AURORA LAW COLLEGE: HYDERABAD
FIRST ASSESSMENT - LLB (3 YDC)
TERM-II- 2024-25
Name of the Subject: Principles of Taxation Law
Assignment-I
QP Published on May 08, 2025
Name of the Candidate: VEGGALAM RAJITHA. Roll No: ABU23LWTYL055.
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Q 1. Discuss how taxation powers are divided between Centre and State
Governments in India
Ans: Constitutional Basis for Division of Taxation Powers
The Constitution of India, under Article 246 and the Seventh Schedule, divides
legislative powers between the Centre and States through:
Union List (List I) – Exclusive to Parliament
State List (List II) – Exclusive to State Legislatures
Concurrent List (List III) – Both can legislate, but Central law prevails in
case of conflict
Taxation powers, however, are primarily distributed between the Union and
State Lists—there are no taxation entries in the Concurrent List (except
incidental overlaps).
2. Union List – Taxes Levied by the Central Government
The Central Government has exclusive powers to impose the following taxes:
Tax Type Details
Income Tax (excluding agricultural
Tax on individual and corporate income
income)
Corporate Tax Tax on company profits
Customs Duty Tax on imports and exports
Tax Type Details
Excise Duty (now subsumed under Earlier levied on manufactured goods; now
GST for most goods) only on alcohol and tobacco
GST on Inter-State Transactions
Central collection, shared with States
(IGST)
Service Tax (now subsumed under
Tax on services
GST)
Capital Gains Tax Tax on profits from sale of assets
Wealth Tax (now abolished) Earlier on net wealth above a threshold
Securities Transaction Tax (STT) Tax on trading of financial securities
3. State List – Taxes Levied by State Governments
The State Governments have exclusive powers to impose taxes on:
Tax Type Details
Agricultural Income Tax States tax income from agriculture
Land Revenue Tax on land holding
Stamp Duty (on property Collected by States (except in matters listed
transactions) under Union List)
On alcohol for human consumption and
State Excise Duty
narcotics
Vehicle Tax On vehicles registered in the state
Property Tax On buildings and land, often by municipalities
Sales Tax (now mostly subsumed
Still applies to alcohol and petroleum products
under GST)
Now largely merged into GST, but still
Entertainment Tax applicable for local bodies on cinema, betting,
etc.
Tax Type Details
On hotel accommodation and luxury goods
Luxury Tax
(largely merged into GST)
Taxes on Professions, Trades, Up to a limit of ₹2,500 per annum under
Callings, and Employments Article 276
4. GST – A Shared Tax System (Post-2017)
The Goods and Services Tax (GST), introduced by the 101st Constitutional
Amendment Act, 2016, is a comprehensive indirect tax on manufacture, sale,
and consumption of goods and services.
Key Features:
Subsumed multiple Central and State taxes like excise, VAT, service tax,
etc.
Promotes "One Nation, One Tax" principle
Based on dual model: levied by both Centre and States
Component Levied By Applicable To
Central
CGST Intra-state supplies
Government
SGST State Government Intra-state supplies
Central Inter-state supplies and imports (shared with
IGST
Government States)
GST Council:
Composed of Union Finance Minister (Chair), State Finance Ministers,
and others
Decides rates, exemptions, threshold limits, and administrative
processes
Reflects cooperative federa
5. Residuary Powers (Article 248 & Entry 97 of Union List)
Parliament has the power to make laws on any matter not enumerated in
the State or Concurrent List, including taxation.
Examples: Gift Tax, Wealth Tax (abolished), Cryptocurrency taxes, Carbon
taxes if introduced.
6. Distribution of Tax Revenues
As per Finance Commission Recommendations:
The Central Government shares a percentage of its revenue with States.
The 15th Finance Commission (2021–26) recommended 41% share of net
Union taxes to States.
7. Important Constitutional Provisions
Article Subject
Article 246 Division of legislative powers
Article 248 Residuary powers of Parliament
Article 265 No tax can be levied or collected except by authority of law
Article 268 Duties levied by Centre but collected by States (e.g., stamp duties)
Taxes levied and collected by Centre but assigned to States (e.g.,
Article 269
IGST)
Article 270 Distribution of taxes between Centre and States
Article
GST Council
279A
Article 286 Restrictions on States from taxing inter-State trade
8. Conclusion
The Indian Constitution provides a well-structured federal framework for
taxation. Over time, especially with the introduction of GST, the system has
evolved towards greater uniformity and cooperation between the Centre and
States. The GST Council now plays a key role in maintaining fiscal harmony in
India's dual federal system.
Q 2. What challenges arise from the overlap or conflict between Union List and
State List in taxation matters?
