All laws and executive actions are subordinate to the constitution of 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 constitution is the foundation and source of powers to legislate taxing laws in India.
The constitution is the supreme law of the land and it is higher than anything in India. It is a holistic document and provides the rights, liabilities of various parties. It provides fundamental rights, Directive Principles, different Institutions like Judiciary, election commission, and various things.
The constitution itself provides for the government laws. The constitution itself provides the power of the government. Therefore this is the source for the constitution is for the government itself and the constitution resource for the power of government.
Government taxation is nothing but the inherent power of the Government and the government levy and collects the taxes and this power of government is derived from the constitution of India itself.
The power of the Parliament or state to legislate any lawyer in the law regarding levy and collection of the taxes. Their restrictions that are imposed by the constitution on such powers, entries are related to taxation in union list, state list, etc as given in the 7th Schedule.
All are originated from the Constitution of India itself. So the constitution is a basic source of tax, taxation, government power of taxation, etc. All the laws, executed actions that are subordinate to the constitution and even the taxing laws, taxing orders that should be subordinate to the constitution.
Provisions of the Indian Constitution that are directly or indirectly related to tax
Part 12 of the Indian Constitution from Article 264 to 300A covers finance property, contracts, and suits.
Constitution provisions of taxation are discussed between Article 265 to 289.
Center-state relation regards to tax are discussed between Article 264 to 291.
Article 265 – It discussed that no tax shall be levied a collected except by the authority of law.
The four important provisions that are consolidated funds, public accounts, contingency funds, and the custody of funds are discussed under Article 266, 267, 282, 283, and 284.
The relationship between taxation and fundamental rights or the constitutional remedies against illegal taxation are discussed under Article 13, 14, 19(1) (a), and 27.
Power of the Union and the states to levy taxes are discussed under 7th Schedule (Union list, State list and concurrent list (who got the tax on what purpose)
Distribution of tax resources between the Union and the states are discussed between Article 268 to 279)
The surcharge is discussed under Section 271 whereas the provision related to finance. The commission is discussed under Article 280 and 281.
Preamble of Indian Constitution
The preamble of the Indian Constitution is nothing but the key to open the mind of the constitution and it provides the object of the Indian Constitution. It sets outs of objects, goals that to be fulfilled by the government under the Indian Constitution. so object of every taxing law that is enacted as per the provisions of the constitution that should be framed in such a manner to help the objects and goals that are enumerated by the preamble of the constitution. It starts from We the People of India and it sets certain goals. Among these important goals, it is the responsible government of India to secure justice for its citizens and the nature of that justice is economic, social, and political. For economic and social justice, it requires some positive acts from the government and this positive acts is to do certain activities to perform welfare functions and for that purpose, it needs fund and that fund can be raised through taxes.
The preamble through its social, economic, and political justice imposes an obligation on the state government to perform certain activities. so the preamble is necessary and it sets our goals and those goals can be assured by the government through its various functions and for that functions, it requires money, it requires funds, funds can be raised through the taxes.
In fundamental rights also, certain provisions are indirectly connected with taxation.
Equality before law – The state shall not deny to any person equality before the law and there should be equal protection of the law. There should be any discrimination between the persons. All persons should be treated equally with regard to the levy and collection of tax. There should not be any discrimination, equally should be maintained but here also, the government can give exemption to certain persons, who are unable to pay tax, who are the weaker sections that can be done by reasonable classification which is allowed by Article 14 of Indian Constitution. Equality before the law is also a principle that is related to taxation.
Article 15 provides that nobody should be discriminated on the basis of sex, caste, religion, etc. and Article 19 which provides the 6 golden freedoms so regarding among these 6 Golden freedoms – one of very important golden freedom is right to practice in a profession or to carry on any occupation, trade, business, etc. Though this is golden freedom this is not absolute and the government has the right to impose certain reasonable restrictions. Government has the right to impose reasonable restrictions and these reasonable restrictions are provided by Article 19 sub-clause 6 which provides that the government may impose certain restrictions for the regulation of trade, business, profession, etc in the interest of the General Public. The Government has the right to impose a tax on that trade, business, profession, etc.
