JAMIA MILLIA ISLAMIA

FACULTY OF LAW

TAX LAW
ON
Taxing power of Center and State and Federal system of Constitution

Submitted by:
Name: Adiba Khan
Student ID: 20183052
Roll. No.: 08
B.A. LL.B. (Hons.) (VI Semester) (Regular)
Faculty of Law, Jamia Millia Islamia

Submitted to: Dr. Ekramuddin, Professor (Faculty of Law, Jamia Millia Islamia, New Delhi)

(Date of Submission: 10.04.2021)

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 TABLE OF CONTENTS

ACKNOWLEDGMENT................................................................................................................. 3

INTRODUCTION .......................................................................................................................... 4

TAXATION SYSTEM IN INDIA.................................................................................................. 5

Distribution of powers of taxation .............................................................................................. 5

DISTRIBUTION OF REVENUES BETWEEN THE UNION AND THE STATES .................... 6

Article 282 ................................................................................................................................. 10

RESTRICTION ON STATES’TAXING POWER ...................................................................... 11

EXEMPTION OF UNION PROPERTY FROM STATE TAXATION ...................................... 12

OTHER TAX-RELATED PROVISIONS .................................................................................... 14

FISCAL FEDERALISM- THE FEDERAL CHARACTER OF INDIAN CONSTITUTION ..... 14

CONCLUSION ............................................................................................................................. 16

BIBLIOGRAPHY ......................................................................................................................... 17

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 ACKNOWLEDGMENT

It is my imperative duty to thank the following people for the successful completion of my
assignment on the topic of ‘Taxing power of center and state and federal system of Constitution’.

Prof. Ekramuddin brings the clarity of the Topic and providing sufficient material, which enables
me to understand the topic clearly.
In addition, I am highly obliged to him for providing constant guidance at each stage of the
project.

I am thankful to E-Library provided by the Faculty, which enables me to excess different

resources, and help me to complete this assignment in such a crucial time.

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INTRODUCTION

India has a federal form of government, and hence a federal finance system. The essence of federal
form of government is that the Centre and the State Governments should be independent of each
other in their respective, constitutionally demarcated spheres of Action. The essence of federal
form of government is that the Centre and the State Governments should be independent of each
other in their respective, constitutionally demarcated spheres of Action. Once the fundamentals of
the government are spelt out, it becomes equally important that each of the government should be
provided with sources of raising adequate revenues to discharge the functions entrusted to it.

No system of federation can be successful unless both Union and the States have at their disposal
adequate financial resources to enable them to discharge their respective responsibilities under the
Constitution.1 It is indeed a fact that if the legislative and administrative authority of the constituent
units are to be maintained they must be autonomous financially. However, this principle of
federalism has not been fully implemented in any of the existing federation of the world.

Sales taxes are most important revenue for the states in India. While the taxes vary in their design,
they are generally levied in the first point of sale within the State.2In India the Constitutional
amendment in 1956, gave the States power to impose sales tax. In the Central Sales Tax Act,
1956,enacted by the Sixth Constitutional Amendment which introduced Entry 92A in List I of
the Seventh Schedule authorizing Parliament to levy tax on the sale or purchase of goods (other
than newspapers) in the course of inter State trade.

The revenue from this tax was assigned to the States by amending Article 269 of the Constitution.
Thus, sale within the State is within the authority of State Government, while sale outside State is
within the authority of Central Government. Accordingly, the Central Sales Tax is levied on sale
or purchase of goods in the course of inter-State trade and commerce. The power to levy the CST

1
D.D. Basu, Introduction of the Constitution of India 141,
2
An Analysis of Fiscal Federalism in India: Concept and Structure of Sales Taxation, available at;
https://www.lawctopus.com/academike/analysis-fiscal-federalism-india-concept-structure-sales-taxation/ (last
visited April 9, 2021).

