Delegated Legislation in Tax Laws

Deciding how tax laws operate in a country and actually implementing them requires significant planning and coordination between different branches of government. In doing so, the lines dividing government organs become somewhat blurred. Often times, the legislature delegates some functions essential for day-to-day administration of state policy onto the executive. This essay looks briefly at this aspect of taxation.

In Section 1, I have briefly outlined the principles of administrative law that are important while researching on delegated legislation. In Section 2, I have attempted to summarize the broad history of delegated legislation in tax laws. There are many aspects of taxation policy, and each is likely to be differently interpreted by the Supreme Court while deciding the validity of a delegated function. To show how there are specific issues that arise when determining the validity of a legislature’s delegation, in Section 3, I have selected and discussed one specific delegated function, namely the power to exempt persons or goods from the tax net, to show.

Administrative Law and Delegated Legislation

In administrative law, the most important principle of law from which the rules regarding delegation are derived is the principle of separation of powers. The doctrine of separation of powers finds its origins in Montesquieu’s famous ‘Spirit of Law’. It finds mention in the Constitution of India in a limited sense in the form of Article 50, which separates the judiciary and the executive. However, the Supreme Court has clarified that our federal Constitution envisages separation of power between legislature and executive as well. [1]

Moreover, unlike the legislature, the executive cannot directly be held accountable for its actions. Therefore, it is imperative that rules made by the executive in exercise of its delegated powers should be reasonable [2] and in public interest. [3]

Thus, despite strict separation of powers, it often becomes necessary for the legislature to delegate some of its powers and functions to the executive to smoothen day to day administration. Yet, in doing so, it would be unwise to devolve substantial powers onto the executive as that would result in putting excessive control in the hands of an unrepresentative body that is not democratically elected.

Nowhere is this clearer than in tax laws and administration. The procedure of identifying tax liability, deciding appropriate rates and collecting taxes is an important function performed by almost every modern government. Yet, its exercise is so complex and trying that it cannot be done without some delegation to executive authorities. The following section looks at the how the Supreme Court has dealt with the executive’s power to exercise delegated functions.

Delegated Legislation in Tax Laws

The extent to which delegation in tax laws is permissible has changed over time. While the Supreme Court’s position has always been that the power to tax is a legislative function and only matters that incidentally arise in the exercise of that function can be delegated to the executive, its own interpretation of this position has broadened to allow more substantial functions to be exercised by the executive.

The Supreme Court stated in Rajnarain v. Chairman, Patna Administration that the power to tax is essentially a legislative function. [4] Quoting Article 265 of the Constitution of India, [5] it held that the constitutional mandate is on the legislature for imposing taxes. Subsequently, the Court held that some elements of the power to tax might devolve onto the executive after the legislature enacts a law. [6] However, even in that case, it mentioned that broad powers are not and cannot be delegated to the executive. In other words the power to delegate is for the purpose of ‘matters of details’ concerning the working of the tax law in question. [7]

Despite advocating broad principles that seemingly suggested minimal executive powers, the Supreme Court’s interpretation of the rule that essential legislative functions may not be delegated actually permitted substantial intervention by the executive. More specifically, the power to exempt goods or persons, the power to bring additional transactions, commodities or persons within the purview of a tax and the power to fix the rate of tax itself were held to be delegable. [8]

One of the earliest cases on the question of executive authority in taxation was Banarasi Das v. State of Madhya Pradesh [9] . In this case, the Supreme Court adjudicated on Section 6(2) of Berar Sales Tax Act, 1947. This provision empowered the State government to amend a schedule to the Act that listed the goods on which service tax could be levied. It was contended that this power of the state executive was excessive and was actually an essential legislative function. Justice Venkatarama Aiyer held that the impugned provision was not an impermissible delegation of legislative power. The Court relied on Raj Narain’s case [10] and held that it is permissible for the executive to determine the details relating to the operation of taxation laws, such as the selection of those on whom the tax is to be laid and the rates at which such tax is to be charged.

Some years later, the Supreme Court once again took up the question in Devi Das v. State of Punjab [11] . In this case, a five judge bench adjudicated upon the validity of section 5 of the Punjab General Sales Tax (Amendment) Act, 1948. [12] The impugned provision gave the Provincial Government the discretion to levy sales tax at the rate not exceeding 2%. The Court held that it was permissible to confer a ‘reasonable area of discretion on the Government by a fiscal statute, but a large statutory discretion by means of a wide gap between the maximum and minimum rates and thus enabling the government to fix an arbitrary rate is not sustainable’.

