LEEWAY

SEVENTH SEMESTER BBA LLB

Taxation law
CREATED BY
AJITH.V, RATHULDEV.S, MUHAMMED NASEEB P
[BBA LLB 5th YEAR]

POWERED BY
UDSF MCT LAW COLLEGE
MCT COLLEGE OF LEGAL STUDIES MALAPPURAM
12 MARK

CONSTITUTIONAL PROVISIONS RELATING TO TAXATION

 The system of taxation is the backbone of a nation’s economy which keeps revenue consistent, manages
growth in the economy, and fuels its industrial activity.
 India’s three-tier federal structure consists of Union Government, the State Governments, and the Local
Bodies which are empowered with the responsibility of the different taxes and duties, which are
applicable in the country.
 The local bodies would include local councils and the municipalities. The government of India is
authorized to levy taxes on individuals and organisations according to the Constitution.
 However, Article 265 of the Indian constitution states that the right to levy/charge taxes hasn’t been
given to any except the authority of law.
 The 7th schedule of the constitution has defined the subjects on which Union/State or both can levy
taxes. As per the 73rd and 74th amendments of the constitution, limited financial powers have been
given to the local governments which are enshrined in Part IX and IX-A of the constitution.
 The government uses this tax to carry out functions such as:

o Social welfare projects like schools, hospitals, housing projects for the poor, etc.
o Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
o Security infrastructure of the country such as military equipment
o Enforcement of law and order
o Pensions for the elderly and benefits schemes to the unemployed or the ones below the poverty line .

Taxes?

 Taxes are mandatory contributions levied on individuals or corporations by a government entity—

whether local, regional, or national. Tax revenues finance government activities, including public works
and services such as roads and schools, or programs such as Social Security and Medicare.
 In economics, taxes fall on whoever pays the burden of the tax, whether this is the entity being taxed,
such as a business, or the end consumers of the business’s goods. From an accounting perspective, there
are various taxes to consider, including payroll taxes, federal and state income taxes, and sales taxes.

Types of Taxes in India

The two types of taxes in India are Direct and Indirect taxes. One of the biggest and most successful tax
reforms in India is the GST(Goods and Services Tax). It assists as a comprehensive indirect tax which helps
in eliminating the flowing effect of tax as a whole.

Direct tax

 It is a tax imposed on corporate units and individual people. It is a type of tax that can’t be moved or
accepted by anyone else. Direct tax examples are wealth tax, income tax, gift tax, etc. In the Ministry of
Finance, the Central Board of Direct Tax (CBDT) is a part of the revenue department.
 This board has a two-fold role that gives important ideas, significant inputs of planning, and policies to
be implemented regarding direct tax in India.
 The management of direct taxes which is done by the Income Tax department is helped by the Central
Board of Direct Taxes in doing so.
Advantages

 It is easy to determine the incidence of the

 Direct taxes tend to be progressive
 Direct taxes are easy to collect. Consider
 Direct taxes are important to the government’s economic policy.

Disadvantages

 Direct taxation may be a disincentive to hard work.

 Direct taxation discourage

 This type of taxation encourages tax evasion – to avoid paying so much tax.

 There is no element of choice about paying the tax

Indirect tax

 Taxes that are indirectly imposed on the public through goods and services are called indirect taxes.
 The government bodies collect taxes from people who sell goods and services.
 When a good or product is sold in a state, then a sales tax is levied on it and its rate is decided by the
government, this is called Value Added Tax (VAT).

o Formulation of the policy regarding duty, collection of custom excise duty and service tax is dealt
with by the Central Board of Excise and Custom (CEBC)
o The Central Board of Excise and Custom was given a new name which was the Central Board of
Indirect tax and Custom (CBIC) after GST came into force. Its key role is to help the government in
formulating policies related to GST.
Advantages

 Indirect tax is fairly easy to collect.

 It is easy to determine the incidence of an indirect tax.

 The government can use it to discourage certain types of consumption.

 Indirect taxation is a good way of raising revenue when levied on goods with an inelastic demand,
such as necessities.

 Tourists do not pay income tax.

 Consumers have a choice as to whether they pay the tax.

 Indirect taxes do not have a discentive effect on work.

Disadvantages

 Indirect taxes are regressive

 These taxes are not impartial.
 Indirect taxes may contribute to inflation.
 According to Article 265 of the Constitution of India, "no tax shall be levied or collected except by
authority of law. Law, here, means the law enacted by the Legislature and it does not include an
executive order or executive instruction Thus a tax cannot be levied or collected on the basis of an
executive order.
 The law should be a valid law. The law must be enacted by the Legislature which is competent to enact
it and it must not violate any provision of the Constitution.
 By virtue of Article 246(1) of the Constitution of India, the Parliament has exclusive power to make laws
with respect to any of the matters enumerated in List (Union List) in the Seventh Schedule.
 By virtue of entries 82 to 92 B of List I the Parliament can enact laws imposing tax on the following
matters
 Taxes on income other than agricultural income
 Duties of customs including export duties 3. Duties of excise on the following goods manufactured
or produced in India, namely
o petroleum crude:
o high speed diesel;
o motor spirit (commonly known as petrol);
o natural gas;
o aviation turbine fuel; and
o tobacco and tobacco products
 Corporation Tax
 Taxes on the capital value of assets, exclusive of agricultural land of individuals and companies:
taxes on the capital of companies.
 Estate duty in respect of property other than agricultural land
 Duties in respect of succession to property other than agricultural land
 Terminal Taxes on goods of passengers, carried by railways, sea or air
 Taxes on railway tares and frieghts
 Taxes on stamp duties on transactions in stock exchanges and futures markets
 Rates of stamp duty in respect of bills of exchange, cheques. promissory notes, bills of lading, letters
of credit, policies of insurance, transfer of shares, debentures, proxies and receipts
 Taxes on the sale or purchase of goods other than Newspapers where such sale or purchase takes
place in the course of inter state trade or commerce.
 Taxes on the consignment of goods (whether the consignment is to the person making it or to any
other person), where such consignment takes place in the course of inter-state trade or commerce.
 Taxes on any matter not mentioned in List 2 or List 3
 By virtue of Article 246 (3)of the Constitution of India, the State Leg lalatures have exclusive power to
make laws with respect to any of the matters enumerated in List 1 (State List) in the Seventh Schedule.
 By virtue of entries 46 to 63 of List 11 the State Legislature can enact laws imposing tax on the
following matters
o Taxes on agricultural income
o Duties in respect of succession to agricultural income
o Estate Duty in respect of agricultural land
o Taxes on land and buildings
o Taxes on mineral rights
 Duties of excise on the following goods manufactured or produced the state
 Alcoholic liquors for human consumption
o opium, indian hemp and other narcotic drugs and narcotics
o Taxes on the consumption or sale of electricity
o Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as
petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not
including sale in the course of inter-State trade or commerce or sale in the course of international
trads or commerce of such goods
o Taxes on goods and passengers carried by road or on inland water ways.
o Taxes on vehicles
o Taxes in animals and boats
o Tolls
 o Taxes on professions, trades, calling and employments
o Capitation taxes
o Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a
Municipality or a Regional Council or a District Council.
 The Parliament cannot enact a law imposing tax on the matters enumerated in State List and the State
Legislature cannot enact laws imposing tax on matters enumerated in Union List.
 If the Parliament or State Legislature enacts a law imposing tax on a matter of which it is not competent,
the Supreme Court or High Court can declare it as ultra vires and word.

27. Freedom as to payment of taxes for promotion of any particular religion – No person shall
be compelled to pay any taxes, the proceeds of which are specifically appropriated in payment
of expenses for the promotion or maintenance of any particular religion or religious
denomination.

 This is the third Article of Right to Freedom of Religion under the section of Fundamental Rights of the
Indian Constitution.

This article says that the government cannot levy any kinds of taxes from its citizens and then use those
taxes for the promotion of a specific religion.
 It is important to understand that this article is banning the taxes to be used for religious purpose but it’s
not banning the imposition of a fee.
 If there are any communal riots then it’s valid for the government to use its funds to reconstruct those
damaged structures using its own money from taxes.

Tax

 Definition: A tax represents money – that a government charges an individual or business when they
perform a particular action or complete a specific transaction. Taxes are levied in the greater interests of
the country.
 Measured: This tax is often assessed as a percentage of the amount of money involved in the transaction.
 Levy collection: A tax is a levy collected for general government services. It is a way to generate
revenue by Govt.
 Administration and Application: Your taxes may pay the salary of a teacher, police officer or
bureaucrat. They may help pave a road or build a school. They may finance the running of the local
sewage-treatment plant.
 Example: A tax is applied on the income that a person makes during a year. In addition, a tax is often
pieced on the sale of goods. income tax, gift tax, wealth tax, VAT, etc. are examples of tax.

