JUNE 08, 2022

By Vijay Kumar

"TAX administrators were genetically programmed to List 1 and List 2 (Central and State Lists in the Constitution of India) each trying to increase its harvest of the revenue regardless of the constitutional boundaries of List 1 and List 2" - an eminent jurist

The Supreme Court in the  Mohit Minerals  case - 2022-TIOL-49-SC-GST-LB observed:

In the pre-GST regime, the Union had the  exclusive  power to impose indirect taxes, that is, on inter-state sale of goods, customs duty, service tax, and excise duty. The States had the  exclusive  power to impose tax on intra-State sale of goods, luxury tax, entertainment tax, purchase tax, and taxes on gambling and betting. The GST regime has subsumed all the indirect taxes. Article 246A which was introduced by the Constitution Amendment Act 2016 vests the Parliament and the State legislatures with the  concurrent  power to make laws with respect to GST.

This mutual exclusiveness is also brought out by the fact that in List III, the Concurrent Legislative List, there is no entry relating to a tax. 

It is well-known that the Central Government and the State governments derive their power to tax from the List 1 and List 2 of the seventh Schedule to the Constitution of India. But it is little known that List 3 has no entry relating to taxes. A former CBIC Chairman once told me that even he was not aware of this fact, and it was Justice Goda Raghuram who enlightened him.

It was perhaps in 1919, more than a hundred years ago that these Lists got codified. As per the Government of India Act 1919 , provision was to be made by Rules for the classification of subjects, in relation to the functions of government, as central and provincial subjects.

Madras High Court in Shanmugha Oil Mill, Erode vs Coimbatore Market Committee on 24 April 1959, observed:

Although to start with, the various presidencies in India were independent of each other, the Regulating Act of 1773 made the Governor of Bengal as Governor General and the Supreme Head of all the provinces. The Charter Act of 1853 gave legislative power to the Governor-general and deprived the local Governments of the power of independent legislation. After the passing of the Indian Councils Act, the local Legislatures had gradually acquired power. But the Government of India's control over revenues and expenditure was derived from the Acts of 1853 and 1858, which treated the revenues of India as one and applied them to the purposes of the Government of India as a whole.

This denied to Provincial Governments the right to use revenues which they raised, and they had to look to the Central Government for expenses. But gradually that system was changed. Later on, each local government was given a fixed grant for the upkeep of definite services, and a classification of revenue heads into Indian, and provincial was made.

Rules were framed under S. 45(1) of the Government of India Act, 1919. These were called the Devolution Rules. Subjects were classified as central and provincial. Under that system, distribution of legislative power was only a matter of administrative convenience. The Provincial Legislatures were able to enact laws under the Devolution Rules for taxation in regard to certain specified matters.

The Devolution Rules stipulated:

For the purpose of distinguishing the functions of local Governments and local legislatures from the functions of the Governor General in Council and the Indian legislature, subjects shall be classified in relation to the functions of Government as central and provincial subjects in accordance with the lists set out in Schedule I.

Any matter which is included in the list of provincial subjects set out in Part II of Schedule I shall, to the extent of such inclusion, be excluded from any central subject of which, but for such inclusion, it would form part.

Then came the Government of India Act 1935, Section 100 of which stated:

100.  (1) Notwithstanding anything in the two next succeeding subsections, the Federal Legislature has, and a Provincial Legislature has not, power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule to this Act (hereinafter called the " Federal Legislative List ").

(2) Notwithstanding anything in the next succeeding subsection, the Federal Legislature, and, subject to the preceding subsection, a Provincial Legislature also, have power to make laws with respect to any of the matters enumerated in List III in the said Schedule (hereinafter called the " Concurrent Legislative List ").

(3) Subject to the two preceding subsections, the Provincial Legislature has, and the Federal 'Legislature has not, power to make laws for a Province or any part thereof with respect to any of the matters enumerated in List II in the said Schedule (hereinafter called the Provincial Legislative List").

