DEPARTMENT OF LAW

PRESTIGE INSTITUTE OF MANAGEMENT AND RESEARCH, INDORE

NAME OF THE TOPIC

“TAXATION LAWS IN INDIA”

SUBMITTED IN THE PARTIAL FULFILMENT OF BALLB (Hons.)

8th SEMESTER

SUBMITTED TO: - SUBMITTED BY: -

Ms. Ritu Tiwari Anushka Sharma
BALLB(Hons.)/ VIII
Section- B

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 ACKNOWLEDGEMENT

I would like to convey my heartfelt gratitude to Ms. Ritu Tiwari Ma’am for her tremendous
support and assistance in the completion of my assignment. I would also like to thank her for
providing me with this wonderful opportunity to work on an assignment on the topic ‘Taxation
Laws in India’. The completion of the assignment would not have been possible without their
help and insights.

The successful and final outcome of this assignment required a lot of guidance and assistance
from many people and I am extremely fortunate to have got this all along the completion of
our assignment work. Whatever is done is only due to the guidance and assistance of such
people.

I am overwhelmed in all humbleness and gratefulness to acknowledge my depth to all those

who have helped me to put these ideas, well above the level of simplicity and into something
concrete.

Anushka Sharma

BALLB 8th Semester

Section- B

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 TABLE OF CONTENTS

INTRODUCTION…………………………………………………………………...……….04

EVOLUTION OF TAXATION LAWS IN INDIA…………………………………..………05

CONSTITUTION OF INDIA AND TAXATION LAWS……………………………………08

TYPES OF TAXES…………………………………………………………………………..10

1. Direct Taxes…………………..………………………………………………………10
2. Indirect Taxes…………………………...……………………………………………11

GOODS AND SERVICES TAX (GST)……………………………………………………..12

CUSTOM LAWS…………………………………………………………………………….14

CONCLUSION………………………………………………………………………………16

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 INTRODUCTION
Taxation laws in India are a set of regulations and statutes that govern the imposition,
collection, and administration of taxes across the country. These laws play a crucial role in
generating revenue for the government, funding public expenditures, and regulating economic
activities. The introduction and development of taxation laws in India have been shaped by
historical, economic, and political factors. The origin of the taxation system in India can be
traced back to ancient times, way before independence. References to tax can be found in
renowned Indian scriptures like the Manusmriti and Arthashastra, the books of law and
economics, respectively. Both lay down methods of imposing taxes, as well as the importance
of a fair tax system for the welfare of the state and its beings.

The word tax has been derived from the latin word Taxare or taxo which means to assess the
worth of something. Tax is the money you pay to the government for the use of state services.
It is a source of revenue for the government, which is used to provide you with better
infrastructure and other facilities. It may be direct tax or indirect tax, and may be paid in money
or as its labour equivalent. A Direct tax is a kind of charge, which is imposed directly on the
taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is
imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. Whereas
an indirect tax is a tax collected by an intermediary (such as a retail store) from the person who
bears the ultimate economic burden of the tax (such as the consumer).

The strength of a nation’s economy depends upon the system of taxation. If correct approaches
are taken it keeps revenue consistent and manages growth in our economy. Our tax structure
has a three-tier federal structure consisting of the Union Government, the State Governments
and the Local Bodies. Any tax levied not backed by law or is beyond the powers of the
legislating authority is unconstitutional. The basic framework for the tax system in independent
India was provided in the constitutional assignment of tax powers. According to the
Constitution of India, the government has the right to levy taxes on individuals and
organizations. However, the constitution states (Article 265) that no one has the right to levy
or charge taxes except the authority of law. Whatever tax is being charged has to be backed by
the law passed by the legislature or the parliament. Any tax levied by the government which is
not backed by law or is beyond the powers of the legislating authority may be struck down as
unconstitutional. The Indian Constitution distributes legislative powers including taxation,
between the Parliament and the State Legislature.

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 HISTORICAL EVOLUTION OF TAXATION SYSTEM IN INDIA

The traditional taxation has been in force in India in different forms from ancient times. Manu,
the ancient law giver, lay down that traders and artisans should pay one-fifth of their profits in
silver and gold, while agriculturists, depending upon their circumstances, were to pay one-
sixth, one eighth or one-tenth of their produce. here are references both in Manusmriti and
Arthashastra a variety of tax measures. Manu, the ancient sage and law-giver stated that the
kind could levy taxes, according to Sastras. The 19th century saw the establishment of British
Rule in India following the Mutiny the Mutiny of 1857, the British Government faced an acute
financial crisis. To fill up treasury, the first Income Tax Act was introduced in February 1860
by James Wilson, who become British-India first Finance Minister. Henceforth, there were
many developments in the field of taxation. The tax system was modelled largely on the lines
of the British System prevailing then. However, major changes in taxation laws in India were
seen post-independence. The timeline of the evolution of taxation laws in India is discussed
here as follows.

