Difference between a tax and a fee

It is well settled that the basic difference between a tax and a fee is that a tax is a compulsory exaction of money by the State or a public authority for public purposes, and is not a payment for some specific services rendered. On the other hand, a fee is generally defined to be a charge for a special service rendered by some governmental agency. In other words there has to be quid pro quo in a fee vide Kewal Krishan Puri vs. State of Punjab (AIR 1980 SC 1008):

The meaning given to the word “tax” by Latham C.J. of the High Court of Australia in Matthews v. Chicory marketing Board 60 CLR 263 has been quoted with approval at page 1040 and has been often repeated in many other decisions. Generally speaking a fee is defined to be a charge for a special service rendered to individuals by some governmental agency. A question arises – “special service” rendered to whom, which kind of individuals? Mr. V. M. Tarkunde who appeared for the Haryana marketing Board stressed the argument that service rendered must be correlated to those on whom the ultimate burden of the fee falls. In our opinion this argument is neither logical nor sound. The impost of fee and the liability to pay it is on a particular individual or a class of individuals. They are under the obligation to submit accounts, returns or the like to the authorities concerned in cases where quantification of the amount of fees depends upon the same. They have to undergo the botherations and harassments, sometimes justifiable and sometimes even unjustifiably, in the process of discharging their liability to pay the fee. The authorities levying the fee deal with them and realize the fee from them. By operation of the economic laws in certain kinds of impositions of fee the burden may be passed on to different other persons one after the other. A few lines occurring at page 119 in the judgment of the Privy Council in the case of Attorney General for British Columbia v. Esquimalt and Nanaimo Rly. Co. 1950 AC 87 may be quoted with advantage.


They are as follows:-

“It is probably true of many forms of tax which are indisputably direct that the assessee will desire, if he can, to pass the burden of the tax on to the shoulders of another. But this is only an economic tendency. The assessee’s efforts may be conscious or unconscious, successful or unsuccessful; they may be defeated in whole or in part by other economic forces. This type of tendency appears to their Lordships to be something fundamentally different from the “passing on” which is regarded as the hallmark of an indirect tax”.

The authorities, more often than not, almost invariably, will not be able to know the individual or individuals on whom partly or wholly the ultimate burden of the fee will fall. They are not concerned to investigate and find out the position of the ultimate burden. It is axiomatic that the special service rendered must be to the payer of the fee. The element of quid pro quo must be established between the payer of the fee and the authority charging it. It may not be the exact equivalent of the fee by a mathematical precision, yet, by and large, or predominantly, the authority collecting the fee must show that the service which they are rendering in lieu of fee is for some special benefit of the payer of the fee. It may be so intimately connected or interwoven with the service rendered to others that it may not be possible to do a complete dichotomy and analysis as to what amount of special service was rendered to the payer of the fee and what proportion went to others. But generally and broadly speaking it must be shown with some amount of certainty, reasonableness or preponderance of probability that quite a substantial portion of the amount of fee realised is spent for the special benefit of its payers.

9. We may now extract some very useful and leading principles from the decision of this Court in Shirur Mutt’s case (supra) pointing out the difference between tax and fee. At pages 1040-41 says Mukherjea. J., as he then was:

“The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue,which when collected forms part of the public revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority………”

“a ‘fee’ is generally defined to be a charge for a special service rendered to individuals by some governmental agency.”

At page 1042 the learned Judge enunciates – “The distinction between a tax and a fee lies primarily in the fact that a tax is levied as a part of common burden, while a fee is a payment for a special benefit or privilege……… Public interest seems to be at the basis of all impositions, but in a fee it is some special benefit which the individual receives.” After pointing out that ordinarily there are two classes of cases where Government imposes ‘fees’ upon persons, the first being the type of cases of the licence fees for Motor Vehicles or the like and in the other class of cases “the Government does some positive work for the benefit of persons and the money is taken as the return for the work done or services rendered” (vide page 1043), it is said further – “If the money thus paid is set apart and appropriated specially for the performance of such work and it is not merged in the public revenues for the benefit of the general public, it could be counted as fees and not a tax. There is really no generic difference between the tax and fees and as said by Seligman, the taxing power of a State may manifest itself in three different forms known respectively as special assessments, fees and taxes.” Finally at page 1044 the striking down by theHigh Court of the imposition of fee under Section 76 of the Madras Act was upheld on the ground – “It may be noticed, however, that the contribution that has been levied under Section 76 of the Act has been made to depend upon the capacity of the payer and not upon the quantum of benefit that is supposed to be conferred on any particular religious institution.” Benefit conferred on any particular religious institution would have been undoubtedly benefit conferred on the payer of the fee.