Taxation Law

TAXATION LAW
COVID-19 EDITION

Beginning of the Beginning Has Begun !

Law of Taxation: COVID-19 Edition

SOURCES OF TAX
LAW

Where Does Tax Law Come From?

 SOURCE OF TAX LAW

❖ Constitution: Enabling Role

❖ Statutes: Supervisory Role
❖ Circulars/Notifications:
Dominate Tax law - both
income tax and GST
❖ Little Parliamentary Oversight
❖ Politics Over Taxes?
 TAXATION

❖ What?
❖ Why?
❖ When?
❖ Where?
❖ How?
 TAX
What?

❖ Compulsory’ payments from people to the government

❖ (somewhat incomplete definition as it does not explain all compulsory
payments people make to governments)

❖ Art 366(28): Taxation includes the imposition of any tax

or impost, whether general or local or special, and “tax”
shall be construed accordingly;
❖ (a very unhelpful definition!)
 TAX
What?

❖ TAX:
❖ Commr, HRE v Sri Lakshmindra…of Sri Shirur Mutt 1954 SC
❖ It is a compulsory extraction of money by public authorities for
public purposes enforceable by laws
❖ Tax is not a payment for services rendered and there is no quid
pro quo between the taxpayer and public authority
❖ Tax is part of a common burden and the quantum of
imposition (ordinarily) depends on a person’s ability to pay
 TAX
What?

❖ INGREDIENTS -
❖ Compulsory extraction of money
❖ By a public authority
❖ For a public purpose
❖ Enforceable by law
❖ Part of a common burden
 KINDS OF TAXES

❖ DIRECT TAXES
❖ Income Tax
❖ Corporation Tax

❖ INDIRECT TAXES
❖ Goods and Service Tax
❖ Entertainment Tax
 KINDS OF TAXES
❖ DIRECT TAXES
❖ Payable directly by the person liable
❖ If A earns Rs 5,00,000/month, A is accountable for income tax payable
on the said income; usually no other entity is involved
❖ Usually progressive and based on ‘ability to pay’
❖ More you earn, greater proportion of your income is liable for income
tax
❖ Require significant administrative resources
❖ Need to keep a track of every person who earns, quantum of their
income, and accuracy of their income records
 KINDS OF TAXES
❖ INDIRECT TAXES
❖ Paid to an intermediary who is in turn responsible for passing on the tax so
collected to the Govt
❖ In case of GST, retail customer pays GST while purchasing goods/
services. But GST is paid to shopkeeper/service provider who passes it
onto the Govt
❖ Usually regressive and do not take into account ‘ability to pay’
❖ Person earning Rs 5,00,000/month pays 5% GST when dining in a
restaurant; person earning Rs 50,000 also pays 5% GST in that restaurant
❖ In comparison to direct taxes, require less administrative capacity
 KINDS OF TAXES
❖ DISGUISED TAXES/STEALTH TAXES

❖ End result or effect is similar to that of collecting more revenue, but no new ‘tax’ is
levied per se e.g. if the Govt reduces the threshold for levying income tax
❖ Currently, if your annual income is below Rs 2.5 lakhs your income tax
liability is NIL
❖ If the govt reduces the threshold of Rs 2.5 lakhs to Rs 50,000 - more
people will come in the sweep of IT Act without the govt levying a new
tax per se
❖ Inflation sometimes acts as a form of disguised tax (Milton Friedman)
❖ His argument was that if govt prints more money to for its expenditure, then it
usually leads to inflation which has the net effect of reducing the value of wealth
of residents of a country
 KINDS OF TAXES
❖ DISGUISED TAXES/STEALTH TAXES - CSR IS A DISGUISED TAX?

❖ New CSR provisions incorporated through the Companies Act (Amendment)

Act, 2019, Section 135 amended to effectively provide that:
❖ Unspent CSR money from past year to be transferred to an escrow
account
❖ If remains unspent after 3 years - to be transferred to a Govt Fund
❖ Effect of the aforementioned provision is similar to that of a tax:
❖ First instance, it is obligatory to spend a part of your profits towards CSR
❖ Second, if the required amount is not spent, Govt gets to claim it as its
own
Are There Other Levies Apart from Tax?

I’m glad you asked …

 OTHER COMPULSORY LEVIES
Fee

❖ FEE:
❖ Charge for special services rendered to individuals by a governmental
agency
❖ When a fee is charged, an element of quid pro quo is necessary
❖ Relation b/w service and fee -
❖ A co-relationship of general character is necessary between the amount
of fee charged and the supposed cost incurred by the government in
providing the service
❖ The relation between fee and cost of service need not be of
mathematical exactitude and, in fact, it is often arbitrary
 OTHER COMPULSORY LEVIES
Fee

❖ REGULATORY FEE:
❖ Secundrabad Hyderabad Hotel Owners Assn v Hybd MC 1999 SC
❖ Court recognised the concept of a regulatory fee distinct from the concept of
compensatory fee mentioned earlier
❖ The element of quid pro quo is practically absent in regulatory fees and thus
relation of cost of services and the quantum of fee is also absent
❖ There is hardly any ‘service’ provided by the state and cost is rarely
commensurate with the regulatory fee
❖ Regulatory fee is levied and collected by the state to regulate the behaviour of
the ‘licensees’ and the state does not provide any active service to the licensees
 COMPULSORY LEVIES
Tax and Fee

