Taxation Power is Derived from Art.265 of the Constitution of India

Taxation Power is Derived from Art.265 of the Constitution of India — Explain the Object of Taxation

Taxation is the primary means by which a government raises revenue to finance its activities and fulfil its obligations to its citizens. In India, the power to levy and collect taxes is derived from the Constitution of India, which is the supreme law of the land. The most fundamental provision governing taxation in India is Article 265 of the Constitution, which acts as the cornerstone of the entire taxation system.

Article 265 of the Constitution of India states:

"No tax shall be levied or collected except by authority of law."

This short but enormously significant provision establishes the fundamental principle that taxation is a sovereign power that can only be exercised through law — i.e., through legislation passed by Parliament or the State Legislature. No executive action, administrative order, or arbitrary government decision can impose a tax. The levy and collection of every tax must be backed by a valid law enacted by a competent legislature.

Article 265 — Analysis and Significance

Meaning of "No Tax Shall Be Levied or Collected"

Article 265 places two distinct restrictions on the government:

1. No Tax Shall Be Levied The government cannot impose or charge a tax without the authority of law. "Levying" a tax means imposing the tax liability on a person — determining who must pay, how much, and on what.

2. No Tax Shall Be Collected Even if a tax has been levied by law, it cannot be collected in a manner not authorized by law. "Collecting" a tax means the actual recovery of the tax amount from the taxpayer.

Meaning of "Except by Authority of Law"

The phrase "by authority of law" means that the tax must be:

Imposed by a valid law enacted by a competent legislature
The law must be within the legislative competence of the legislature that enacted it
The law must not violate any provision of the Constitution including Fundamental Rights
The law must clearly specify the nature of the tax, the persons liable, the rate, and the procedure for collection

The Supreme Court in Against State of Rajasthan v. Sajjansingh (1965) held that the word "law" in Article 265 means a valid, constitutional law enacted by a competent legislature.

Constitutional Framework for Taxation

Division of Taxing Powers — Seventh Schedule

The Constitution of India divides the power to levy taxes between the Central Government and State Governments through the Seventh Schedule, which contains three lists:

Union List (List I) Parliament has exclusive power to levy taxes mentioned in the Union List. Important entries include:

Entry 82 — Taxes on income other than agricultural income
Entry 83 — Duties of customs including export duties
Entry 84 — Duties of excise on tobacco, petroleum products
Entry 85 — Corporation tax
Entry 92A — Taxes on sale or purchase of goods in inter-state trade (CST — now subsumed in GST)
Entry 97 — Residuary powers — any tax not mentioned in State List or Concurrent List

State List (List II) State Legislatures have exclusive power to levy taxes mentioned in the State List. Important entries include:

Entry 45 — Land revenue
Entry 46 — Taxes on agricultural income
Entry 47 — Duties in respect of succession to agricultural land
Entry 48 — Estate duty in respect of agricultural land
Entry 49 — Taxes on lands and buildings
Entry 54 — Taxes on sale or purchase of goods (VAT — now subsumed in GST)
Entry 55 — Taxes on advertisements other than in newspapers
Entry 56 — Taxes on goods and passengers carried by road
Entry 60 — Taxes on professions, trades, callings, and employments
Entry 62 — Taxes on luxuries including taxes on entertainments

Concurrent List (List III) Neither Parliament nor State Legislatures have exclusive taxation powers under the Concurrent List. However, Entry 25 of the Concurrent List deals with fees in courts.

GST — Article 246A (Added by 101st Amendment) After the introduction of GST, Article 246A was added which gives both Parliament and State Legislatures the power to make laws with respect to GST.

Doctrine of Pith and Substance

Since the taxing powers of the Centre and States are divided, disputes often arise about whether a particular tax falls within the competence of Parliament or the State Legislature. The Supreme Court applies the doctrine of pith and substance to resolve such disputes.

Under this doctrine, the court looks at the true nature and character of the legislation. If the pith and substance of the law falls within the competence of the legislature that enacted it, the law is valid even if it incidentally trenches upon a subject in the other legislature's list.

In State of Bombay v. United Motors (India) Ltd. (1953), the Supreme Court applied this doctrine to uphold a state law on taxation.

Object of Taxation

Taxation serves multiple important objectives in a modern democratic state like India. These objectives can be broadly classified as follows:

1. Revenue Generation — Primary Object

The primary and most fundamental object of taxation is to raise revenue for the government to finance its activities. Without tax revenue, the government cannot:

Pay salaries of government employees
Maintain law and order through police and judiciary
Provide defence and national security
Build and maintain infrastructure (roads, bridges, dams)
Run public schools, hospitals, and universities
Pay interest on public debt

In India, the major sources of tax revenue include income tax, GST, customs duty, and excise duty. Tax revenue forms the largest component of the government's receipts.

2. Redistribution of Wealth — Social Object

One of the most important objects of taxation in a welfare state is the redistribution of wealth from the rich to the poor. This is achieved through:

(a) Progressive Taxation — The income tax in India is progressive — higher income earners pay a higher percentage of their income as tax. This reduces the gap between the rich and the poor.

(b) Wealth Tax — The now-abolished Wealth Tax Act, 1957 levied tax on accumulated wealth of rich persons to reduce concentration of wealth. The Constitutional basis for this is Article 39(c) which directs the State to ensure that wealth is not concentrated in the hands of a few.

