planning, trade unions, charitable institutions, price control factories, etc.
In case there is a conflict between the laws legislated by State Government and Central Government in respect of entries contained in Concurrent list, law made by Union Government prevails.
However there is one exception to this rule, if law made by State contains any provision repugnant to earlier law made by Parliament, law made by State Government prevails, if it has received assent of President. Even in such cases, Parliament can make fresh law and amend, repeal or vary law made by State.
Now let's go through the Entries in Union list and State list relevant to Taxation.
Union List:
Entry No. 82 - Tax on Income other than agriculture income.
Entry No. 83 - Duties of customs including export duties.
Entry No. 84 - Duties of excise on Tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.
Entry No. 85 - Corporation tax.
Entry No. 92A - Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the cource of Interstate trade or commerce.
Entry No. 92B - Taxes on consignment of goods where such consignment takes place during Inter-State trade or commerce.
Entry No. 92C – Tax on services.
Entry No. 97 – Any other matter not included in List II, List III and any tax not mentioned in List II or List III.
State List:
Entry No. 46 – Taxes on agricultural income.
Entry No. 51 – Excise duty on alcoholic liquors, opium and narcotics.
Entry No. 52 – Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi or Entry Tax).
Entry No. 54 – Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.
Entry No. 55 – Tax on advertisements other than advertisements in newspapers.
Entry No. 56 – Tax on goods and passengers carried by road or inland waterways.
Entry No. 59 – Tax on professionals, trades, callings and employment.
There are also certain restrictions which have been imposed in our Constitution on the powers of State Governments and Union Government. So far indirect tax especially the tax on sale and purchase of goods is concerned certain restrictions imposed in Constitution are provided here below:
Article 286(1) - State Government cannot impose tax on sale or purchase during imports or exports; or tax on sale outside the State.
Article 286(2) - Parliament is authorized to formulate principles for determining when a sale or purchase takes place (a) outside the State (b) in the course of import or export.[sections 3,4,5 of CST Act, 1956 have been legislated under these powers]
Article 286(3) - Parliament can place restrictions on tax on sale or purchase of goods declared as goods of special importance and the State Government can tax such declared goods subject to these restrictions[section 14, 15 of CST Act, 1956 imposes restrictions and conditions on the power of State Governments to levy tax on declared goods.]
Article 301- Trade, commerce and intercourse through out the territory of India shall be free, subject to provisions of Article 302 to 304 of Constitution.[Entry tax in Haryana was held as ultra vires of article 301 by Punjab & Haryana High Court in Jindal Strips Ltd. v State of Haryana and others, (2007) 29 PHT 385 (P&H)].
Article 302 - Restriction on trade or commerce can be placed by Parliament in the public interest.
Article 303(1), 303(2) - No discrimination can be made between one State and another or give preference to one State over another. Such discrimination or preference can be made only by Parliament by law to deal with situation arising from scarcity of the goods.
Article 304 - State can impose tax on goods imported from other States or Union territories, but a State cannot discriminate between goods manufactured in the State and goods brought from other States.
Proviso to article 304 provides that State legislature can impose reasonable restrictions on freedom of trade and commerce within the state in public interest. However, such bill cannot be introduced in State Legislature without previous sanction of the President.
Article 265 – No tax shall be levied or collected except by authority of law.
Article 300A - No person shall be deprived of its property save by authority of law.
Concluding in the end, all the above articles of the Constitution are very important in relation to taxation and must be deeply understood by every tax professional. Interpretation of every law, validity of subordinate legislations and administrative actions must be judged in the background of the provisions of Constitution.
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