❖ State of HP v Shivalik Agro Poly Products 2004 SC

❖ No generic difference between tax and fee and both are compulsory
extractions of money by public authorities

❖ Jindal Stainless Steel v State of Haryana (2016) (9 Judge Bench)

❖ Reiterated the essential difference between tax and fee and held that tax
has no element of quid pro quo while a fee without that element cannot
be validly levied
❖ This continues to be the position now; though Jindal case never really
clarified if fee is also a ‘compulsory levy’
 COMPULSORY LEVIES
Cess and Surcharge

❖ CESS:
❖ Tax on tax
❖ It is levied for a specified purpose
❖ Ideally should be temporary and to raise a specified amount of money; not always the
case
❖ Kerala Flood Cess (w.e.f from 1 August 2019)
❖ Tax Base: GST
❖ Purpose: Reconstruction/recover losses from floods witnessed in Kerala in 2018
❖ Health and Education Cess (for all income tax payers)
❖ Tax Base: Income Tax
❖ Purpose: To improve health and education infrastructure/services
 COMPULSORY LEVIES
Cess and Surcharge

❖ Like all other taxes, money collected from a cess is credited to the Consolidated Fund of
India
❖ However, the amount of money collected through a cess is supposed to be used only
for the purpose mentioned in the cess
❖ The money collected through cess is in addition to the money that will be spent from
general revenue
❖ e.g. If Rs 100 crores is collected from the Health and Education Cess, it will be in
addition to the money earmarked for education in the Annual Budget
❖ At times, a cess can also assume the nature of a fee
❖ In such a scenario, money goes to a specific and specially created fund; and
❖ the money is used to provide services to the people who pay the cess
 COMPULSORY LEVIES
Cess and Surcharge

❖ Approximate international equivalent concept of cess is ‘earmarked

tax’/‘hypothecated tax’/‘ring fencing’
❖ In Australia, taxpayers pay 2% medicare levy over and above the income
tax. This money partially funds Australia’s public health system - Medicare.
❖ In UK, people who use television sets to receive broadcast transmissions are
required to pay ‘fee’ which funds the BBC
❖ The efficacy and rationale of earmarked taxes is subject of an unending debate
among economists
❖ In India - cesses have raised constitutional issues, issues of misappropriation,
purposes of cess are chosen arbitrarily and there is no a priori estimation of the
money needed to achieve the stated aims
 COMPULSORY LEVIES
Cess and Surcharge

❖ SURCHARGE:
❖ Tax on tax (no specified purpose)
❖ Usually, levied on the higher income tax brackets under the IT Act, 1961
❖ e.g. currently, surcharge is 10% of income tax if income is between 50 lakh
rupees and 1 crore
❖ 15% of income tax is income exceeds 1 crore rupees
❖ Person pays 30% income tax + 10% surcharge on income above 50 lakhs
❖ Levy of surcharge on the higher income tax bracket is justified on the ground of
‘ability to pay’ - rich need to pay more taxes
❖ But, why income tax + surcharge? Why not just increase the income tax rate
for the rich? It would achieve the same purpose, no?
 COW CESS
❖ Very popular in India these days
❖ Rajasthan
❖ UP
❖ Punjab
❖ Chandigarh
❖ Among others … levy cow cess
I need your money !
 COMPULSORY LEVIES
Cess and Surcharge

❖ Both Cess and Surcharge are in essence ‘taxes on taxes’. Thus, either of them will
be paid in addition to the underlying tax - income tax or GST or excise duty or
VAT.
❖ When Central Govt levies cesses and surcharges, revenues from cesses and
surcharge are at exclusive disposal of the Central Government. The Central
Government is not obligated to share revenues from cess and surcharges with the
State Governments
❖ Host of issues - constitutional and otherwise - relating to cesses and surcharges
e.g.
❖ whether they were originally designed to be only temporary levies?
❖ Is it in the spirit of the constitutional scheme for the Centre to increase its share
of revenues through cesses and surcharges?
 TAX
Why?

❖ Building State Capacity

❖ States need resources to exist and survive
❖ Internal Management
❖ Mediates societal relations through the allocation of resources
❖ Regulatory Lever
❖ You shall pay for your ‘sins’
❖ Tax ‘holidays’ and tax incentives
❖ Negotiated Expansion
❖ Compete with other states for resources
❖ ‘Commercialisation of Sovereignty’ - Ronen Palan
 TAX
When?

❖ PAY WHEN YOU FEEL LIKE IT .. After all, feelings are

important.
❖ OR
❖ Liability to pay commences when the taxable event
occurs
❖ In case of income tax, taxable event usually is when
income is received, or it accrues or arises.
❖ In case of GST, it is ‘supply of goods or services’
 TAX
When?

❖ Once a year?
❖ Direct taxes, the reconciliation and accounting happens once a year e.g. when taxpayer
files ITR at the end of the financial year
❖ The deduction of taxes does, however, in many cases happens throughout the year as
and when the ‘taxable event’ occurs e.g. Tax Deduction at Source (TDS) by the payer to
the payee as and when the payment is made
❖ On conclusion of the taxable activity (pay as you go)
❖ In case of indirect taxes, tax is paid every time a taxpayer purchases goods or receives
benefit of a service
❖ The tax is eventually is paid to the government by the intermediary at intervals
mandated by the law
❖ But final reconciliation and accounting happens once a year when annual return is filed
 TAX
When?