MANUSMRITI AND ARTHASHASTRA

The earliest source of tax in India, Manusmriti, suggests the king collect and regulate taxes in
a manner that is fair on the subjects. As per provisions mentioned in it:

o Traders must pay 20% or 1/5th of their income

o Artisans must pay 20% or 1/5th of their income
o Agriculturists must pay 1/6th, 1/8th, or 1/10th of the crop produce, depending on the
circumstances

Laid down in the 3rd century BCE, the Arthashastra deals with the subjects of politics,
economics, military and defence, and state functioning, to name a few. The book mentions that
the affluent pay high taxes as compared to the less privileged. It also flattened the tax rate for
agriculturists at 1/6th of the land produce. Moreover, it mentions taxes regarding the import,
export, tolls, and income tax during emergencies.

INCOME TAX ACT, 1860

While ancient texts play a crucial role in the evolution of taxation in India, the income tax
system as we know it today first came into the picture in the year 1860. It was introduced by
Sir James Wilson during the British era in the country.

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The taxation policies were formed to compensate for the loss to the British government of the
time during the military mutiny of 1857.

As per the Act, the income was divided into four sections - from landed property, from trade
and profession, from salary and pension, and from securities. Some of the best tax-saving
investments of today, such as life insurance premiums, were exempted from tax even then.

INCOME TAX ACT, 1886

In the year 1886, the Indian Income Tax Act was passed. Since then, the tax laws have
witnessed constant revisions from time to time. Under this, the tax was levied on income from
four sources including, income from salaries, pensions and gratuities, company net profits,
interest on securities, and from other sources.

INCOME TAX ACT, 1918

A novel Income Tax Act was passed in April 1918, which introduced several changes to the
previous Act. Among the various amendments, the deductions and receipts of casual or not
recurring in nature that occurred during business and professional transactions were also taken
into account while computing taxable income.

INCOME TAX ACT, 1922

A milestone that led us to the current tax structure and laws is the Income Tax Act passed in
the year 1922. It not only provides flexibility to the income tax structure in India but also helps
build a proper administration system for tax in India. It remained in force until the year 1961.

INCOME TAX ACT, 1961

After the innumerable amendments to the previous laws, the Income Tax Act was passed in
consultation with the Ministry of Law in 1961. Applying to the whole of India, which includes
Sikkim and Jammu and Kashmir, the Act was brought into effect from the 1st of April 1962.
Along with this, the Central Board of Revenue was divided, giving birth to the Central Board
of Direct Taxes (CBDT).

Currently, the calculation of your taxable income, the tax slab you fall into, the taxes you pay,
and the tax-saving funds you choose are all determined as per this Act of 1961. According to
this Act, presently, tax is imposed on income belonging to five different heads:

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 o Income from Salary
o Income from Business or Profession
o Income from Capital Gains
o Income from House Property
o Income from Other Sources

Each successive government amends the Act with an aim to finance government operations,
and to try and distribute wealth more evenly. A noticeable feature of the Income Tax Act of
India is that agricultural income in India is not taxable. Income tax in India (and all other
countries) is assessed annually for the previous financial year.

India currently has a three tier setup for taxation. The central government and the state
government can both impose tax. The State government in turn can delegate taxation to the
local governing bodies like the municipal corporations and gram panchayats. It is said that that
the Indian tax system is one of the most complex in the world, including the likes of income
tax, wealth tax, property tax, gift tax, sales tax, VAT, custom duty, excise duty (now replaced
by GST), corporate tax, income tax and a plethora or other taxes. Indeed, it is one of the reasons
why there is a high demand in India for income tax consultants, GST consultants, auditors, and
other professionals. As a nation evolves, its needs change. India is no exception. No doubt as
the nation progresses, the tax structure of India will undergo many refinements. For example,
the Goods and Services Tax (GST), which has replaced the Central and State indirect taxes
such as VAT, excise duty and service tax, was implemented in India on July 1, 2017. GST has
been already introduced in more than 160 countries, starting from France where it was
introduced way back in 1954. So, it can be safely said that GST is a tired and tested taxation
solution; India need not worry unnecessarily about its effectiveness.

There is a long history of evolution of taxation system in India. With India going through
dynamic changes, the tax structure of the country is bound to witness refinements to suit
people’s needs.

