How to challenge taxing statutes? When is exaction a tax, charge, or fee?

Introduction

A legislative enactment which provides for the imposition of a tax may make provisions for:

1. The levy of the tax on the basis of a taxable event;
2. The measure of the tax;
3. The rate at which the tax will be imposed;
4. The incidence of the tax; and
5. Assessment, collection, recovery and other incidental provisions.

What forms tax?

A basic principle of tax jurisprudence is that the levy of a tax cannot be conflated with its measure. Also, The nomenclature of the tax does not indicate its true character and substance. (vide: Jal Vibhag Nagar Nigam & Ors v. Pradeshiya Industrial and Investment Corporation & Anr. (Civil Appeal No. 6107 of 2021/ SLP No. 22574 of 2015)

The locus classicus( a passage considered to be the best known or most authoritative on a particular subject) on this point was a two judge Bench decision in Govind Saran Ganga Saran v. CST ( 1985 Supp SCC 205). Justice RS Pathak (as the learned Chief Justice then was) held:

In Federation of Hotel and Restaurant Association of India v. Union of India [(1989) 3 SCC 634] , a challenge was raised to the constitutional validity of the Expenditure Tax Act 1987 which imposed an ‘expenditure tax’ on persons incurring “chargeable expenditure” in a class of hotels. In that case, the petitioners argued that the Act in essence levied a tax on luxuries, which falls within Entry 62 of List II and lies outside the competence of Parliament. Rejecting this contention, the Constitution Bench, speaking through Justice MN Venkatachaliah (as the learned Chief Justice then was), observed:

“43. The subject of a tax is different from the measure of the levy. The measure of the tax is not determinative of its essential character or of the competence of the legislature. In Sainik Motors v. State of Rajasthan [AIR 1961 SC 1480 : (1962) 1 SCR 517] , the provisions of a State law levying a tax on passengers and goods under Entry 56 of List I were assailed on the ground that the State was, in the guise of taxing passengers and goods, in substance and reality taxing the income of the stage carriage operators or, at any rate, was taxing the “fares and freights”, both outside of its powers. It was pointed out that the operators were required to pay the tax calculated at a rate related to the value of the fare and freight. Repelling the contention, Hidayatullah, J., speaking for the court said : (SCR p. 525)

 “We do not agree that the Act, in its pith and substance, lays the tax upon income and not upon passengers and goods. Section 3, in terms, speaks of the charge of the tax ‘in respect of all passengers carried and goods transported by motor vehicles’, and though the measure of the tax is furnished by the amount of fare and freight charged, it does not cease to be a tax on passengers and goods.”

Indeed, reference may be made to the following statement in Encyclopaedia Britannica (Vol. 14 p. 459) on “Luxury Tax”:

“A different approach to luxury taxation, much less frequently found, seeks to single out the luxury component of spending on a given object rather than taxing specified goods and services as luxuries. One example of this is the Massachusetts 5 per cent tax on restaurant meal of $. 1 or more….”

Federation of Hotel and Restaurant Association of India v. Union of India

44. The submissions of the learned Attorney General that the tax is essentially a tax on expenditure and not on luxuries or sale of goods falling within the State power, must, in our opinion, be accepted. As contended by the learned Attorney General, the distinct aspect, namely, “the expenditure” aspect of the transaction falling with the Union power must be distinguished and the legislative competence to impose a tax thereon sustained. Contention (a) is, in our opinion, unsubstantial and, accordingly, fails.”

In State of West Bengal v. Kesoram Industries Ltd [(2004) 10 SCC 201] a Constitution Bench of Hon’ble SCI  held that the measure employed for assessing a tax must not be confused with the nature of the tax. In doing so, Justice RC Lahoti (as the learned Chief Justice then was), adverted to a line of decisions in Ralla Ram v. Province of East Punjab [AIR 1949 FC 81] , Sainik Motors v. State of Rajasthan [AIR 1961 SC1480], D.G Gose & Co. (Agents) P. Ltd. v. State of Kerala [(1980) 2 SCC 410]  and Hingir Rampur Coal Co. Ltd. v. State of Orissa [AIR 1961 SC 459], and observed:

“33. […] It has been long recognised that the measure employed for assessing a tax must not be confused with the nature of the tax. A tax has two elements : first, the person, thing or activity on which the tax is imposed, and second, the amount of tax. The amount may be measured in many ways; but a distinction between the subject-matter of a tax and the standard by which the amount of tax is measured must not be lost sight of. These are described respectively as the subject of a tax and the measure of a tax. It is true that the standard adopted as a measure of the levy may be indicative of the nature of the tax, but it does not necessarily determine it. The nature of the mechanism by which the tax is to be assessed is not decisive of the essential characteristic of the particular tax charged, though it may throw light on the general character of the tax.”

The Hon’ble SCI in the case of Jal Vibhag Nagar Nigam & Ors v. Pradeshiya Industrial and Investment Corporation & Anr. (Civil Appeal No. 6107 of 2021/ SLP No. 22574 of 2015) while determining the constitutionality and validity of UP Water Supply and Sewerage Act 1975, in order to make elaborate the distinction between fee, tax and charge, noted:

“28. The nomenclature that the legislature has ascribed to the tax does not determine either the nature of the levy or its true and essential character. The legislature may choose a label for a tax. The label however will not determine or for that matter clarify the nature of the levy. The nature of the levy has to be deduced from the nature of the tax, the provision which specifies the taxing event and, as in the case of Section 52, the unit upon which the levy is to be imposed. The legislature may choose a label for the tax based on the nature of the levy. On the other hand, the legislature may choose a label having a relationship with the function of the authority which imposes the tax as in the present case. The tax has been labelled as the water tax or a sewerage tax simply because it is imposed by the Jal Sansthan constituted under the UP Water Supply and Sewerage Act. That does not alter the nature of the levy which in substance is a tax on lands and buildings within the meaning of Entry 49 of List II of the Seventh Schedule.