❖ For both - direct and indirect

taxes, payment of tax on a
provisional basis happens
throughout the year

❖ Final determination of liability

for a year is done at the end of
the financial year after the
taxpayer files her annual tax
return
 TAX
Where?

❖ To which government does one pay tax?

❖ Residence principle
❖ Complicated set of rules to determine the residence of a person and/or
corporation
❖ Source principle
❖ Again, a fact specific inquiry if a particular country is the source of the
income and to what extent
❖ Prominent outlier to the above rules is the United States of America
❖ Income tax is certainly levied on the basis of residence and source
❖ But, also citizenship
 TAX
How?

❖ How?
❖ You can pay directly to the government if it is a direct tax e.g.
income tax
❖ You can pay via an intermediary if it is an indirect tax e.g. GST/VAT
❖ How?
❖ The most prominent, widespread and acceptable way of paying taxes
is cash - digital or actual cash. Official currency needs to be exchanged.
❖ Is tax payable in kind as well?
Law of Taxation 2020-21

Canons
Theories THEORETICAL ASPECTS OF
TAX

Laffer Curve
 CANONS OF TAXATION
Adam Smith, 1776

❖ Equality
❖ Everyone earning the same should be under similar tax burden
❖ Certainty
❖ The taxpayer should know what, when, and how to pay the taxes
❖ Convenience
❖ In a manner and time that is convenient to the taxpayer
❖ Economy
❖ The cost of collection of tax should ideally be kept to a minimum
 THEORIES OF TAXATION
❖ Ability to pay
❖ Widespread acceptance
❖ Easy to quantify

❖ Benefits principle
❖ Analogous to ability to pay
❖ Issues of quantifying the value of benefits received by the (potential) taxpayer

❖ 2 underlying principle of tax justice

❖ Horizontal equity
❖ Vertical equity
 LAFFER CURVE
❖ Succinct insights:
❖ Tax Rate of 0% = Zero Tax
❖ (No Shit, Sherlock!)
❖ AND
❖ Tax Rate of 100% = Zero Tax

❖ Suggested that a reduction in

tax rate may lead to an increase
in government revenue
 LAFFER CURVE

❖ Used to justify cut in tax rates -

India reduced its tax rates in
1977-78 when marginal income
tax rates for the high income
earners exceeded 90%

❖ Partially contributed to
improving India’s tax revenues
and curbing black economy
 LAFFER CURVE - INDIA
❖ In 1970, Indira Gandhi who was also the Finance Minister of India
raised the marginal tax rate by 11% for income above Rs 2,00,000
❖ Marginal tax rate for income above 2,00,000 became 93.5%
❖ For every Rs 100 you earned after Rs 2,00,000 you took home Rs 6.50
❖ But, this was before surcharge - after surcharge marginal tax rate
was 97.5% ONLY!

❖ We have, of course, reduced the tax rates since then in accordance

with the logic of Laffer Curve.
FISCAL POLICY DESIGN
INDIA
“If it moves, Indian government will tax it.”

–Unknown
 TAXES IN INDIA
❖ Income Tax
❖ Corporation Tax
❖ Customs Duty
❖ Excise Duty - Union
❖ Central GST
❖ Securities Transaction Tax
❖ Wealth Tax
❖ Cess
❖ Surcharge
 TAXES IN INDIA
❖ VAT
❖ State GST
❖ Excise Duty
❖ Property Tax
❖ Stamp Duty
❖ Motor Vehicle Tax
❖ Tax on Agricultural Income
❖ Entertainment Tax
❖ Advertisement Tax/Fee
❖ Professional Tax
❖ Cess
 TAX REVENUES
FIGURES FROM BUDGET 2018-19

❖ Gross Tax Revenue: 22,71,241.56 (crores)

❖ Biggest Contributors:
❖ GST: 7,43,900
❖ Corporation Tax: 6,21,000
❖ Income Tax: 5,29,000
❖ Others: Customs Duty, (Union) Excise Duty
❖ Net Tax Revenue: 14,80,649.04
 OVERVIEW OF NUMBERS

In a country where only a minuscule portion of the population pays

taxes — the prime minister noted that only 1.5 crore paid taxes in
a country of 130 crore — efforts to widen the tax base and curb
leakages need to be encouraged.

- IndianExpress, 18 Aug 2020 (quoting the PM with figures backed

by the CBDT)
 OVERVIEW OF NUMBERS
❖ No. of people who filed Income Tax Returns in 2018-19:
❖ 5.5 crores
❖ These are people who filed ITR, not people who paid
income tax

❖ Biggest challenge is to increase the number of taxpayers in

this country
❖ This is referred to as the need to ‘broaden the tax base’
INDIA’S FISCAL POLICY
Brief Overview and Analysis
CONSTITUTIONAL ASPECTS OF TAXATION
UNION-STATE FINANCIAL RELATIONS
Taxation Law

Constitution and Tax Valid Till the Constitution

Survives
 Constitution and Tax
❖ 5 ASPECTS

❖ Legislative Entries
❖ Money Bills
❖ Prominent Constitutional
Bodies that Handle Tax
Revenues
❖ Part XIII
❖ Part III
“The course of true love constitution and tax law
never did run smooth”