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and revenue from this tax is, however, assigned to the State occasioning the movement of goods
from one State to another.3

TAXATION SYSTEM IN INDIA

India’s tax system is a three-tier federal structure, which is made up of the following:

1. Union List (List 1 of the 7th schedule to the Constitution of India) contains those matters
on which the Central Government has the power to make laws [Article 246(1)].

2. The State List has only those matters on which the State Government has the power to
make laws [Article 246(3)].
3. The Concurrent List has those matters on which both the Central and State Governments
have the power to make laws [Article 246(2)].

Law made by Union Government prevails whenever there is a conflict between the Centre and
state concerning entries in the concurrent list. However, if any provision repugnant to earlier law
made by parliament is part of law made by the state, if the law made by the state government gets
the assent of the President of India, it prevails.4

Distribution of powers of taxation

a. List 1 in the 7th schedule to the constitution has the powers of the Central Government
listed in Entries 82-92B.
b. List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
c. As regards list 3, it does not deal with taxation and hence both center and state do not have
any concurrent powers of taxation.
d. Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only
to the center.5

3
Ibid.
4
The Constitution of India, Art. 246.
5
Dr. J.N. Pandey, Constitution law of India (Central law Agency, edn., 56th).

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TAXATION ONLY BY AUTHORITY OF LAW

As per Art. 265 no tax can be levied or collected except by authority of law. No tax can be imposed
by an executive order. The law providing for imposition of tax must be a valid law, that is, it should
not be prohibited by any provision of the Constitution. Thus, the Tax law will be invalid if it
violated the fundamental rights to equality guaranteed by the Article 14.

In the case Tangkhul v. Simirei Shailei6, all the villagers were paying Rs. 50 a day to the head man
in place of a custom to render free a day’s labor. This was done every year and the practice had
been continuing for generations. The Court, in this case, held that the amount of Rs. 50 was like a
collection of tax and no law had authorized it, and therefore it violated Art 265. Article 265 is
infringed every time the law does not authorize the tax imposed.

In the case, Lord Krishna Sugar Mills v. UOI7, sugar merchants had to meet some export targets
in a promotion scheme started by the government but if they fell short of the targets then an
additional excise duty was to be levied on the shortfall. The court intervened here and said that the
government had no authority of law to collect this additional excise tax. What this means in effect
is that the government on its own cannot levy this tax by itself because it has not been passed by
the Parliament.

DISTRIBUTION OF REVENUES BETWEEN THE UNION AND THE STATES

Article 268 provides the scheme of the distribution of revenue between the Union and the States.
The States possess exclusive jurisdiction over taxes enumerated in the State List. The Union is
entitled to the proceeds of the taxes in the Union List. The Concurrent List includes no taxes
However, it is to be noted that while the proceeds of taxes within the State Lists are entirely
retained by the States proceeds of some of the taxes in the Union List may be allowed, wholly or
partially to the States. The Constitution mentions following categories of the Union taxes, which
wholly or partially assigned to the States:

6
AIR 1961 Mani 1.
7
AIR 1959 SC 1124.

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 1. Duties levied by the Union but collected and appropriated by the States: According to
Art. 268 stamps duties mentioned in the Union It shall be levied by the Central
Government. These duties are collected by the States within which such duties are leviable.
The proceeds of the duties are assigned the States.

2. Service Tax levied by Union and collected and appropriated by Union and Stares: As
per Art. 268A which was added by the Constitution (88th Amendment) Act, 2003
empowering the Union of India to levy service tes to be collected and appropriated by the
Union and the States in ascendance which such principles as could be formulated by
Parliament by law, has been omitted by 101 Amendment of the Constitution in 2016.

3. Taxes levied and collected by the Union and assigned to the States: Art. 269 provides
that taxes on sale or purchase of goods and taxes on the assignment of goods except as
provided in Art. 269A shall be levied and collected by the Government of India.

