Introduction

Taxation is the legal capacity of the sovereignty or one of its governmental

agents to exact or impose a charge upon persons or their property for the
support of government and for the payment for any other public purposes which
it may constitutionally carry out. The power of taxation differs from the power
of eminent domain, for under taxation the government is required to make and
enforce contribution of money or property by the citizen as his share of the
burden of support of the government. Property taken under eminent domain is
much beyond the owner’s share of the burden of government. Eminent domain
takes nit a share of the public burden, but more than a share.
A government cannot exist without raising and spending money. Parliament
controls public finance which includes granting of money to the administration
for expenses on public services, imposition of taxes and authorization of loans.
This is a very important function of Parliament. Through this means Parliament
exercise control over the executive because whenever Parliament discusses
financial matters, government’s broad policies are invariably brought into focus.
The Indian Constitution devises an elaborate machinery for securing
parliamentary control over finances which is based on the following four
principles.
(i) The first principle regulates the constitutional relation between the
Government and Parliament in matters of finance. The executive
cannot raise money by taxation, borrowing or otherwise, or spend
money, without the authority of Parliament.
(ii) The second principle regulates the relation between the two Houses of
Parliament in financial matters. The powers of raising money by tax or
loan and authorizing expenditure belongs exclusively to the popular
House, viz., Lok Sabha. Rajya Sabha merely assents to it. It cannot
revise, alter or initiate a grant. In financial matters, Rajya Sabha does
not have co-ordinate authority with Lok-Sabha and Rajya Sabha plays
only a subsidiary role in this respect.
(iii) The third principle imposes a restriction on the power of Parliament to
authorize expenditure. Parliament cannot vote money for any purpose
whatsoever except on demand by ministers.
(iv) The fourth principle imposes a similar restriction on the power of
Parliament to impose taxation. Parliament cannot impose any tax
except upon the recommendation of the Executive.
Constitutional Podium of taxing power
The entries in the legislative lists are divided into two groups- one relating to
the power to tax and the other relating to the power of general legislation
relating to specified subjects. Taxation is considered as a distinct matter for
purposes of legislative competence. Hence, the power to tax cannot be deducted
from a general legislative Entry as an ancillary power. Thus, the power to
legislate on inter-state trade and commerce under Entry 42 of List I does not
include a power to impose tax on sales in the course of such trade and
commerce.
There is no Entry as to tax, in the Concurrent List; it only contains an Entry
relating to levy fees in respect of matters specified in List III other than court-
fees.
In order to determine whether a tax was within the legislative competence of the
legislature which imposed it, it is necessary to determine the nature of the tax,
whether it is a tax on income, property, business or the like so that the Entry
under which the legislative power has been assumed could be ascertained.
The primary guide for this is what is known as the ‘charging section.’ The
identification of the subject-matter of a tax is only to be found in the charging
section, the section which creates the liability to pay the tax as distinguished
from the mode of assessment or machinery by which it is assessed.
Generally speaking, all taxation is imposed on persons, but the nature and
amount of liability is determined either by individual units, as in the case of a
poll-tax, or in respect of the tax payers’ interest in property or in respect of
transactions of activities of the tax payers.
But, the ‘incidence’ or the ultimate burden of a tax does not determine its nature
or alter the legislative power relating to it. It is the substance of the levy and not
the form that determines the nature of the tax. The name given by the
Legislature is not conclusive for this purpose.
Once it is held that a legislature has the power to legislate over a particular
subject, its competence is not to be limited by the manner in which the power is
exercised. Thus, a taxing statute may be amended by incorporating a provision
in an annual Finance Act. The intrinsic character of the tax is not to be
determined by the mode of measurement or the standard of calculation
prescribed for assessing the amount of the tax.
So far as the Entries relating to the taxing power are concerned,- “it is wrong to
think that two independent imposts arising from two different acts or
circumstances were not permitted” by the Constitution. Thus, the same article
may be subject to a Central excise duty and a State Octori duty, or a State tax as
well as an Ambit of Taxing Power.
If the power to impose a tax is established, the power to collect the same is
necessarily implied. The legislature having the power to impose a tax has also
the power to prescribe the means by which the tax shall be collected and to
designate officers by whom it shall be enforced; the obligation and indemnity of
those officers; the means to ensure proper realization of the tax. The method and
manner of collection of tax is no criterion for judging the vires of the tax law.
The following powers flow from the power to tax as ancillary powers-
(1) To provide for refund of a tax illegally or improperly collected and to
impose restriction upon the right to claim such refund.
(2) To provide for the prevention of evasion of the tax imposed.
(3) To levy a penalty for the proper enforcement of the taxing statute, or
collecting any amount wrongly under colour of that statute, whether by way of
fine or forfeiture.
On the other hand, in exercise of taxing power conferred by exercise of a
legislative Entry, the Legislature cannot provide for the following, which cannot
be said to be ‘ancillary’ to the legislative power in question:
(1) that any money collected by a person by a wrong application of taxing law
would still be recoverable by the State as if it were a tax imposed under its
legitimate powers, even though the Legislature may penalize such illegal
collection.
(2) The result would be the same if the law required the dealer who has
recovered an illegal sum which was not recoverable under the taxing law to
deposit it with the State so that the State might refund to the person from whom
the money had been illegally recovered, because the requirement of deposit with
the State is an exercise of the taxing power over a subject which was outside
that power.

