Tax, Constitution and the Supreme Court: A review

Rahul Unnikrishnan

Karthik Sundaram, an advocate of the Madras High Court, has written a scholarly book on constitutional aspects of law of taxation in India. The book is in twelve chapters: Karthik starts with the meaning of “tax”, “components of tax”, and then proceeds to explain legislative powers/fields under the Constitution and the interplay between Part III rights and taxation laws. This book is unique as Karthik offers a single pit stop for all constitutional aspects pertaining to law of taxation in India. 

Markus Cicero called taxes the “sinews of the state”. The societal impact of taxes is often the most neglected field of study in academics. The judiciary in India has often failed to recognize tax laws as public laws, which deals with duties and relationship of individuals to government and society. The increasing emphasis on assessee as a focal point for taxation laws, both by the legislature and the judiciary, overlooks taxation’s constitutive importance in the society.

One such instance where the judiciary overlooked all known principles of taxation was the case of Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan, wherein the Supreme Court, in 1963, introduced a new concept known as “compensatory tax”. It took another 50 years for the Supreme Court to finally hold that there was nothing “compensatory” about a tax, and that it was contrary to fundamental principles of taxation (Jindal Stainless Ltd. v. State of Haryana (2017) 12 SCC 1). Karthik begins his first chapter acknowledging the disastrous judgment in Automobile Transport, and discusses the meaning of tax, cess, surcharge, and the distinction between tax and fee. 

The second chapter deals with the four components of a tax as propounded by the Supreme Court in Govind Saran Ganga Saran, and the effect of the absence of any of the essential components of a tax. Karthik discusses the four components in detail, and covers almost all reported judgments on this topic. Chapter three deals with legislative power and legislative fields under the Constitution. This includes in-depth discussion on Articles 245, 246, 246A, 248 and applicable entries of Schedule VII to the Constitution of India.

He also discusses “aspect theory” of legislation and “rag-bag” theory of legislation in this chapter. On “aspect theory”, there is also an alternate view that it is in fact indistinguishable from doctrine of pith and substance. Those who are interested may read V Niranjan’s, Legislative Competence: the Union and the States, in The Oxford Handbook of the Indian Constitution (2016, Oxford University Press). 

Chapter four deals with fundamental rights, judicial review and the law of taxation. There is a detailed discussion on Articles 14,19, constitutionality of tax legislations, and scope of writ remedies. One topic which I found missing here is the right of companies to claim freedom under Article 19(1)(g) of the Constitution. Chapter five deals with territorial jurisdiction to tax under Article 245 of the Constitution. The remaining chapters deal with topics such as Part XIII of the Constitution, delegated legislation in taxation, interpretation of tax statutes and the law of precedents.

This book also discusses the scope of retrospective taxation under the Indian Constitution. This is rather an important topic especially after the inclusion of Vodafone amendment in the Income-tax Act, 1961. Globally, whilst retrospective laws are frowned upon, there is still some confusion regarding the difference between retrospective laws and retroactive laws.

There are broadly three types of retrospective laws. The first is “retroactivity”, which is a species of retrospectivity wherein the factual and legal situation is deemed to be something which it was not. The second type may have the effect of changing the consequences of past conduct or the earlier factual situation. The third type is where the legislature interferes or takes away “vested rights”. Ronan  Cormacain states the difference with clarity in his article, “Retroactivity, Retrospectivity, and Legislative Competence in Northern Ireland: Determining the Validity of Janus-faced Legislation” (Statute Law Review, 2015, 36(2) 134).

The above discussion on retroactivity and retrospectivity is the culmination of numerous discussions with Senior Advocate Arvind Datar. These are evergreen topics in taxation laws of India. The latest example is section 164(3) of the Central Goods and Services Tax Act, 2017, which gives power to the Central Government to make rules with retrospective effect. 

In short, this book is a compulsory read for every tax lawyer, Chartered Accountant, law student and GST practitioner in India. Karthik has painstakingly identified all the relevant case-laws explaining the interplay between taxation laws and constitutional provisions in India. I would be remiss not to mention the effort that has gone into the writing of this book. Karthik’s writing is simple, explanations are crisp, and one does not require a background in tax law to understand the themes of this book. 

Disclosure: Karthik and I have worked together in more than one occasion. 

Rahul Unnikrishnan is an advocate practicing at the Madras High Court.