–Unknown
LEGISLATIVE ENTRIES
 Distribution of Legislative Power
❖ Art 245:
❖ Whole or any part of the territory of India;
❖ Whole or any part of the State
❖ Art 246:
❖ Parliament has exclusive powers on matters enumerated in List I
❖ State has exclusive powers on matter enumerated in List II
❖ Parliament and State, both have powers on matters enumerated in List III
❖ Art 248:
❖ Residuary Powers of legislation
Distinct Tax Entries in Schedule VII
❖ In both the Union List and the State List there is a distinction between the general subjects of legislation
and taxation

❖ The fields of taxation are specifically enumerated in the Lists

❖ Union List: Entries 82 to 92B
❖ State List: Entries 45 to 63
❖ Concurrent List: Entry 43 and 44

❖ State of UP v Synthetics and Chemicals Ltd (1991):

❖ Unlike general entries, the power to tax cannot be deduced from another entry as an ancillary
exercise of power
❖ Power to legislate/regulate a particular activity is not co-terminus with the power to levy taxes on
that activity
 Legislative Entries and Tax

❖ Hoechst Pharmaceuticals & Ors v State of Bihar & Ors (1983):

❖ Constitution enforces a complete separation of taxing
powers of the Union and the States under Art 246
❖ There is no overlapping in the exercise of taxation power as
sources of taxation are clearly delineated
❖ No substantive tax entries in the Concurrent List to prevent any
friction or overlap between the Centre and States on matters of
taxation
 Legislative Entries and Tax
❖ All-India Federation of Tax Practitioners v UOI (2007):
❖ Entries dealing with taxation are distinct entries vis-a-vis the general entries;
❖ Doctrine of pith and substance is important to determine if the Union or the State is
competent to levy that tax;
❖ The nomenclature of a levy is not important, court has to look into the ‘pith and
substance’ of the legislation
❖ State of Kerala v Fr. William Fernandez (2017):
❖ Taxation power of both the Union and the State are mutually exclusive and has
been clearly demarcated
❖ In deciding whether a particular enactment is within the purview of one Legislature
or other, it is the ‘pith and substance’ of the legislation that has to be looked into
 New Provision on the Block
Art 246A

❖ Art 246A:
❖ Parliament and Legislature of every State have power
to make laws with respect to goods and services tax
imposed by the Union or by such State
❖ Parliament has exclusive power to make laws with
respect to goods and services tax where the supply or
goods or services - both takes place in the course of
inter-State trade or commerce
Under which legislative entry has
GST been enacted?
 Art 246A
❖ Art 246A inserted via
the GST Amendment
(Constitution 101st
Amendment)
❖ The only Constitutional
provision where the
source of the legislative
power and the field of
taxation are in the
provision itself
 Source of Legislative Power
❖ Art 246A:
❖ This provision confers simultaneous legislative power on both the
Parliament and the State Legislature - a first in the Indian
Constitution
❖ Departs from previous legislative scheme as source of legislative
power and legislative field is contained in the provision itself.
❖ Beings with a non-obstante clause - ‘Notwithstanding anything
contained in Article 246’ - overrides Art 246 which demarcates
legislative powers on subjects contained in the 3 Lists
❖ Other implications, if any, of Art 246A may be tested in future
Taxation Entries Favour the Union?
❖ Comparatively more buoyant, elastic, and sources of greater revenue have been allocated to
the Union
❖ Union: Income Tax, Corporation Tax, Excise Duty (except alcohol), Stamp Duty on
transactions in stock exchanges
❖ Tax bases allocated the States face various challenges
❖ Taxes on agricultural income are frozen and non-existent due to politicisation
❖ Taxes on lands and buildings are minuscule and face administrative, local politics and
other related challenges
❖ Taxes on profession - capped under Art 276(2):
❖ The total amount payable in respect of any one person to a State or to any one
municipality, district board, local board or other local authority in the State by way
of taxes on professions, trades, callings and employment shall not exceed two
thousand and give hundred rupees per annum
 LEGISLATIVE ENTRIES &
TAX

❖ There is a difference between

general subjects of legislation and
tax entries
❖ Issues of legislative competence are
decided by courts by applying the
doctrine of pith and substance
❖ Originally, Constitution envisaged
complete separation of legislative
powers on tax between the Union
and the State
❖ The separation has been blurred by
the GST Amendment and insertion
of Art 246A
ENACTING TAX LAWS
Money Bills
 What is a Money Bill?
❖ Article 110(1) lays down that a bill is a Money Bill ONLY if it deals with all or any of the
following matters:
❖ (a) Imposition, abolition, remission, alteration or regulation of any tax
❖ (b) Regulation of the borrowing of money or giving any guarantee by the Govt of India or
the amendment of the law with respect to any financial obligation undertaken or to be
undertaken by the Govt of India
❖ (c) The custody of the Consolidated Fund of India or the Contingency Fund of India, the
payment of moneys into or the withdrawal of moneys from any such Fund
❖ (d) The appropriation of money out of the Consolidated Fund of India
❖ (e) Declaring of any expenditure to be charged to be expenditure charged on the
Consolidated Fund of India or increasing amount of any such expenditure
❖ (f) Receipt of money on account of the Consolidated Fund of India or the public account of
India ….
❖ (g) Any other matter incidental to any of the matters specified in above sub-clauses
 Legislative Procedure
Money Bills