Fee

 Definition: A fee is related to a tax in that it is also a charge paid to the government by individuals or by
a business. Fees are mostly imposed to regulate or control various types of activities.
 Measured: The fee rate is directly tied to the cost of maintaining the service. Money from the fee is
generally not applied to uses other than to provide the service for which the fee is applied.
 Levy collection: A fee is a levy collected to provide a service that benefits the group of people from
which the money is collected. It is charged for services rendered by an individual
/Company/Professionals.
 Administration and Application: A fee is assessed for an exacting service, and the money collected is
usually earmarked for that service. The fee that you pay for inspecting your assets every other year
probably goes directly to cover the costs.
 Example: However, a fee is specifically applied for the use of a service. For example, a government may
charge a fee to visit a park. Stamp fee, driving license fee, Govt. registration fee, etc. are examples of Fee.
Cess

 is a form of tax levied by the government on tax with specific purposes till the time the government gets
enough money for that purpose.
 Different from the usual taxes and duties like excise and personal income tax, a cess is imposed as an
additional tax besides the existing tax (tax on tax).
 For example, the Swachh Bharat cess is levied by the government for cleanliness activities that it is
undertaking across India

Duty

 This is an on-border tax charged on goods (commodities, or things that you can physically touch)
either while coming into the country or going out of the country. Generally, a percentage of the value
of the good. i.e Custom duty, excise duty, stamp duty etc.

Toll Tax

 or Toll is the charge that vehicle drivers have to pay while crossing certain interstate expressways,
tunnels, bridges, and other national and state highways.
 These roads are termed toll roads and are under the control of the National Highway Authority of
India (NHAI). The counters to collect the toll tax are toll booths as well as toll plazas (which consist
of several booths).

CONSTITUTIONAL PROVISIONS REGARDING TAXATION IN INDIA

 The roots of every law in India lie in the Constitution, therefore understanding the provisions of the
Constitution is foremost to have a clear understanding of any law.

 The Constitutional provisions regarding taxation in India can be divided into the following categories:

o Only by the authority of law can taxes be levied. (Article 265)

o Levy of duty on tax and its distribution between centre and states (Article 268, Article 269,
and Article 270)
o Restriction on power of the states to levy taxes (Article 286)
o Sale/purchase of goods which take place outside the respective state
o Sale/purchase of goods which take place during the import and export of the goods
o Taxes imposed by the state or purpose of the state (Article 276, and Article 277)
o Taxes imposed by the state or purpose of the union (Article 271, Article 279, and Article 284)
o Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)

Article 265

 Without the ‘authority of law,’ no taxes can be collected is what this article means in simple terms. The
law here means only a statute law or an act of the legislature.
 The law when applied should not violate any other constitutional provision. This article acts as an
armour instrument for arbitrary tax extraction.
Article 266
 This article has provisions for the Consolidated Funds and Public Accounts of India and the States. In
this matter, the law is that subject to the provisions of Article 267 and provisions of Chapter 1 (part
XII),the whole or part of the net proceeds of certain taxes and duties to States, all loans raised by the
Government by the issue of treasury bills, all money received by the Government in repayment of loans,
all revenues received by the Government of India, and loans or ways and means of advances shall form
one consolidated fund to be entitled the Consolidated Fund of India

Article 268

 This gives the duties levied by the Union government but are collected and claimed by the State
governments such as stamp duties, excise on medicinal and toilet preparations which although are
mentioned in the Union List and levied by the Government of India but collected by the state (these
duties collected by states do not form a part of the Consolidated Fund of India but are with the state
only) within which these duties are eligible for levy except in union territories which are collected by the
Government of India

Article 269(A)

This article is newly inserted which gives the power of collection of GST on inter-state trade or commerce to
the Government of India i.e. the Centre and is named IGST by the Model Draft Law. But out of all the
collecting by Centre, there are two ways within which states get their share out of such collection

1. Direct Apportionment (let say out of total net proceeds 42% is directly apportioned to states).
2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a selected
prescribed percentage goes to the States.

Article 270
This Article gives provision for the taxes levied and distributed between the Union and the States:

o All taxes and duties named within the Union List, except the duties and taxes named in articles 268,
269 and 269A, separately.
o Taxes and surcharges on taxes, duties, and cess on particular functions which are specified in Article
271 under any law created by Parliament are extracted by the Union Government.
o It is distributed between the Union and the States as mentioned in clause (2).
o The proceeds from any tax/duty levied in any financial year, is assigned to the states where this
tax/duty is extractable in that year but it doesn’t form a part of the Consolidated Fund of India.
o Any tax collected by the centre should also be divided among the centre and states as provided in
clause (2).
o With the introduction of GST 2 sub-clauses having been added to this Article- Article
270(1A) and Article 20(1B7).

Article 271;-----Article 271 is an exception to Article 269 and Article 270. The collection of the surcharge is

also done by the Union and the State has no role to play in it.

Article 273 ;-----This grant is charged to the Consolidated Fund of India every year in place of any share of
the net proceeds, export duty on products of jute to the states of Assam, Bihar, Orissa, and West Bengal.
Article 275;-----These grants are sanctioned as the parliament by law decides to give to those states which
are in dire need of funds and assistance in procuring these funds.

Article 276;----This article talks about the taxes that are levied by the state government, governed by the
state government and the taxes are collected also by the state government.

Article 277 ;---Except for cesses, fees, duties or taxes which were levied immediately before the
commencement of the constitution by any municipality or other local body for the purposes of the State,
despite being mentioned in the Union List can continue to be levied and applied for the same purposes until
a new law contradicting it has been passed by the parliament.

Article 279;----This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the
proceeds which are left after deducting the cost of collection of the tax, ascertained and certified by the
Comptroller and Auditor-General of India.

Article 282 ;-----It is normally meant for special, temporary or ad hoc schemes and the power to grant
sanctions under it is not restricted.

Article 286;----This article restricts the power of the State to tax

Article 289;-----State Governments are exempted from Union taxation as regards their property and income
but if there is any law made by the parliament in this regard then the Union can impose the tax to such
extent.

Some other tax-related provisions

Article 301 which states that trade, commerce and inter-course are exempted from any taxation throughout
India except for the provisions mentioned in Article 302, 303, and 304 of the Indian Constitution, 1949.
 Article 301 of the Indian Constitution provides that the trade, commerce and intercourse in the country
should be free throughout the country.

 In trade, goods and services are exchanged between the buyer and the seller and it also includes the
transportation of these goods.

 In commerce, the focus is more towards the element of transmission of goods as well as that of men and
animals.

 Thus in commerce, the element of profit is not the primary concern.

 The word “intercourse” was included to remove any ambiguity about the intention of the Constitution
makers and thus it has been used to express the intention that, free flow of goods throughout the country
is part of the freedom under Article 301 of the Indian Constitution.
 If A, a seller lives in Maharashtra wants to sell his goods to B who lives in Madhya Pradesh, then under
Article 301 of the Constitution, they have the freedom to do so and cannot be restricted from selling or
buying the goods.

 While the freedom under Article 301 is provided for carrying out trade and commerce freely, this right
cannot be allowed to be exercised in those activities which do not fall within the category of trade or
business.

 In the case of State of Bombay v. RMDC, the Bombay Lotteries and Prize Competitions Control and
Tax (Amendment) Act, 1952 was held to be valid and it was stated that it did not violate Article 301 of
the Indian Constitution because the act was imposing restrictions on prize competition which was in the
nature of gambling and therefore it did not require any skill and thus it could not be said that it was
restricting trade.

 In gambling, there is an element of chance and the person may either win or may not win but such a
victory does not depends on his own ability or effort but only on his luck and therefore such an act is not
covered under the protection of Article 301.

 There is a maxim for such activities which is res extra commercium which means the activities which
are not part of trade or commerce or business and any act which is res extra commercium will not be
protected under Article 301.

 Also, any unlawful trade is not protected by the provisions of Article 301 and if the laws prohibit
carrying out such trade, it cannot be said to be a violation of the freedom of trade.

 For e.g., if A is trading in illegal drugs and such an act is restricted by the State then he cannot claim that
his right under Article 301 is being violated because such a trade is unlawful.

The object of Article 301

 Article 301 has been included in the Constitution in order to ensure that the unity of the nation is
maintained by removing the geographical barriers which exist in various parts of the country. Also, by
removing the imposition of any restrictions which may be put up, it ensures the free flow of goods
throughout the country.

 So, the main objective of this provision is to bring the feeling of one nation among all the Indians which
may not be possible if the economic activities face many barriers and which has already been facing
problems due to the existence of regionalism and the language barrier.

Inter-relation between Articles 301 and 19(1)(g)

 One view is that while Article 19(1)(g) deals with the right of the individuals, Article 301 provides
safeguards for the carrying on trade as a whole distinguished from an individuals right to do the same.