Constitutional Limitations upon the taxing power

Apart from Art 265 and the limitations imposed by the division of the taxing
power between the Union and the State Legislature by the relevant entries in the
Legislative list, the taxing power of either Legislature is particularly subject to
the following limitation imposed by particular provision of our constitution.
(i) It must not contravene Art 13.
(ii) It must not deny equal protection of the laws (Art 14).
(iii ) It must not constitute an unreasonable restrictions upon the rights of
business [Art 19(l)(g)].
(iv) No tax shall be levied on the proceeds of which are specifically
appropriated in payment of expenses for the promotion or maintenance of any
particular religion or religions denomination. (Art 27).
(v) A State legislature or any authority within the State cannot tax the property
of the Union (Art 285).
(vi) The Union cannot tax the property and income of a State (Art 289).
(vii) The power of a State to levy tax on sale or purchase of goods is subject to
Art 286.
(viii) Save in so far as Parliament may by Law otherwise provide a State shall
not tax the consumption or sale of electricity in the case specified in Art 287.
(ix) Imposition of tax should not impede the free flow of trade. Commerce and
intercourse (Art 301).
(x) Levy of tax must not offend Art 304 (a).
It is observed that taxation laws are challenged being violative of above Arties
in a good number of cases.
In Bengal Immunity-Co Ltd. V State of Bihar 1, the Supreme Court had held that
no state, including the delivery State, would be competent to impose sales tax
on goods in the course of inter-state trade and commence unless Parliament
lifted the ban as provided under Art 286. It was held that the operative
provisions of the several parts of Art 286 of the constitution namely clause 1 (a)
clause (b) and clauses 2 and 3 were intended to deal with different topics and
one could not have projected or read into another. The bans imposed by Art 286
of the constitution on the taxing powers of the States were independent and
separate and each one of them had to be got over before a State Legislature
could impose tax on transactions of the sale or purchase of goods. The
Explanation to Art 286 (1) (a) determined by the legal fiction created there - in
the situs of the sale in the case of transactions coming within that category and
once it was determined by the application of the explanation that a transactions
was out side the State, it followed as a matter of course that the State, with

1
AIR 1955 SE 661
reference to which the transaction could thus be predicted to be outside it, could
never tax the transaction.
In the interest of the national economy, Art 286 places certain restrictions on the
plenary power of the State Legislatures to make laws with respect to Sales tax.
In order to remove the chaos and confusion, Art 286 was amended in the year
1956 by the Constitution (Sixth Amendment) Act, 1956. By this amendment,
the Parliament was empowered to levy tax on the sale or purchase of goods
other than newspapers where such sale or purchase takes place in course of
inter-state trade or commerce and was also empowered to formulate, by law,
principles for determining when a sale or purchase of goods takes place in the
course of inter-state trade or commerce. Accordingly Central Sales Tax Act
1956 was passed by the Union Parliament.