❖ Money Bills can only be introduced:

❖ Only on the recommendation of the President (Art 117(1))
❖ It can be introduced only in the Lok Sabha (Art 117(1), 109(1))
❖ Rajya Sabha can recommend changes, but Lok Sabha has the power to reject all the
changes; and, if Bill not returned by Rajya Sabha within 14 days it is deemed to be
passed by both Houses (Art 109(2), Art 109(5))
❖ President does not have the power to return a Money Bill asking the House to
reconsider the Bill (Proviso, Art 111)
❖ Legislative procedure of Money Bills:
❖ the role of Lok Sabha is primary; and
❖ Rajya Sabha and President seem to have curtailed roles in determining the content
of the Bill
 MONEY BILLS
❖ Decision of the Speaker whether a bill is a money bill or not is final (Art
110(3))
❖ What is the implication of the word ‘final’?
❖ Is it final for the purposes of the House?, or;
❖ Is it final in the sense that no judicial review’ of the decision is allowed?
❖ In other words, if the certificate of the Speaker is final,
❖ The question is - whether judicial review of Speaker’s decision should
be allowed?
❖ If yes, on what grounds?
 MONEY BILLS
❖ Special Reference No. 1 of 1964
❖ A citizen is allowed to question before a court the validity of any proceedings before a
court of law
❖ But only if the citizen’s case is that the proceedings suffer from an illegality
❖ Mere irregularity of procedure is not questionable before a court
❖ Raja Ram Pal v Speaker, Lok Sabha (2007)
❖ Court will not review procedural irregularities in the parliamentary proceedings
❖ Judicial review is only available on grounds of illegality and/or unconstitutionality
❖ Also added that procedural illegality is also subject to judicial review
❖ BASICALLY:
❖ SUBSTANTIVE ILLEGALITY/PROCEDURAL ILLEGALITY: Jud Rev is allowed
❖ PROCEDURAL IRREGULARITY: Jud Rev is allowed
 MONEY BILLS
❖ Mangalore Ganesh Bedi v State of Mysore (1962)
❖ Challenge was that a money bill was passed as an ordinary
bill
❖ Held that Speaker’s decision is a mere procedural
irregularity and cannot be challenged in a Court
❖ Mohd Saeed Siddiqui v State of UP (2014)
❖ Court held that Speakers’ certification was a matter of
procedural irregularity and not substantive illegality;
❖ Thus, outside the scope of judicial review
 MONEY BILLS
❖ SO -
❖ Substantive Illegality can be reviewed by the Court, but
Procedural Irregularity cannot be.
❖ Speaker’s decision of classifying an ordinary Bill as
Money Bill is then held to be procedural irregularity
and kept outside judicial scrutiny
❖ This question came up again in the Aadhaar Case.
 MONEY BILL
❖ Puttaswamy v UOI (Writ No. 494 of 2012)
❖ The primary challenge was the constitutionality of Aadhaar
❖ Since Aadhaar Act was passed as a Money Bill, constitutionality of the bill was
challenged inter alia on the ground that it does not qualify as a Money Bill
❖ Petitioner’s Arguments :-
❖ Argument against Aadhaar as a Money Bill was that while the Bill has ‘elements’ of
a Money Bill e.g. all benefits, services and subsidies will be provided from the CFI -
but this was only one provision: Sec 7
❖ However, the larger and predominant scheme of the Bill had nothing to do with CFI
❖ Since Art 110 uses the word ‘only’ - Aadhaar can be a Money Bill if ‘only’ Sec 7 and
like provisions were in the Bill
 MONEY BILL
❖ Govt’s Arguments:-
❖ Sec 7 and Preamble of the Bill clearly say that aim is to identify people
who need to be provided subsidies, benefits, and services
❖ And, since the cost of these subsidies, benefits and services is going to
be charged to the CFI, it is clearly a Money Bill
❖ Creation of unique numbers is only a means to identify the recipient of
the subsidies and is thus secondary
❖ Primary purpose is to provide subsidies, benefits, and services
❖ And, since Sec 7 states these subsidies, benefits, and services will
charged to the CFI - it is clearly a Money Bill
 MONEY BILLS
❖ Supreme Court accepted the contentions of the government
❖ Held that judicial review of the Speaker’s decision is allowed despite the use of the word
‘final’ in Art 110(3)
❖ But, the Court did not inquire into the implication of using the word ‘only’ in Art 110(1)
❖ Majority:
❖ Aadhaar Bill was correctly introduced and certified as a Money Bill
❖ Endorsed the argument that judicial review of Speaker’s decision would be admissible
under certain circumstances; but did not spell out those circumstances
❖ Dissenting:
❖ ‘constitutional trust has been vested in the office of the speaker of the Lok Sabha … This
power cannot be unbridled or bereft of judicial scrutiny.’
❖ On the touchstone of Art 110(1), Aadhaar Bill cannot be a Money Bill
 MONEY BILL

❖ Definition of a Money Bill

❖ Legislative Procedure for passing a Money Bill
❖ Judicial Review of Money Bill
What is a BUDGET?

