Unit - 1

Unit - 1
Explain the meaning and essentials of tax and distinguish if from fees and cess.
(Incomplete)
Introduction
The system of taxation is the backbone of a nation’s economy which keeps revenue consistent,
manages growth in the economy, and fuels its industrial activity. India’s three-tier federal
structure consists of Union Government, the State Governments, and the Local Bodies which are
empowered with the responsibility of the different taxes and duties, which are applicable in the
country. The local bodies would include local councils and the municipalities. The government of
India is authorized to levy taxes on individuals and organisations according to the Constitution.
However, Article 265 of the Indian constitution states that the right to levy/charge taxes hasn’t
been given to any except the authority of law. The 7th Schedule of the Constitution has defined
the subjects on which Union/State or both can levy taxes. As per the 73rd and 74th amendments
of the constitution limited financial powers have been given to the local governments which are
enshrined in Part IX and IX-A of the constitution.
Meaning of tax
A tax may be defined as a monetary burden rested upon individuals or people with property to
help add to the government’s revenue. Tax is, therefore, a mandatory contribution and not a
voluntary payment or donation which one decides on one’s own. It is a payment exacted by the
legislative authority. It may be direct tax or indirect tax. Revenue growth which may be a little
faster than GDP (Gross Domestic Product) can result from revenue mobilization with an effective
tax system and measures.
The government uses this tax to carry out functions such as:

• Social welfare projects like schools, hospitals, housing projects for the poor, etc.

• Infrastructure such as roads, bridges, flyovers, railways, ports, etc.

• Security infrastructure of the country such as military equipment

• Enforcement of law and order

• Pensions for the elderly and benefits schemes to the unemployed or the ones below the
poverty line.

Characteristics of a good tax structure

• A good tax system as a whole should be equitable and be fairly leading
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of wealth in the community.

• It should be effective and yield the required revenue for the government.

• The collection of taxes is a major task and it should be economical.

• The development of trade and industry should not be hampered by the burden of taxes.

• The taxes levied should give a clear picture to the government of its revenue.

• The tax system should be based on comprehensive and up-to-date statistical information
enabling accurate forecasting.

• The tax system should also be simple and elastic so that it can respond to the new needs of
the State.

• While distributing the burden of taxes, the ability of the tax-payers should be considered.
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 Fees Cess

It’s a type of fee. It’s a kind of tax.

A mandatory fee charged by a Technically, is just another word for tax.

government on a product, income, or The term might be used in regard to a
activity. specific type of tax.

To generate revenue for the government To generate revenue for the government

The word is used all over the world and
in all manners to refer to any type of tax.
The term is still frequently used in a few
countries including Britain, Ireland, to
indicate a local tax, Scotland, to indicate
a land tax, and India, applied as a suffix
to a indicate a category of tax such as
‘property-cess'.

It’s has two types 1)Direct Tax – tax Usually used in regard to Local tax
levied directly on personal or corporate and/or Land and Property tax.
income 2)Indirect Tax – tax levied on
the price of a good or service

Define the Term Tax? Explain a)the different types of taxes.