In the case of M/s. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and
Others8, placing faith in a judgement of the Apex Court in the case of Gannon Dunkerley
& Co. and others v. State of Rajasthan and others, the advocate from the appellant side
submitted that to arrive at a Taxable Turnover, turnover relating to inter-State transactions,
export, import under the CST Act are to be excluded. Thus, the provision of the State Sales
Tax Act is always subject to the provisions of Sections 3 and 5 of the CST Act. Sale or
purchase in the course of interstate trade or commerce and levy and collection of tax
thereon is prohibited by Article 269 of the Constitution of India.

4. Article 269(A) This article is newly inserted which gives the power of collection of GST
on inter-state trade or commerce to the Government of India i.e. the Centre and is named
IGST by the Model Draft Law. But out of all the collecting by Centre, there are two ways
within which states get their share out of such collection
 Direct Apportionment (let say out of total net proceeds 42% is directly apportioned
to states).

8
2013 (1) ILR-CUT 422.

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  Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a
selected prescribed percentage goes to the States.

5. Taxes levied and collected by the Union but distributed between the Union and States:
All taxes and duties named within the Union List, except the duties and taxes named in
articles 268, 269 and 269A, separately. The Union Government extracts taxes and
surcharges on taxes, duties, and cess on particular functions that are specified in Article
271 under any law created by Parliament. It is distributed between the Union and the States
as mentioned in clause (2). The proceeds from any tax/duty levied in any financial year, is
assigned to the states where this tax/duty is extractable in that year but it does not form a
part of the Consolidated Fund of India. Any tax collected by the centre should also be
divided among the centre and states as provided in clause (2). With the introduction of GST
2 sub-clauses having been added to this Article- Article 270(1A) and Article 20(1B7).

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.O9. The SC, in this case, propounded
that the Income-tax collected forms a part of the Consolidated Fund of India. The Income-
tax thus extracted cannot be distributed between the centre, union territories, and states
which are under Presidential rule.

6. Taxes for the purpose of the Union: Art. 271 provides that parliament at any time
increases any of the duties or taxes mentioned in Art. 269, 270, and services tax under Art.
246A by imposing a surcharge, the whole proceeds of any such surcharge shall from part
of the Consolidated fund of India.
Cess and surcharge
There seems to be a lot of confusion between cess and surcharge. Cess is described in
Article 270 of the Constitution of India. Cess is as a fee imposed for a particular purpose
that the legislation charging it decides. Article 271 deals with a surcharge, which is nothing
but an additional tax on the existing tax collected by the union for a particular purpose.

9
AIR 1968 SC 637.

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 Proceeds from both the cess and surcharge form part of the Consolidated Fund of India In
the case of M/s Srd Nutrients Private Limited v. Commissioner of Central Excise,
Guwahait10, the Supreme Court was presented with the question: If on excisable goods an
education cess can be levied before the imposition of cess on goods manufactured but
cleared after imposition of such cess. The judgement given in this case was in favour of
the manufacturer but the judges, Justice A K Sikri and Justice Ashok Bhushan observed
that education and higher education cess are surcharges

7. Grand-in-aid: The Constitution provides the three kinds of grand-in-aid to the States from
the Union resources. Under A 273 grand-in-aid inside will be given to the States of Assam,
Bihar Odisha, and West Bengal in lieu of export duty on the jute products. The sum of such
grant are prescribed by the President with the consultation of finance Commission. These
sums shall be given to the States for a period ten years from the commencement of the
Constitution.
Article 275 empowers Parliament to make such grants, as it may deem essential, to the
state which are in need of financial assistance. The Constitution also provides for special
grants given to the States which undertake schemes of development for the purpose of
promoting the welfare of the Scheduled Tribes or raising the level of administration of the
scheduled areas. A special rent to Assam is given for this purpose. Under Article 282 Both
Union and a State make grant for any public purpose even if it relates to a subject over
which it cannot make laws. The Central Government can under this Art. to make grants to
hospitals or to schools.