 This view is hardly tenable. Article 301 is based on section 92 of the Australian constitution which has
been held to compromise rights of the individual as well, and the same should be the position in India.
 In actual practice, the view has never been enforced and individuals have challenged legislation on the
ground of its effect on their right to carry on trade and commerce. The supreme court has denounced the
theory that Article 301 guarantees freedom "in abstract and not of the individuals."

 A difference between Arts. 19(1)(g) and 301, it has been said, is that Art. 301 could be invoked only
when an individual, is prevented from sending his goods across the state, or from one point to another in
the same state, while Art. 19(1)(g) can be invoked when the complaint is with regard to the right of an
individual to carryon business unrelated to, or irrespective of, the movement of goods, i.e., while Art.
301 contemplates the right of trade in motion, Art. 19(1)(g) secures the right at rest.

 Art. 301 covers many interferences with trade and commerce which may not ordinarily come within Art.
19(1)(g),

 Freedom of trade and commerce is a wider concept than that of an individual's freedom to trade
guaranteed by Art. 19(1)(g).

 Art. 19(1)(g) can be taken advantage of by a citizen, while Art. 301 can be invoked by a citizen as well
as a non-citizen.

Freedom of trade and taxation

 While freedom on the free flow of goods is the objective behind Article 301 it does not mean that the
State is barred from completely regulating aspects of the trade.

 The state has the right to regulate the trade and therefore if taxes are charged on the goods it does not
automatically become a restriction on freedom of trade and therefore there is a criterion which is
followed to understand whether a tax charged on the goods is a violation of Article 301 or not.

Compensatory tax

 The Government charges tax on various goods and services but it does not mean that it is a restriction on
freedom of trade.

 In many cases, it is necessary for the States to charge these taxes because they are providing many
services which are facilitating the trade activities.

 Such taxes which are charged are known as compensatory taxes. For the validity of a compensatory tax,
it is necessary to show the object behind the tax and the relation which such a tax has with the subject
and object of it.

 Once such a relation or connection is shown then the tax can be validly upheld and it is not important to
show the exact amount of benefit which is provided and the expenditure which has been done for
providing such a service.

 But if the tax is not in the nature of facilitation of trade and is in reality charged for restricting the trade,
then such a tax cannot be upheld and it will become bound to be struck down by the Courts.
  A compensatory tax can be turned as confiscatory which means that it is in violation of the freedom of
trade under Article 301 if any of the following situations arise

o The amount of tax which is charged is so excessive that it has become a setback in the free flow
of goods.
o The tax which is charged is not in proportion to the cost of the facilities which are provided
against it.
o There are no services which are being provided by the state in exchange for the tax being
charged.
o There is no fixed procedure which has been provided by the state levying the tax as to how are
they assessing and levying the tax.
o The tax which is charged is discriminating between the goods produced within the State and the
goods which are produced outside it.

Consumption Tax?
 Consumption tax is a tax we pay for using goods and services. It is deducted on the money spent on
consumption. It is a kind of indirect tax like sales tax or value added tax. Consumption tax is also known
as cash-flow tax, expenditure tax or even consumed income tax.
 Consumption tax can be rather regressive in nature, like other sales taxes. Using methods of exemptions,
deductions, graduated rates, tax rebates etc will make this kind of tax less regressive in nature.
 The tax exemptions and deductions accumulated will in turn reduce the taxpayer’s burden; and also will
be a form of saving when it comes to your taxes. This is a tax for the expenses made by you, while
income tax is a tax you pay on the income earned by you.
Features of Consumption Tax
Consumption Tax is a western concept, and will be gradually moving it’s way towards the east. Some of the
main features of consumption tax are:
1. Everyone who pays consumption tax will get certain exemptions and deductions, so that the people with
lower consumption power do not have to pay these taxes.
2. Any individual who is liable to pay consumption tax will not receive any deductions since they have the
ability to save, and these savings are already subject to deduction.
3. The consumption tax payee will get tax exemption on all incomes placed in investments made, since it
taxes only consumptions made or amount spent, not saved.

Freedom of trade, commerce and intercourse is not absolute

 Even though Article 301 provides that trade, commerce and intercourse should be free throughout the
territory India, this freedom is not absolute in nature.

 It means that certain restrictions can be imposed on this freedom and such restrictions will no be
violative of the provisions under Article 301.

 These restrictions have been mentioned in Part XIII of the constitution and even Article 301 provides
that this freedom is subjected to the provisions of this part.

 Parliament has been provided with the power to impose some restrictions on the free flow of goods
under Article 302 of the Indian Constitution and such a power is subject to the provisions of Article 303.
 Under Article 302, the Parliament can restrict the freedom of trade between different states, if it is
necessary for the public interest. This restriction can be applied on any State or it may also be placed in
any part of the territory of India.

 In the case of Prag Ice & Oil Mills v. Union of India, it was held by the Supreme Court that even though
Article 302 does not speak about reasonable restrictions, but still the restrictions which can be imposed
under this Article should have a reasonable nexus with the public interest for which the restriction is
placed.

 While the Parliament has the power to impose restrictions on the freedom of trade in any State or part of
the territory of India, this power is subjected to the provisions of Article 303 of the Indian Constitution
which provides that the Parliament cannot impose a restriction on any State in favour of another State.

 It means that no discriminatory restriction can be made by the Parliament which gives benefit to one
State while the other States are excluded from such benefit.

 But clause 2 of Article 303 provides that in case of scarcity in a State, the Parliament can be allowed to
impose such discriminatory restrictions so that the State which is facing the problem of scarcity to
overcome it.

 Article 304 of the Indian Constitution provides some powers to the State Legislatures for imposing some
restrictions on the freedom of trade.

 Under this Article, the legislature of a State can charge tax on the goods which are imported from other
States, if such tax is charged on the similar goods which are produced in that State.

Article 302 empowers the parliament to impose restrictions on trade and commerce in view of public
interest.

Article 303– Whenever there is the scarcity of goods this article comes in play. Discrimination against the
different State Governments is not permitted under the law except when there is a scarcity of goods in a
particular state and this preference to that state can be made only by the Parliament and in keeping with the
law.

Article 304– permits a State Government to impose taxes on goods imported from other States and Union
Territories but it cannot discriminate between goods from within the State and goods from outside the State.
The State can also exercise the power to impose some restrictions on freedom of trade and commerce within
its territory.

Article 366;---Apart from all these provisions, there are other provisions also that require mention such
as Article 366 which gives the definition of:Goods; Services; Taxation; State; Taxes that are levied on
the sale/purchase of goods; Goods and service tax etc.

METHODS OF TAXATION
Tax systems in the U.S. fall into three main categories: Regressive, proportional, and progressive. Two of
these systems impact high- and low-income earners differently. Regressive taxes have a greater impact on
lower-income individuals than the wealthy.
Proportional tax, also referred to as a flat tax, affects low-, middle-, and high-income earners relatively
equally. They all pay the same tax rate, regardless of income.

A progressive tax has more of a financial impact on higher-income individuals than on low-income earners.

Regressive Taxes

 Low-income individuals pay a higher amount of taxes compared to high-income earners under a
regressive tax system.
 That's because the government assesses tax as a percentage of the value of the asset that a taxpayer
purchases or owns. This type of tax has no correlation with an individual's earnings or income level.
 Regressive taxes include property taxes, sales taxes on goods, and excise taxes on consumables, such as
gasoline or airfare. Excise taxes are fixed and they're included in the price of the product or service.
 Sin taxes, a subset of excise taxes, are imposed on commodities or activities that are perceived to be
unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol.
 They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that
these disproportionately affect those who are less well off.
 Many also consider Social Security to be a regressive tax. Social Security tax obligations are capped at
a certain level of income called a wage base—$142,800 for the 2021 tax year and 147,000 in 2022. An
individual's earnings above this base are not subject to the 6.2% Social Security tax.
 The annual maximum that you can pay in Social Security tax is capped at $9,114.00 in 2021, whether
you earn $147,001 or $1 million. Employers pay an additional 6.2% on behalf of their workers, and
self-employed individuals must pay both halves on earnings up to the wage base.
 Higher-income employees effectively pay a lower proportion of their overall pay into the Social
Security system than lower-income employees because it's a flat rate for everyone and because of this
cap.

