The question regarding the meaning and scope of terms Tax and Fees is one of the earliest interpretational issues taken up by the Hon’ble Supreme Court of India, yet the test to differentiate between said terms remains unsettled. The Courts in the past seven decades have acknowledged the existence of constitutional difference between Tax and Fees and have laid down several tests to determine whether a particular levy is a Tax or a Fees.

However, recent judicial trends suggests that the difference between Tax and Fees has been obliterated. Such observations by the Courts will have a far-reaching consequence and impact. This article analyzes the difference between Tax and Fees and how the Courts in recent time are diverting from the earlier decisions highlighting the difference between Tax and Fees.

The Courts in the past have defined Tax as a compulsory extraction of money, by public authority, for public purposes enforceable by law[1] while Fees is collected for a specific service rendered or benefit conferred.[2] The differentiation is based on the element of quid pro quo in the case of Fees and its absence in Tax.[3] The other tests to distinguish between Tax and Fees includes collections to be credited in consolidated fund of India or not, appropriation of funds etc.

The author understands that the Courts had obliterated the tests of compulsory extraction, quid pro quo qua specific service, credit of amount in a specific fund or general, to differentiate between tax or fee[4], yet the Courts maintained the position that Tax and Fees are different nature of constitutional levies.[5]

The fact that the power to levy Tax and Fees have been mentioned under separate constitutional entries affirms the view of the Courts that there exists constitutional difference between Tax and Fees. In State of Karnataka v. State of Meghalaya[6], the Hon’ble Supreme Court while dealing with the interpretation of taxing entries at Paragraph 149.5 observed that the Indian Constitution has divided Entries enabling taxes to be imposed; and the topics of legislation into following three broad categories:

• Entries enabling laws to be made.
• Entries enabling taxes to be imposed; and
• Entries enabling fees and stamp duties to be collected.

However, the Hon’ble Supreme Court in Jalkal Vibhag Nagar Nigam v. Pradeshiya Industrial & Investment Corporation[7], while relying on a catena of judgements, observed that the difference between Tax and Fees has substantially been effaced in the development of constitutional jurisprudence. However, even after such observation, the Court while determining the nature of levy under Uttar Pradesh Water Supply and Sewerage Act, 1975, held that levy under Section 52 of the said Act, being a compulsory extraction, is a Tax and not Fees. Thus, in essence, Court upheld and maintained the constitutional difference between Tax and Fees.

The ratio of aforesaid judgement was followed in Kerela State Beverages Manufacturing and Marketing Corporation Limited[8], wherein Hon’ble Supreme Court observed that the judgement in Jalkal Vibhag (supra) in fact maintains and does not fade way the constitutional difference between Tax and Fees.

Despite a long line of judgements maintaining the constitutional difference between Tax and Fees, recently the Division Bench of the Hon’ble Supreme Court in Bharat Sanchar Nigam Limited v. State of Chhattisgarh[9] took a divergent view and upheld the levy of fees imposed by State of Chhattisgarh under Entry 49 List II i.e., taxation entry. The Court in its order has used the words ‘tax’, ‘fee’ or ‘charge’ interchangeably, thereby indicating that there exists no difference between tax, fee, or charge.

The impact of such order may have far reaching consequences inasmuch as it provides the States an unfettered power to levy Fees or Charge by invoking taxing powers. For instance, Entry 42 List II provides power to States to levy ‘Tax on land and building’. If the constitutional difference between Tax and Fees is faded away, the States, by exercising the power under Entry 42 List II, could also levy Fees on land and building. The same would essentially make Entry 66 List II, which provides the power to States to levy fees in respect of any of the matters in List II, but not including fees taken in any court, redundant.

Further, for imposition of Tax, it is mandatory for a legislative enactment to provide taxable event, measure of tax, the rate and incidence of tax.[10] In the absence of such components, a legislation imposing tax would be stuck down. If the difference between Tax and Fees is faded away, would that imply that the components to levy tax has to be followed while levying fees? Would levy of fees attract Article 265 of the Indian Constitution? These questions still remain unanswered.

In our view, there exists a constitutional difference between Tax and Fees. Only the ‘tests’ to differentiate between Tax and Fees has been weathered down by the Hon’ble Apex Court. Interestingly, the Court in Bharat Sanchar Nigam Limited (supra) had faded away the difference between Tax and Fee itself. A review against the said order has recently been dismissed by the Hon’ble Court. It will be crucial to observe how the constitutional entries empowering the Union and States to levy Tax and Fees would be interpreted by the Courts in coming future.

[The authors are Partner, Principal Associate and Associate, respectively, in Commercial Dispute Practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

1. [1] Hingir Rampur Coal Co. Ltd. v. State of Orissa [1961 2 (SCR) 537]
2. [2] Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt [AIR 1961 SC 1480], Southern Pharmaceuticals and Chemicals, Trichur v. State of Kerala [(1981) 4 SCC 391]
3. [3] Ratilal Panachand Gandhi v. State of Bombay and Others [1954 SCR 1055]
4. [4] Jalkal Vibhag Nagar Nigam and Others v. Pradeshiya Industrial and Investment Corporation and Another [2021 SCC Online SC 960]
5. [5] Kerela State Beverages Manufacturing and Marketing Corporation Limited v. Assistant Commissioner of Income Tax [2022 (4) SCC 240], Municipal Corporation of Greater Mumbai and Ors. v. Property Owners Association and Others [2023 (3) SCC 258]
6. [6] (2023) (4) SCC 416
7. [7] 2021 SCC OnLine SC 960- Para 60.
8. [8] (2022) 4 SCC 240- Para- 30, 38, 39, 40 and 41.
9. [9] SLP (C) No. 16014-16015 of 2020.
10. [10] Govind Saran Ganga Saran v. CST (1985 Supp SCC 205), Commissioner of Income Tax (Central)- I, New Delhi v. Vatika Township Private Limited ((2015) 1 SCC 1).