Written By: Anshuman Singh
Taxation is not a recent phenomenon that is being followed in almost every country of the world as it has been present in the world since the dawn of civilizations. People from the early civilizations like the Indus valley civilization realized that to create a welfare state it was necessary to ask for some proportion of civilian’s earnings as a tax. In India too the practice of taxing the civilians has been followed since ancient times and it continues till now. As the time changed and India saw the rise and fall of many empires and kingdoms it simultaneously also saw changes in the taxation system as some of the empires had strict and unfair taxation systems in place while the others had little lenient and more just and reasonable. After the arrival of the colonial rulers in India, the taxation system followed in India again saw drastic changes to it, and just like many other empires before the British Empire, the taxation system followed by them was largely unjust and unreasonable as the Indian population, which was already poverty-stricken, was taxed by the Britishers unreasonably and disproportionately. The independence of India, which came in the year 1947, changed the scenario of the taxation system followed in India changed completely. In 1950, when the constitution of India was adopted, a completely new taxation system was brought by it and to this day it is the same system that is being followed in India. This blog focuses on constitutional provisions that are on taxation in India.
Taxation System in India
Taxation in a country like India is one of the most important aspects of the economy as being a developing country while also having great income disparity between the upper class and the lower strata of the Indian society made it crucial for the post-independent governments to have an efficient and systematic taxation system in India which is not only reasonable and as per the need of the Indian society but also helps in creating a welfare state as aimed by the constitution of India. The government uses the tax to have and initiate social welfare projects like schools, hospitals, free food for the poor, etc. Furthermore, not only on a societal level but also on the infrastructural level too taxes help the government, for example, roads, railways, etc. A good taxation system in any country should be equitable and should be as per the distribution of wealth and disparity of income inside the country. Similarly, it should be implemented in such a way that it manages to collect a sufficient amount of revenue for the central government which is required to meet the aims of development. The constitution of India provides extensive provisions which govern the taxation system in India, and it has been quite efficient and has managed to meet the targets that were set by the framers of the constitution at the time of independence.
The Indian tax system is a three-tier federal framework, including the following components:
The Union List i.e. list 1 of the 7th schedule to the Indian Constitution, lists the subjects over which the Central Government has legislative authority as mentioned under Article 246(1) of the Indian constitution. Only those issues on which the State Government has the authority to create laws are included in the State List as mandated under Article 246(3) of the Indian constitution. The Concurrent List contains subjects over which both the federal and state governments have legislative authority as stated under article 246(2) of the constitution. Whenever there is a direct conflict between the Centre and the states over entries in the concurrent list, the Union Government's law takes precedence. However, if a provision in a law established by the president is incompatible with previous legislation made by parliament, the law will be invalidated. Similarly, the constitution also extensively provides for the distribution of taxing power between the state and the central government. The constitution of India distributes it in the following manner: The functions of the Central Government are specified in Entries 82-92B of List 1 of the 7th Schedule to the Constitution.
Similarly, entries 45-63 in List 2 of the schedule list the powers of the state government, and lastly the residuary rights of taxing relating solely to the center are listed in Entry 97 of List 1 in the 7th Schedule.
Now that we have got an overview as to what are the constitutional provisions dealing with the taxation system in India, we can discuss these provisions one by one: Article 268 deals with the stamp duty that is levied by the union and distributed and collected by the states. These taxes are outside the ambit of the consolidated funds of India as these are only allocated by those states upon which they are levied. Article 269 further mandates the union to levy and collect taxes that are deemed to be assigned to the states. A further clause was added to article 269 when parliament through one hundred and a first constitutional amendment added article 269A to the constitution which introduced a new tax known as goods and services tax which is levied and collected by the union government. The collected tax then is to be apportioned between the union and the states on the recommendations of the GST council which was also made a constitutional body under Article 279A. Article 270 gives provisions for the taxes levied and distributed between the union and the states and it mandates that.
Article 265 of the Indian constitution states that without the ‘authority of law,’ no taxes can be collected the term "law" refers solely to statute law or a legislative act. The legislation should not be applied in a way that violates any other article of the Constitution. This article serves as a deterrent against arbitrary tax collection. In the case of Tangkhul v. Simirei shailei  instead of a custom of rendering free a day's labor, all of the villagers were paying the head man Rs 50 every day. Every year, this was done, and the tradition had been passed down through the generations. In this instance, the Court concluded that the sum of Rs. 50 was similar to a tax collection, and no legislation had permitted it, therefore it violated Art 265 and it was held that every time the legislation does not permit the tax levied, Article 265 is violated. Similarly, in the case of Lord Krishna Sugar Mills v. Union of India  in a government-sponsored marketing program, sugar merchants were required to fulfill certain export objectives, but if they fell short, an extra excise charge was to be assessed on the deficit. The court stepped in and declared that the government lacked the jurisdiction to levy this extra excise tax. This effectively implies that the administration cannot impose this tax on its own because it has not been approved by Parliament. Except for the duties and taxes listed in articles 268, 269, and 269A, all taxes and duties included in the Union List must be paid individually. The Union Government collects taxes and surcharges on taxes, duties, and cess on certain activities that are stated in Article 271 of any statute passed by Parliament. The profits of any tax or duty collected in a given fiscal year are distributed to the states where the tax or duty is collectible in that year, but they are not included in the Consolidated Fund of India any tax collected by the center shall be split equally between the center and the states, as stipulated in clause (2).
India, being a developing country that faces various socio-economical issues and great income and wealth disparity among the different strata of the Indian society cannot have the same taxation system for everyone. This is the reason why India's tax structure has been so complex for so long. India has been dealing with the issue of tax evasion, which appears to be hollowing out our taxation structure. India's tax rate is high, but its direct tax yield is modest. As a result, the government has attempted to lower taxes throughout time. Furthermore, for a country to succeed, its tax collecting system must be robust and efficient, even if tax rates are not high, or else the country's coffers would be exhausted and developmental programs will be slashed. One of the most serious flaws in India's taxation system is the government's ability to modify tax statutes retroactively. The procedure has grown easier since the establishment of the GST, which is an all-inclusive indirect tax that has helped eliminate the cascading effect that existed previously. The Indian Constitution provides provisions for the division of financial resources in chapter two of part twelfth, which corresponds to the Federal, State, and Concurrent list in the 7th Schedule.
Tangkhul v. Simirei shailei, AIR 1961
Lord Krishna Sugar Mills v. Union of India, 1959 AIR 1124, 1960 SCR (1) 226