The recent introduction of The Taxation Laws (Amendment) Bill, 2021 by the Government of India in the Lok Sabha has sparked discussions. This legislation proposes the withdrawal of tax demands that were made using a 2012 retrospective legislation to tax the indirect transfer of Indian assets. In this context, the government emphasized the need to establish its sovereign right to taxation.
Sovereignty and Constitutional Sovereignty
Sovereignty refers to ultimate authority or overseer in state decision-making and order maintenance, as per political theory. It is a term rooted in Latin terminology, originally denoting the equivalent of supreme power. Within the context of India, the sovereignty particularly implicates constitutional sovereignty, suggesting that the constitution holds supreme power.
Sovereign Right to Taxation in India: Constitutional Provisions
The Constitution of India endows the government with the right to impose taxes on individuals and organizations. However, it makes it explicit that nobody can impose or charge taxes without the authority of law. Thus, any levied tax must be supported by a law passed by the legislature or Parliament, as stated in Article 265 of the Constitution.
Taxation System in India
Tax serves as a financial obligation imposed on individuals or property owners to fund the government. It is not a voluntary contribution but a compulsory one, enacted under legislation. The Indian taxation system operates on a three-tier model encompassing Central, State, and local governments. The Seventh Schedule of the Constitution delineates separate heads of taxation for the Union and State. No such head exists under the Concurrent list, implying a lack of concurrent taxation power between the Union and the States.
Limitations to States’ Sovereignty Regarding Taxation
The Bilateral Investment Treaties (BIT) provisions frequently invoked to question a state’s taxation measures include provisions about expropriation and fair and equitable treatment. This entails that tax imposition should not be discriminatory or confiscatory.
Way Forward and Limitations to Sovereign Right To Tax
India must judiciously exercise its right to regulate, bearing in mind its obligations under international law. Such regulations should be enacted in good faith and in a proportionate manner. Investor-State Dispute Settlement (ISDS) tribunals typically do not intervene in such cases. The real point of contention is not whether India possesses a sovereign right to tax, but whether this right is subject to certain constraints. The answer is affirmative because international law renders the sovereign right to tax non-absolute.