Introduction:
The payment of tax is beneficial on multiple levels including the development of the nation,
betterment of infrastructure, the upliftment of the society, and even for welfare activities for the
nation.
Types of Taxes
There are two main categories of taxes, which are further sub-divided into other categories. The
two major categories are direct tax and indirect tax. There are also minor cess taxes that fall into
different sub-categories. Within the Income Tax Act, there are different acts that govern these
taxes.
1.Direct Tax
Direct tax is tax that are to be paid directly to the government by the individual or legal entity.
Direct taxes are overlooked by the Central Board of Direct Taxes (CBDT). Direct taxes cannot be
transferred to any other individual or legal entity.
Sub-categories of Direct Taxes The following are the sub-categories of direct taxes:
1. Income tax:
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This is the tax that is levied on the annual income or the profits which is Page
directly
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government. Everyone who earns any kind of income is liable to pay income tax. For individuals
below 60 years of age, the tax exemption limit is Rs.2.5 lakh per annum. For individuals between
the age of 60 and 80, the tax exemption limit is Rs.3 lakh. For individuals above the age of 80,
the tax exemption limit is Rs.5 lakh. There are different tax slabs for different income amounts.
Apart from individuals, legal entities are also liable to pay taxes. These include all Artificial
Judicial Persons, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of
Persons (AOP), companies, local firms, and local authorities.
2. Capital gains: Capital gains tax is levied on the sale of a property or money received through
an investment. It could be from either short-term or long-term capital gains from an investment.
This includes all exchanges made in kind that is weighed against its value.
3. Securities transaction Tax: STT is levied on stock market and securities trading. The tax is
levied on the price of the share as well as securities traded on the ISE (Indian Stock Exchange).
4. Prerequisite Tax: These are taxes that are levied on the different benefits and perks that are
provided by a company to its employees. The purpose of the benefits and perks, whether it is
official or personal, is to be defined.
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 5. Corporate tax: The income tax paid by a company is defined as the corporate tax. It is based
on the different slabs that the revenue falls under. The sub-categories of corporate taxes are as
follows:
1. Dividend distribution tax ( DDT): This tax is levied on the dividends that companies
pay to the investors. It applies to the net or gross income that an investor receives from the
investment.
2. Fringe benefit tax (FBT): This is tax levied on the fringe benefits that an employee
receives from the company. This include expenses related to accommodation, transportation,
leave travel allowance, entertainment, retirement fund contribution by the employee, employee
welfare, Employee Stock Ownership Plan (ESOP), etc.
3. Minimum Alternative Tax (MAT): Companies pay the IT Department through MAT
which is governed by Section 115JA of the IT Act. Companies that are exempt from MAT are
those that are in the power and infrastructure sectors.
2. Indirect tax
Taxes that are levied on services and products are called indirect tax. Indirect taxes are
collected by the seller of the service or product. The tax is added to the price of the products
and services. It increases the price of the product or service. There is only one indirect tax
levied by the government currently. This is called GST or the Goods and Services Tax.
GST: This is a consumption tax that is levied on the supply of services and goods in India. Every
step of the production process of any goods or valueadded services is subject to the imposition
of GST. It is supposed to be refunded to the parties that are involved in the production process
(and not the final consumer).
GST resulted in the elimination of other kinds of taxes and charges such as Value Added Tax
(VAT), octroi, customs duty, Central Value Added Tax (CENVAT), as well as customs and excise
taxes. The products or services that are not taxed under GST are electricity, alcoholic drinks,
and petroleum products. These are taxed as per the previous tax regime by the individual state
governments.

b) the nature and characteristic of different types of taxes.

Government levy taxes on citizens for creating an influx of income that are utilized for
supplementing projects for country's development, welfare, and boosting the economy so as to
raise the standard of living. By the Constitution of India, the government can levy tax and
allocate the same to central and state governments. The Parliament and State Legislature has to
agree on the taxes levied so as to pass into the mainstream of application. For FY 2017-18, the
slab rate for income tax up to Rs. 5 lakh has has been brought down31/03/23,
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rate for companies with per annual turnover of up to Rs 50 crore has been brought down to 25%
from 30%.

Income Tax Slab for Individual Tax Payers & HUF (Less Than 60 Years Old
Both Men and Women)

Income Slab Slab

Income up to Rs 2,50,000* No Tax

Income from Rs 2,50,000 - Rs 5,00,000 5%

Income from Rs 5,00,000 - 10,00,000 10%

Income more than Rs 10,00,000 20%

Income Tax Slab for Senior Citizens (60 Years Old Or More but Less than 80 Years Old Both
Men & Women)
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 Income Slab Tax rate

Income up to 3,00,000 No Tax

Income from Rs 3,00,000 to 5,00,000 5%

Income from 5,00,000 to 10,00,000 10%

Income above 10,00,000 30%

Essential characteristics of tax.

