While both “taxes” and “fees” are compulsory contributions towards government revenue, a tax is a part of a common exaction while a fee is towards specific services rendered. However, the dispute whether a charge is a tax or a fee for the purposes of its maintainability has been one of the most debated and judicially scrutinized issues in India.
The genesis of most of these debates lies in the country’s federal structure, which empowers both the centre and state to impose levies that at times intercede and/or overlap, coupled by the revenue-centric approach to mop up funds by subjecting to levy a wide range of activity. This approach has often led to a hasty imposition of a charge oblivious to the norms of such charge being a tax or a fee – thereby creating huge disputes.
The debate surrounding the nature of a charge as a tax or a fee is an old one and the judicially declared tests have evolved over time. While earlier the element of quid pro quo between the person who pays the fee and the public authority which imposes it was sine qua non for a charge/payment to be in the nature of fee, this traditional view has undergone a sea change, and the test of quid pro quo has been diluted in recent years. For a charge to be called a fee, it is no longer necessary that the services rendered be directly in proportion with the amount of fee collected. It is equally not necessary that benefit of the services rendered should remain confined to the person from whom the fee has been collected.
As has been reaffirmed in various Supreme Court rulings, the test to determine the character of a levy is to assess the primary object of the levy and what it intends to achieve. In this regard, whether a particular amount forms part of a special fund (set apart for a specified purpose) as opposed to the consolidated fund of India goes to show whether a co-relation exists between the levy and the purpose for which it was levied. In the absence of such a co-relation, the imposition/charge is in the nature of a tax.
Recently, the Supreme Court faced a similar issue in KCP Ltd v Government of Andhra Pradesh & Ors, where the legality of the Andhra Pradesh Rectified Spirits Rules, 1971, formulated under the Andhra Pradesh Excise Act, 1968, was challenged. The rules included an “administrative fee” (rule 4) and “export permit fee” (rule 15) for issuance from a distillery/warehouse or for exportation of rectified spirit to any area outside the state.
While the state government was not empowered to levy “excise duty” on rectified spirits (which is within the domain of the centre) it was permitted to impose a “fee”. Therefore, an issue before the Supreme Court was whether the administrative fee and export permit fee were in the nature of tax or fee.
The court reaffirmed the tests that had been laid down in various seminal decisions that tax is levied as part of a common exaction as opposed to fee, which is in the nature of payment towards services rendered. In this regard, it was clarified that a fee need not be charged strictly on a quid pro quo basis if it is not excessive and is towards a special benefit of the class of payers. The test adopted by the court is in line with the jurisprudence developed over a period of time.
While applying this test to the factual scenario in respect of the administrative fee – without delving into quantum of fee, the court accepted that such payment was in the nature of fee inasmuch as it was essential to defray expenses incurred by the state government to prevent the illegal conversion of industrial alcohol to potable alcohol. However, in respect of the export permit fee, the court found that the intention behind the imposition of the fee was to prevent “manufacturers from exporting industrial alcohol to breweries of potable alcohol in other states that would fetch them a better price than producers of other products within their own state”.
Given that the objective of payment of the export permit fee was towards regulation, control and to discourage the export of rectified spirit, the fee did not confer any special benefit onto its payers. Hence, such payment was found to be in the nature of tax which could not have been imposed by the state government. In this regard, while the court found that the rules were themselves not illegal, it struck down rule 15 dealing with the export of rectified spirits.
Be that as it may, for the smooth implementation of a new levy, governments should not lose sight of the principles of taxation vis-à-vis principles of imposition of fee. Given that the implementation of goods and services tax is imminent, it would be interesting to see how the debate around a charge being in the nature of a tax or a fee would pan out in the GST era, when the imposition of both tax and fee would substantially change.
Kumar Visalaksh is an associate partner and Dhruv Bhattacharya is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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