Quid pro quo test no longer the norm

Last week, on October 22, the Supreme Court passed a very important decision in the matter of Jalkal Vibhag Nagar Nigam & Ors vs Pradeshiya Industrial and Investment Corporation & Anr. By way of the ruling, the Court attempts to resolve the chronic problem of distinction between a tax and a fee which the courts have faced since time immemorial.

In the present case, the Court while dealing with the constitutional validity of ‘water tax’ levied by the state of UP through a specialised body held that the principles of distinction between fee and tax must now undergo a change and a fee must not always be looked through the benchmark of quid pro quo. It has been understood and judicially interpreted that a fee is a compensation towards a specific service provided by the state whereas a tax is a compulsory exaction which cannot be correlated to a specific service or facility provided by the state.
 
The present ruling of the Supreme Court consciously blurs this line to say that a tax and a fee must not be understood primarily based on the concept of quid pro quo. The present ruling brings a paradigm change in the way taxes, cess and fee have been recognised by the courts. These terms have been subject of much judicial interpretation over the years with the apex court trying its best to keep the distinction clear.

In spite of rulings passed by the courts, the issue remains heavily litigated. Over the years, the central and the state governments have levied various taxes, cess and fee through enactments, these levies and enactments have been aggressively challenged before the writ courts for reasons such as constitutional validity, non-adherence to principles of compensation, arbitrariness etc. The recent judgment rehauls all the previous jurisprudence to declare that a tax, fee, or a cess can no longer be interpreted like it has been done over the years.

The Court tries to lay emphasis on the point that till the time the state or the central government has the legislative mandate under the constitution to enact a law it can always create a levy that may have trappings of a tax or a fee or both.
 
While the ruling seeks to clarify important concepts it also raises certain questions with regards to the status of the earlier rulings of the Supreme Court where the bench of larger corum have given interpretations that are somewhat different from what the present rulings seek to crystalise. It is known that the courts (Supreme Court as well as high courts) have been re-visiting its own principles on this subject for some time. What effect this ruling will have on those cases is an issue which needs to be observed in the future.

Lastly, and most importantly the ruling also echoes a need that the apex court must converge a larger quorum to put at rest the concepts of tax, cess and fee; a test or a benchmark that can be followed for all such cases.

(Aditya Bhattacharya is Partner, and Mounica Kasturi is Principal Associate at Lakshmikumaran & Sridharan Attorneys)

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