EXAMPLE;-

o INCOME RATE OF TAX

o Upto Rs. 1.00.000 40%
o Rs. 1.00.000 to Rs. 2,00,000 30%
o Rs. 2.00.000 to Rs. 3,00,000 20%
o Rs. 3.00.000 to Rs. 4,00,000 10%

Proportional Taxes
 A proportional or flat tax system assesses the same tax rate on everyone regardless of income or wealth.
This system is meant to create equality between marginal tax rates and average tax rates paid.
 Nine states use this income tax system as of January 2021: Colorado, Illinois, Indiana, Kentucky,
Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. Other examples of proportional
taxes include per capita taxes, gross receipts taxes, and occupational taxes.
 Proponents of proportional taxes believe they stimulate the economy by encouraging people to work
more because there is no tax penalty for earning more.
 They also believe that businesses are likely to spend and invest more under a flat tax system, putting
more dollars into the economy.
 EXAMPLE

Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income
regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls.
An individual who earns $25,000 annually would pay $1,250 at a 5% rate, whereas someone who earns
$250,000 each year would pay pays $12,500 at that same rate.
Progressive Taxes
 Taxes assessed under a progressive system are based on the taxable amount of an individual's income.
 They follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax
rate, along with tax liability, increases as an individual's wealth increases.
 The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes
than do lower-income earners.
 This sort of system is meant to affect higher-income people more than low- or middle-class earners to
reflect the presumption that they can afford to pay more.
 The U.S. federal income tax is a progressive tax system. Its schedule of marginal tax rates imposes a
higher income tax rate on people with higher incomes, and a lower income tax rate on people with
lower incomes.
 The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns
places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new
threshold.
 Part of what makes the U.S. federal income tax progressive is the standard deduction that lets
individuals avoid paying taxes on the first portion of the income they earn each year.
 The amount of the standard deduction changes from year to year to keep pace with inflation. Taxpayers
can elect to itemize deductions instead if this option results in a greater overall deduction.
 Many low-income Americans pay no federal income tax at all because of tax deductions.
 Estate taxes are another example of progressive taxes as they mainly affect high-net-worth
individuals (HNWIs) and they increase with the size of the estate.
 Only estates valued at $11.58 million or more are liable for federal estate taxes for 2021, although
many states have lower thresholds.
 As with any government policy, progressive tax rates have critics. Some say progressive taxation is a
form of inequality and amounts to a redistribution of wealth as higher earners pay more to a nation that
supports more lower-income earners.
 Those who oppose progressive taxes often point to a flat tax rate as the most appropriate alternative.
 EXAMPLE;-

o INCOME RATE OF TAX

o Upto Rs. 1.00.000 10%
o Rs. 1.00.000 to Rs. 2,00,000 20%
o Rs. 2.00.000 to Rs. 3,00,000 30%
o Rs. 3.00.000 to Rs. 4,00,000 40% and so on

Degressive method

 In degressive method of taxation, rate of tax increases with the rise in income but the increase in rate of
tax will not be in proportion to the rise in income

 EXAMPLE;-

o INCOME RATE OF TAX

o Upto Rs. 1.00.000 10%
o Rs. 1.00.000 to Rs. 2,00,000 15%
o Rs. 2.00.000 to Rs. 3,00,000 18%
o Rs. 3.00.000 to Rs. 4,00,000 20%

FINANCE COMMISSION OF INDIA

 Article 280 requires that the President of India should appoint a Finance Commission within two years
from the commencement of the Constitution and thereafter once in every five years or even earlier, if
necessary.
 It also specifies broadly the Terms of Reference (ToR) of the Finance Commission and its composition.
Composition

 Article 280 has fixed the total strength of Finance Commission by specifying that it should consist of a
Chairperson and four other members.
 The Finance Act 1951, Section (3) specifies the qualifications for the Chairperson and members.
According to the Act, ‘the Chairperson of the Commission shall be selected from among persons, who
have or had experience in public affairs.
 The other members shall be selected from among persons who:

o are or have been or qualified to be appointed, as a Judge of a High Court; or

o have expertise in financial and accounts matters; or
o are profound administrators; or
o have expertise in economics.

 Functions It shall be the duty of the Finance Commission to make recommendations to the President
pertaining to the following matters:
o The distribution between the Union and the States of the net proceeds of taxes revenues and the
allocation between the States of the respective shares of such proceeds.
o The principles that should govern the grants-in-aid of the revenues of the States out of the
Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their
revenues.
o The measures needed to augment the Consolidated Fund of a State to supplement the resources
of the Panchayats and Municipalities in the State on the basis of the recommendations made by
the Finance Commission of the State.
o The continuance or modification of the terms of any agreement entered into by the Government
of India with the Government of any State specified in Part ‘B’ of the First Schedule under clause
(i) of Article 278 or under Article 306.
o The Commission shall use the latest Census for drawing the population data while making its
recommendations.

Procedure of Working

 The work of the Finance Commission starts soon after the Government announces its composition and
terms of reference.
 In the first phase the Commission addresses letters to the State Governments, asking them to submit
estimates of their expenditure and revenue for over the next five years. Once the estimates are received,
the Commission scrutinizes these estimates and calls for the concerned officers from the States to its
Headquarters in Delhi for clarifications.
 The estimates of different States are then revised accordingly, as per. The Commission then undertakes
tour in all States in the subsequent phase. Normally, the Commission hears the Chief Minister and the
Finance Minister of each State vis-à-vis the financial estimates delved upon.
 Here, the State can submit a memorandum outlining their needs and demands. The Commission also
hears and receives memoranda pertaining to finances from industry and bankers.
 This then is followed by the final phase, wherein, the Commission meets in Delhi to finalize the report of
each and every State.
 It submits its report to the President of India a few months before the annual budget presentation. The
President then recommends the same for consideration and implementation by the Union Cabinet.

ORIGIN AND DEVELOPMENT OF TAXATION IN INDIA

 Tax payment is mandatory for every citizen of the country. There are two types of tax in india i.e. direct
and indirect.
 Taxation in India is rooted from the period of Manu Smriti and Arthasastra. Present Indian tax system is
based on this ancient tax system which was based on the theory of maximum social welfare.
 Tax is a mandatory liability for every citizen of the country. There are two types of tax in india i.e. direct
and indirect.
 Taxation in India is rooted from the period of Manu Smriti and Arthasastra. Present Indian tax system is
based on this ancient tax system which was based on the theory of maximum social welfare.

The origin of the word "Tax" is from "Taxation" which means an estimate.
In India, the system of direct taxation as it is known today has been in force in one form or another even
from ancient times.
 Variety of tax measures are referred in both Manu Smriti and Arthasastra. The wise sage advised that
taxes should be related to the income and expenditure of the subject.
 He, however, cautioned the king against excessive taxation; a king should neither impose high rate of tax
nor exempt all from tax.
 According to Manu Smriti, the king should arrange the collection of taxes in such a manner that the tax
payer did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of
their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their
produce depending upon their circumstances.
Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It is
remarkable that the present day tax system is in many ways similar to the system of taxation in vogue
about 2300 years ago.
 Arthasastra mentioned that each tax was specific and there was no scope for arbitrariness. Tax
collectors determined the schedule of each payment, and its time, manner and quantity being all pre-
determined. The land revenue was fixed at 1/6 share of the produce and import and export duties were
determined on ad-valorem basis. The import duties on foreign goods were roughly 20% of their value.
Similarly, tolls, road cess, ferry charges and other levies were all fixed.

 Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system
should be made more stringent and the king could also raise war loans.

 The land revenue could be raised from 1/6th to 1/4th during the emergencies. The people engaged in
commerce were to pay big donations to war efforts.

 Kautilya's concept of taxation emphasised equity and justice in taxation. The affluent had to pay
higher taxes as compared to the poor.

 In India, the system of direct taxation as it is known today has been in force in one form or another even
from ancient times.
 In this article, we are discussing how the Income Tax evolved over the time in India.
 1860- The Tax was introduced for the first time by Sir James Wilson. India’s First “Union Budget”
Introduced by Pre-independence finance minister, James Wilson on 7 April, 1860.
 The Indian Income Tax Act of 1860 was enforced to meet the losses sustained by the government on
account of the military mutiny of 1857.
 Income was divided into four schedules taxed separately:
o Income from landed property;
o Income from professions and trades;
o Income from Securities;
o Income from Salaries and pensions.
 Report this ad Time to time this act was replaced by several license taxes.
 Report this ad 1886- Separate Income tax act was passed.
 This act remained in force up to, with various amendments from time to time. Under the Indian Income
Tax Act of 1886, income was divided into four schedules taxed separately:
o Salaries, pensions or gratuities;
o Net profits of companies;
o Interests on the securities of the Government of India;
o Other sources of income.
 Report this ad 1918- A new income tax was passed. The Indian Income Tax Act of 1918 repealed the
Indian Income Tax Act of 1886 and introduced several important changes.
 1922- Again it was replaced by another new act which was passed in 1922. The organizational history of
the Income-tax Department starts in the year 1922.
 The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax
authorities. The Income Tax Act of 1922 remained in force until the year 1961.
 The Income Tax Act of 1922 had become very complicated on account of innumerable amendments.
 The Government of India therefore referred it to the law commission in1956 with a view to simplify and
prevent the evasion of tax 1961– In consultation with the Ministry of Law finally the Income Tax Act,
1961 was passed.
 The Income Tax Act 1961 has been brought into force with 1 April 1962.It applies to the whole of India
(including Jammu and Kashmir). Since 1962 several amendments of far-reaching nature have been made
in the Income Tax Act by the Union Budget every year which also contains Finance Bill.
 After it is passed by both the houses of Parliament and receives the assent of the President of India, it
becomes the Finance act. At present, there are five heads of Income:
o Income from Salary;
o Income from House Property;
o Income from Profits and Gains of Business or Profession;
o Income from Capital Gains;
o Income from Other Sources.
 There are XXIII Chapters, 298 Sections and Fourteen Schedules in the Income Tax Act.