In Atiaban Tea Co V State or Assam 2, the Assam Taxation (on goods carried by
road or on Inland Water Ways) Act, 1954, was challenged being violative of Art
301 and Supreme Court has struck down the said Act as being unconstitutional.
It has been held that tax laws are not out side the perview of Art 301. In this
case, the appellants carried on the business of growing and manufacturing Tea
in Assam and exporting it to Calcutta. In the course of its passing through the
State of Assam, the Tea was liable to tax under the Assam Taxation Act which
imposed tax on goods carried by road or inland water ways in the State of
Assam. The Supreme Court held that the tax imposed on the goods directly
passed on their transport or movement and thus offended against Art 301. The
Act was, therefore, held void and the State was restrained from levying the tax.
In the course of his judgment, Gajendra Gadkar, J explained that restrictions of
freedom which is guaranteed by Art 301, would be such restrictions as directly
and immediately restrict or impede the free flow or movement of trade. On the
other hand, restrictions having impact which is indirect or remote on the free
flow or movement of trade would be permissible within the purview of Art 301.
It was pointed out that taxes may and do amount to restrictions, but it is only
such taxes as directly and immediately restrict trade that would fall within the
purview of Art 301. Since the tax in the instant case, affected the free flow of
trade, it could only be valid if it had satisfied the requirement of Art 304 (b) i.e.
the restrictions on trade were reasonable and in the interest of general public
and also the Bill proposing the tax had been introduced with the previous
sanction of the President. The impugned Act had not fulfilled the above
conditions. The Assam Legislature subsequently amended the Act following the
2
AIR 1961 S.C. 232
requirement of Art 304 as the Assam Taxation (on goods carried by road or on
Inland Water ways) Act 1961. The validity of this amended Act was again
challenged in Khyerbari Tea Co. V State of Assam3 on two grounds-
(1) that the provisions of the Act are unconstitutional because they
constituted an unreasonable restriction on the freedom of trade
guaranteed by Article 301; and
(2) that the petitioner's fundamental rights guaranteed by Article 19(1) (g) of
the constitution is infringed.
The Supreme Court repelled these two contentions and upheld the validity of
the Act. In this case the Supreme Court has laid down a guideline under what
circumstances and in what manner the Court should interfere in these matters.
The Court observes: "It is of course, true that the validity of tax law can be
questioned in the light of the provisions of Articles 14, 19 and Art 301, if the
said tax directly and immediately imposes a restriction on the freedom of trade,
but the power conferred on the court to strike down a taxing statute if it
contravences the provisions of Arts 14, 19 or 301 has to be exercised with
circumspection, bearing in mind that the power of the State to levy taxes for the
purpose of Governance and for carrying out its welfare activities is a necessary
attribute of sovereignty and in that sense it is a power of paramount character.
But where the court is satisfied that the impugned Act imposed unreasonable
restrictions on the fundamental right of the citizen, conferred unbridled on the
appropriate authorities, introduced unconstitutional discrimination and in
consequence amounted to colourable exercise of legislative power, such a
taxing statute can properly be regarded as purely confiscatory and the power of
the Court can be legitimately involved and exercised.” The Court further said
that “the legislature which is competent to levy a tax must inevitably be given
full freedom to determine which articles should be taxed, in what manner and at
what rate. It would be idle to contend that a state must tax everything in order to
tax something. Thus, when it is not disputed that tea and jute are the main
products of the state of Assam, and the State Legislature selects these two
articles for taxation under section 3 of the Assam Act 10 of 1961, the tax cannot
be struck down as discriminatory and as such unconstitutional only because it
has taxed these two Articles".
In the same case the Supreme Court has said that the Legislature can allow a
statute with provisions to operate retroactively and thereby entitling the State to
recover tax which could not be recovered under the earlier Act owing to its
constitutional infirmities.

