Since Constitution of India is foundation and source of powers to all laws in India, it is necessary to understand general background of Constitution to enable us to understand and appreciate each individual Law. In India, Constitution which came into effect on 26th January 1950 is supreme and all laws and Government actions are subordinate to our Constitution.

India is Union of States - Our Constitution generally follows British pattern, though concepts of federal structure are borrowed from American and other constitutions. India is a Union of States. The structure of Government is federal in nature. Government of India (Central Government) has certain powers in respect of whole country. India is divided into various States and Union Territories and each State and Union Territory has certain powers in respect of that particular State. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Territories like Pondicherry, Chandigarh etc.

Taxation under Constitution - In the basic scheme of taxation in India, it is envisaged that (a) Central Government will get tax revenue from Income Tax (except on Agricultural Income), Excise (except on alcoholic drinks) and Customs (b) State Government will get tax revenue from sales tax, excise on liquor and tax on Agricultural Income (c) Municipalities will get tax revenue from octroi and house property tax.

Income Tax, Central Excise and Customs are administered by Central Government. As regards sales tax, Central Sales Tax is levied by Central Government while State Sales Tax is levied by individual State Governments. Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax collected in each State is retained by that State Government itself.

Article 246(1) of Constitution of India states that Parliament has exclusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution. (Called ‘Union List’). As per Article 246(3), State Government has exclusive powers to make laws for State with respect to any matter enumerated in List II of Seventh Schedule to Constitution. Seventh schedule to Constitution (referred to in Article 246) indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].

Union List relevant to taxation - List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :

Entry No. 82 - Tax on income other than agricultural income.

Entry No. 83 - Duties of customs including export duties.

Entry No. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

Entry No. 85 - Corporation Tax.

Entry No. 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

Entry No. 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.

Entry No. 97 - Any other matter not included in List II, list III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)

State list pertaining to taxation - State Government has exclusive powers to make laws in respect of matters in list II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:

Entry No. 46 - Taxes on agricultural income.

Entry No. 51 - Excise duty on alcoholic liquors, opium and narcotics.

Entry No. 52 - Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi).

Entry No. 54 - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.