MODULE 2

CONSTITUTIONAL PROVISIONS OF TAXATION

1. Introduction
• The Constitution of India is the supreme legal authority that empowers
the government to levy taxes.
• Taxation authority does not originate from the government, but directly
from the Constitution.
• Taxation is a fundamental tool for the government to raise revenue while
ensuring fairness and adherence to democratic principles.
2. Constitutional Division of Power
• India has a three-tier federal taxation structure:
1. Central Government
2. State Governments
3. Local Municipal Bodies
• The Constitution strictly limits how and when taxation powers are
exercised to prevent arbitrary taxation.
2.1 Geographic Jurisdiction – Article 245
• Article 245 specifies the territorial authority of law-making:
o Central Parliament → Can make laws for the entire territory of
India.
o State Legislature → Can make laws only for its own state.
2.2 Subject Matter Jurisdiction – Article 246 and Seventh Schedule
• Article 246 divides legislative powers into three lists to prevent
conflicts:
1. Union List (Central Government Exclusive Powers)
o Contains national subjects, including taxes.
o Key entries:
 ▪ Entry 82: Exclusive power to levy taxes on income,
excluding agricultural income.
▪ Entry 83: Customs duties.
▪ Entry 84: Excise duties (e.g., petroleum products).
▪ Entry 85: Corporation tax.
2. State List (State Governments Exclusive Powers)
o Covers local subjects, including local taxation.
o Key entries:
▪ Entry 46: Tax on agricultural income.
▪ Entry 53: Tax on electricity consumption.
▪ Entry 54: Tax on sale of alcoholic liquor.
3. Concurrent List
o Subjects where both Union and State can legislate.
o No standard tax entries exist to prevent overlap.
o Exception: Goods and Services Tax (GST) → Article 279A →
Joint GST Council manages central and state coordination.
3. Fundamental Rights and Tax Protections
• Taxation laws must respect fundamental rights, ensuring fairness,
equality, and protection of property.
1. Right to Equality – Article 14
o Tax laws cannot arbitrarily favor or punish individuals.
o Courts allow reasonable classification:
▪ Example: Old tax system with deductions vs. new simplified
system under Section 115BAC [2025 Act].
2. Freedom of Profession – Article 19(1)(g)
o Citizens have the right to practice any profession or run
business.
 o Government cannot levy taxes that destroy legitimate trade or
impose unreasonable financial burdens.
3. Right to Property – Article 300A
o Protects property rights.
o Taxation legally removes property but only through valid
legislative process.
4. Consolidated Fund and Public Money
• Article 266 establishes the Consolidated Fund of India:
o All tax revenues, especially direct taxes, are deposited here.
o Ensures centralized management and accountability.
• Taxpayers cannot direct their contributions to specific uses.
• Government can spend Consolidated Fund money on:
o Highways
o Defense
o Public salaries
o Social welfare programs
5. Free Trade and Taxation – Articles 301 & 302
• Article 301 → Guarantees free trade and commerce across India.
o States cannot block inter-state movement of goods using taxes.
• Article 302 → Allows Parliament to impose restrictions or taxes for
public good.
o Balances free trade with national economic interests.
6. Key Judicial Interpretations
1. Binoy Viswam vs Union of India (2017)
o Legislative competence upheld: Linking Aadhaar with income tax
is valid.
o Courts cannot strike down law merely assuming arbitrariness.
 2. Kunnathat Thathunni Moopil Nair vs State of Kerala (1961)
o Equality principle: Taxes must fall within legislative
competence.
o State cannot deny equal protection under the law when imposing
taxes.
7. Summary
• Constitution provides:
o Legal foundation for central and state taxation.
o Limits on arbitrary taxation via fundamental rights.
o Clear distribution of powers through Union, State, and
Concurrent Lists.
o Mechanisms for coordination, e.g., GST Council.
• Taxation under the Constitution is a structured, democratic necessity,
not arbitrary government action.
•

ARTICLE 265 – NO TAX WITHOUT AUTHORITY OF LAW

1. Introduction
• Article 265 of the Constitution of India is the fundamental safeguard
for taxpayers.
• It states:
“No tax shall be levied or collected except by the authority of law.”
• Meaning: Both the creation (levy) and collection of a tax must strictly
follow a valid, written statute passed by a competent legislature.
• Protects citizens from arbitrary taxation by the executive or
administrative officials.
2. Key Terms Explained
1. Tax
 o A mandatory financial contribution demanded by the State.
o Not voluntary, not a fee for a service, not a fine for a violation.
o Citizens must pay even without a direct personal benefit.
2. Levied
o Refers to the legal imposition of the tax.
o Must be clearly defined in statute:
▪ Who is liable
▪ What triggers the tax
▪ What is being taxed
3. Collected
o Refers to the physical process of taking the tax.
o Includes assessment procedures, powers of recovery officers,
forms, and notices.
o Arbitrary collection methods are unconstitutional.
4. Authority of Law
o Tax must originate from a valid, written law:
▪ Passed by Parliament (for central taxes)
▪ Passed by competent State Legislature (for state taxes)
3. Four Structural Pillars of Legal Tax Authority

Pillar Description Legal Effect

Permanent statute
Income Tax Act Foundation of all income taxation
passed by Parliament

Annual law fixing rates

Finance Act Determines yearly tax liability
for the year

Income Tax Framed by CBDT for Helps day-to-day operations;

Rules administration cannot create new tax
Pillar Description Legal Effect

Legally binding only on tax

Circulars & Issued by tax
officers, never on citizens; cannot
Notifications authorities for guidance
create tax

• Executive orders or internal memos cannot impose new taxes.