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 CONSTITUTION OF INDIA AND TAXATION LAWS

The constitutional framework of the taxation system in India is primarily outlined in the
Constitution of India, which was adopted on January 26, 1950. The Constitution delineates the
powers and responsibilities of the central and state governments regarding taxation. India has
a three-tier federal structure, comprising the Union Government, the State Governments and
the Local Government. The power to levy taxes and duties is distributed among the three tiers
of Governments, in accordance with the provisions of the Indian Constitution.

India’s tax system is a three-tier federal structure which is made up of the following:

 Union List (List 1 of the 7th schedule to the Constitution of India) contains those
matters on which the Central Government has the power to make laws [Article 246(1)].
 The State List has only those matters on which the State Government has the power to
make laws [Article 246(3)].
 The Concurrent List has those matters on which both the Central and State
Governments have the power to make laws [Article 246(2)].

Law made by Union Government prevails whenever there is a conflict between the Centre and
state concerning entries in the concurrent list. But if any provision repugnant to earlier law
made by parliament is part of law made by the state, if the law made by the state government
gets the assent of the President of India, it prevails.

CONSTITUTIONAL PROVISIONS RELATED TO TAX IN INDIA

ARTICLE 265: This article succinctly states, “No tax shall be levied or collected except by
authority of law.” In other words, taxation powers are primarily governed by this constitutional
provision.

Levy and Distribution of Taxes

ARTICLE 268- Deals with the levy of duties on taxes and their distribution between the centre
and states.

ARTICLE 269- Pertains to taxes on goods and passengers carried by railways.

ARTICLE 270- Addresses taxes levied by the Union for specific purposes.

ARTICLE 271- Covers surcharges and cess

ARTICLE 273- Relates to grants-in-aid for local bodies.

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Restrictions on State Taxation

ARTICLE 286: Imposes restrictions on the power of states to levy taxes. It prevents states
from taxing goods in transit or export.

Other Relevant Articles

ARTICLE 275: Deals with grants-in-aid from the Union to states.

ARTICLE 276: Concerns taxes on professions, trades, callings, and employments.

ARTICLE 279: Establishes the Goods and Services Tax (GST) Council.

ARTICLE 282: Allows the Union and states to make grants for any public purpose.

ARTICLE 286: Addresses restrictions on the imposition of taxes on the sale or purchase of
goods.

The Constitution can be amended to make changes to taxation-related provisions. However,

certain fundamental features, such as the basic structure of federalism, cannot be altered
without adhering to stringent amendment procedures specified in the Constitution. Overall, the
constitutional framework of the taxation system in India provides a balance of powers between
the Union and states, ensures compliance with fundamental rights, and guides the formulation
and implementation of tax policies to promote economic development and social welfare.

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 TYPES OF TAXES

Taxation in India is majorly divided into Central and State Government taxes with two types
of taxes:

1. Direct Taxes
2. Indirect Taxes

While direct taxes are levied on your earnings in India, indirect taxes are levied on expenses.
The responsibility to deposit the direct tax liability lies with the earning party, whether
individual, HUF or a company. Indirect taxes are collected majorly by the corporates and
businesses providing services and products. Thus, the responsibility to deposit indirect taxes
lies with these entities.

1. DIRECT TAXES

Direct tax is levied on the income or profits of people. For example, a taxpayer pays the
government for different purposes, including income tax, personal property tax, FBT, etc. The
burden has to be borne by the person on whom the tax is levied and cannot be passed on to
someone else. Here are some key types of direct taxes:

a) Income Tax: Income tax helps to make sure that everyone contributes fairly to the
government based on their income. The tax system is designed to make sure that people
with higher incomes pay more, which is important for fairness. Income tax applies to
different types of income, including wages, salaries, business profits, capital gains,
rental income, and other types of income. Everyone, including people who live outside
of India, must pay income tax on money they make in India.
b) Corporate Tax: The corporate tax applies to the businesses and entities filing their
returns as a company. This is also a slab rate depending on the turnover of the firm.
Corporate tax applies to the profits generated by companies from their business
activities, including manufacturing, trading, services, and other commercial operations.
c) Capital Gains Tax: Capital gains tax apply to the profits from the sale of a capital asset
only. The rate of tax on capital gains depends on the type of capital gain. Income Tax
Act, 1961 divides the capital gains tax into the following two types:
i. Short-Term Capital Gains Tax
ii. Long-Term Capital Gains Tax

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Short-term capital gains are when the assets are sold within a specified period, for example:

 Equity stocks sold within 12 months of purchase

 Debt mutual fund units sold within 36 months of purchase
 Real estate property or gold sold within 36 months of purchase

If the asset is sold after the specified period, the gains or losses will become long-term capital
gain or loss.

