Distinction Between Tax And Fee Has Been Substantially Removed, Says Supreme Court

The Supreme Court observed that the distinction between a tax and fee has been substantially removed.

The practical and even constitutional, distinction between a tax and fee has been weathered down, the bench headed by Justice DY Chandrachud observed while rejecting the challenge against Constitutional validity of Sections 52(a), 55(b)(i) and 56(b) of the UP Water Supply and Sewerage Act.

In this case, the petitioners contended that the levy under Section 52(1)(a) though described as a water tax, is a fee and not a tax and though the legislature has used the nomenclature of "water tax", the levy in effect is an exaction on water or water supply and thus impermissible in view of Entry 49 of List II to the Seventh Schedule to the Constitution. Addressing this argument, the bench also comprising Justices Vikram Nath and BV Nagarathna observed:

"The distinction between a tax and fee has substantially been effaced in the development of our constitutional jurisprudence. At one time, it was possible for courts to assume that there is a distinction between a tax and a fee: a tax being in the nature of a compulsory exaction while a fee is for a service rendered. This differentiation, based on the element of a quid pro quo in the case of a fee and its absence in the case of a tax, has gradually, yet steadily, been obliterated to the point where it lacks any practical or constitutional significance."

The court added that the distinction that while a tax is a compulsory exaction, a fee constitutes a voluntary payment for services rendered does not hold good.

"For one thing, the payment of a charge or a fee may not be truly voluntary and the charge may be imposed simply on a class to whom the service is made available. For another, the service may not be provided directly to a person as distinguished from a general service which is provided to the members of a group or class of which that person is a part. Moreover, as the law has progressed, it has come to be recognized that there need not be any exact correlation between the expenditure which is incurred in providing a service and the amount which is realized by the State. The distinction that while a tax is a compulsory exaction, a fee constitutes a voluntary payment for services rendered does not hold good. As in the case of a tax, so also in the case of a fee, the exaction may not be truly of a voluntary nature. Similarly, the element of a service may not be totally absent in a given case in the context of a provision which imposes a tax."

The bench then referred to earlier judgments viz. Southern Pharmaceuticals and Chemicals, Trichur v. State of Kerala , Municipal Corporation of Delhi v. Mohd. Yasin and Sreenivasa General Traders and Others v. State of Andhra Pradesh and observed:

47. In view of this consistent line of authority, it emerges that the practical and even constitutional, distinction between a tax and fee has been weathered down. As in the case of a tax, a fee may also involve a compulsory exaction. A fee may involve an element of compulsion and its proceeds may form a part of the Consolidated Fund. Similarly, the element of a quid pro quo is not necessarily absent in the case of every tax. In the present case, the tax has been imposed by

In this case, the court observed that levy under Section 52 (1) is  a tax and not a fee and it is a tax on lands and buildings within the meaning of Entry 49 of List II.