8. Taxes for the purposes of States. Articles 276 and 277 are saving provisions These
Articles save the authority of the State to levy taxes, on subject now forming Part of the
Union List, immediately before the commencement of the Constitution. Thus taxes which
are being levied by a State or a Municipality or other local authority notwithstanding that

10
Civil Appeal Nos. 2781-2790 of 2010.

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 those taxes are mentioned in the Union List continue to be levied by those authorities until
Parliament by law makes contrary provision.11
An. 276 empowers the States to impose taxes on professions, trades, callings and
employment for the benefit of the State or of a municipality, district board, local boards or
other local authorities. But the provision of Article 277 does not extend to taxes levied
under a law passed after the Constitution came into force.12
In Amroti Municipality v. Ram Chandra, the Municipality of Amraoti13, under a pre-
Constitution law imposed a terminal tax on certain goods. These taxes now can only be
levied by the Parliament. The Municipality thereafter issued a notification imposing taxes
on gold and silver which were not taxable under the pre-Constitution law. The Supreme
Court held the notification as unconstitutional on the ground that Article 277 could neither
permit increases in the rate nor alteration in the incidence.
In S. L Corp (P.) Ltd. v. Secy Board of Revenue. A tax was imposed under a law, which
was passed before but brought into force after the commencement of the Constitution. The
Court held that An 277 could only save the as it actually been levied and collected before
the came into force.14

Article 282: It is normally meant for special, temporary or ad hoc schemes and the power to grant

sanctions under it is not restricted. In the case Bhim Singh v. Union of India & Ors15 the Supreme
Court said that from the time of the applicability of the Constitution of India, welfare schemes
have been there intending to advance public welfare and for public purposes by grants which have
been disbursed by the Union Government. In this case, the Scheme was MPLAD (Member of
Parliament Local Area Development Scheme) and it falls within the meaning of ‘public purpose’
to fulfil the development and welfare projects undertaken by the state as reflected in the Directive
Principles of State Policy but subject to fulfilling the constitutional requirements. Articles 275 and
282 are sources of granting funds under the Constitution. Article 282 is normally meant for special,
temporary or ad hoc schemes and the power to grant sanctions under it is not restricted. In the
case Cf. Narayanan Nambudripad, Kidangazhi Manakkal v. State of Madras, the Supreme Court

11
M.B.S. Oushadhalya v. Unionn of India, AIR 1963 SC 622.
12
Liberty Cinema v. Commr. Calcutta Corporation, AIR1951 Cal. 45.
13
AIR 1964 SC 1166.
14
AIR 1964 SC 207.
15
(2010) 5 SCC 538.

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held that the practice of religion is a private purpose. And donations and endowments made are
therefore not a state affair unless the state takes the responsibility of the management of such
religious endowment for a public purpose and uses the funds for public welfare measures. So it
can be seen that Article 282 can be used for a public purpose but at times in the name of public
purpose it can even be misused.

RESTRICTION ON STATES’TAXING POWER

1. Restriction on the power of the States to impose tax on the sale or purchase of goods:
The State has, like the Union, power to levy tax on supply of goods or services of both,
other than newspapers Article 286, however, imposes the following restrictions on the
State's power to impose sales tax on goods.
2. Sale or purchase of goods which takes place outside the State: Article 286(1)(a)
prohibits a State to impose a tax on the supply of goods or service or both which takes
place outside the State.
3. Sale or purchase of goods in the course of import and export: Article 286 (1)(b)
prohibits States to impose a tax on the supply of goods or of services or both where such
supply takes place outside the State or in the course of import of the goods or services or
both out export of the goods or services or both out of the territory of India.
4. Under Article 286(2). The Parliament is empowered by law to lay down the principle for
determining when a supply of goods or services or both takes place outside the State, or in
the course of import into or export from India Finance Commission.

In the case of K. Gopinath v. the State of Kerala16, Cashew nuts were purchased and imported by
the Cashew Corporation of India from African suppliers and sold by it to local users after
processing it. The apex court held that this sale 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

16
WP(c). No. 13997 of 2016.

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liability to tax under Kerala General Sales Tax Act, 1963. The judgement here went against the
appellants.