(c) Expenditure on Poor — Tax revenue is used to fund welfare schemes for the poor — MGNREGA, PM Awas Yojana, free ration schemes, etc. This effectively transfers wealth from taxpayers to the poor.

3. Economic Regulation — Regulatory Object

Taxation is used as a powerful tool for regulating economic activity and achieving specific economic policy objectives:

(a) Encouraging Savings and Investment — Deductions under Section 80C of the Income Tax Act (for investments in PPF, ELSS, NSC, life insurance) encourage citizens to save and invest, channeling funds into productive economic activities.

(b) Encouraging Specific Industries — Tax holidays and deductions for specific sectors (like startups, SEZs, renewable energy) encourage investment in these areas.

(c) Discouraging Harmful Activities — High taxes on tobacco, alcohol, and luxury goods (sin taxes) discourage consumption of harmful products. This serves both a fiscal and a social purpose.

(d) Import Protection — High customs duties on imported goods protect domestic industries from foreign competition.

(e) Export Promotion — Exemptions from GST and customs duty on exports make Indian goods more competitive in international markets.

4. Achieving Constitutional Directives — Welfare Object

Taxation is an important instrument for achieving the Directive Principles of State Policy enshrined in Part IV of the Constitution:

Article 38 — Promoting the welfare of the people and reducing inequalities of income and status
Article 39(b) — Ensuring that the ownership and control of material resources is distributed to serve the common good
Article 39(c) — Preventing concentration of wealth to the common detriment
Article 41 — Providing right to work, education, and public assistance
Article 47 — Raising the level of nutrition and standard of living

Tax revenue funds the government's efforts to implement these constitutional directives.

5. Stabilization of Economy — Macroeconomic Object

Taxation is used as a macroeconomic tool to stabilize the economy:

(a) Controlling Inflation — When there is excess money in the economy leading to inflation, the government can increase taxes to reduce purchasing power and cool down inflation.

(b) Stimulating Growth — During economic recession, the government can reduce taxes (as was done during COVID-19) to put more money in people's hands and stimulate economic activity.

(c) Reducing Fiscal Deficit — Increasing tax revenue helps the government reduce its fiscal deficit (the gap between its expenditure and revenue).

6. Encouraging Compliance and Formalization — Administrative Object

The taxation system, particularly GST, is designed to encourage businesses to operate in the formal economy by providing incentives (like input tax credit) for registration and compliance. This brings more businesses into the tax net, broadens the tax base, and reduces tax evasion.

Limitations on Taxing Power

While the taxing power under Article 265 is wide, it is subject to important constitutional limitations:

1. Must be Within Legislative Competence

The tax must be levied under an entry in the appropriate List of the Seventh Schedule. A tax outside the legislature's competence is unconstitutional.

2. Must Not Violate Fundamental Rights

The tax law must not violate the Fundamental Rights guaranteed under Part III of the Constitution, particularly:

Article 14 — Equality before law (no arbitrary or discriminatory taxation)
Article 19(1)(g) — Right to carry on trade or profession (tax must not be confiscatory)
Article 300A — Right to property (tax cannot amount to deprivation of property without authority of law)

3. Must Not be Excessive or Confiscatory

While there is no express constitutional prohibition on high taxes, the Supreme Court has held in several cases that a tax that is so high as to be confiscatory may violate Article 19(1)(g) or Article 14.

4. Must Follow Prescribed Procedure

The tax must be levied and collected strictly in accordance with the procedure prescribed by the law. Any collection not in accordance with the prescribed procedure violates Article 265.

Important Case Laws on Article 265

1. Collector of Customs v. Nathella Sampathu Chetty (1962)

The Supreme Court held that Article 265 is a comprehensive provision that covers all kinds of taxes and that both the levy and the collection must be authorized by law.

2. Bolani Ores Ltd. v. State of Orissa (1975)

The Supreme Court held that a tax collected in excess of what is authorized by law must be refunded to the taxpayer, as excess collection is contrary to Article 265.

3. Mathuram Agarwal v. State of Madhya Pradesh (1999)

The Supreme Court held that Article 265 is a fundamental constitutional safeguard against arbitrary taxation and that any tax not backed by a valid law is unconstitutional.

4. In re Sea Customs Act (1963)

The Supreme Court held that customs duties are taxes within the meaning of Article 265 and must be levied and collected only under the authority of law.

5. Shri Prithvi Cotton Mills v. Broach Municipality (1969)

The Supreme Court held that even if a tax has been declared invalid by a court, the legislature can retrospectively validate it by passing an appropriate law, provided the retrospective law does not violate any constitutional provision.

Conclusion

Article 265 of the Constitution of India is the bedrock of India's entire taxation system. By requiring that every tax be levied and collected only by authority of law, it protects citizens from arbitrary and illegal taxation and ensures that the government's enormous power to tax is exercised only through democratic and constitutional processes. The objects of taxation — revenue generation, redistribution of wealth, economic regulation, welfare promotion, and macroeconomic stabilization — reflect the multifaceted role that taxation plays in a modern welfare state like India. Taxation is not merely a fiscal instrument but a powerful tool for achieving social justice, economic equality, and constitutional values. A proper understanding of Article 265 and the objects of taxation is therefore fundamental to any study of Indian constitutional and taxation law.

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