Legal Notes by Arvind Datar: Tax and fee distinction must be maintained

The three Lists in Schedule VII have a definite architecture. List-I and List-II contain general entries and entries related to taxation. List-III has no entry for taxation. All the three Lists have an entry enabling the imposition of fees for any of the subject matters mentioned in each of those Lists.

Thus, Entries 1 to 81 in the Union List are general entries, while Entries 82 to 92B enable the levy of various taxes, including stamp duties. Similarly, Entries 1 to 45 in the State List are general entries, while Entries 46 to 63 are taxation entries, including one on stamp duty. Entry 96 in the Union List, Entry 66 in the State List and Entry 47 in the Concurrent List deal with fees.

The distinction between tax and fee was first authoritatively decided by a bench of seven judges in the historic Commissioner, HRE v. Shri LT Swamiar. The bench held that the distinction between a tax and a fee was “primarily in the fact that a tax is levied as part of a common burden, while a fee is a payment for a special benefit or privilege…Public interest seems to be the basis of all imposition but in a fee, it is some special benefit which the individual receives.”

This primary distinction was maintained with slight changes in various cases after 1955. 

A controversy that frequently arose was whether an imposition which was labelled as a fee was really a tax and, therefore, outside the legislative competence of the State Legislature. 

Six years later, the distinction was once again examined by a bench of five judges in Hingir-Rampur Coal Company Limited v. State of Orissa. It was held that although a fee was levied for rendering a specific service to a specific area or to specific class of persons, a direct benefit to each member of that class was not necessary. The Court laid down that the important test was: what was the primary object and the essential purpose which was intended to be achieved? 

The object and the essential purpose had to be distinguished from the ultimate or the incidental results or consequences. This case concerned the levy of cess, which was held to be valid as a fee relatable to Entry 23 of List-II read with Entry 66, and was not an excise duty. The five-judge bench emphasised that there was an element of quid pro quo as the cess was collected and deposited in a specific fund.

The essential distinction between tax and fee thus continued to be maintained although there were observations in later cases that  the payment into the Consolidated Fund was held not mandatory for a levy to be a tax, nor was an exact co-relation necessary between the fees charged and the service rendered. 

In 1980, another bench of five judges was concerned with the validity of market fee and examined the law in detail [see Kewal Krishan Puri v. State of Punjab]. The Court concluded that while arithmetical exactitude was not necessary, a good and substantial portion of the amount collected must be shown as being spent for the service rendered.

The first note of discord was in Southern Pharmaceutical and Chemicals v. State of Kerala, wherein it was erroneously held that the observations in Kewal Krishan Puri were not intended to lay down a rule of universal application. For the first time, the Supreme Court observed that the traditional concept of quid pro quo was undergoing a transformation. It is submitted that till 1981, there was no case which showed any transformation in the concept of quid pro quo.

The error in the Southern Pharmaceutical and Chemical case was then compounded in Municipal Corporation of Delhi v. Mohd. Yasin. The short point in this case was the enhancement of fees for slaughterhouses. There was enough material to show that the enhancement was justified and the case could have been concluded on that basis. However, the Court went into some of the earlier cases and held that even a “casual relation” between the imposition and service rendered would be enough. It is submitted that this view is incorrect. 

The further dilution of the distinction between a tax and a fee was in Sreenivasa General Traders v. State of Andhra Pradesh, where a bench of three judges remarked that the “traditional view” that a fee required quid pro quo had undergone a sea change. Apart from this erroneous view, the bench further observed that the observations in Kewal Krishan Puri were not necessary and had only persuasive value. It is submitted that the judgment in Sreenivasa General Traders is per incuriam, as it is contrary to the view taken by the benches of seven and five judges. The Court did not explain what the “sea change” was.

In Jalkal Vibhag Nagar Nigam v. Pradeshiya Industrial and Investment Corporation, the Supreme Court observed that the distinction between tax and fee was substantially effaced and that the earlier view that tax was compulsory exaction, while fee was for the service rendered was “gradually yet steadily obliterated”. It is submitted that this decision is also per incuriam. Indeed, the distinction cannot be effaced from our “constitutional jurisprudence”, as the Court held, for the simple reason that our Constitution itself makes a critical distinction between the powers of taxation and the power to levy fee. Taxes can be levied for specific subject matters whereas fees can be levied for any of the matters in that List. If there was no distinction between tax and fee, there was no need for separate entries for tax and one entry for fees.

It is submitted that the views taken from 1981, that diluted, eroded or effaced the distinction between taxes and fees require reconsideration.  It is important to restore the classical view that maintained the distinction between a tax and a fee. If the distinction is obliterated, then what cannot be levied as a tax by State Legislatures can be labelled as a fee. This ought not to be permitted. It is hoped that the earlier view is restored by a bench of five or seven judges at the earliest. Till then, cases that departed from the classical view and blurred the distinction, from 1981 onwards, must be held to be per incuriam and not binding.

Arvind P Datar is a Senior Advocate practicing before the Supreme Court of India.