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Difference Between Tax and Fee
The three lists in Schedule VII of the Indian Constitution define the limits of the Centre's and States' legislative authority. Tax and fee-levying authority do not overlap, and the terms "fee" and "tax" have been given various interpretations. To distinguish fees from tax, the Hon. Supreme Court has carved out a "quid pro quo test" between the fees received and the services delivered in its initial judgments. While levying a charge is related to the costs paid by the government in providing a service, tax was once thought to be a general burden for the benefit of the public. The fees were supposed to be kept separate and not deposited in the Consolidated Fund.
What is Tax?
In order to pay for its expenses, the government imposes taxes on its citizens as a matter of law. By definition, a tax is a payment for which the taxpayer receives neither a direct nor a defined benefit in exchange. We can identify some of the most significant characteristics of tax from the definition.
A tax is a requirement that the government imposes on its people and various commercial enterprises. Since paying taxes is required, failing to do so will result in penalties.
The connection between the taxpayer and the taxing body is not one of a direct quid pro quo. In other words, a taxpayer cannot ask for anything in exchange for paying taxes.
To fund public spending for the benefit of the entire nation, a tax is imposed.
It is impossible for the base of taxation to be constant across time. The tax authority examines it on a regular basis.
What is Fee?
A fee is a voluntary payment made to the government in exchange for one-of-a-kind services provided in the public interest, but which provides the payer with a specific benefit.
Difference between Tax and Fee
In the landmark case of Commissioner, Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, AIR 1963 SC 966, the distinction between a tax and a charge was first addressed. The Supreme Court ruled that a tax constitutes a charge in this case when, firstly, the money obtained through the levy is related to the costs incurred by the government in providing the service. Therefore, a quid pro quo component is required. Second, the money raised must be explicitly designated for the costs the government incurs in providing the services and not combined with the Consolidated Fund.
The given table highlights the major differences between tax and fee −
| Basis | Tax | Fee |
|---|---|---|
Definition |
A tax is money that the government levies on a person or company when they carry out a particular act or complete a particular transaction. Taxes are imposed for the benefit of the nation as a whole. | A fee is similar to a tax in that both are amounts that people or businesses must pay to the government. The main purpose of fees is to manage or control different kinds of activities. |
Measured |
This tax is frequently calculated as a percentage of the transaction's total cost. |
The cost of providing the service is closely correlated with the rate. In general, the fee's proceeds are only used to provide the service for which they are intended. |
Levy Collection |
Taxes are levies that are paid for general government services. It is a method for the government to make money. |
A charge is a levy that is taken in order to provide a service that helps the population from which the money is taken. It is billed for services provided by a person, a business, or a professional. |
Administration and Application |
Administration and Use: Your taxes may cover a teacher's, police officer's, or bureaucrat's wage. They might aid in building a school or paving a road. They might provide funding for the local sewage treatment facility. |
An exacting service is charged a fee, and the money obtained is typically set aside for that service. |
Example |
The money that a person earns over the course of a year is subject to taxation. Furthermore, taxes are frequently levied on the sale of goods. Taxes include things like income tax, gift tax, wealth tax, VAT, etc |
However, a fee is imposed specifically for the use of a service. For instance, a government might impose admission charges for parks. Examples of fees include stamp fees, license fees for driving, government registration fees, etc. |
Mahant Sri Jagannath Ramanuj Das v. State of Orissa, AIR 1954 SC 400, where it was held that the fee must be the consideration for certain services that the individuals received and that it must not be merged in the general revenue of the state to be used for general public purposes, further established these two factors. Through successive legal decisions, the two aforementioned principles of a fee have undergone significant alteration, and their stringent requirement has been lessened.
Conclusion
While it is true that a provision imposing the tax might not entirely be devoid of any elements of service, the present judgment disregards rulings made by the Apex Court that made it clear that a broad correlation between expenses and service is required. Quid pro quo is eliminated by the current ruling, but it is unclear what other standards should be applied in its place.
The Hon. Supreme Court's decision is further perplexing because it notes that both tax and fee obligatory exactions are possible while also holding that the charge under Section 52 of the UP Act is a compulsory exaction and is, therefore, in the nature of a tax.
Frequently Asked Questions
Q1. What type of expense is fee?
Ans. The costs associated with a company's primary operations include the cost of items sold, administrative costs, office supplies, direct labor costs, and rent. These are the costs that are related to regular, everyday activities.
Q2. How tax and fee are different in case laws?
Ans. Taxes were seen as a general burden on the welfare of the public, whereas fee levies were related to the costs the government incurred to provide a service. The fees were not to be deposited into the consolidated fund but rather held in a separate fund.
Q3. What is the concept of fee?
Ans. A fee is a set cost associated with a certain service. There are many different types of fees, including costs, charges, commissions, and penalties. Fees are paid in lieu of wages or salaries and are most frequently found in highly transactional services.
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