Finance Bill
Money Bill
“You don’t pay taxes, they take taxes”

CR
CONSTITUTIONAL BODIES
AND
TAXATION
Taxation Law

CONSTITUTIONAL
BODIES
FINANCE COMMISSION OF INDIA
(Constituted every 5 years)

GST COUNCIL
(Permanent Body)
FINANCE COMMISSION OF INDIA
❖ Buoyant taxes with nationwide base are assigned to the
Union: Income tax, Corporation tax, Portion of GST
❖ But greater responsibilities are assigned to the states
❖ To take care of this vertical imbalance, the Constitution
provides for an institution such as the FINANCE
COMMISSION OF INDIA
❖ The task of the Commission is to recommend resource
transfer to States
FINANCE COMMISSION OF INDIA
❖ Art 280:
❖ Every five years, the President shall constitute a Finance Commission
❖ Finance Commission, inter alia, is duty bound to make recommendations to the President on
❖ Distribution between the Union and States of net proceeds of taxes
❖ Principles which should govern grants-in aid of the revenues of States out of
Consolidated Fund of India (Art 275)
❖ Measures to augment the Consolidated Funds and supplement resources of
Municipalities in the State
❖ The scope of Finance Commission is usually determined by the Terms of Reference (TOR) or
the order issued by the President for constitution of the Finance Commission
❖ Art 281:
❖ Recommendations of the Finance Commission are laid before each House of the Parliament
 FINANCE COMMISSION OF INDIA
Devolution of Tax Revenues

❖ Vertical allocation: Commission has to make

recommendations on the distribution between the
Union and the States of taxes which are to be divided
among them under the Constitution
❖ Horizontal allocation: Allocation among States of their
respective shares of such proceeds
 FINANCE COMMISSION OF INDIA
Vertical Allocation

❖ 1950-2000: 1st to 10th Fin Comm

❖ Only Income Taxes and Excise Duties were shareable with States
❖ Shares of States in income tax went from
❖ 55% first Fin Comm
❖ 85% seventh Fin Comm
❖ 77.5% tenth Fin Comm
❖ 2000 onwards
❖ All taxes in Union List are shareable with the States, except cesses and surcharges
❖ 32% thirteenth Fin Comm
❖ 42% fourteenth Fin Comm (highest ever increase)
❖ Comm noted that share of non-non-divisible cesses and surcharges has increased to 13.14 per
cent of the total revenue in 2013-14
 FINANCE COMMISSION OF INDIA
Horizontal Allocation

❖ 1st to 7th Fin Comm:

❖ Distribute between states on the basis of population and contribution
❖ 80-90% weightage to population
❖ 10-20% to contribution
❖ 10th Fin Comm:
❖ Population, income distance, tax effort, area, infrastructure and fiscal
discipline
❖ 14th Fin Comm:
❖ Population, income distance, area and included forest cover for the first
time as a criterion
FINANCE COMMISSION OF INDIA
❖ Principle based grant-in aid
❖ Principles which should govern the grants-in aid of the revenues of the States out of
the Consolidated Fund of India (Art 275)
❖ Money transferred by the Central Govt to State Govts or Municipalities in addition
to the tax revenues
❖ This is usually tied to specific sectors
❖ Or to implement Centrally Sponsored Schemes (CSS) (Art 282)
❖ Meet development needs of certain States where revenues are insufficient
❖ Fin Comm, in the past, has recommended grants for elementary education, protection
of environment, water sector, improving justice delivery, etc
❖ 14th Fin Comm recommended that there should only be general purpose grants - States
should identify the sectors/projects/schemes it wishes to fund
FINANCE COMMISSION OF INDIA
❖ 15th Fin Comm:
❖ Currently, the 15th Fin Comm is preparing its report and
recommendations
❖ At the time of its constitution, it faced vociferous opposition
from southern states since the TOR require the Fin Comm to
base its recommendations on the 2011 census population
figures
❖ Centre has thrown another challenge to it and asked for
recommendations on creation of a permanent ‘Defence Fund’
to meet national security needs.
FINANCE COMMISSION OF INDIA
❖ One of the successful constitutional bodies of India.
❖ Core recommendations of every Fin Comm have been accepted by
the Parliament without any changes or modifications
❖ Beyond the core recommendations, other suggestions are ignored
❖ e.g. recommendations that cesses and surcharges be levied
sparingly have been made in every Fin Comm report for decades.
There has been no visible change in the practice
❖ Likely to face new challenges with the constitution of the GST
Council - challenges of co-ordination with the GST Council and that
some parts of GST revenue are outside the scope of the Commission
 GST COUNCIL
❖ Distinct from Fin Comm because of its composition, but handles some GST revenues
❖ Created after the 101st Constitutional amendment under Article 279A
❖ Art 279A (2): GST Council shall consist of following members:
❖ Union Finance Minister as Chairperson
❖ Union Minister of State (Revenue of Finance) as Member
❖ Minister in charge of Finance or Taxation or any Minister appointed by State Govt as
Member
❖ Art 279A(9): Decisions cannot be taken by less than 3/4 of weighted votes of the members
present and voting
❖ Vote of Central Govt shall have a weightage of 1/3 of total votes cast
❖ Votes of all State Governments weightage of 2/3 of total votes cast
 GST COUNCIL
❖ Art 279A (4): GST Council shall make ‘recommendations’ to the Union
and the States on -
❖ Art 279A(11): GST Council shall establish a mechanism to adjudicate
any dispute
❖ Arising out of recommendations of the GST Council or implementation
thereof
❖ Additionally, GST Council is responsible for disbursing revenues
collected from:
❖ IGST
❖ GST Compensation Cess
 Distribution of GST Revenues
Fin Commsn GST Council

CGST IGST
❖ SGST?