EXEMPTION OF UNION PROPERTY FROM STATE TAXATION

Article 285 imposes a restriction on the State to tax property of the Union Clause (1) says that
unless Parliament otherwise provides the Union property shall be exempt from all taxes imposed
by a State or any authority within a State. The word property includes every kind of property
movable or immovable. Clause (2) saves the State's power to tax the property of Union which were
taxable by a State under a law passed before the commencement of the Constitution, until
Parliament by law provides otherwise.
Article 287 prohibits a State from imposing tax on consumption or sale of electricity supplied to
the Government of India or utilized for construction, maintenance or operation of any railway
unless Parliament by law otherwise provides

Exemption of State property or income from Union Taxation.-Article 289 exempts the
property and income of a State from Union taxation Parliament, however can impose a tax in
respect of trade or business of any kind carried on by or on behalf of the Government of a State.
However, under clause (3) of this Article Parliament may by law exempt any class of business
incidental to ordinary functions of Government from Union taxation
Under Article 285 the Centre's property is exempted from all States taxes whether it is used for
commercial purposes or governmental purpose. But under Art. 289 such an exemption is not
available to the State property. The Union of India can levy tax on all kinds of a State property.

In State of West Bengal v. Union of India17 the validity of the Coal Bearing Areas (Acquisition
and Development) Act passed by the Parliament was challenged by the State The Act provided for
the acquisition of certain lands belonging to the State of West Bengal was contended on behalf of
the State that the State was sovereign within its allotted field The Court held that Parliament was
competent to acquire State property and therefore the Act was valid. The Court held that under the
Indian Constitution the States are not sovereign. The Court refused to apply the doctrine of

17
AIR 1974 SC 1510.

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immunity of instrumentality beyond the scope of express pronoun in Arts. 285, 287, 288 and 289
of the Constitution.

Borrowing Power.-Article 292 gives the Union unlimited power to borrow money on the security
of the Consolidated Fund of India either within or outside The Union Government can borrow
within such limits as may be fixed by Parliament from time to time. Art. 293 permits a Statee,
subject to any limits fixed by the legislature, to borrow money within the territory of India on the
security of the Consolidate fund of the state. The borrowing bower of the State is thus subject to a
number of restriction, a state cannot borrow from outside India.

Centre-State relations- An evaluation.

The main characteristic of a federal Constitution is the distribution of powers between the general
and the regional governments. The Indian Constitution contains an elaborate scheme of
distribution of powers. However, from the scheme of the distribution of powers between the Centre
and the States it appears that the framers have opted for a stranger Centre. The reasons for this are
obvious Arts 245, 246 contain the scheme of distribution of legislative powers. There are three
lists, the Union List, the State List and the Concurrent List. The residuary powers are vested in the
Union. On a subject in the Concurrent list both the Centre and the States have power to make laws,
but in case of conflict between the two, the law made by the Centre shall in the end prevail upon
the State's law. Under Arts. 249, 250. 252, 253 and 356, the Union Parliament is empowered to
legislate on any matter in the State list.

Articles 256 to 263 provide for Union control over States even in normal times through various
ways. The Centre has power to give directions to the States as to the manner in which they shall
exercise their executive powers. The Constitution provides a coercive sanction for the enforcement
of the directions through Art 356.

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OTHER TAX-RELATED PROVISIONS

1. Article 301 which states that trade, commerce and inter-course are exempted from any
taxation throughout India except for the provisions mentioned in Article 302, 303, and 304
of the Indian Constitution, 1949.
2. Article 302 empowers the parliament to impose restrictions on trade and commerce in view
of public interest.
3. Article 303– Whenever there is the scarcity of goods this article comes in play.
Discrimination against the different State Governments is not permitted under the law
except when there is a scarcity of goods in a particular state and this preference to that state
can be made only by the Parliament and in keeping with the law.
4. Article 304– permits a State Government to impose taxes on goods imported from other
States and Union Territories but it cannot discriminate between goods from within the State
and goods from outside the State. The State can also exercise the power to impose some
restrictions on freedom of trade and commerce within its territory.