3
AIR 1964 S.C. 925
The scope of Art 301 was again defined by the Supreme Court in Automobile
Transport Ltd. vs State of Rajasthan 4. There the majority held that regulatory
measure of imposing compensatory taxes for the use of trading facilities did not
hamper trade commerce and inter-course but rather facilitated them and
therefore were not hit by the freedom declared by the Art 301.
In State of Assam, V Labanya Prabha5, the impugned Act imposed tax on motor
vehicles in Assam. The petitioner challenged the tax as violative of Art 301.
The court rejected the plea as the said Act was only regulatory measures
imposing compensatory taxes for facilitating trade commerce and intercourse.
Art 304 (a) enables the legislature of a state to make laws affecting trade,
commerce and inter course. It enables the imposition of taxes on goods from
other states if similar goods in the state are subjected to similar taxes, so as not
to discriminate between the goods manufactured or produced in that state and
the goods which are imported from other states. Thus in the case of sales tax
imposed by the States, it will be valid only if it comes within the terms of Art
304 (a).
The Supreme Court in a very recent judgement in Weston Electronics and Anr.
V State of Gujrat6 quashed the notification of the Gujrat Government under
Gujrat Sale Tax Act which was held to be not in conformity with Art 304 (a)
and thereby being violative of Art 301.
In this case, the petitioners manufacture electronic goods, including television
sets, television cameras and television monitors. The factories are located at
Delhi and the goods are sold through sales organisations spread all over India,
including the State of Gujarat. The rate of tax was 15% originally upto 1981, on
television sets, whether manufactured and sold within the State of Gujarat or
imported from outside the state. No distinction was made between the goods on
the basis of the place of manufacture. However, in 1981, while the rate of
electronic goods entering the State for sale therein was maintained at 15% but
the rate in respect of locally manufactured goods was reduced to 6% by
Notification No (GHN- 51 GST 1081 (S .49) (109) TH issued u/sub-s. (2) of
s.49 of the Act. The Notification introduced a new entry in the schedule dealing
specifically with electronic goods manufactured in the State of Gujarat.
Thereafter in 1986 the rate of sales tax in respect of television sets imported
from outside the state was reduced from 15% to 10% and for goods

