FEDERAL BASE OF TAXING POWER

INTRODUCTION

Indian constitution has divided the taxing powers as well as the spending powers (and
responsibilities) between the Union and the state governments. The subjects on which Union
or State or both can levy taxes are defined in the 7th schedule of the constitution. Further,
limited financial powers have been given to the local governments also as per 73rd and 74th
amendments of the constitution and enshrined in Part IX and IX-A of the constitution.

Since the taxing abilities of the states are not necessarily commensurate with their spending
responsibilities, some of the centre’s revenues need to be assigned to the state governments.
On what basis this assignment should be made and on what guidelines the government should
act – the Constitution provides for the formation of a Finance Commission (FC) by President
of India, every five years, or any such earlier period which the President deems necessary via
Article 280. Based on the report of the Finance Commission, the central taxes are devolved to
the state governments.

CONTENTS :

 Separation of Powers
 Sources of Revenue for Union Government
 Sources of revenue for State Governments
  Certain Taxes levied as Concurrent Powers
 State’s power Regarding Sales Tax
 Other facts about levying and appropriation of Taxes

- SEPARATION OF POWERS

The Union government is responsible for issues that usually concern the country as a whole,
for example national defence, foreign policy, railways, national highways, shipping, airways,
post and telegraphs, foreign trade and banking. The state governments are responsible for
other items including, law and order, agriculture, fisheries, water supply and irrigation, and
public health.

Some items for which responsibility vests in both the Centre and the states include forests,
economic and social planning, education, trade unions and industrial disputes, price control
and electricity. Then, there is devolution of some powers to local governments at the city,
town and village levels.

The taxing powers of the central government encompass taxes on income (except agricultural
income), excise on goods produced (other than alcohol), customs duties, and inter-state sale
of goods. The state governments are vested with the power to tax agricultural income, land
and buildings, sale of goods (other than inter-state), and excise on alcohol. Local authorities
such as Panchayat and Municipality also have power to levy some minor taxes.

The authority to levy a tax is comes from the Constitution which allocates the power to levy
various taxes between the Centre and the State. An important restriction on this power is
Article 265 of the Constitution which states that “No tax shall be levied or collected except
by the authority of law.” This means that no tax can be levied if it is not backed by a
legislation passed by either Parliament or the State Legislature.

- SOURCES OF REVENUE FOR UNION GOVERNMENT

The sources of Revenue of the Union Government are as follows:

 Income (except tax on agricultural income), Corporation Tax & Service Tax
 Currency, Coinage, legal tender, Foreign Exchange
 Custom duties (except export duties)
 Excise on tobacco and other goods.
 Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the
constitution but Estate duty was abolished in India in 1985 by Rajiv Gandhi Government)
 Fees related to any matter in Union list except Court Fee
 Foreign Loans
 Lotteries by Union as well as State Governments.
 Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting,
other forms of communication
 Property of the Union
 Public Debt of the Union
 Railways
 Stamp duty on negotiable instruments such as Bills of Exchange, Cheques,
Promissory notes etc.
 Reserve Bank of India
 Capital gains taxes, Taxes on capital value of assets except farm land
 Taxes other than stamp duties on transactions in stock exchanges and future markets
 Taxes on the sale and purchase of newspapers and advertisements published therein.
 Terminal Taxes on Goods and passengers, carried by Railways and sea or air.

- SOURCES OF REVENUE FOR STATE GOVERNMENTS

The following are sources of revenue for State Governments.

 Taxes and duties related to agricultural lands

 Capitation Taxes
 Excise on liquors, opium etc.
 Fees on matters related to state list except court fee
 Land Revenue, Land and buildings related taxes
 Rates of Stamp duties in respect of documents other than those specified in the Union
List
 Taxes on mineral rights subject to limitations imposed by the parliament related to
mineral development
 Taxes on the consumption or sale of electricity
 Sales tax on goods (other than newspapers) for consumption and use within state.
 Taxes on advertisements except newspaper ads.
 Taxes on goods and passengers carried by road or on inland waterways
 Taxes on vehicles, animals and boats, professions, trades, callings, employments,
luxuries, including the taxes on entertainments, amusements, betting and gambling.
 Toll Taxes.