• Customary practices do not have legal authority.
4. Constitutional Validity
• A tax law is valid only if:
1. Passed by a constitutionally competent authority.
▪ Example: States cannot levy corporate tax or customs
duties.
2. Respects fundamental rights:
▪ Equality (Art. 14)
▪ Freedom of trade (Art. 19(1)(g))
▪ Right to property (Art. 300A)
• Violation → Statute declared void; government must refund any
collected money.
5. Judicial Interpretations
1. Chottabhai vs Union of India (1962)
o Article 265 applies to both levy and collection of taxes.
o Executive cannot act without statutory backing.
2. Vikram Cement vs State of Madhya Pradesh (2015)
o Arbitrary or discriminatory taxation without a valid objective is
unconstitutional.
o Example: Denying refunds to some dealers without logic →
violation of Article 265.
6. The Assessee and Legal Notice
 • Assessee: Person legally responsible to pay tax under Section 2(11) of
Income Tax Act, 2025.
• Includes:
o Individuals
o Hindu Undivided Families (HUFs)
o Companies
o Partnership firms
o Local authorities
o Artificial juridical persons
• Legal Notice Requirement:
o Tax demand must be preceded by a formal notice.
o Defective or unauthorized notice → invalid collection.
7. Rule of Strict Interpretation
• Article 265 enforces strict literal interpretation:
o Executive cannot expand tax scope beyond legislature’s intent.
o Only clearly defined incomes/transactions/assets fall under
taxable scope.
• Ensures taxation remains democratic and parliamentary-controlled.
8. Key Takeaways
• Article 265 is the cornerstone of Indian taxation law.
• Taxation without legislative authority is illegal and unconstitutional.
• Protects citizens from arbitrary executive action and ensures
accountability.
• All tax laws must survive:
o Constitutional competence
o Fundamental rights scrutiny
o Strict adherence to statutory procedures
 LEGISLATIVE ENTRIES FOR TAXATION IN INDIA

1. Introduction
• Taxation powers in India are constitutionally divided between the
central government and state governments.
• The Constitution strictly dictates who can tax what to prevent arbitrary
or overlapping taxation.
• Key Articles:
o Article 245 – Territorial jurisdiction of lawmaking
o Article 246 – Subject matter jurisdiction (Union, State, Concurrent
Lists)
o Seventh Schedule – Master list dividing governance subjects
2. Article 245 – Geographical Basis of Lawmaking
• Central Parliament: Can make laws for entire territory of India.
• State Legislature: Can make laws only within its state boundaries.
• Ensures tax laws respect territorial jurisdiction.
3. Article 246 – Division of Subject Matter
• Divides legislative powers by topic, including taxation.
• Prevents conflict between central and state governments.
• The Seventh Schedule lists three categories:
1. Union List – Central government exclusive subjects
2. State List – State government exclusive subjects
3. Concurrent List – Shared subjects (generally no independent
taxes)
4. Union List – Central Taxation Powers
• Exclusive powers of Parliament; major national taxes.
 • Important Entries:

Entry Subject Key Notes

Constitutional foundation of income tax;

Income tax (excluding
82 Section 4 of Income Tax Act, 2025
agricultural income)
derives power here

Customs duties (imports &

83 Protects trade & collects border revenue
exports)

Excise duties (tobacco,

Central excise for domestic production
84 specified goods, except
control
alcoholic liquor)

85 Corporation tax Levied on companies’ profits

Taxes on inter-state
92A Mostly subsumed under GST post-reform
sale/purchase (pre-GST)

5. State List – State Taxation Powers

• Exclusive powers of State Legislatures; local/regional taxation.
• Important Entries:

Entry Subject Key Notes

States exclusively tax farming

46 Agricultural income
income

49 Taxes on land & buildings Local property revenue

Excise duty on alcoholic

51 Regional consumption control
liquor/narcotics

52 Entry tax (pre-GST) Now largely subsumed

Tax on sale/purchase of goods in

54 State-level trade taxes
retained areas
Entry Subject Key Notes

Tax on goods & passengers by

56 Local transport taxation
road/waterways

57 Tax on vehicles Motor vehicle tax

Tax on professions, trades, Professional & employment

60
employments taxation

Local entertainment & luxury

62 Tax on luxuries, entertainment, betting
taxation

6. Concurrent List – Shared Subjects

• Historically, no independent taxation entries exist to avoid overlap.
• Exception: GST system created by 101st Constitutional Amendment:
o Article 246A: Simultaneous power to Parliament & States to
legislate on GST
o Article 269A: Parliament alone legislates on interstate supply
7. Residuary Power – Article 248 & Entry 97, Union List
• If new/unforeseen economic activity arises, Parliament has exclusive
power to tax under residuary clause.
• Ensures taxation authority remains comprehensive and adaptable.
8. Principles of Legislative Interpretation
• Legislative entries must be read narrowly and strictly.
• A legislature cannot move beyond its assigned field.
• Overlap resolution: Courts identify dominant entry to avoid double
taxation.
• Tax imposed outside constitutional competence → invalid, even if
economically similar.
9. Judicial Decisions
1. S Gopalan v State of Madras (1958)
 o “Law” = valid act by competent legislature.
o Tax law must strictly follow legislative competence and respect
constitutional limitations.
2. Chamber Of Tax Consultants v Union of India (2018)
o Executive cannot override statute or judicial interpretation via
delegated standards.
o Parliament alone can enact validation laws.
10. Summary
• Union List: Central taxes (income tax, customs, excise, corporate tax).
• State List: State taxes (agriculture, property, liquor, profession, local
trade).
• Concurrent List: Limited taxation; major exception = GST.
• Residuary power: Exclusive central power for new/unforeseen taxes.
• Judicial oversight: Ensures tax law remains within legislative
boundaries.