FISCAL FEDERALISM- THE FEDERAL CHARACTER OF INDIAN CONSTITUTION

Fiscal federalism entails the division of responsibilities in respect of taxation and public
expenditure among the different layers of the government, namely the Center, the states and the
local bodies. Fiscal federalism helps governmental organization to realize cost efficiency by
economies of scale in providing public services, which correspond most closely to the preference
of the people.
India has a federal form of government, and hence a federal finance system. The essence of federal
form of government is that the Centre and the State Governments should be independent of each
provided with sources of raising adequate revenues to discharge the functions entrusted to it. For
the successful operation of the federal form of government financial independence and adequacy
form the backbone.18
According to Article 246, Seventh Schedule, Parliament has exclusive powers to make laws
regarding matters enumerated in List I, notwithstanding the provisions of the other clauses of this
Article. On the other hand, the Legislature of any state has exclusive power to make laws for the

18
Anand, Mukesh, Amaresh Bagchi and Tapas K. Sen “Fiscal Discipline at the State level: Perverse Incentives and
Paths to Reform“, Working Paper No. 1, January, (2002).

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state regarding any of the matters enumerated in List II, subject to other clauses. With regard to
List III, both the Parliament and a State Legislature can make laws but the law listed in I or III,
vests with the Union. Thus, the Union has supremacy over a wide range of the legislative field.
These lists include the powers of taxation also. The union List includes among others, taxes on
income other than agricultural income, excise duties, customs and corporation tax. The State list
includes land revenue, excise on Alcoholic liquors, tax on agricultural incomes, estate duty, taxes
on sale or purchase of goods, taxes on vehicles, on professions, on luxuries, on entertainment, on
stamp duties, etc. the concurrent list does not include any important taxes.

Thus, having provided for a certain division of powers of taxation between the union and the states,
the Constitution gives the States a share in the resources available to the Center. Any amendment
of the lists from the Union and the States derive their power of taxation is covered by the Proviso
to Article 368. This requires ratification by the Legislatures of not less than one half of the
States.19 On the other hand, if any provisions of the Part XII are to be amended, this can be done
under Article 368(2), which requires the approval of only half of the members of each house of
the Parliament. This means that the share of the Union resources that the states are entitled to, can
be altered by Parliament by its power of amendment.

Though considerations of national policy and administrative convenience require that some of the
more elastic taxes should be assigned to the Union Governments, these considerations themselves
require that some of the most expansive expenditure heads apart from defense should be
undertaken by the States. Consequently, a salient characteristic of federal government is legislative
autonomy with financial dependence. This feature is accentuated in a developing economy where
the functions of the States develop by leaps and bound with no corresponding increase in the
sources of revenue.20

19
Bagchi, Amresh, “Tax Harmonization in Federalism- A survey of theory and Practice’, NIPFP Working Paper no.1,
February. (1995).
20
An Analysis of Fiscal Federalism in India: Concept and Structure of Sales Taxation, available at;
https://www.lawctopus.com/academike/analysis-fiscal-federalism-india-concept-structure-sales-taxation/ (last
visited April 9, 2021).

15
CONCLUSION

An attempt has been made hereby to study the Distribution of Power and Tax federalism in India
with respect to Sales Taxation in India Keeping in view the Central Sales Tax Act and the
Individual States Sales Tax Acts.

16
 BIBLIOGRAPHY

BOOKS.
1. M.P. Jain, Indian Constitutional Law, Lexis Nexis, 8th edn,.
2. J.N. Pandey, Constitutional Law of India, Central Law Agency, 56th edn.

STATUTE
1. The Constitution of India.

. ONLINE REFERENCES

1. www.scconline.com
2. www.jstor.com
3. www.researchgate.net

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