1. It is an enforced contribution
2. it is generally payable in money.
3. It is proportionate in character, usually based on the ability to pay
4. it is levied on persons and property within the jurisdiction of the state
5. it is levied pursuant to legislative authority, the power to tax can only be exercised by the law
making body or congress
6. it is levied for public purpose
7. it is commonly required to be paid a regular intervals.

What are the Benefits of Taxes?

• The government can work on important infrastructures and developmental plans for the
nation from the income generated through taxes.

• These also encourage citizens to create sufficient investments and savings and use several
financial investments to reduce the taxable income and thus lessening the tax amount to be
paid.

• Paying taxes includes that you must file for tax returns. On doing so it gets easier to apply
for home loan or credits and easing your financial journey.
What are the Penalties for Not Paying Taxes?
Different types of taxes carry unique penalties if not paid out. These penalties can be monetary
fines to imprisonment according to the crime's severity. In few cases, you may have to pay the
owed tax with a lump sum as fine that is determined by the government officials. Thus, it is
recommended that everyone must pay the taxes in time and be aware of the taxes you are liable
to pay.

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Explain the power of taxation under constitution.++ Page 4 of 11

Constitutional Provisions Regarding Taxation in India

The roots of every law in India lie in the Constitution, therefore understanding the provisions of
the Constitution is foremost to have a clear understanding of any law. The Constitutional
provisions regarding taxation in India can be divided into the following categories:

• Only by the authority of law can taxes be levied. (Article 265)

Without the ‘authority of law,’ no taxes can be collected is what this article means in simple
terms. The law here means only a statute law or an act of the legislature. The law when applied
should not violate any other constitutional provision. This article acts as an armour instrument
for arbitrary tax extraction.
In Tangkhul v. Simirei Shailei, the villagers paid the head man Rs. 50 per day instead of providing
free labor for one day per year, as was customary for generations. The Court ruled that this
payment was essentially an unauthorized tax, violating Article 265, which requires that all taxes
be authorized by law.
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 In the case, Lord Krishna Sugar Mills v. UOI, 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.

• Levy of duty on tax and its distribution between centre and states
According to Article 268, some duties are levied by the Union government but collected by the
State governments. These include stamp duties and excise on medicinal and toilet preparations.
Although mentioned in the Union List and levied by the Government of India, these duties are
collected by the state. They do not form a part of the Consolidated Fund of India and are only
held by the state, except in union territories where they are collected by the Government of
India.
Article 269A
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
1. Direct Apportionment (let say out of total net proceeds 42% is directly apportioned to
states).
2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a selected
prescribed percentage goes to the States.

• Restriction on power of the states to levy taxes (Article 286)

This article restricts the power of the State to tax
1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the
territory of the state.
2) Only parliament can lay down principles to ascertain when a sale/purchase takes place during
export or import or outside the state. (Sections 3, 4, 5 of the Central Sales Tax Act, 1956 have
been constituted with these powers)
3) Taxes on sale/purchase of goods that are of special importance can be restricted by the
parliament and the State Government can levy taxes on these goods of special importance
subject to these restrictions (Section 14 and Section 15 of Central Sales Act, 1956 have been
constituted to impose restrictions on the state Government to levy taxes on these goods of
special importance).

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• Grants-in-Aid Page 5 of 11

This grant is charged to the Consolidated Fund of India every year in place of any share of the
net proceeds, export duty on products of jute to the states of Assam, Bihar, Orissa, and West
Bengal. This grant will continue and will be charged to the Consolidated Fund of India as long as
the Union government continues to levy export duty on jute, or products of jute or the time of
expiration which is 10 years from its commencement.

Article 275
These grants are sanctioned as the parliament by law decides to give to those states which are
in dire need of funds and assistance in procuring these funds. These funds /grants are mainly
used for the development of the state and for the widening of the welfare measures/schemes
undertaken by the state government. It is also used for social welfare work for the Scheduled
tribes in their areas.