RECOMMANDATIONS OF VARIOUS TAX REFORMING COMMITTEES

Several committees on tax reforms in India examined the taxation system in the country and suggested their
recommendations. The first one was Tax Reforms Committee (TRC) under the chairmanship of Raja
Chelliah on both Direct and Indirect taxes. The next one was Rekhi committee, which examined the taxation
system on indirect taxes. Another committee covering both direct and indirect taxes was constituted under
the chairmanship of Dr. Vijay Kelkar.

Tax Reforms Committee of Raja Chelliah

 The Tax Reforms Committee was constituted in 1991under the chairmanship of Dr. Raja J. Chelliah
and it submitted its report in 1992. It recommended tax reforms in both Direct and Indirect taxes.
The important recommendations of Raja Chelliah Committee are,

 Direct Taxes

The tax rates should be brought down and the difference between the entry rate and the
highest marginal rate should be narrowed down and bring the agricultural income under
the tax net.
The corporate tax rates should be brought down and the difference between the tax rates
of domestic and foreign companies should not exceed 10%.
There should not be any wealth tax on the productive assets. Only those assets are to be
taxed which are unproductive and are socially undesirable.
Some sort of indexation needs to be introduced while calculating long term capital gains
in order to compensate for inflation.

 Indirect Taxes

Regarding Customs Duty, there should be reduction in the number of tariff rates and there
should be rationalization of the system by abolishing numerous exemptions and special
treatments.
 Regarding Excise Duty, the law andprocedure pertaining to valuation should be
simplified. Ad valorem Duty should be applied instead of specific duties. The present
Excise Duty system should be gradually transformed into Value Added Tax (VAT) at the
manufacturing level.
The services sector should be brought under the tax net.

Rekhi Committee on Indirect Tax Reforms

 Rekhi Committee was constituted in 1992 under the chairmanship of K.L. Rekhi. The recommendations
are

o A Tribunal should be setup to deal with problems between taxpayers and tax collectors.
o A high level All India Classification Committee with trade and industry representatives should be
set up.
o Import consignments should be cleared within 3 days.
o Monopoly of one nominated bank in each State should be supplemented by another bank.
o Coercive measures must not be used for recovery of disputed duty amount when the assessee
files a stay application.

Kelkar Committee Report on Tax Reforms

 A Task Force on Direct and Indirect Taxes was constituted under the chairmanship of Dr. Vijay Kelkar
in 2002. The recommendations of Vijay Kelkar committee are
o Direct Taxes

Income tax exemption limit must be increased to Rs. 1 lakh from the present Rs. 50,000. Tax
exemption limit for senior citizens and widows should be Rs. 1.5 lakhs.
There should be two tier Income tax structure with 20% tax for earnings of Rs. 1 lakh to Rs. 4
lakhs and 30% tax for over Rs. 4 lakhs. Standard deduction must be abolished but suggested
exemption for conveyance allowance.

There should be abolition of long term capital gains tax, dividend tax and wealth tax. There
should not be any surcharge on income tax.
There must be elimination of tax incentives for savings and other income except for the
handicapped.
There should be interest subsidy of 2% for housing loans upto Rs. 5 lakhs
There must be 30% corporate tax for domestic companies and 35% for foreign companies
and there should be no Minimum Alternate Tax (MAT).
There should be 20% tax on short term capital gains derived by Mutual Funds.
There should be no distinction between the unabsorbed depreciation and the business loss.

o Indirect Taxes

There should be 14% Central Value Added Tax (CENVAT) rate.

There should be nationwide VAT and Comprehensive Service Tax.

Exemptions for life saving drugs, security items and farm products.

Exemption of tax for small scale units with a turnover upto Rs. 50 lakhs.

 Different tax reform measures were being undertaken by the Government based on the recommendations
made by the committees on tax reforms in India and the reforms are still continuing to this day.
 The biggest and the recent tax reforms in India that was undertaken is the introduction of Goods And
Services Tax (GST),
 Goods And Services Tax - The Goods and Services Tax replaced almost all the existing indirect taxes
throughout the country except Customs Duty, and itcame into force effective from 1st July, 2017.

TAX POWERS

 American democracy functions on the doctrine of separation of powers carved out in the U.S.
Constitution. In the federalist system established by the nation’s founding documents, jurisdictional
boundaries create clear divisions. Federal, state, and local governments all have the authority to levy
taxes, but this power is limited.
 This module discusses how and when tax powers are limited, particularly in light of recent major
changes in national tax policy.

Federal Taxation

 Collecting taxes is an important way that governments acquire revenue to fund public services.
However, tax powers can be a double-edged sword.
 Excessive taxation has raised the public ire many times throughout the history of western civilization,
and tax issues were the main motivator behind the Boston Tea Party – an event that helped ignite the
American Revolution.
 The governance issues that caused the American colonies to separate from England are reflected in the
limited authority that the Constitution allows the federal government, particularly with respect to taxing
powers.
 The Constitution listed specific tax powers for the federal government in the “taxing and spending”
clause of Article I, Section 8.
 This clause empowers Congress to “lay and collect taxes, duties, imposts and excises, to pay the debts
and provide the common defense and general welfare of the United States.”
 This, according to the expressed terms of the Constitution, the federal government may tax its citizens
only to raise money for common defense, general welfare of U.S. citizens and to pay down public debt.
The Constitution does not allow the federal government to levy taxes for any other purpose.
 Constitutional law divides federal tax authority into two categories: the power to levy direct taxes, and
the power to levy indirect taxes.
 Indirect taxes are taxes on articles consumed or used by taxpayers, such as sales or consumption taxes.
The Constitution allows the federal government to pass indirect taxes as long as the tax is levied in the
same manner across all fifty states.
 The federal government is endowed with broad authority to pass indirect taxes, allowing the numerous
federal taxes and fees imposed on regulated goods and services.
 Federal income tax was considered unconstitutional until 1913 when Congress passed the 16th
Amendment, which gave the federal legislature the power to collect income taxes without regard to
apportionment.

State Taxation

 Like many other key terms in the Constitution, the “taxing and spending” clause has evolved over time.
Over the past two hundred years, the Supreme Court has increased Congress’s power to tax and spend as
litigants have raised challenges to federal tax laws. State tax powers, on the other hand, are more
expansive.
 This is true because upon signing the Constitution, the states retained the majority of their sovereign
lawmaking powers, including the right to impose nearly any type of tax.
 Still, state tax powers are limited in one key manner: state and local taxes may not impose unreasonable
burdens on interstate commerce or international trade.
 States need expansive tax powers because they are responsible for the administration of many aspects of
public governance. As a matter of constitutional jurisdiction, states are responsible for the protection of
residents’ lives and property.
 This includes the obligation to maintain important public safety services, such as police, fire, and
emergency responders. States must also maintain in-state transportation, utility services, and other
infrastructure while also providing for the general welfare. States also must provide basic social services
to their residents, such as public education and assistance for the disabled or elderly.
 States use the revenue they collect from taxes, fees, and licenses to maintain their governments and fund
the public services that they provide.
 Wisconsin was the first jurisdiction to introduce a successful personal income tax in 1911 and,
subsequently, most states have followed suit.
 Sales taxes on goods produced, bought, and sold entirely within a state are one example of taxation
authority that is reserved to the states. Sales taxes are indirect taxes, which the federal government may
not impose without apportionment.
 Similarly, only state and local governments may tax real property – another form of indirect tax. A tax
on real property was first introduced by the Massachusetts Bay Colony in 1646, well before the United
States was even conceptualized.
 Today, property taxes are an important source of state and local revenue.

Balance Between Federal and State Taxes

 Sometimes, states and localities impose taxes that are in addition to taxes charged by the federal
government.
 For example, many states charge an inheritance tax or an estate tax on the transfer of property after
death.
 The decedent’s beneficiaries are responsible for paying these taxes in addition to whatever potential
liability the estate incurs under federal transfer tax rules.
 Double taxation issues like this may be costly and frustrating, but they are generally permissible.
 However, all taxes are subject to the same constitutional limitations, which includes prohibition on
undue burdens on interstate commerce. For example, in the 2015 case Comptroller of Maryland v.
Wynne, the Supreme Court struck down a Maryland state tax because it had the effect of double-taxing
income earned outside the state.
 In Wynne, the tax law at issue imposed a “special nonresident tax” on out-of-state residents who earned
income within Maryland.
 According to the majority opinion, requiring nonresidents to pay a special tax in addition to their regular
state income taxes was an unconstitutional overreach of state tax power.
 The balance of tax powers between states and the federal government has shifted substantially over time.
This is particularly true in light the Tax Cuts and Jobs Act of 2017 and the Affordable Care Act.
 The Supreme Court has gone back and forth regarding the degree to which Congress has the authority to
tax to accomplish regulatory goals.
 This is particularly true when the federal government uses its tax powers to further policy agendas that
would otherwise be outside the scope of its enumerated powers.
 Early in American history, federal tax powers were tightly restricted. However, modern reform has
changed this substantially.