Depending on the type of asset your gain may receive indexation benefit on long-term capital
gains. Indexation allows you the benefit of inflation to your capital gains, reducing your tax
liability.

2. INDIRECT TAX

Conversely, indirect tax is levied by the government on goods and services. Therefore, it can
be shifted from one tax-paying individual to another e.g. the wholesaler can pass it on to
retailers, who then pass it on to customers. Therefore, customers bear the brunt of indirect
taxes. People are subjected to an indirect tax when they use products and services. A person’s
income is not directly taxed when they pay indirect taxes. However, in addition to the actual
cost of the goods or services the seller paid for, he must pay the tax. Indirect taxes are payable
even before the goods/services reach the tax payer. In general, sellers who pass the tax on to
the final customer are subject to indirect tax.

There is a distinction between the person bearing the burden and the person paying the tax in
indirect taxes. These taxes must be paid to the government by the sellers (e.g., manufacturers
and retailers). However, businesses pass on the cost of paying the tax to you because they sell
items to consumers. Here are some key types of Indirect taxes in India:

a) Goods and Services Tax (GST): The Goods and Services Tax (GST) is a well-
established and widely applicable value-added tax that is levied on the provision of
goods and services in India. It operates on the basis of destination-based consumption
tax, which means that tax is imposed at each stage of the supply chain and ultimately
borne by the end user. This tax applies to all types of transactions in India, irrespective
of whether they are intra-state or inter-state.

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 b) Customs Duty: Customs duty is imposed on the import and export of goods. It serves
various purposes such as protecting domestic industries, regulating trade, and
generating revenue for the government. Customs duty applies to goods imported into
India (import duty) and goods exported from India (export duty), including goods
transported through customs territories. Customs duty is applicable to importers,
exporters, customs agents, and other entities involved in cross-border trade activities.
c) Excise Duty: Excise duty is a tax levied on the production or manufacture of goods in
India. It is imposed at the point of manufacture and is typically included in the price of
the goods.
d) Service Tax (Replaced by GST): Previously, service tax was levied on certain
specified services provided in India. However, it has been subsumed under GST since
its implementation.

These are the main types of taxes levied in India, each serving different purposes and governed
by specific laws and regulations.

GOODS AND SERVICES TAX (GST)

GST is a single, unified tax on every value-add, right from manufacture to sale / consumption
of goods /services. Hence, with the advent of GST, the legacy taxes on manufacture (Excise),
Inter-state sales (CST), Intra-state sales (VAT) and Service Tax have been subsumed. There
has been a paradigm shift in the way the tax is being levied. We have now moved from source
based to destination-based taxation, with GST coming into foray. Hence GST is also labelled
as a destination-based / consumption-based tax. GST is one of the biggest taxation reforms of
independent India with the objective of integrating State economies.

In other words, Goods and Service Tax (GST) is levied on the supply of goods and services.
Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax
that is levied on every value addition. GST is a single domestic indirect tax law for the entire
country.

GST, the most historic indirect tax reform, is implemented with the aim of enhancing the
overall growth of the Nation along with supporting the Make in India initiative. It aims at
creating a single, unified Indian market throughout the Nation. It is a comprehensive
destination based indirect tax levy on goods as well as services at the national level.

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Its main objective is to consolidate multiple indirect tax levies into a single tax thus subsuming
an array of tax levies, overcoming the limitations of previous indirect tax structure, and creating
efficiencies in tax administration. The essence of GST is in removing the cascading effects i.e.,
tax on tax of both Central and State taxes by allowing setting-off of taxes throughout the value
chain, right from the original producer and service provider’s point up to the consumer level.

GST is a major improvement over existing system of VAT and disjointed Service Tax ushering
a collective gain for industry, trade and common consumers as well as for the Central
Government and the State Governments at large. GST, as a well-designed value added tax on
all goods and services, is the most elegant method to eliminate distortions and to tax
consumption. The GST journey began in the year 2000 when a committee was set up to draft
law. It took 17 years from then for the Law to evolve. In 2017, the GST Bill was passed in the
Lok Sabha and Rajya Sabha. On 1st July 2017, the GST Law came into force.