Article 276
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 This article talks about the taxes that are levied by the state government, governed by the state
government and the taxes are collected also by the state government. But the taxes levied are
not uniform across the different states and may vary. These are sales tax and VAT, professional
tax and stamp duty to name a few.

Article 277
Except for cesses, fees, duties or taxes which were levied immediately before the
commencement of the constitution by any municipality or other local body for the purposes of
the State, despite being mentioned in the Union List can continue to be levied and applied for
the same purposes until a new law contradicting it has been passed by the parliament.

“The law of taxation is levied in conformity with the fundamental rights under Indian
Constitution”. Discuss.

INTRODUCTION:
Tax is a compulsory payment made to government by the people of a territory, without
expecting a direct benefit or definite return by the tax payer. The concept of tax is not explained
anywhere in the Constitution of India. However Article 366(28) states that taxation includes the
imposition of any tax or impost, whether General or local or social and ‘tax’ shall be constructed
accordingly. According to Bastable - Tax is a compulsory contribution of wealth of a person or a
body of persons for the services of public power. Article 265 imposes a limitation on the taxing
power of the State. It provides that " no tax can be levied or collected except by the authority
oflaw"

SCOPE OF TAXING POWERS OF PARLIAMENT/ LEGISLATURE:

It means that no tax can be levied by order, circular, bye-law, regulation etc., of the executive.
The tax can be levied only by an Act of Parliament or Legislature and no body or organisation
lesser than that.
Atlas cycle Industries Limited Vs. State of Haryana: The Supreme Court held that 'notification'
imposing a tax cannot be deemed to be extended to new areas included in the Municipality.
Such an extension is not possible without fresh notification under law, specifying the extended
areas. The object behind this constitutional provision is that the citizens of India should not be
saddled with the financial burden cf tax by mere rules, regulations, orders, circulars, etc. There
should be specific laws enacted for the purpose of levy of tax. Such laws must also be
reasonable and obey the provisions of the Indian Constitution. Even in the levy of tax under
legislation/ statute, there are strict rules and guidelines for proper levy of tax. The Supreme
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enactment.

FUNDAMENTAL RIGHTS AND THE POWER OF TAXATION

All the tax imposed, levied or collected must be in adherence to the fundamental rights
guaranteed under the Constitution of India. All tax formed must be by Legislative actions only,
which is specified under Article 265 of the Indian Constitution. The Fundamental rights also acts
as remedies against taxation which are Article 13, 14, 19(1)(g) and 27.
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 Article 13 states that " The state shall not make any law which takes away or abridges the rights
conferred by this part and any law made in contravention of this clause shall, to the extent of the
contravention, be void. "S Article 13, seeks to assert the supremacy of the constitutional
provisions over laws made by the parliament. It brings a sense of clarity with regard to the fate
of legislation which violates the constitution. Any law made regarding taxation must be
according to the legislative provisions. Therefore, Article 13 gives the people the right to seek
remedy for any law violating the provisions of the constitution or the fundamental rights of the
people.

Article 14 states, about equality before law and equal protection of the law within the territory of
India. In literal sense the word Equality is used which means equal treatment to all. But in
practical sense the word Equity is brought into use, which basically means equal treatment to
equals based on their capacity and capabilities.

Therefore, when any tax is levied on the people for their general welfare, it must be kept in mind
and their capacity to pay keeping in aside their basic necessities. For example - All people must
not be taxed equally but they must be categorized based on their income and then taxed
accordingly.
Article 19(1)(g) states, the freedom of trade, occupation, profession and business.' Trade means
any commercial activity which includes exchange of goods and services for its value with the
intention of profit making. Any tax imposed on the people must be done keeping in mind that it
does not restrain or infringe the freedom of right to trade and business of a person. Therefore,
Article 19 allows the people to seek relief if any tax is restricting the people to conduct the trade
and business. Even if the tax implied is a compensatory tax or not, if it is causing an immediate
threat or burden of carrying on a business or trade, then it can be invoked by seeking remedy
under Article 19 of the constitution of India.