-  CERTAIN TAXES LEVIED AS CONCURRENT POWERS

 Please note that the Union and the State Governments have the concurrent powers to fix the
principles on which taxes on motor vehicles shall be levied and to impose stamp duties on
non-judicial stamps. The property of the Union is exempted from State Taxation; and the
property of the states is exempted from the Union Taxation. But the parliament of India can
pass legislation for taxation by Union Government of any business activities / trade of the
state which are not the ordinary functions of the state.
Residuary Power of Taxation
Union Government has exclusive powers to impose taxes which are not specifically
mentioned in the state or concurrent lists. Some taxes imposed using these powers include
Gift tax, wealth tax and expenditure tax.

- STATE’S POWER REGARDING SALES TAX

The sales tax on consumer goods such as toothpastes, soaps, daily use items, electronic items
etc. are imposed, collected and appropriated by state governments.  However, newspapers
and newspaper ads are exception to this. Further, there are four restrictions to this power of
the state. These include:

 A state cannot impose sales tax if a good is produced there but is sold outside the
state.
 A state cannot impose sales tax if the sale and purchase is taking place for items due
for export.
 A state cannot impose tax on interstate trade and commerce of goods
 State cannot impose a tax on a good that has been declared of special importance by
parliament.

- OTHER FACTS ABOUT LEVYING AND APPROPRIATION OF

TAXES

 Sales tax is imposed, levied, collected, appropriated by states as mentioned above

 Income tax, Corporation Tax, Service tax are levied and collected by Centre but are
appropriated by both states and centres as per distribution formula recommended by Finance
Commission. This formula is NOT binding upon the parliament.
 However states have no share in surcharges, cesses on these taxes.
 Stamp duties on negotiable instruments and excise duties on medicinal and toilet
preparations that have use of alcohol and narcotics are levied by Centre. But these taxes don’t
make a part of consolidated fund of India. They are assigned to respective states only, which
appropriate these taxes.
 Sales tax in case of Inter-state trade of goods (except newspapers) is levied and
collected by the centre but such proceeds are assigned to states. (This is known as Central
Sales Tax
CASE LAWS
The court, however, ventured to spell out the most prominent aspects of the essential
legislative function in HARI SHANKAR BAGLA VS MADHYA PRADESH as follows:

It was settled by the majority judgment in the article 143 of the constitution of India and In re
Delhi Laws Act 1912 etc., that essential powers of legislation cannot be delegated. In other
words, the legislature cannot delegate its function of laying down the legislative policy in
respect of a measure and its formulation as a rule of conduct. The legislature must declare the
policy of the law and the legal principles, which are to control any given cases and must
provide a standard to guide officials or the body in power to execute the law. The essential
legislative function consists in the determination or choice of the legislative policy and of
formally enacting that policy into binding rule of conduct.

The supreme court upheld section 3 (2) (d) of the essential commodities act which delegated
legislative power in almost similar terms in  LINGAM VS INDIA.