Just two years earlier, another five judge bench had decided in Corp. of Calcutta v. Liberty Cinema [13] that the power to fix rates and tax a certain group was allowed to be delegated. To clarify the apparent inconsistency between Devi Das and Liberty Cinema, the Supreme Court constituted a 7 judge bench to hear Municipal Corporate of Delhi v. Birla Spinning and Weaving Mills Ltd. [14] in which it attempted to resolve the matter. In this case, the respondents contested the validity of section 150(1) of the Delhi Municipal Corporate Act, 1957. [15] The provision provided the maximum rate of tax that could be levied, and allowed the Central Government to decide what the rate would be. The provision was upheld by a majority of 5:2 wherein Wanchoo, CJ wrote in his judgment that such provisions are perfectly valid as as essential legislative function was retained by the legislature in its own hands. [16]

Wanchoo, CJ, quoted with approval the observation of Aiyer, J in Banarasi Das and pointed out that there is no conflict between Devi Das and Liberty Cinema. Most importantly, he declared that when the constitutionality of a delegation is considered, it has to be seen in light of the ‘guideline theory’, which posits that a delegation is permissible, if it is made with sufficient guidelines and policy for the exercise of the power conferred.

Having settled the position, few cases exist that significantly alter the position taken by the Court in Birla Spinning and Weaving. One such case is S.B. Dayal v. State of U.P. [17] wherein the validity of section 3D(1) of the U.P. Sales Tax Act, 1948, was challenged. This provision gave the government the power to tax goods at up to 5 percent. While rejecting such a contention, the Court held that ‘19th Century doctrines of delegation of power were out of date and there is a need for extensive delegation of legislative power under a cabinet form of government even if that legislative power is a power to fix the rate if tax’. The Supreme Court speaking through Justice Hegde commented that:

“However much one might deplore the new despotism of the executive, the very complexity of modern society and the demand that it makes on its government have set in motion forces which have made it absolutely necessary for the legislatures to entrust more and more power to the executive”

The case that perhaps settles the matter authoritatively in Gwalior Rayon Mills v. Asst. Commissioner of Sales Tax [18] . In this case, a five judge bench unanimously upheld the validity of section 8(2)(b) of the Central Sales Tax Act, 1956. Justice Khanna reaffirmed the guideline theory that was accepted in Birla Spinning and Weaving. Justice Mathew gave an alternate reasoning, while concurring with the majority, and held that it was not for the Court to ‘hunt for legislative policy or guidance in the crevices of the Statute.’ [19] With this case, the question of the extent to which the executive could exercise functions delegated to it by the legislature in its role as a tax collector was given some finality.

Exemptions

Having given a broad overview of the growth and expansion of the delegation principle in tax law, in this section I will deal with one particular aspect of this power, viz. exemptions.

The government’s power to exempt the payment of taxes can either be through ad hoc exemptions on case to case bases, or by framing rules that govern when and to whom exceptions are made. Both these powers can possibly be delegated to the executive. Despite the content of the power being similar, the status of validity of such powers is different.

In the second and more general delegation of the power to make rules allowing for exemptions, the Supreme Court has held in Union of India v. Jalyan [20] that the power to grant exemptions through rule making can best be described as conditional legislation. However, it held that since the Parliament ‘cannot constantly monitor the needs of the economy, it is essential to empower the Central Government to exercise certain functions’. In the exercise of such functions, the Central Government may make rules that exempt some goods or persons from the tax net. While it may be some form of legislation, it is a necessary and legal delegation. This is in consonance with other decisions of the Court such as Dwarka Prasad v. State of Madhya Pradesh [21] and Irani v. State of Madras [22] , wherein the Court held that ‘whenever the legislature lays down the policy of law, it may authorize the executive to make subordinate rules. This would not amount to anything more than ‘filling up the details’.

Regarding ad hoc exemptions, the Court has been even more liberal and has almost allowed the executive the power to grant ad hoc exemptions (as long as permitted in some form by the parent statute), such as in Banarasi Das. The rationale for this has simply been that as long as contemplated by the parent statute, the State always has the power to decide when an exemption can be given to a certain person or group of persons as it may deem fit. The use of such power would obviously not amount to any type of legislation.

Conclusion

It is clear that there is a need for the legislature to delegate some tasks to its executive. The existence of this need in the case of tax laws is even clearer. What is not so clear, however, is how far this need translates into legally valid actions. The jurisprudence on this point has expanded and today, we see that the Supreme Court upholds a majority of tax legislations that confer powers on the executive.

It might even be said that this attitude displays a sort of special treatment to tax laws. Unlike in other spheres where the law operates, the Supreme Court seems to be mindful of the fact that taxation imposes a heavy burden on the State; one that cannot be managed without deep cooperation between the organs of government. Such cooperation sometime involves extensive support by the executive.

To encourage and facilitate this necessary cooperation, the Supreme Court has taken a lenient view on delegation of legislative functions to the executive. The result has been an ever-increasing occupation of power by the executive. The only concern that remains unaddressed so far is whether such extensive delegation will at some time lead to an over powerful executive. Only time and further case law will give us the answer to this question.