GST Compensation
-
Cess
 GST COUNCIL
❖ Due to the composition, decision making is and will largely be
controlled by the Union due to the fact that its vote has 1/3rd
weightage
❖ Unclear what is the legal standing of ‘recommendations’ of GST
Council? Can Union or State refuse to implement it?
❖ GST Council is authorised to set up a dispute resolution from
disputes arising out of its recommendations. Conflict of interest?
❖ Unclear if and how GST Council should co-ordinate with the
Finance Commission
 PART XIII
(Outdated?) Tax Jurisprudence
 PART XIII
❖ Art 301: Subject to the other provisions of this Part, trade, commerce and intercourse throughout the
territory of India shall be free
❖ Art 302: Parliament may impose such restrictions on freedom of trade, commerce and intercourse between
one State and another or within any part or territory of India as may be required in public interest
❖ Art 303:
❖ Notwithstanding anything contained in Art 302 Parliament or State Legislatures cannot make laws
giving preference to one State over another
❖ Nothing in clause 1 shall prevent Parliament from discrimination if purpose is to deal with scarcity of
goods
❖ Art 304: Notwithstanding anything in Art 301 or Art 303, Legislature of a State may by law -
❖ Impose tax on goods imported from other States
❖ Impose reasonable restrictions on trade and commerce as may be required in public interest
❖ Underlying idea was to create an economic union and yet accommodate rights of the state to levy taxes on
goods entering their jurisdiction
 Entry 52, LIST II

❖ ‘TAXES ON THE ENTRY OF

GOODS INTO A LOCAL
AREA FOR CONSUMPTION,
USE OR SALE THEREIN’

❖ Octroi
❖ Entry Tax
 Art 301
Confusing Imprudence

❖ Aitabari Tea Co Ltd v State of Assam (1961):

❖ The Assam Taxation (on Goods Carried by Road or Inland Waterways)
Act, 1954 - levied tax on tea carried through State of Assam via roads
❖ The tax was challenged as violative of Art 301
❖ Tax laws can and do amount to restrictions on the freedoms guaranteed
to trade under Part XIII of the Constitution
❖ But it is incorrect to state that all taxes amount to restrictions to free
trade and commerce under Part XIII
❖ It was held that only such taxes as directly and immediately restrict trade
would fall within the purview of Article 301
 Art 301
Confusing Imprudence

❖ Automobile Transport (Rajasthan) Ltd v State of Rajasthan (1963):

❖ Judicial exception to Art 301 was created and a new category of
tax was invented by the judiciary
❖ (Do we have the most inventive judiciary?)
❖ Court held that taxes levied under the Rajasthan Motor
Vehicles Taxation Act, 1951 are ‘compensatory taxes’ which
instead of hindering trade, commerce and intercourse facilitate
them by proving roads and maintaining the roads
❖ What is a compensatory tax?
 Art 301
Confusing Imprudence

❖ Working test for determining if a tax is a compensatory tax or not

is to enquire:
❖ Whether the people who are in that relevant trade have access
to or use certain facilities for the better conduct of their
business;
❖ And whether they are not paying patently much more than
what is required for providing those facilities
❖ Compensatory taxes theory propounded by the Supreme Court
was flawed from the beginning but was further muddled by
subsequent decisions
 Art 301
Confusing Imprudence

❖ Bhagatram v CST (1995):

❖ Widened the compensatory tax theory and held that if
there is substantial or even some link between the tax and
the facilities extended to such traders, directly or indirectly,
the levy cannot be held to be invalid
❖ State of Bihar v Bihar Chamber of Commerce (1996):
❖ Reiterated Bhagatram and held that ‘some connection’
between the tax and trading facilities is sufficient to
characterise a tax as ‘compensatory tax’
 Art 301
Confusing Imprudence

❖ Jindal Stainless Steel Ltd v State of Haryana (2006):

❖ 5-Judge Bench held that the working test propounded in
Automobile case cannot stand together with the ‘some
connection’ test propounded in the Bhagatram case.
❖ And, accordingly, to that extent the Bhagatram and Bihar Chamber
of Commerce cases were overruled.
❖ But, some constitutional issues still remained unresolved and
ultimately a reference was made to a 9-Judge Bench to resolve the
contradictions of ‘compensatory tax’ and Part XIII jurisprudence
 Art 301
Confusing Imprudence

❖ Jindal Stainless Steel v Union of India (2016-17):

❖ Concept of ‘compensatory taxes’ is not recognised by the
Constitution. A tax is compulsory extraction of money for general
public good and providing facilities to people; there is no question of
tax being non-compensatory in character
❖ Compensatory tax obliterates the distinction between a tax and a fee;
the element of quid pro quo is essential in the latter
❖ It is difficult to apply the concept of ‘compensatory tax’ in practice
❖ The ‘compensatory tax theory’ evolved in Automobile case and latter
cases has no juristic basis and is therefore rejected.
 Art 301
Confusing Imprudence

❖ The word ‘free’ used in Art 301 does not mean free from taxation
❖ Only discriminatory taxes are prohibited by Art 304(a), thereby meaning
non-discriminatory taxes do not constitute an infraction of Art 301
❖ Tax on goods entering a state is permissible even if such goods are not
produced within the state
❖ Art 304(a) prohibits discrimination and not differentiation

❖ What’s the Catch?