S. 3 of the Essential Supplies (Temporary Powers) Act, 1946 amounts to delegation of

legislative power outside the permissible limits is again without any merit. It was settled by
the majority judgment in the - 'Constitution of India and Delhi Laws Act, 1912, etc.,' that
essential powers of legislation cannot be delegated. In other words; the Legislature cannot
delegate its function of laying down legislative policy in respective of a measure and in
formulation as a rule of conduct. The Legislature must declare the policy of the law and the
legal principles which are to control any given cases and must provide a standard to guide the
officials or the body in power to execute the law. The essential legislative function consists in
the determination or choice of the legislative policy and of formally enacting that policy into
a binding rule of conduct. In the present case the Legislature has laid down such a principle
and that principle is the maintenance or increase in supply or essential commodities and of
securing equitable distribution and availability at fair prices. The principle is clear and offers
sufficient guidance to the Central Government in exercising its powers under S. 3. Delegation
of the kind mentioned in S. 3 was upheld before the Constitution in a number of decisions of
their Lordships of the Privy Council, and since the coming into force of the Constitution
delegation of this character has been upheld in a number of decision of this Court on
principles enunciated by the majority in the. As already pointed out the preamble and the
body of the sections sufficiently formulate the legislative policy and the ambit and character
of the Act is such that the details of that policy can only be worked out by delegating them to
a subordinate authority within the framework of that policy.

In BHATNAGARS AND CO VS INDIA the supreme court upheld s (3) (a) of the imports
and exports control act 1947 which authorised the central government to prohibit or restrict
the import or export of goods of any specified description. The act did not contain any
statement of policy. The court however referred to the preamble of the defence of India act
1939, which was a predecessor act providing for similar control of imports and exports, to
find the policy which the impugned statute had purported to continue.

In MAKHANSINGH VS PUNJAB, the supreme court upheld s 3 of the defence of India act
1962, which empowered the central government to make rules as it ` appears expedient’ to it
for the defence of India and maintenance of public order and safety.
In D S GAREWAL VS PUNJAB, s 3 of the all India services act 1951, which authorised the
central government to make rules to regulate conditions of service in the All India Services
was upheld though the act contained absolutely no guidance. The act provided that pending
the making the new rules, the rules existing on the date on which the law was enacted were to
continue and the court observed that the policy had been indicated in such existing rules.
While upholding the delegation of rule making power, the court relied upon the fact that the
rules were required to be laid before the parliament.

IN HARAK CHAND VS INDIA, s 5 (2) (b) of the gold control act 1968 was held to be
invalid on the ground of excessive delegation. The section authorised the administration ` so
far as it appeared to him to be necessary or expedient for carrying out the provisions of the
act’ to regulate by licenses, permits or otherwise, the manufacture, distribution,
transportation, acquisition, possession, transfer, disposal, use or consumption of gold. The
court held that the power was `legislative’ in character and was not controlled either by any
guidance in the act or by a provision for legislative supervision.

In DK TRIVEDI VS GUJARAT, the supreme court held s 15 (1) of the mines and miner
( regulation and development) act 1957. The section conferred rule making power on the state
government for regulating the grant of quarry leases, mining leases or other mineral
concessions in respect of minor minerals and for purposes connected therewith. It was
contented that s 15 (1) much as the power delegated was unguided and uncanalised enabling
the state governments to act arbitrary with respect to minor minerals. Madan j held that the
power conferred on the state governments was subject to guidelines contained in the objects
for which the power was conferred and therefore it did not amount to excessive delegation of
legislative power. It was held that the delegation of power to enhance the rate of royalty on
mines and minerals under the above act did not amount to excessive delegation of legislative
power was subject to the following restrictions:

(i) Bar to enhancement of royalty before the end of three years;

(ii) A requirement that the royalty to be fixed ought to have a nexus with the royalties
elsewhere;
(iii) The rules were required to be laid before the parliament.

In GWALIOR RAYON SILK MANUFACTURING CO LTD VS ASSISTANT

COMMISSIONER OF SALES TAX, S8 (2)(b) of the central sales tax act which authorised
levy of sales tax on sale of goods in the course of inter state trade and commerce at the rate of
10 percent or at the rate applicable to the sale or purchase of goods inside the appropriate
state, whichever is higher was challenged. The impugned section was upheld by all the
judges, though they differed on the extent of permissible delegation. Khanna j rejected the
argument that since the legislature could repeal the act it had retained enough control over
subordinate legislation and therefore it was not necessary to lay down legislative policy or
guidelines for the delegate.