Objectives of Goods and Services Tax

o To achieve the ideology of ‘One Nation, One Tax’

o To subsume a majority of the indirect taxes in India
o To eliminate the cascading effect of taxes
o To curb tax evasion
o To increase the taxpayer base
o Online procedures for ease of doing business
o To promote competitive pricing and increase consumption

Advantages of Goods and Services Tax

GST has mainly removed the cascading effect on the sale of goods and services. Removal of
the cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax
on tax, the cost of goods decreases.

Also, GST is mainly technologically driven. All the activities like registration, return filing,
application for refund and response to notice needs to be done online on the GST portal, which
accelerates the processes.

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 CUSTOM LAWS

Customs duty, often called import duty, is a key component of a country’s trade policies,
influencing the flow of goods across its borders. As an indirect tax imposed on imports and
exports, customs duty serves economic and regulatory purposes. Customs duties are charges
levied on goods when they cross international borders. Customs duties are charged by special
authorities and bodies created by local governments and are meant to protect local industries,
economies, and businesses. Different products, as well as different countries of origin, may
have different customs duties associated with them.

Customs Duty is an indirect tax, imposed under the Customs Act formulated in 1962 and all
matters related to it fall under the Central Board of Excise & Customs (CBEC). The Customs
Act, 1962 is the basic statute which governs entry or exit of different categories of vessels,
aircrafts, goods, passengers etc., into or outside the country. The Act extends to whole of India
and, save as otherwise provided in this Act, it applies also to any offence or contravention
thereunder committed outside India by any person.

Every good has a predefined rate of duty that is determined based on various factors, including
where such good was acquired, where such goods were made, and what these goods is made
of. Also, anything that you bring into India for the first time should be declared as per the
customs rules. For instance, you need to declare the items purchased in a foreign country and
any gifts which you acquire outside India. The Customs Act, 1962, not only regulates the levy
and collection of duties, but also, serves equally important purposes, like:

i) Regulation of Imports & Exports

ii) Protection of Domestic Industry

iii) Prevention of smuggling

iv) Conservation and augmentation of foreign exchange

It may be pertinent to note that it is Section 12 of the Customs Act, 1962 that provides duties
of customs to be levied at such rates as may be specified under the Customs Tariff Act, 1975
or other applicable Acts on goods imported into or exported from India. Customs Act, 1962
and Customs Tariff Act, 1975 are the two limbs of Customs Law in India which must be read
with rules and regulations.

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The Indian government has increased the basic customs duty on an array of items that include
refrigerators, air-conditioners, footwear, washing machines, furniture fittings, tableware,
jewellery and many more. This was done in an effort to shore up the falling rupee and restrict
the current account deficit. This was initiated with an aim to curb imports of specified imported
items. With the increase in duty, the prices of these goods are likely to rise, dampening their
demand, reducing the imports and then indirectly assisting the domestic manufacturers.

What is the difference between a tax and a customs duty?

While the two terms are used interchangeably, technically speaking, there is a difference
between a duty and a tax:

 A duty is a kind of tax that is placed on goods being imported. The purpose of customs
duties is primarily to protect local economies;
 A tax is placed on all goods sold in the country, including those being imported. The
primary purpose of taxes is revenue generation for the government.

The main difference is that duties are taxes that specifically apply to imports, while taxes apply
to everything, including imports. For the importer, both are charges that are applied to their
shipments that must be paid (typically to relevant customs authorities), and both contribute to
the overall landed cost. Import compliance and classification solutions can help importers
determine which taxes and duties apply to their products.

Customs duty is charged by the federal government on import and export of goods from India.
Duty is payable at the time of import and export of goods. Exports of goods and services are
free from duties and duties paid on exported goods/inputs are refunded.

India follows the HSN classification rules, and the goods are classified under different chapters
or tariff headings, primarily according to their description, components and use. The duties or
taxes applicable on imports are Basic Custom Duty, Social Welfare Surcharge and IGST at
applicable rates.

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 CONCLUSION

Tax administration, has progressed and more to be covered in reforming the tax system. It is a
continuous exercise for improving revenue productivity and minimizing distortions.
Coordinated reforms should be undertaken at the central, state, and local levels. A major
objective should be minimization of distortions and compliance costs. These new changes to
form a new direct tax code had been planned expecting that lower taxes and simpler rules will
ensure compliance and more revenue. Having no space for complicated clauses, sub-clauses
and caveats and saying good bye to unnecessary exemptions, the new direct tax code will have
an impact on all including common man to the big corporate organizations. It is expected that
it will disincentivise tax evasion because if a person doesn’t pay tax on what he sell, he don’t
get credit for taxes on his inputs. Moreover, people will buy only from those who have already
paid taxes on what they are supplying and all these will make a lot of currently underground
transactions will come over ground22brightening India’s future more.

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