Article 27 states that, tax collected by the state shall not be used for promoting any specific
religion and no specific tax can be collected to promote any religion. Article 27 guarantees the
right to live in a secular nation, which allows every person to enjoy their own religion or religious
practices. But the state cannot promote any religion or religious activities by the means of
imposing tax on all people. Fee can be collected but not tax.

Explain the provisions relating to immunity of State agencies from tax.

1.Exemption of Property of the Union from 'State taxation (Article 285) - Article 285 debars a
state from taxing union property. In Constituent Assembly Debate, there were two views. First, in
favour of state to tax union property especially railway because it renders
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hygiene, roads, lighting, fire-brigade etc. and financial position was so good. Second in favour of
union because it was objectionable to conceive property of a person who was not represented in
an organisation, to be taxed by organisation ad infinitium and taxing power depend upon the
statute passed by state and it was not known that kind of taxes and to what extent, the state
empower to local authority to levy. Second view was accepted.
Article 285(1) says that property of Union should be exempt from all state taxation except where
Parliament may otherwise provide. This clause raises two questions -
(i) whether tax is one on property and
(ii) whether such property is vested in union property includes lands, buildings, chattels, share,
debts, anything that has a money value, every kind of property movable or immovable. The state
cannot tax under Article 298. Property of Union means the ownership is vested in union.
The exemption under this Article and complementary Article 289 extends to only tax on
property. A tax on succession to property is not tax on property, but it is a tax upon the right to
succeed to property. The Supreme Court of India, in Union of India Vs Bhusaval Municipal
Council held that this exemption extends not only from state taxation but also local authority.
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 2.Exemption of State Property and Income from Union Taxation (Article 289)
Article 289(1) of the Constitution of India limits the taxing power of union by
exempting from its purview state property and income under Article 289(2), the
business operation of the state, State property used or occupied for trade or
business or income accruing therefrom may be taxed if Parliament so provides. Under
Article 289(3), Parliament has power to declare any class of trade or business as incidental to
the ordinary functions of government and it would be immune from Union taxation. In
Constituent Assembly Debate, an argument in favour of exemption of state property
and income from union taxation was that it would place a heavy financial burden on the states
which might retard country's industrialisation. But argument in favour of Central taxation was
that centre had heavy responsibilities and so it should be able to raise sufficient revenue.
Taxation of business carried on by a Government
(i) Trade or business carried on by state
In Peninsular and Oriental Steam Navigation Co. Vs Secretary of State for India case the court
clearly observed that exemption from union taxation given to state property and income does
not apply in respect of trade or business carried on by State. Article 289(3) says that where the
trade or business is carried on as incidental to normal government functions by state, there will
be no liability of union taxation in respect of business or trade. So the Parliament by law must
declare that business or trade carried by state is incidental to its normal government's functions,
otherwise state government will be liable to union taxation. But it does not mean that
Parliament enactment is necessary to empower a state to carry on trade or business. Exemption
from central taxation extends only to the state and their instrumentalities.

(ii) Trade or business carried on by the union

Article 285 confines immunity of the union to its property only. In this regard it is not clear why
the members of Indian Constitution made no provision as to immunity of a union trading activity
from state taxation. Probably there was at that time some doubt whether it was legitimate for the
Union Government to carry on any trading activity at all. But Article 298 leaves no doubt that the
Union Government may carry on a trade or business just as State Government can. Proviso (a)
to Article 298 itself would not enable the state legislature to levy any tax on the business carried
on by the Union Government.