BANARASI DAS V. STATE OF MADHYA PRADESH. In this case the Supreme Court
was confronted with the question as to whether Section 6(2) of Berar Sales Tax Act, 1947
which empowered the State government to amend the schedule of the Act providing either for
exemption from sales tax or to bring in other goods within the purview of sales tax, was
suffering from the vice of excessive delegation. The Supreme Court speaking through Justice
VenkataramaAiyer held that the impugned provision was not an impermissible delegation of
legislative power. The Supreme Court relied on Raj Narain’s Case and held that the executive
can determine details relating to the working of taxation laws, such as the selection of persons
on whom the tax is to be laid and the rates at which it is to be charged. In the instant case the
Court also referred to POWELL V. APOLLO CANDLE CO. LTD. AND SYED
MOHAMMED AND CO. V. MADRAS AND HAMPTON JUNIOR AND CO. V.
US and went on to hold that the power conferred by Section 6(2) was not unconstitutional.
Actually, the judicial comprehension of the judgment in Banarasi Das case came to light
only after the subsequent judgments like in the case of Corp. of Calcutta v. Liberty Cinema,
wherein the court held there was no distinction in principle between delegating a power to fix
rates of taxes to be charged on different classes of goods and a power to fix rates simpliciter.
Thus, in the instant case the majority upheld the validity of Section 548(2) of the Calcutta
Municipal Act, 1951 was not void notwithstanding that no guideline was issued

. Two years later in the year 1967 in the case OF DEVI DAS V. STATE OF PUNJAB, the
Supreme Court was confronted with the question as to whether Section 5 of the Punjab
General Sales Tax (Amendment) Act, 1948 suffered from the vice of excessive delegation.
The provision empowered the executive to levy sales tax at the rate not exceeding 2%. The
Court stated that it was alright to confer a reasonable area of discretion on the Government by
a fiscal statute, but a large statutory discretion by means of a wide gap between the maximum
and the minimum rates and thus enabling the government to fix an arbitrary rate is not
sustainable. While over the other provision in the same case which gave a power to the
government to impose tax at any rate from time to time was held to be void. Justice Subba
Rao, speaking for the constitution bench held that the power conferred on the provincial
government to levy every year on the taxable turnover of a dealer a tax at such rates as the
said government might direct was an uncontrolled power. He also added that the legislature
practically effaced under that section as no guidance could be gathered under that section or
any other provisions of the Act.

In the case of CST, UP V. BAKHTAWAR LAL KAILASH CHAND ARHTIIT was that

it is immaterial whether a completed sale precedes the movement of goods or follows the
movement of goods or takes place while the goods are in transit. What is important is that
movement of goods and the sale must be inseparably connected, moreover the movement
shall be physical and such movement must be inextricably connected with sale. This Sale
need not precede the inter-State movement. Sale can be either before the movement or after
the movement.

As the purposes differ, the nature and the modes of exercise of sovereign power by the
Parliament, as the Peoples’ delegate, under Parts XI and XX, differ. The exercise of Power by
the Parliament under Part XI is ordinary legislative Power, within the prescribed limits of
authority. The exercise of Power by the Parliament under Part XX, being special in nature, is
extra-ordinary, in its mode of exercising the law making Power within its prescribed limits of
authority. Considering, the special nature with reference to the mode of exercising the
extraordinary power, under Part XX, the unenumerated power to amend Part III under Art.
368 of Part XX, the exercise of which by any organ in the state, is expressly forbidden under
Art.13(2), as an incident of the Peoples’ exercise of sovereign power of retaining
Fundamental Rights under Part III, in the process of exercising the Rights of Self-
Determination, the unenumerated power to amend Part III under Art.368 of Part XX cannot
be construed as one identical with unenumerated ordinary legislative power, under Entry 97,
List I, Schedule VII read with Art.248 of Part XI as is held in the decision of Golak Nath v.
The State of Punjab