Limits of tax powers

 Apart from the limitation by the division of the taxing power between the Union and State
Legislature by the relevant Entries in the legislative Lists, the taxing power of either Legislature is
particularly subject to the following limitations imposed by particular provisions of our Constitution:
(1)It must not contravene Art.13.
(2) It must not deny equal protection of the laws, must not be discriminatory or arbitrary .(Art.14)
(3) It must not constitute an unreasonable restriction upon the right to business.(19(1)(g))
(4) No tax shall be levied the proceeds of which are specially appropriated in payment of expenses
for the promotion or maintenance of any particular religion or religious denomination (Art.27).
(5) A State Legislature or any authority within the State cannot tax the property of the
Union.(Art.285)
 (6) The Union cannot tax the property and income of a State (Art.289).
(7) The power of a State to levy tax on sale or purchase of goods is subject to Art.286.
(8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax the
consumption or sale of electricity in the cases specified in Art.287

SOME OF THE TAX CHALLENGES IN INDIA IN CURRENT GLOBAL CRISIS

 We all are well aware of the current situation and its impact across the globe. The wrath of pandemic
novel Corona virus (Covid – 19) has affected many lives taking the number of positive cases to 2.5
million while more than 40000 cases in India.
 Considering the seriousness of the crisis, our honourable Prime Minister Narendra Modi has taken
various steps to control the spread of this virus by imposing a nationwide lockdown from March 26 –
April 14, then imposing a second nationwide lockdown from April 15 –May 3 and finally we are in third
phase of lockdown from May 4 to May 17 thereby forcing a unity amongst all Indians to fight against
this pandemic..
 Most of the corporates would have not anticipated such a crisis in their business. Thus, in this article, we
have tried to explain the difficulties or challenges that tax officials or taxpayers are facing in the current
crises.
 As per Nitin Sood, CFO, PVR, “the biggest problem haunting them is that their business continuity plans
(BCPs) are being tested and reworked every day”. For any organisation, the biggest challenge right now
is business continuity.
 A company like PVR, which garners revenue in the range of Rs 300 crore per month, is staring at a
situation where revenue is NIL because all theatres are shut. So, the question is how to sustain the fixed
cost. Nobody knows how long it will last and how soon India will bounce back.
 So, CFOs will have to play a very active role and work with business teams to figure out business
continuity plan. Here we have explained what the major tax challenges from the Direct tax perspective
could be
Residential status of Internationally Mobile Employees:
 The scope of income that may be subject to tax in India for individuals is dependent upon their
residential status in India.
 The residential status of an individual is determined on the basis of the period of stay in India for each
financial year.
 An individual would qualify to be resident in India during a financial year, if any one of the following
conditions are satisfied:
a) Stay in India is 182 days or more during the financial year; or
b) Stay in India is 60 days or more during the financial year and 365 days or more within 4 years
preceding that financial year.
 If none of the above conditions are satisfied, an individual qualifies as non-resident (NR) and only
paying taxes in India for the income received in India.
 The current situation has restricted the ability of individuals to travel. This has resulted in following
situations: > Inability of resident temporarily overseas to come back to India; and > Inability of foreign
employees temporarily in India to go back to their home country It will create uncertainty for individuals
and their employers with specific reference to their residential status, tax position to be taken etc.
 This might result in income being taxed in both the countries and may result in unnecessary hardships
hardship to the taxpayers.
Residential Status of companies (Place of Effective Management):
 A company is said to be a resident in India if: > It is an Indian company > Its place of effective
management (‘PoEM’) is in India PoEM means a place where key management and
commercial decisions that are necessary for the conduct of the business of an entity as a whole, are, in
substance made.

In the context of determination of POEM in cases where company are not engaged in active business
outside India, then the following two-steps test is done: > identification of the persons who make the key
 commercial or management decisions of such company, involves determining the place where such
decisions are made.
 Thus, the Management personnel/CEO may not be able to travel to the habitual workplace due to
COVID-19 restrictions and may have to attend board meetings from India via telephone or video
conferencing. This may result in the creation of POEM in India.
 Thus, a clarification would be required in this regard also from the Government of India.
Risk of creation of Service Permanent Establishment (PE)
 The employees of home country traveling to foreign country for an assignment had to extend their stay
in foreign country due to lockdown and travel restriction.
 As a result , the companies may be concerned that their employees will create a PE for them in another
jurisdiction because of a change in working location, which would trigger new filing obligations and tax
obligations

For example: working from home for a considerable period of time in another jusidiction might lead to
creation of Fixed place PE treating the home as a fixed place from where the business is carried on partly
or wholly .
 Similarly , due to the extended period of stay in another jurisdiction, it might also lead to creation of
Service or Construction PEConsidering the above issues, though Organization for Economic
Cooperation & Development (OECD) issued guidance on April 3,2020 but it would not be binding on
India as India is not a member country.
 Thus, the government is required to come out with some guidelines to avoid creation of PE due to
COVID-19 and reduce future litigation. Extension of statutory filing due dates Many developed nations
like USA, UK, Australia, Canada have extended the due date for statutory filing considering the current

TAXATION POLICY SINCE 1991 ECONOMIC REFORMS

 A comparison of the current structures of India's main central government taxes with
those prevailing before 1991 indicates that, following international trends, there has been
a sizable scaling back of rates in income, excise, and trade taxes.
 During this period, states also attempted to harmonize their sales tax rates and, most
importantly, introduced a value-added tax (VAT) on 1 April 2005, comprising perhaps
the most important subnational tax reform since the formation of the Indian Republic in
1950.
 The base of the central government's service tax has been expanded steadily, though its
full coordination into a national VAT remains to be accomplished. At the subnational
level, an agreement among states to cut back incentives and exemptions met with partial
success. The VAT should improve its adherence.
 Before 1991 India's overall tax structure had been broadly inefficient and quite
inequitable. By international standards, the income tax rates had been high, and there was
no VAT at the central level, except on a selective basis from the mid-1980s.
 Nevertheless, one cost of the improvements has been the government's inability to make
up for revenue loss from rate decreases because of insufficient base expansion.
 The central government's tax revenue collected since 1994 declined by 1 percent of gross
domestic product (GDP) from what had been collected previously.
 Declines in customs and excise revenues were not compensated by the increase in income
tax revenues.
 Some sunset tax exemption clauses were extended and new incentives crept in, despite
the scaling back of central tax
 Though the states' tax collections improved somewhat, they could not fully compensate
for the central government's tax revenue decline, so that the combined central and states
tax/GDP ratio fell during the decade.
Major Changes in Central Tax Structure
Income tax
 The scaling back of corporate income tax rates reflected, to some extent, the twin objectives of
administrative feasibility and better tax compliance, but was motivated in particular by the forces of
globalization and the increased international movement of capital.

 In India, corporate income tax rates for both domestic and foreign companies have been reduced to 35
percent and 40 percent respectively Insufficiency in streamlining exemptions and incentives has
adversely affected the full potential of revenue productivity in both the individual and corporate income
tax.

 The coverage of tax incentives includes savings generation, regional development, capital investment,
labor employment, research and technology, infrastructure development, exports, and charities, among
others.

 The outcome has been a thinning out of the overall income tax base. However, income tax revenue in
terms of GDP has steadily improved, reflecting administrative improvements, an expansion in the
taxpayer net, and, possibly, favorable supply-side effects.

 Highly generous depreciation rates were scaled back in 2005–2006 and that should correct for some of
this problem.

 There is little doubt that without base broadening, income tax revenue is unlikely to be able to make up
fully for the revenue losses emanating from structural reforms of production and trade taxes.

Central excises and customs

 Central excises essentially operate as a VAT that has evolved over almost two decades, with a small
beginning in 1986–1987, when a VAT-type credit mechanism for selected raw materials was introduced
for the production of specified goods.

 In 1994–1995, capital goods were made creditable. The emerging quasi-VAT structure was termed
Modified VAT or MODVAT.

 With a further effort to reduce the main rates to only two—8 and 16 percent—it was renamed the Central
VAT, or CENVAT, in 2001.

State-Level Taxes
Multiple taxes and low buoyancy
 The taxing powers of Indian states include a plethora of minor taxes and one major source of tax
revenue, the sales tax, recently replaced by the VAT.

