Taxation Laws: Concept, Canons and Constitutional Scheme

Taxation is the State's power to compel contributions for public purposes. In India, that power comes only from the Constitution: Article 265 requires a law, the Seventh Schedule and Article 246A decide which legislature may tax what, and Articles 268 to 281 divide the revenue. This note explains what a tax is, how it differs from fees, cesses, surcharges and royalty, the classical canons of taxation, and the constitutional scheme the rest of the series builds on.

1. Meaning of Tax

• Article 366(28). Taxation includes the imposition of any tax or impost, whether general, local or special, and 'tax' is construed accordingly.
• Essential features. A tax is a compulsory exaction, imposed by law, for public purposes, without any direct quid pro quo to the individual taxpayer.
• Destination. Tax proceeds go to the Consolidated Fund and are spent through appropriation by the legislature.

2. Tax and Other Levies

Figure 1: Kinds of levies

• Fee. Charged for a special service or for regulation, with a broad correlation between the levy and the service; the distinction is examined in Topic 4.
• Cess. A tax levied for a specific purpose; cesses so levied are kept out of the divisible pool shared with the States under Article 270(1)
• Surcharge. An addition to a tax for the purposes of the Union under Article 271; it also stays outside the divisible pool.
• Royalty. Consideration for the right to extract minerals under a lease. In Mineral Area Development Authority v Steel Authority of India (2024), a nine judge bench held by 8 to 1 that royalty is not a tax (Topic 3)

3. Direct and Indirect Taxes

• Direct tax. Imposed on and borne by the same person, such as income tax and corporation tax.
• Indirect tax. Collected from one person but passed on to another, typically the consumer, such as GST and customs duty.
• Why it matters. The burden of an indirect tax shifts, which is why refund claims face the bar of unjust enrichment (Topic 2)

4. Canons of Taxation

Figure 2: Adam Smith's canons and later additions

Adam Smith set out four canons in The Wealth of Nations (1776): equality, certainty, convenience and economy. Later writers added productivity, elasticity, simplicity and diversity. The canons are not legal rules, but courts draw on the idea of certainty when they insist that a taxing statute must clearly identify what is taxed, who pays and at what rate (Topic 2).

5. The Constitutional Scheme

Figure 3: Where taxing power comes from and how it is limited

• Authority. No tax may be levied or collected except by authority of law (Article 265; Topic 2)
• Competence. Taxing power is distributed through separate tax entries in Lists I and II, the residuary power of Parliament, and the concurrent GST power in Article 246A (Topic 3)
• Distribution. Articles 268 to 281 divide the proceeds between the Union and the States, with the Finance Commission recommending the shares (Topic 6)
• Limits. Articles 276 and 285 to 289 restrict taxing power, and tax laws remain subject to fundamental rights (Topic 5)
• GST. The GST Council under Article 279A recommends rates, exemptions and model laws (Topic 26)

6. Frequently Asked Questions

What is the difference between a cess and a surcharge?

A cess is a tax levied for a specific purpose, while a surcharge is an addition to an existing tax for the purposes of the Union under Article 271. Both are kept outside the divisible pool shared with the States under Article 270(1).

Is royalty a tax?

No. In Mineral Area Development Authority v Steel Authority of India (2024), the Supreme Court held by 8 to 1 that royalty is a contractual consideration for mining rights, not a tax, overruling India Cement (1990).

Is GST a direct or an indirect tax?

An indirect tax. It is collected by the supplier from the recipient, and its burden is passed on along the supply chain to the final consumer.

Why do cesses and surcharges matter to the States?

Because Article 270(1) keeps cesses levied for specific purposes and Article 271 surcharges out of the divisible pool, their proceeds are not shared with the States on the Finance Commission's formula.

7. Related Topics

• Topic 2: No Tax without Authority of Law, Article 265. The first principle.
• Topic 3: Distribution of Taxing Powers. Who may tax what.
• Topic 4: Tax and Fee. The distinction in depth.