Long years ago in 1958, Hon’ble SCI in M.P.V. Sundararamier & Co. v. State of AP21 held that the Constitution makes a differentiation between the subject matter of the legislation, and the tax in relation to the said subject matter in the Union, State and Concurrent List in the Seventh Schedule. Justice TL Venkatarama Aiyar, speaking for the majority (4:1), observed that:

              “51. In List I, Entries 1 to 81 mention the several matters over which Parliament has authority to legislate. Entries 82 to 92 enumerate the taxes which could be imposed by a law of Parliament. An examination of these two groups of Entries shows that while the main subject of legislation figures in the first group, a tax in relation thereto is separately mentioned in the second. Thus, Entry 22 in List I is “Railways”, and Entry 89 is “Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights”. If Entry 22 is to be construed as involving taxes to be imposed, then Entry 89 would be superfluous. Entry 41 mentions “Trade and commerce with foreign countries; import and export across customs frontiers”. If these expressions are to be interpreted as including duties to be levied in respect of that trade and commerce, then Entry 83 which is “Duties of customs including export duties” would be wholly redundant. Entries 43 and 44 relate to incorporation, regulation and winding up of corporations. Entry 85 provides separately for corporation tax. Turning to List II, Entries 1 to 44 form one group mentioning the subjects on which the States could legislate. Entries 45 to 63 in that List form another group, and they deal with taxes. Entry 18, for example, is “Land” and Entry 45 is “Land revenue”. Entry 23 is “Regulation of mines” and Entry 50 is “Taxes on mineral rights”. The above analysis — and it is not exhaustive of the Entries in the Lists — leads to the inference that taxation is not intended to be comprised in the main subject in which it might on an extended construction be regarded as included, but is treated as a distinct matter for purposes of legislative competence. And this distinction is also manifest in the language of Article 248, clauses (1) and (2) and of Entry 97 in List I of the Constitution. Construing Entry 42 in the light of the above scheme, it is difficult to resist the conclusion that the power of Parliament to legislate on inter-State trade and commerce under Entry 42 does not include a power to impose a tax on sales in the course of such trade and commerce.

[…]

55. To sum up: (1) Entry 54 is successor to Entry 48 in the Government of India Act, and it would be legitimate to construe it as including tax on inter State sales, unless there is anything repugnant to it in the Constitution, and there is none such. (2) Under the scheme of the entries in the Lists, taxation is regarded as a distinct matter and is separately set out. (3) Article 286(2) proceeds on the basis that it is the States that have the power to enact laws imposing tax on inter-State sales. It is a fair inference to draw from these considerations that under Entry 54 in List II the States are competent to enact laws imposing tax on inter-State sales.”

Distinction between Tax and Fee under a statute:

The Hon’ble SCI in the case of Jal Vibhag Nagar Nigam & Ors v. Pradeshiya Industrial and Investment Corporation & Anr. (Civil Appeal No. 6107 of 2021/ SLP No. 22574 of 2015), noted:

              “42 The distinction between a tax and fee has substantially been effaced in the development of our constitutional jurisprudence. At one time, it was possible for courts to assume that there is a distinction between a tax and a fee: a tax being in the nature of a compulsory exaction while a fee is for a service rendered. This differentiation, based on the element of a quid pro quo in the case of a fee and its absence in the case of a tax, has gradually, yet steadily, been obliterated to the point where it lacks any practical or constitutional significance. For one thing, the payment of a charge or a fee may not be truly voluntary and the charge may be imposed simply on a class to whom the service is made available. For another, the service may not be provided directly to a person as distinguished from a general service which is provided to the members of a group or class of which that person is a part. Moreover, as the law has progressed, it has come to be recognized that there need not be any exact correlation between the expenditure which is incurred in providing a service and the amount which is realized by the State. The distinction that while a tax is a compulsory exaction, a fee constitutes a voluntary payment for services rendered does not hold good. As in the case of a tax, so also in the case of a fee, the exaction may not be truly of a voluntary nature. Similarly, the element of a service may not be totally absent in a given case in the context of a provision which imposes a tax.

…

Conclusion

47 In view of this consistent line of authority, it emerges that the practical and even constitutional distinction between a tax and fee has been weathered down. As in the case of a tax, a fee may also involve a compulsory exaction. A fee may involve an element of compulsion and its proceeds may form a part of the Consolidated Fund. Similarly, the element of a quid pro quo is not necessarily absent in the case of every tax. In the present case, the tax has been imposed by the legislature in Section 52 on-premises situated within the area of the Jal Sansthan. The proceeds of the tax are intended to constitute revenue available to the Jal Sansthan to carry out its mandatory obligations and functions under the statute of making water and sewerage facilities available in the area under its jurisdiction. The levy is imposed by virtue of the presence of the premises within the area of the jurisdiction of the Jal Sansthan. The water tax is levied so long as the Jal Sansthan has provided a stand post or waterworks within a stipulated radius of the premises through which water has been made available to the public by the Jal Sansthan. The levy of the tax does not depend upon the actual consumption of water by the owner or occupier upon whom the tax is levied. Unlike the charge under Section 59 which is towards the cost of water to be supplied by the Jal Sansthan according to its volume or, in lieu thereof on a fixed sum, the tax under Section 52 is a compulsory exaction. Where the premises are connected with water supply, the tax is levied on the occupier of the premises. On the other hand, where the premises are not so connected, it is the owner of the premises who bears the tax. The levy under Section 52 (1) is hence a tax and not a fee. Moreover, for the reasons that we have indicated above, it is a tax on lands and buildings within the meaning of Entry 49 of List II.”