 In the major states (14 out of a total of 25), tax revenue has represented approximately 7 percent of the
state domestic product in recent years. Indirect taxes include state excise duties, taxes on vehicles,
purchase tax, entertainment tax, and some surcharges.
 The sales tax represents approximately 60 percent of total tax revenue, while excises are the second most
important revenue source, in particular, on potable alcohol. Thus, Indian states have been assigned
mainly indirect taxes by the Constitution.

 Direct tax powers include stamp duty and registration fee, profession tax, and an income tax on
agriculture. The last is usually viewed as insufficiently exploited, while the profession tax is basically a
fee with a low nominal ceiling imposed by the central government. Only the stamp duty and registration
fee could be said to have been revenue productive among the direct taxes.

Replacing sales tax with a VAT

 Given the primary importance of the sales tax in revenue generation and its recent conversion to a state-
level VAT, the main concerns and prospects are examined here.

 The general dilemma for a subnational VAT is that introducing a VAT at the central level is far easier
than at the state level. Countries with the intention of introducing a subnational VAT have grappled with
one main problem, that of structuring the VAT as a consumption tax, generally without an appropriate
solution.

 Either they have introduced a VAT that is not a fully consumption-type (Brazil), or one that is
administratively complex (Canada); or they have desisted from introducing it at all (United States), or
have been debating its appropriate form for a considerable time (Argentina).

Tax Administration
 Three issues in tax administration are closely connected to the success of any tax policy reform:
expanding the taxpayer register; computerization; and implementation of the state-level VAT.

 Arguably the most successful action that has been undertaken in the area of central tax administration
has been an impressive expansion of the taxpayer net for the income tax. In the mid-1990s, the taxpayer
roll included some 14 million taxpayers, of which 10 million to 11 million were current. However, a
rudimentary calculation of the potential number of taxpayers would be as follows.

 Of the total population of 1 billion, the taxable population is approximately 300 million. With an average
household size of 5, that would imply 60 million potential taxpayers.

 Discounting 10 million for taxable agricultural households would result finally in a net 50 million
taxable households. Thus only about 20 percent of potential taxpayers were within the taxpayer net.

 The success of implementation of the state VAT is dependent on the computerization of VAT
procedures of various states. States have progressed at differing speeds in this area.

 The central government is lending a helping hand to some of the smaller states in the form of turnkey
projects through computer training, installation, and implementation.

 A further challenge remains in the development of a comprehensive information exchange system

among states that should enable the states to cross-check tax data across state borders, once the VAT
evolves to the destination principle.

 The cost of developing such a system is being shared between the center and the states.

10 MARK

THE FOUR CANONS OF TAXATION

 Taxation is a highly controversial issue. It is challenging to design a tax system that is considered fair by
the general public.

 That’s why the economist Adam Smith presented four basic rules and principles of proper tax policy in
his famous book The Wealth of Nations. His maxims are often referred to as the four canons of taxation.

 Namely (1) equity, (2) certainty, (3) convenience, and (4) economy. We will look at each of them in
more detail below.

Equity

 In this context, equity means that the taxes people or organizations have to pay should be proportional to
their income.

 That means the more money a person earns, the higher their taxes should be and vice versa. This idea is
commonly known as the ability-to-pay principle.

 The idea behind this is that the people who can afford to pay more taxes should pay more than those who
cannot afford to pay as much.

 To illustrate this, imagine all US citizens had to pay USD 10,000 a year in federal taxes, regardless of
their income.

 In that case, a millionaire who earns USD 1,000,000 and a cashier who only makes USD 20,000 a year
would have to pay the same amount. In other words, the taxes would account for 1% of the millionaire’s
income, whereas the cashier would have to spend 50% of his income to pay his tax bill. Most people
wouldn’t consider that fair.

 Therefore, in reality, virtually all tax systems are designed so that the rich pay more taxes than the poor.

Certainty

 Certainty refers to the idea that taxes should be clear and transparent. That means everybody should
know or quickly find out how much they have to pay, when they have to pay, and how they have to pay
their taxes.
 This is important because it allows taxpayers to consider their taxes when drawing up a budget. In
addition to that, it has been shown that transparency increases public acceptance.
 For example, imagine what would happen if the United States didn’t have any official regulations on
how taxes are determined and when they are due.
 Instead, people would simply get their tax bills at different times throughout the year, and the amounts
would seem somewhat arbitrary. Again, most people wouldn’t consider this an acceptable tax system
and refuse to pay taxes at all.
 It is, therefore, essential for the government to lay down clear rules and regulations to ensure a
transparent system.

Convenience

 Convenience means that both the timing as well as the method of payment are convenient for the
taxpayers.
 That means the system should be designed in a way that allows people to quickly file and pay their taxes
when they’re due.
 In that sense, the canon of convenience is sometimes also considered an extension of the canon of
certainty (see above) that focuses more on the administrative process (e.g., reporting, payment).
 To give an example, assume the government decided that people had to pay their federal taxes in cash.
 That means they would have to withdraw large sums of money from their bank, show up to the IRS
offices in person, and hand over their money at a dedicated desk.
 This is extremely inconvenient for several reasons:
 It’s much more complicated than simple wire transfers,
 it’s a lot more time-consuming, and
 withdrawing large sums of cash exposes people to an unnecessary
risk of being robbed.

Economy

 In this context, economy refers to the idea that the cost of collecting taxes should be minimized. That
means the government has to ensure that the collection of taxes only requires the least possible
expenditure.
 The reasoning behind this is that most of the money collected through taxes should be used to fund
projects that, in turn, benefit the taxpayers.
 To illustrate this, imagine that the collection of federal income taxes was costly and accounted for about
90 percent of all tax revenues.
 That means only 10 percent of the total tax revenue could be used for projects that actually benefit the
taxpayers, while most of the money would go elsewhere.
 In that case, the population would most likely be dissatisfied with the tax and demand a more efficient
system.

STATE FINANCE COMMISSION OF INDIA

 State Finance Commissions has been established in the various states of India so that they can help in
improving the financial condition of the various local bodies such as Panchayati raj institutions and
municipal bodies that are there in the states. The Finance Commissions in States are also responsible for
many other functions.
 The setting up of State Finance Commissions
 State Finance Commissions have been set up in the various states of the country according to the
guidelines that have been laid down in the Constitution of India, Article 243 (I).
 According to this article, the governor of the state shall set up the Finance Commission within the period
of one year that begins with the seventy- third amendment act of the Indian Constitution, 1992 and after
that at the end of every five years.
 The Finance Commissions in the States usually comprises of the chairman, member secretary, and other
members. State Finance Commissions receive grants from the Finance Commission that is set up by the
central government.
 The various functions of State Finance Commissions are

o To review the economic condition of the various Panchayati raj institutions and municipal bodies
that are there in the state

o To take such steps that help in boosting the financial condition of the various municipal bodies and
Panchayati raj institutions in the state

o To allot funds to the various Panchayati raj institutions and municipal bodies in the state from the
Consolidated Fund of the State

o To act as an arbiter between the central and the state governments with regard to issues that are of
financial nature
 o To transfer funds that are granted by the central government to the state government

o To distribute between the various municipal bodies and Panchayati raj institutions that are there
within the state and the state government the total proceeds of taxes, fees, tolls, and duties that are
charged by the state government

o To determine the taxes, tolls, duties, and fees that may be levied by the various Panchayati raj
institutions and municipal bodies that are there within the state
Role

o A State Finance Commission has functions similar to that of the Central Finance Commission. It
allocates resources of a state to its Panchayati Raj institutions at all three levels in terms of taxes,
duties and levies to be collected by the state and the local bodies.
o Its job is similar to that of the Central Finance Commission constituted by the President of India
under Article 280 of the Constitution, that divides the central taxes between the Union government
and state governments.

CENTRAL BOARD OF DIRECT TAXES (CBDT)

 The apex body of the department is the Central Board of Direct Taxes (CBDT).
 CBDT functions as a division of the Ministry of Finance under the Department of Revenue. Its functions
include
 formulation of policies,
 dealing with natters relating to levy and collection of direct taxes, and supervision of the functioning of
the entire Income Tax Department.
 CBDT also proposes legislative changes in direct tax enactments and changes in rates and structure of
taxation in tune with the policies of the Government.
 The Board comprises of the Chairman and six Members.
 The Chairman is the co-ordinating head and each of the members has been assigned a specialized
function.
 They are assisted by Joint Secretaries, Directors, Deputy Secretaries, Under Secretaries and ministerial
staff for carrying out their day-to-day functions.
The Investigation Directorates and the Central Charges of the department, which are headed by the
Directors General of Income Tax (Investigation) and the Chief Commissioners of Income Tax (Central),
function under the supervisory umbrella of Member (Investigation) in the CBDT.
 The Chairman and other Members have been assigned territorial zones for the purpose of supervising
and monitoring the work of field formations.
 For the effective discharge of its functions, the CBDT is assisted by a number of attached offices known
as Directorates.
 These directorates have been assigned specific functions like vigilance, inspection, judicial, recovery,
maintenance of statistics, printing and publications, publicity, conducting of departmental examinations,
imparting of training to officers and staff, etc.
 These functions are performed by the directorates at the all-India level.