(iii) Exemption from taxes on Electricity (Article 287) (Section 154A of

Government of India Act, 1935)
Under schedule VII, List II, Entry 53, the state legislature has exclusive power of making laws as
to the imposition of taxes on the consumption or sale of electricity. Articles 287 and 288 impose
some limitation upon it which is relating to Central Government and to the railways. Under Article
288, restriction is relating to electricity, water stored, generated, consumed
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by authorities constituted for developing any inter-state river or river valley. But Parliament by
making law can permit to tax upon that.

(iv) Exemption from taxation by State in respect of water or electricity in certain case
(Article 288)
The restriction relates to water of electricity stored, generated, consumed, distributed or sold by
any authority establish by law for regulating or developing any inter-state river or river valley.
The restriction under this Article is not absolute. It refers both pre-constitution and post
constitutional laws. Here President's assent is necessary only if such legislation imposes or
authorises the imposition of tax. In pepsu case, the court held that the levy of water rate under
Northern India and Drainage Act, 1823 and
Pepsu Sirhind Canal and Western Jamuna Canal (Enforcement and Validation) Act, 1954 is not a
tax and Acts are not inoperative for not having Present's Assent.

Six Marks
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 Write a note on tax evasion and tax avoidance.++
Tax evasion is illegal action in which a individual or company to avoid paying tax liability. It
involves hiding or false income, without proof of inflating deductions, not reporting cash
transactions etc. Tax evasion is serious offence comes under criminal charges and substantial
penalties.
Rooting for taxes is never an easy thing because most people question that concept of giving
away part of their earning to a government held that the fact is that taxes are an important
sources of income for the government. There are two ascents of not paying taxes when they are
due. The first is tax avoidance and the other tax evasion. The difference between the two is that
tax avoidance is basically finding a loophole that exempts you from paying taxes and is not
strictly illegal, while evasion is not paying the taxes when they are actually due, which is
absolutely illegal.
The term tax avoidance refers to the use of legal methods to minimise the amount of income tax
owned by an individual or a business. This is generally accomplished by claiming as many
deductions and credits are allowable. It may also be achieved by prioritising investments that
have tax advantages, such as buying tax-free municipal bonds. Tax avoidance is not the same as
tax evasion, which relies on illegal methods such as underreporting income and falsifying
deductions.

Write a note on the difference between tax evasion and tax avoidance.
The following are the major differences between Tax Avoidance and Tax Evasion:
1. A planning made to reduce the tax burden without infringement of the legislature is known
as Tax Avoidance. An unlawful act, done to avoid tax payment is known as Tax Evasion.
2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax.
3. Tax avoidance is immoral that tends to bend the law without causing any damage to it.
Unlike tax evasion, which is illegal and objectionable both according to law and morality.
4. Tax avoidance aims at minimising the tax burden by applying the script of law. However, tax
evasion minimises the tax liability by exercising unfair means.
5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax Evasion
includes the deliberate concealment of material facts.
6. The arrangement for tax avoidance is made prior to the occurrence of tax liability. Unlike Tax
Evasion, where the arrangements for it, are made after the occurrence of the tax liability.
7. Tax avoidance is completely legal however Tax Evasion is a criminal activity.
8. The result of tax avoidance is the postponement of the tax, whereas the consequence of tax
evasion if the assessee is found guilty of doing so, is either imprisonment or penalty or both.
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Write a note on delegation of facing power to state legislatures and local bodies.