❖ Since July 2017, Entry tax has been subsumed under GST
 “Somebody Something That I Used To Know”

– Constitution of India reminiscing about compensatory tax, 2017

Does Compensatory Tax Jurisprudence Matter?

❖ Yes!
Does Compensatory Tax Jurisprudence Matter?

❖ No!
PART III AND TAXATION
WRITS AS REMEDIES IN TAX LAW
❖ Writ Remedies are (comparatively)
rare in tax matters - Principle of
alternate remedy
❖ Writ remedies in tax matters are
granted if:
❖ Prima facie establish that
alternate remedy does not exist
or will be ineffective
❖ Involves an interpretation of a
Constitutional provision and
thus requires intervention of a
constitutional court
WRITS AS REMEDIES IN TAX LAW
❖ Writs can be filed to challenge
that:
❖ The law lacks legislative
competence; not in accordance
with the distribution of
legislative powers contained in
Schedule VII
❖ The tax law in question is
violative of one, several or all
of the FRs guaranteed under
the Indian Constitution
 Benoy Viswam v UOI (2017)
❖ Challenge was regard to constitutionality of Sec 139-AA of the IT Act
❖ The provision stated that every person who files IT returns after 1 July 2017 will
mandatorily need to quote Aadhaar Number with PAN
❖ People who had applied for and not received Aadhaar numbers will need to quote the
application number
❖ Inability to do so would result in:
❖ Cancellation of PAN of the assessee
❖ PAN would be cancelled from retrospective effect
❖ The constitutionality was challenged primarily on two grounds:
❖ Art 14
❖ Art 19(1)(g)
 Benoy Viswam v UOI (2017)
❖ Challenge was regard to constitutionality of Sec 139-AA of the IT Act
❖ The court held that there is always a presumption of constitutionality of statute
❖ The court further held that the exercise of judicial review is to be conducted on
3 levels
❖ 1st stage:
❖ Compatible with Part III and constitutional provisions
❖ In accordance with distribution of legislative powers
❖ 2nd stage: can the impugned provision be saved without striking it down
❖ 3rd stage: if the impugned provision cannot be saved at 2nd stage can it saved
by another method
 Benoy Viswam v UOI (2017)
❖ Petitioner’s Art 19(1)(g) argument was that requiring a
person to mandatorily obtain a Aadhaar number is an
unreasonable restriction
❖ Court rejected the argument
❖ Art 14 argument stated that the provision suffered from
arbitrariness
❖ Court held that arbitrariness cannot be a ground to
challenge a statute’s constitutionality … (Wait what?)
Binoy Viswam - Shayara Bano - Puttaswamy Saga!

❖ Binoy Viswam
❖ Constitutionality of a legislation
cannot be challenged on ground
of arbitrariness
❖ Shayara Bano
❖ Constitutionality can be
challenged on ground of
‘manifest arbitrariness’
❖ Puttaswamy
❖ Reconsidered the validity of Sec
139AA on the touchstone of
‘manifest arbitrariness’
Challenging Constitutionality of a Statute
❖ Not in accordance with Part III
❖ Arguments of Art 19(1)(g) are often made in the
context of tax laws and are rejected with the same
frequency
❖ Arguments on basis of Art 14 and Art 21 are also made
❖ The relevant legislature is not competent to make the
impugned law
❖ The law suffers from manifest arbitrariness
UNION STATE FINANCIAL
RELATIONS
UNION-STATE FINANCIAL RELATIONS
❖ There is a clear leaning of the Constitution towards the Union
❖ The tax bases allocated to the Union are much more buoyant
❖ The tax bases allocated to the State are narrower and not as buoyant
❖ This is not unique to taxation aspects of the Constitution - India is a quasi-federal state with a
strong Union
❖ In taxation matters, it means the States are to a significant extent dependent on the Union for
money; this is increasingly so after GST
❖ The romantic complicated financial relations between the Union and States are handled by
various bodies, which include:
❖ Finance Commission of India - usually a body of technocrats
❖ GST Council - a political body
❖ The relative success and failures of these institutions, especially of the latter is an open question
 TAKEAWAYS
❖ BASIC TERMINOLOGY/CONCEPTS
❖ Tax, Fee, Cess, Surcharge, and
Compensatory Tax
❖ Kinds of Taxes
❖ Progressive Taxation/Ability to Pay
❖ Regressive Taxation

❖ THEORETICAL ASPECTS
❖ Canons of Taxation
❖ Laffer Curve
❖ Incidence of Tax
 TAKEAWAYS
❖ CONSTITUTIONAL ASPECTS
❖ Legislative Entries and Tax
❖ Art 246A
❖ Money Bill
❖ Finance Comm and Its Role
❖ GST Council and Its Role
❖ Jurisprudence of Part XIII - A
snapshot
❖ Part III and Tax
“There are only two certainties in life: death and
taxes. Which one do you prefer?”

– Someone