Article 27-provides that no tax shall be levied on a person following a particular religion. A government while imposing the tax shall not make any discrimination based on religion. For example – In India, the majority of people are Hindus and minorities are Muslim, Christian, etc. So the government cannot impose any specific tax on those persons following the religion other than the Hindu religion. So specific tax cannot be imposed on any person.
Directive Principles are not enforceable by the court in case of violation. It is the responsibility of the state to try to implement or protect such rights which are provided under directive principles. Under the directive principle, there are some articles that are indirectly connected with taxation.
Article 38 – State to secure a social order for the promotion of the welfare of the public. The government must act in such a way that he has to provide welfare to the public at large. The functions on activity to be performed by Government must not against the welfare of the public. If any expenditure is necessary, that expenditure should be borne from the consolidated fund of India and it can be raised through various sources. Taxation of one of those sources to raise the consolidated fund of India.
Article 38 provides some guidelines that it is the responsibility of the government to promote welfare, securing social, economic, and political justice, and to minimize the equalities in income, it can be minimized by imposing more taxes on rich people and use that tax amount for the welfare of poor people.
Article 39 – This article also imposes an obligation upon the state or government to secure a social order for the promotion of the welfare of the people. It is the responsibility of the state that the policy of the government should be made in such a manner to secure the right to an adequate means of livelihood without any discrimination and government policies should be a frame in such a manner that ownership and control of material resources of the community shall be distributed in such a manner to subserve the common good.
Article 265 – No tax without the authority can be levied. It can be levied only by the Parliament / Legislature. In the case of Atlas Cycle industries limited State of Haryana, SC that notification imposing a tax cannot be deemed to be extended to new areas included in the municipality. There are 6 important things are need to observe while levying taxes under Article 265. They are –
Levy of tax must be within the legislative preview.
Levy of tax must be only with the clear legislative intention to levy such tax.
There must be no presumption in the levy of tax. There should not be any analogy available for making any presumption of tax.
For the levy of tax, the fiscal statute must be read as a whole.
Spirit of law alone is not a basis for levy of tax. There should not be any implied meaning.
Strict and favorable construction of tax enactments should be available.
The 7th Schedule is one of the main important aspects. It has 3 types of the list which discuss who got what power to decide taxation on.
Union list – Article 246(1) stated that the Parliament has the exclusive powers to make law as per list I of the 7th Schedule.
State list – Article 246(3) stated that the state government has the exclusive power to make law as per list II of the 7th Schedule.
Concurrent list – Where both union and the state government the power to make rules and laws.
Taxation is aligned according and there should not be any kind of interferences between thew union and the state list.
There are 2 other important provisions – Surcharge and Grant in aid.
Surcharge – When the state is putting taxes but parliament is also authorized to levy additional tax over state taxation subject. It is called a surcharge.
Grants in aid – Whatever the tax is collected, the major part of it is going to state in the name of welfare. Whenever there is any kind of contingent situation, the Central/ Union will give grants in aid and there are 3 important conditions for that –
Firstly is a yearly grant in aid which is very common to give to Assam, Bihar, Orissa, West Bengal because the export duty in June is released by Union. So every year they have to grant aid to these 4 states.
Second are other states like if there is any drought/ flood/ earthquake or any other natural calamity, to attend that state government do not have sufficient funds. In that case, the Union will support in the name of Grants in aid.
The third one is for the promotion of Schedule caste and Schedule tribe, the Union will support the state.
Limitation of taxation law when it comes to the provisions of the constitution
The taxation law must contravene the provisions of Article 13. They should not harm equal protection of the law under Article 14.
There must not be any unreasonable restrictions upon the right to business [Article 19(1)(g)]
No tax shall be levied on the proceeds of which are specially appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination under Article 27.
A state legislature or any authority within the state cannot tax the property of the Union Article 285.
Union cannot tax the property and income of a state Article 289.
These are the 2 articles which are protecting the interest of Union and State Article 285 protects the interest of Union whereas Article 289 protects the interest of the State.
The power of the state to levy tax on sale or purchase of goods is subject to Article 286.
And Article 287 discuss save in so far as parliamentary may, by law, otherwise provide, a state shall not tax the consumption or sale of electricity in the cases.
It comes to the conclusion that all these articles are very important related to taxation and must be deeply understood by every tax professional. Interpretation of every law, validity of subordinate legislation and administrative action must be judged in the background of the provisions of the constitution.