Most of us would be baffled if we were asked whether the tomato is a fruit or a vegetable, or whether hide and leather are the same, or if a crane on four wheels can be classified as an equipment or a vehicle. But ask a tax lawyer and you will find a glint in her eyes. This is the stuff that would release forensic hot air and tons of judicial ink.
Though several Constitution benches have discussed the difference between taxes and fees, this is an issue that refuses to die. Last week, the problem cropped up again in the judgment Delhi Race Club Ltd vs Union of India. The cause of action was the hike in the licence fee for horse races and betting. The entertainment and luxury tax commissioner demanded the higher rate. The race club moved the Delhi High Court against the hike and failed. Its appeal to the Supreme Court was also in vain.
The decision turned on the question whether the impost was a tax or a fee. One of the earliest Constitution bench judgments by the Supreme Court (the “Shirur Mutt case” of 1954) answered the question. Another Constitution bench in 1961 (the Hingir-Rampur Coal Company case) again discussed the difference between tax, fee and cess.
It explained that “a tax is imposed for public purposes and is not supported by any consideration of service rendered in return. A fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it.”
In another Constitution bench judgment (State of West Bengal vs Kesoram Industries), the court explained the difference: “Availability of indirect benefit and a general nexus between the persons bearing the burden of the levy of fee and the services rendered out of the fee collected is enough to uphold the validity of the fee charged.”
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In the case of horse racing, the recent judgment elaborated that a fee need not merely be compensatory, but the purpose could also be regulatory. Further, it could include control and management of horse racing and encouragement of horse racing as a sport in public interest. These include aspects like jockey training, improving Indian horse breeds and allotting the amount of stakes for different kinds of horses. Therefore, the quid pro quo need not be direct, and the entire fee collected need not be spent on the service rendered. “A good and substantial portion of the amount collected on account of fee, may be in the neighbourhood of two-third of three-fourths”, is enough to classify it as fee. The amount collected need not be credited to a separate fund.
This is because it is not always possible to work out with mathematical precision the amount of fee required for services to be rendered each year. Thus, it is not possible to collect the amount that is sufficient to meet the expenditure of that year in a certain sector. In the case of a market committee, for instance, the income from market fee or licence fee might exceed the expenditure in one year. In another, the situation might be the reverse.
Moreover, under the Constitution, a fee could be of two kinds: a licence fee and that for services (Article 110). Therefore, a public authority can impose a fee even if no service is rendered. The only caveat is that the rate should not be excessive, though arithmetical equivalence is not possible.
The problem could get complicated if words like “cess” or “compensatory tax” are used in legislation and rules. Though these are essentially the same, they could provoke more debate. The high courts have, in fact, reached different conclusions. In Jindal Stainless Ltd vs State of Haryana, the use of “compensatory tax” led to such conflicting judgments. Several high courts took one view, and a two-judge bench of the Supreme Court doubted its own earlier view. Therefore, the issue was referred to a Constitution bench and then returned to a smaller bench. The court remarked that “compensatory tax is by nature hybrid, but it is closer to fees than to tax as both fees and compensatory taxes are based on the principle of equivalence and on the basis of reimbursement/recompense.”
Lack of clarity in laws and judicial statements can lead to semantic confusion. Some time ago, Madhya Pradesh imposed a levy on motor vehicles plying without permits or running on unauthorised routes. That was a new hybrid — fees or penalty? The Supreme Court struck it down stating that levies could not be imposed as penalty. With depleting coffers, lawmakers might now think of coining new words to extract more revenue.