The Federal List (Central) had items like:

The List II Provincial (States) List included:

The Constitution of India which came into force on 26th January 1950 in Article 246 stated:

Article 246

(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List"). 

(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "Concurrent List").

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the "State List").

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State notwithstanding that such matter is a matter enumerated in the State List.

The List 1 included:

82. Taxes on income other than agricultural income.

83. Duties of customs including export duties.

84. Duties of excise on tobacco and other goods manufactured or produced in India except-

a. alcoholic liquors for human consumption.

b. opium, Indian hemp and other narcotic drugs and narcotics.

85. Corporation tax.

89. Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights.

90. Taxes other than stamp duties on transactions in stock exchanges and futures markets.

92. Taxes on the sale or purchase of newspapers and on advertisements published therein.

97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.

The List 2 included:

46. Taxes on agricultural income. 

48. Estate duty in respect of agricultural land.

49. Taxes on lands and buildings.

51. Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:-

(a) alcoholic liquors for human consumption;

(b) opium, Indian hemp and other narcotic drugs and narcotics;

but not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry. 

52. Taxes on the entry of goods into a local area for consumption, use or sale therein.

53. Taxes on the consumption or sale of electricity.

54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.

56. Taxes on goods and passengers carried by road or on inland waterways.

57. Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including tramcars subject to the provisions of entry 35 of List III.

58. Taxes on animals and boats.

60. Taxes on professions, trades, callings and employments.

62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.

The List 3 has

1. Criminal law

2. Criminal procedure

3. Preventive detention for reasons connected with the security of a State, the maintenance of public order, or the maintenance of supplies and services essential to the community; persons subjected to such detention.

6. Transfer of property other than agricultural land; registration of deeds and documents.

7. Contracts, including partnership, agency, contracts of carriage, and other special forms of contracts, but not including contracts relating to agricultural land.

8. Actionable wrongs.

26. Legal, medical and other professions. 

31. Ports other than those declared by or under law made by Parliament or existing law to be major ports. 

47. Fees in respect of any of the matters in this List, but not including fees taken in any court.

66. Fees in respect of any of the matters in this List, but not including fees taken in any court.

Service Tax

When Service Tax was introduced in 1994, we were not sure whether the government at the Centre had the power to levy service tax, for no entry in the Lists mentioned service tax.

The Constitution 88th Amendment inserted a new Article 268A and a new Entry 92C in List -I (Union List) of the Seventh Schedule to the Constitution of India.

Article 268A (1) states,

"Taxes on services shall be levied by the Government of India".

Entry 92C reads as:

"92C. Taxes on services."

But there was a small problem - the Eighty Eighth amendment which was passed by both houses of parliament and 15 State Assemblies received the assent of the President on 15th January 2004. But this was never notified! But service tax continued to be levied. How?

Introducing the Bill on 6th May 2003, the Finance Minister Jaswant Singh said,

Taxation of services in India was started through the Union Budget of 1994-95 when it was levied with effect from July 1 1994 on stockbrokers, general insurance and telephone services.

The power to levy tax on service is, however, not specifically mentioned either in the Union List or in the State List or in the Seventh Schedule of the Constitution (?). Entry 97 of the Union List gives power to the Centre for levy and collection of any tax not mentioned in either List II or List III. At present, therefore, the Parliament has the power to levy and collect tax on services only as a residual taxation matter. In exercise of this power, the Central Government had periodically taxed selected services.

GST

Now GST is not in any of the Lists 1 or 2; As mentioned earlier, it cannot be in List 3. So, the Constitutional amendment brought in GST outside the Lists by Article 246A

246A. Special provision with respect to goods and services tax.-(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.

So, GST is something like an entry in the concurrent list, where both the Central Government and the State governments can levy GST. And that's where they got into trouble about the GST Council in the Mohit Minerals case.

Until Next week