4
AIR 1962, S.C. 1406
5
AIR 1967, S.C. 1575
6
(1988) 25 STL 192 (S.C.)
manufactured within the State the sales tax was reduced 1% by Notification No.
(GHN 22) GST 1986/(S.49) (73)-TH dt. 29th March 1986. (Paras 1,2,3.).
The same was challenged by the petitioner on the ground that by lowering the
rate of tax in respect of goods manufactured within the State, the State
Government has created an invidious discrimination which is adversely
affecting the free flow of inter-state Trade and commerce, resulting in a
contravention of Art 301 of the Constitution. It was pointed out that a purchaser
buying a television set manufactured within the State of Gujarat pays about R s .
250/- to Rs. 300/- less for a black and white model and Rs. 750/- to Rs. 1000/-
for a colour model. It was said that the sales of electronic goods manufactured
by the petitioner have been prejudicially affected within the state of Gujarat.
(Para 3).
The Court allowed the writ petition saying that it is apparent that while a State
Legislature may enact a law imposing a tax on goods imported from other states
as is levied on similar goods manufactured in that state, the imposition must not
be such as to discriminate between goods so imported and goods so
manufactured. The respondents' contention that the rate of tax was reduced in
the case of goods manufactured locally in order to provide an incentive for
encouraging local manufacturing units is not tenable. No support can be derived
from the two clauses of Art 39 (b) and (c), clause (a) of the Art. 304 is clear in
meaning. An exception to the mandate declared in Art. 301 and the prohibition
contained in clause (1) of Art 303 can be sustained on the basis of clause (a) of
Art. 304 only if the conditions contained in the latter provision are satisfied. In
the result the discrimination affected by applying different rates of tax between
goods imported into the states of Gujarat and goods manufactured within that
state must be struck down.
However in a very recent case in M/s. Dises Electronics Ltd., V State of U.P. 7 &
other petitions, S.C. held that taxes may and sometimes do amount to
restrictions but it is only such taxes as directly and immediately restrict trade
that would fall within the mischief of article 301 of the Constitution.
Part XIII of the Constitution of India cannot be read in isolation. It is part and
parcel of a single constitutional instrument envisaging a federal scheme and
containing a general scheme conferring legislative powers in respect of the
matters relating to list II of the Seventh Schedule on the States. It also confers
plenary powers on the States to raise revenue for their purposes and does not
require that every Legislation of the state must obtain the assent of the
president.
7
1990 77 STC S.C. 82
The constitution of India is an organic document. It must be so construed that it
lives and adapts itself to the exigencies of the situation, in a growing and
evolving society, economically, politically and socially. The meanings of the
expressions used therein must, therefore, be so interpreted as to attempt to solve
the present problem of distribution of power and rights of the different states in
the union of India, and anticipate the future contingencies that might arise in a
developing organism. The Constitution must be able to comprehend the present
at the relevant time and anticipate the future which is a natural and necessary
corollary for a growing the living organism. That must be part of the
constitutional adjudication. Hence, the economic development of the State to
bring it into equality with all other states and thereby develop the economic
unity of India is one of the major commitments or goals of the constitutional
aspirations of this land. For working of an orderly society economic equality of
all the states is as much vital as economic unity.
If a taxing provision in respect of intra-state sale does not offend article 301,
logically it would not affect the freedom of trade in respect of free flow and
movement of goods from one part of the country to the other under article 301
as well.
Free-flow of trade between two states does not necessarily or generally depend
upon the rate of tax alone. Many factors including the cost of 'goods play an
important role in the movement of goods from one State to another. Hence the
mere fact that there is a difference in the rate of tax on goods locally
manufactured and those imported would not necessarily amount to hampering
of trade between the two states within the meaning of article 301.
Article 304 is an exception to article 301. The need for taking resort to the
exception will arise only if the tax impugned is hit by articles 301 and 303. If it
is not, then article 304 will not come into the picture at all.
The imposition of rates of sales tax is influenced by various political, economic
and social factors. Prevalence of differential rates of tax on sales of the same
commodity cannot be regarded in isolation as determinative of the object to
discriminate between one State and other. The object to article 301 is to prevent
discrimination against imported goods by imposing tax on such goods at a rate
higher than that borne by local goods. The question as to when the levy of the
tax would constitute discrimination would depend upon a variety of factors
including the rate of tax and the item of goods in respect of the sale on which it
is levied. Every differentiation is not discrimination. The word "discrimination"
is not used in article 14 but is used in article 16, 303 and 304 (a). When used in
article 304 (a), it involves an element of intentional and purposeful
differentiation thereby creating an economic barrier and involves an element of
an unfavourable bias.
Where the general rate applicable to the goods locally made and on those
imported from other states is the same, nothing more, normally and generally, is
to be shown by the state to dispel the argument of discrimination under article
304 (a), even though the resultant tax amount on imported goods may be
different.
The granting of exemption from tax by a state to a special class for a limited
period on specific conditions, while maintaining the general rate of tax on goods
manufactured by all the producers in the state who do not fall within the
exempted category at par with the rate applicable to imported goods, does not
interfere with the freedom of trade and commerce envisaged by article 301.
If the power of granting exemption from tax is exercised in a colourable manner
intentionally or purposely to create unfavourable bias by prescribing a general
lower rate on locally manufactured goods either in the shape of general
exemption to locally manufactured goods or in the shape of a lower rate of tax,
such ah exercise would be struck down by the courts.
Conclusion –
The constitution empowers the Central and State governments to levy tax on
certain aspects. Art 265 of the Constitution says that no tax shall be levied or
collected except by authority of law and thus, it implies that with a proper
enactment or law, neither the State nor the Central Government can levy and
collect any sort of tax. But even after making such laws the Legislature should
make sure that such laws are not violative of the constitution which can
eventually render it to be invalid. Moreover, the Central or the State
Government cannot impose restrictions which directly influence free flow of
trade but however, impose reasonable restrictions on the trade on commerce for
the purpose of regulation.
References
1. http://www.legalserviceindia.com/article/l471-Taxing-Power-In-
Democracy.html - accessed on 14/03/2019

2. https://indiankanoon.org/doc/1629830/ - accessed on 14/03/2019

3. https://indiankanoon.org/doc/128161/ - accessed on 15/03/2019

4. https://indiankanoon.org/doc/668225/ - accessed on 15/03/2019

5. http://www.legalserviceindia.com/articles/taxes_int.htm - accessed on
15/03/2019

6. https://www.lawsfeed.com/supreme-court-
judgement/state_of_assam_ors_vs_labanya_probha_debi_11-04-1967 -
accessed on 15/03/2019

7. https://indiankanoon.org/doc/1692271/ - accessed on 16/03/2019