Article 268A

Article 268A of the Constitution of India, now repealed, was a transitional constitutional provision that empowered the Union Government to levy service tax while allowing both the Union and the States to share in its collection and appropriation. It represented a key stage in the evolution of India’s indirect tax system, bridging the gap between traditional excise and sales taxes and the later introduction of the Goods and Services Tax (GST). The Article was introduced by the Constitution (Eighty-eighth Amendment) Act, 2003, and was repealed by the Constitution (One Hundred and First Amendment) Act, 2016, which established the GST framework.

Background and Constitutional Context

Before the introduction of Article 268A, India’s taxation framework did not clearly define how taxes on services were to be administered. While goods were subject to excise duty and sales tax, services — which were rapidly becoming a major component of the Indian economy — lacked a specific constitutional basis for taxation.
The Finance Act of 1994 had introduced the concept of service tax under the residuary powers of the Union (Article 248 read with Entry 97 of the Union List), but as the service sector expanded, there arose a need for a more explicit constitutional provision. The 88th Amendment of 2003 addressed this gap by introducing Article 268A and Entry 92C in the Union List, thereby giving the Union clear authority to levy taxes on services.

Key Provisions of Article 268A

Article 268A provided a constitutional foundation for the levy, collection, and distribution of service tax between the Union and the States.

1. Empowerment to Levy Service Tax: Clause (1) of Article 268A empowered the Government of India to levy taxes on services provided or agreed to be provided. This legalised the collection of service tax as a Union levy and provided constitutional recognition to an increasingly significant source of revenue.
2. Collection and Appropriation of Proceeds: Clause (2) of Article 268A outlined the mechanism for collecting and distributing the proceeds of service tax:
   • The tax would be levied by the Union, but both the Union and the States were entitled to collect and appropriate the proceeds.
   • The exact manner of distribution and appropriation was to be determined by Parliament through legislation.

This system of shared collection reflected a cooperative fiscal model, promoting coordination between the two levels of government.

1. Administrative Mechanism: The Central Board of Excise and Customs (CBEC), now the Central Board of Indirect Taxes and Customs (CBIC), was responsible for administering service tax on behalf of the Union. States participated indirectly through fiscal arrangements rather than direct assessment and collection.

Significance of Article 268A

The introduction of Article 268A marked a major reform in India’s fiscal and constitutional framework:

• It formally recognised service tax as a distinct constitutional category, separate from excise and sales tax.
• It created a shared revenue structure between the Union and the States, laying the groundwork for the eventual move towards dual taxation under GST.
• It represented a key step towards comprehensive tax reform, facilitating uniformity and coordination across India’s indirect tax system.
• By explicitly including services within the taxation framework, it expanded the revenue base for both levels of government.

Related Constitutional Provisions

Article 268A operated alongside other fiscal provisions that governed the distribution and administration of taxes in India:

• Article 246: Defined the legislative competence of Parliament and State Legislatures, allocating taxation powers through the Union, State, and Concurrent Lists.
• Article 268: Concerned with Union duties collected and appropriated by the States.
• Article 269: Related to taxes levied and collected by the Union but assigned to the States.
• Article 270: Provided for the distribution of taxes between the Union and the States.

Together, these provisions structured the fiscal federal system, with Article 268A serving as a transitional link between pre-GST indirect taxation and the unified GST regime.

Legislative Implementation

Following the 88th Amendment, the Parliament continued to impose service tax through the Finance Acts, which specified taxable services, rates, exemptions, and procedural details. The Finance Act of 2003 and subsequent annual Finance Acts expanded the scope of service tax to cover a wide range of professional, commercial, and technical services, including telecommunications, insurance, banking, construction, and information technology.

Repeal of Article 268A and Introduction of GST

Article 268A was repealed by the Constitution (One Hundred and First Amendment) Act, 2016, which introduced the Goods and Services Tax (GST) — a comprehensive indirect tax replacing multiple existing levies such as excise, sales, and service tax.
The repeal became effective on 16 September 2016, marking the transition from a fragmented indirect taxation structure to a unified GST framework.

Key Reasons for Repeal

• The service tax regime was fragmented and often resulted in overlapping jurisdiction between the Centre and the States.
• The complexity of multiple indirect taxes led to cascading effects on goods and services.
• The GST model, by subsuming service tax, provided a seamless tax structure with a common base for both goods and services.

Impact of the Repeal

• The GST regime replaced service tax, integrating it within a broader system where both the Union and the States share concurrent powers to tax goods and services under Article 246A.
• It marked the end of Article 268A’s transitional role and the beginning of a new era of cooperative fiscal federalism.
• The Goods and Services Tax Acts, 2017 (Central GST, State GST, and Integrated GST) became the primary legislative framework for indirect taxation in India.

Judicial Context and Case Law

Although Article 268A itself did not generate extensive litigation due to its limited period of operation, several cases concerning service tax helped define its scope and implications:

• Union of India v. Satyam Computer Services Ltd. (2011): Clarified that service tax applies to transactions involving services provided for consideration, even when bundled with goods or software.
• CCE v. Bharti Airtel Ltd. (2011): Addressed disputes regarding the valuation and applicability of service tax on telecommunication services.
• All India Federation of Tax Practitioners v. Union of India (2007): Upheld the constitutional validity of service tax, recognising it as a tax on services distinct from tax on professions or goods.

These cases collectively reinforced the constitutional legitimacy and administrative rationale behind Article 268A.

Role in the Evolution of Fiscal Federalism

Article 268A represented a transitional phase in India’s fiscal development. It demonstrated how the Constitution could evolve to accommodate emerging economic realities and revenue models. Its legacy lies in its role as a precursor to GST, helping to:

• Develop the concept of dual tax jurisdiction, shared by the Union and the States.
• Provide an administrative model for cooperative tax collection and appropriation.
• Foster consensus-building for the eventual constitutional amendment introducing the GST system.