Distinction between tax and fees.+

DIFFERENCE BETWEEN TAX AND FEE:
A tax and a fee are not the same thing. Tax is levied for the public at large. The money collected
from a tax payer does not help him directly in any way. It goes to the consolidated fund of India
and it is used for the general welfare of the public. There is no direct return to the tax payer. In
other words, there is no quid pro quo (something in return). A fee is a specific charge for some
direct services rendered. There is quid proquo and the fee payer gets some special services or
treatment. For e.g., payment of college fees, payment of temple worship fee, have the element
of quid pro quo. A fee does not go to the consolidated fund of India. It is not used for the welfare
of the common people.
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 A tax is a charge on the person's income or property, whereas fees is a payment for special
services rendered. Tax is a compulsory payment for which the tax payer does not get direct
benefit, whereas payment of fees is for some work done for the benefit of the person who pays
the fees.
Though tax can be levied only within the tax entries, fees can be collected for a non tax entry.
The fees collected for the various services go to the particular department whereas tax
collected is merged in the general revenue.
Eg. of Tax: Income Tax, fixed sum collected by the Municipality for supply of water, amount
charged for registration of document, etc.
Eg. of fees: Fee for getting a licence as a Stamp vendor, supply of water by a municipality
according to the meter reading and collection of charges according to the water supplied, etc.
Government may charge user fees, tolls, or other types of fees in exchange of particular goods,
services, or use of property. These are generally not considered taxes, as they are levied as
payment for a direct benefit to the individual paying. For eg., toll fee.

TOLL FEE:
1. This is a fee charged to travel via a road, bridge, tunnel, canal, waterway or other
transportation facilities.
2. Toll fee are used as fee to pay for public bridge, road and tunnel projects.
3. Such toll fee are used to construct and maintain private transport links.
4. The toll fee is a fixed charge, varied depending on the vehicle type, or the distance covered
in long routes.

write a note on compensatory tax.

DOCTRINE OF COMPENSATORY TAXES:
1.Regulatory and Compensatory Restrictions:
These restrictions are valid, because they tend to promote the freedom of trade and commerce
throughout India. They are not restrictive and do not affect the freedom of trade in any way. In
fact, they are beneficial and helpful for the progress of commerce.
E.g.: Traffic regulations of vehicles licences, price control, minimum wages, etc., are all
regulatory restrictions. These are compensatory restrictions because taxes levied on these
restrictions are only used to promote the commerce and trade.

State of H.P. and Others Vs. Yash Pal Gargh & Ors.(2003): The Supreme Court upheld the H.P.
Act which imposed tax on goods carried by road as valid. It also held so long as the tax remains
compensatory or regulatory, it cannot operate as a hindrance to interstate
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2. Direct and Immediate Restrictions:

All taxes are restrictive which are not incidental or indirect. They are considered to be immediate
restrictions and hence these are held to be violative of the Constitution. E.g.: double taxation
border entry Tax, etc., are held to be void, since they are direct restrictions. The following
leading cases will illustrate this subject.

Atiabari Tea Company Vs. State of Assam: The Assam Taxation Act 1954 levied tax for all
goods passing through Assam. The Tea Company was taxed by the Assam Government. The
Company challenged the order by a writ in the Supreme Court. The Court held that the Assam
Taxation Act was void as it imposed direct and immediate restrictions on the freedom of trade
and commerce without getting the prior sanction of the President as required in Art. 304.

Write a note on Centre-State tax relationships.

:
 A. LEVY AND COLLECTION OF TAX BY AUTHORITY OF LAW ONLY:
1) Article 265 of the Indian constitution states that the right to levy/ charge taxes has not been
given to any rule/bylaw/ regulation except by the authority of law.
2) The 7th schedule of the constitution has defined the subjects on which Union / State or both
can levy taxes.
3) As per the 73rd and 74th amendments of the constitution, limited financial powers have been
given to the local governments. These powers are enshrined in Part IX and IX-A of the
constitution.

B. TAXATION SYSTEM UNDER THE INDIAN CONSTITUTION:

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

C. LAW MADE BY UNION GOVERNMENT:

Union Government prevails whenever there is a conflict between the Centre and state
concerning entries in the concurrent list. But 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.

DISTRIBUTION OF POWERS OF TAXATION:

1) List 1 in the 7th schedule to the constitution has the powers of the Central Government listed
in Entries 82- 92B.
2) List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
3) List 3 doesn't deal with taxation and hence both centre and state do not have any concurrent
powers of taxation.
4) Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to
the centre.

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