Firewalling GST Tax Rate in Constitution

Courtesy:  Dr Ravindran Pranatharthy, Advocate
“I would rather the money was in the pockets of my people than in my treasury”. – Queen Elizabeth I of England

THAT was the wise response of Queen Elizabeth, the sixteenth century virgin monarch of England when she was offered new taxes by her Parliament which she declined. No other ruler in Western history would be found to have foregone such fiscal largesse. Charles Adams, the tax historian notes that she was in her time known as the Good Queen Bess. According to his analysis, she inherited an England which was mediocre at best, almost fiscally bankrupt and by the time she left, her country was well on the way to becoming a superpower and would dominate the world for the next four centuries. The wonder was that her regime was marked by moderate taxation, almost no coercion, characterized by the forbidding of forcing oaths from taxpayers (so as to penalize them for the inevitable perjuries) and instead relying on their self-assessment, the flowering of arts and stunning dramas of playwrights led by the great Shakespeare and economic progress of her country. Her tax policy was such that when Spain which was the dominant worldpower at the time launched the biggest navalArmada in maritime history to invade and overthrow her regime, she turned to Parliament for additional taxation which was given generously and her treasury was said to have been quickly filled and beyond her expectations. It was said that revenue of two years was collected in just two months from the adoring countrymen. With somefortuitoushelp from the stormy weather nick-named the ‘Protestant Wind’ , the Spanish armada was overcome, scattered and forced to retreat to Spain. The defeat of the Armada hastened the end of Spanish world domination. Queen Elizabeth was also known for stemming currency debasement by putting a good bit of silver back into the English coinage which added to the prestige and value of the English currency. Closer home, around the end of the eleventh century, the great Chola Emperor of South India, Kulothunga Chola went to the extent of withdrawingTolls and Entry Taxes to boost the flow of trade and commerce in his Kingdom and was praised as “ Sungam Thavirtha Cholan” (The Chola Who Abolished Tolls and Entry Taxes). He recognized that tolls and entry taxes were barriers to trade and could add a lot to the original cost of products. History remembers him for his wise tax policy and not for his battles.It will be difficult to find a modern government which is willing to go by a moderate tax policy and refrain from additional taxation except in times of national emergencies. The ever increasing welfare-cum-bureaucratic state has dashed hopes of moderate taxation. Nevertheless, what worries citizens more is the proclivity of tax departments to assess and levy taxes beyond the pale of the tax law.

The silence of Article 265 against high tax rates or multiple taxes

Article 265 of the Constitution of India is celebrated as the foremost safeguard regarding the levy of taxation in India. According to this mandate, no tax shall be levied or collected except by authority of law. The ‘law’ imposing taxation means a valid law and hence tax levied or collected contrary to the law is to be returned to the taxpayer provided the taxpayer has not enriched himself by passing on the tax to his customer. But this tax breakwater fails to guarantee against a high rate of tax or more pertinently against an oppressive plethora of taxes by the union government, state government, and local authorities. Unless the tax rates are seen to be at confiscatory levels, the Courts will not disallow a tax rate even if it is at high levels from the view of taxpayers. As for multiple taxes on the same value chain or a multiciplity of taxes, the game has not been discountenanced by the Courts, relying on the grounds of aspects theory and legislative power respectively . Further, the tax law can be changed by a simple majority in the parliament or in the state legislature and thus Article 265 is little more than a limited jurisprudential tool.

The revolutionary idea of a tax-rate firewall in the Constitution:

It is against the backdrop of the constrained potential of Article 265 that one has to consider the interesting proposition to cap the GST @18% in the Constitution itself. That the idea might have come to be seen as a strategy by the main Opposition party should not blind us to the inherent merit of the concept. The rate of 18% by itself is not very moderate and one should remember that the Finance Commission panel recommended about 12%. Most Asian economies have less than 18% in any case. Therefore, the 18% as a maximum tax is some solace for the taxpayers of this country. The objection to the tax maximum has been made on the ground that during an emergent need to collect additional tax revenues, the cap of 18% in the Constitution would be a dampener to national tax collection since amending the Constitution without a consensus is no easy task, generally speaking. Let us examine whether the difficulty expressed against the tax cap can be surmounted without an amendment to the Constitution.

Availability of serial no 97 in the Union List of 7th Schedule

It is in this context that we can turn to a residual armoury of tax power within the Constitution. The seventh schedule to the Constitution offers this last but not the least residual power to the Union government. Let us have a look at serial no 97 of the Union List or List no 1:

“97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists”. (emphasis added)

When service tax was levied and collected for the first time in 1994, the Constitution had not provided for a tax on services by any government. The government claimed and the Courts concurred that the Constitutional basis of the levy was derived from serial no 97 of List 1 of the seventh schedule. The same power still remains in the Constitution. It can be deployed to levy a new tax if the GST remained capped at a rate which does not meet the emergent revenue needs of the governments. The centre can collect the tax, retain it completely or choose to share it with the states or it can levy the new tax and provide that it be collected and retained by the states. The power to collect newer and newer taxes hitherto uncollected remains undiminished in the Constitution, whatever the rates of the taxes.


In the backdrop of the foregoing analysis, it can be seen that there is merit in the idea of a GST rate cap in the Constitution, notwithstanding the novelty of the idea. That no modern state has capped the rate of the main taxation in the Constitution is not a sufficient moral reason to reject the merit of the concept. The true test is whether it is in the interests of the people and the country. Given the emergency lifeline inherent in the serial no 97 of List 1 of the 7th Schedule to the Constitution, the GST rate cap in the Constitution if it eventually happens will be something of a pleasant prospect to be welcomed all around.


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