Ans :I. CONSTITUTIONAL FRAMEWORK: DIVISION OF TAXING POWERS
The Indian Constitution distributes legislative powers between the Union and
the States in Schedule VII, across three lists:
List Authority Description
Exclusive powers on matters of
Union List (List I) Parliament
national importance
Exclusive powers on matters of
State List (List II) State Legislatures
local/state interest
Concurrent List Both Parliament &
Matters where both can legislate
(List III) States
Article 246
Clause (1): Union has exclusive power over subjects in List I.
Clause (3): States have exclusive power over List II subjects.
Clause (2): Both can legislate on List III, but in case of conflict, Union law
prevails (Article 254).
Article 265 – No tax can be levied or collected except by authority of law.
II. TAXATION ENTRIES IN THE LISTS
Union List (Examples)
Entry 82: Income tax (excluding agricultural income)
Entry 83: Customs duties
Entry 84: Excise duty (excluding alcoholic liquors for human consumption)
Entry 92C (now repealed): Taxes on services
State List (Examples)
Entry 46: Taxes on agricultural income
Entry 49: Property tax
Entry 54: Sales tax on goods (except inter-state or import/export sales)
Entry 51: Excise on alcoholic liquors and narcotics
III. CHALLENGES DUE TO OVERLAP OR CONFLICT
1. Ambiguity in Classifying Taxable Events
Many economic activities straddle multiple entries.
o Example: Works contracts involve both sale of goods and provision
of services—should this be taxed by State or Union?
Resulted in conflicting interpretations and litigation.
2. Double/Multiple Taxation (Pre-GST Era)
Same transaction taxed by multiple authorities:
o Manufacture of goods: Excise duty (Union)
o Sale of goods: VAT (State)
o Services: Service tax (Union)
Increased the cascading effect of taxes and cost of compliance.
3. Judicial Conflicts and Constitutional Interpretation
Courts often had to resolve tax overlaps:
State of Madras v. Gannon Dunkerley (1958)
Held that sales tax can only be levied on sale of goods, not on the service
portion of works contracts.
Bharat Sanchar Nigam Ltd. v. UOI (2006)
Determined what part of telecom services constitute sale of goods (e.g.,
SIM cards) and what part is service.
These cases highlighted the challenge of assigning legislative competence over
composite activities.
4. Administrative and Compliance Burdens
Businesses had to register with multiple tax authorities, file various
returns, face audits from different departments.
Conflict in classification (e.g., Is software a good or a service?) led to tax
notices from both Centre and State.
5. Federal Tensions: Centre vs State Powers
Some State governments have historically felt that the Centre’s stronger
revenue base (e.g., income tax, customs) and constitutional override
powers under Article 246(1) and Article 254 give it undue dominance.
States complained of being financially dependent and having limited
autonomy over critical revenue streams.
IV. THE GST SOLUTION: COOPERATIVE FEDERALISM
Goods and Services Tax (GST) – Introduced via 101st Constitutional
Amendment, 2016
Key Changes:
Article 246A inserted: Parliament and State legislatures can both make
laws on GST.
Dual GST model: CGST (Central), SGST (State), IGST (for inter-state
transactions).
GST Council (Article 279A): A federal body to ensure harmonized decision-
making.
What GST Solved:
Pre-GST Post-GST
Central Excise, Service Tax, VAT, Octroi, Entry Tax Single unified GST subsuming
(different taxes on same event) all
One registration, unified
Multiple registrations & returns
return system
Harmonized tax structure
Tax disputes over classification
through GST Council
Input tax credit mechanism
Cascading tax burden
removes tax-on-tax
V. CHALLENGES EVEN AFTER GST
Despite the improvement, new challenges remain:
1. Centre-State Trust Deficit
GST Compensation issue during COVID led to disputes, as Centre delayed
payments to States.
States seek more say in GST Council decisions, especially concerning rate
changes.
2. Alcohol, Petroleum Outside GST
States continue to tax alcohol and petroleum, causing confusion in certain
transactions and affecting full input credit flow.
3. Implementation & Classification Disputes
Issues continue in classifying goods (e.g., food items, education services)
and rate slabs.
Still occasional disputes on what is a “good” vs “service” in edge cases.
VI. CONCLUSION
The overlap and conflict between Union and State taxation powers posed
significant constitutional, administrative, and economic challenges in India.
These were largely addressed through GST, which brought in a new model of
cooperative federalism and attempted to harmonize tax policy across the
country.
However, GST is still evolving, and intergovernmental coordination, respect for
fiscal federalism, and continuous legal clarity are essential to fully resolve these
tensions.
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