5 MARK

Tax and Article 14

 Article 14 of the Constitution of India - “ The state shall not deny to any person equality before law or
the equal protection of laws within the territory of India.”
 Equality before law is a negative concept and have certain limitation. It is also mentioned by Dicey as
second corollary of Rule of law would rule out any special privileges to authority or person.
 But our Constitution provides certain privilege to the president, governor, member of parliament and
state legislature etc
 In determining the validity of statutory provision, the Indian Court followed the principle of equal
protection of law which means right to equal treatment in similar circumstances.
 The court uphold legislation consisting apparently discriminatory provisions where discrimination is
based on reasonable basis. Reasonable means rational not arbitrary.
 The classical test enunciated by judiciary requires fulfillment of two following conditions –
o The Classification must be founded on an intelligible differentia which distinguish those that are
grouped together from others ,
o The differentia must have rational relation to the object sought to be achieved by the law under
challenge. Taxing statutes are also not exempted from the test consisting in article 14 of the
Constitution of India and for its application in the territory of India need to pass the test. The
taxing statutes enjoy more judicial indulgence because picking and choosing within limit is
inevitable in taxation. The Court adopted more tolerant attitude in matter of tax due to adverse
impact of economy of Government.

DELEGATION OF TAXATION

 The doctrine of excessive delegation is applied by the courts to adjudge the validity of the provision
delegating the power.
 Therefore, too board power ought not to be vested in the executive matters of taxation; the parent act
ought to contain policy in the light of which the executive is to exercise the power delegated to it.
 The courts uphold delegation of power to decide “ matters of details” concerning the working of the tax
law in question.
 The expression “matters of details”, in truth, is really an euphemism to cover the delegation of
significant powers to the executive in the tax area.
 The power to impose a tax is essentially a legislative function, under article 265 of the constitution no
tax can be levied or collected except by the authority of law, and here law means law enacted by the
legislature and not made by the executive.
 Therefore, the legislature cannot delegate the essential legislative function of imposition of tax to an
executive authority.Subject to the above limitation, a power can be conferred on the government to
exempt a particular commodity from the levy of tax.
 A power may also be delegated to bring certain commodity under the levy of tax.The power to fix the
rate of tax is a legislative function, but if the legislative policy has been laid down, the said power can be
delegated to the executive.It is open to the legislature or executive to fix different rate of tax for different
commodities

Tax planning

 It is the process of analysing a financial plan or a situation from a tax perspective.

 The objective of tax planning is to make sure there is tax efficiency. With the help of tax planning, one
can ensure that all elements of a financial plan can function together with maximum tax-efficiency.
 Tax planning is a significant component of a financial plan. Reducing tax liability and increasing the
ability to make contributions towards retirement plans are critical for success.
 Tax planning comprises various considerations. Considerations such as size, the timing of income,
timing of purchases, and planning are concerned with other kinds of expenditures.
 Also, the chosen investments and the various retirement plans should go hand-in-hand with the tax filing
status as well as the deductions in order to create the best possible outcome.
 Tax planning plays an important role in the financial growth story of every individual as tax payments
are compulsory for all individuals who fall under the IT bracket.
 Tax planning can be classified into the following:

1. Permissive tax planning: Tax planning which falls under the framework of the law.
2. Purposive tax planning: Tax planning with a specific objective.
3. Long-range/short-range tax planning: Planning executed at the beginning and towards the end of
the fiscal year.
Tax Holiday

 A tax holiday is a government incentive program that offers a tax reduction or elimination to
businesses.
 Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly
used by governments in developing countries to help stimulate foreign investment.
 A tax holiday can encourage economic activity and foster growth.
 Tax holidays are instituted by local governments and governments in developing countries to help
stimulate foreign investment.
 Tax holidays are believed to increase long-term tax revenue because they help businesses maintain or
grow operations, which creates more taxable revenue for the tax authority.
 A tax holiday is also implemented for businesses to encourage economic activity and foster growth.
Used in the hopes of increasing the gross domestic product (GDP) in developing countries, tax holidays
are a way in which governments attract foreign investors or foreign companies that establish base in the
host country.

Money bill

 Money Bill is defined in Article 110 of the Indian Constitution. Money bills are concerned with financial
matters like taxation, public expenditure, etc. The bill is significant for Indian Polity and governance as
many important issues like Aadhar Bill, Insolvency and Bankruptcy Bill are also related to it
 The imposition, abolition, remission, alteration or regulation of any tax
 The regulation of the borrowing of money by the Union government
 The custody of the Consolidated Fund of India or the contingency fund of India, the payment of money
into or the withdrawal of money from any such fund
 The appropriation of money out of the Consolidated Fund of India
 Declaration of any expenditure charged on the Consolidated Fund of India or increasing the amount of
any such expenditure
 The receipt of money on account of the Consolidated Fund of India or the public account of India or the
custody or issue of such money, or the audit of the accounts of the Union or of a state

Tax Evasion?

 Tax evasion is an illegal activity in which a person or entity deliberately avoids paying a true tax
liability.
 Those caught evading taxes are generally subject to criminal charges and substantial penalties. To
willfully fail to pay taxes is a federal offense under the Internal Revenue Service (IRS) tax code.
 Tax evasion can be either the illegal non-payment or underpayment of actual tax liabilities due.
 Tax evasion can be determined by the IRS regardless of whether or not tax forms were filed with the
agency.
 To determine tax evasion, the agency must be able to show that the avoidance of taxes was willful on
the part of the taxpayer.
 While tax evasion is illegal, tax avoidance includes finding legal ways (within the law) to reduce
taxpayer obligations.
 Tax evasion applies to both the illegal nonpayment as well as the illegal underpayment of taxes.
Tax Mitigation :
 "Tax Mitigation" is a situation where the taxpayer takes advantage of a fiscal incentive afforded to
him by the tax legislation by actually submitting to the conditions and economic consequences that

the particular tax legislation entails.

  A good example of tax mitigation is the setting up of a business undertaking by a tax payer in a

specified area such as Special Economic Zone (SEZ).

Kautilya on principles of taxation

 The purpose of this paper is to present Kautilya's principles of taxation during the fourth century BCE.
Design/methodology/approach – Modern tools of economic analysis are used to present Kautilya's
principles on income taxation.
 Findings – Kautilya implicitly suggests a linear income tax. He emphasizes fairness, stability of tax
structure, fiscal federalism, avoidance of heavy taxation, ensuring of tax compliance and subsidies to
encourage capital formation.
 Research limitations/implications – According to Kautilya, some linkage between the ability to pay (i.e.
provision of a safety net to the poor, old and the sick) and the benefit principle may be better than the
current approaches, which treat the ability to pay and the expenditure side of the taxation separately.
 Practical implication – Ensuring tax compliance and avoidance of heavy taxation are the most important
ingredients of a sound fiscal policy. Originality/value – The paper presents the very first growth-oriented
fiscal policy along with a provision of a safety net.
 There are many similarities between the current day tax system and the Kautilya’s system of Tax
administration prevalent more than two thousand years ago.
 For example, Kautilya had specifically laid down the terms for taxation, without any scope for
arbitrariness. Further, he fixed a time table for payment of taxes and also what share of the produce or
product value is to be paid as tax.

Social purpose of taxation

 In general terms the issue I have been asked to address is not whether taxes should be used to
support "social" expenditures (if we want to have "social"* expenditures we have to support them by
taxes), but how the tax system should be employed toward the achievement of a social purpose.
 The question, therefore, is the choice between two broad types of fiscal incentives (both financed
by taxes)-a direct subsidy provided a given activity through the expenditure side of the government
budget, or what has come to be called a tax "expenditure" (or tax "'incentive") provided through the
remission, moderation or deferral of tax liability on the income earned from that activity,
 Both kinds of fiscal incentives are available to promote objectives judged to be in the public interest
which, broadly speaking, can be taken to mean areas in which society "desires"a higher (or lower) level
of outlays than free market exchange would bring forth.
 To achieve the desired level of "'social" expenditures a subsidy is required. Since a firm (or individual) is
equally well off if it receives a given amount of dollars as a direct payment or in the form of a lower tax
liability some have argued that the issue that is posed is really a non-problem, a matter of semantics
rather than fundamental differences

Double taxation

 It is a situation where an income is subject to tax twice. This can occur in one of two ways - economic or
juridical. Economic double taxation occurs if an income or a part of it is taxed twice in the same country,
in the hands of two individuals.
 Alternatively, juridical double taxation occurs if income earned outside India is taxed two times in the
hands of the same individual, once abroad and once in their home country. This unique situation puts an
undue burden on the taxpayer when their income is taxed twice.
 A Double Taxation Avoidance Agreement is a tax treaty that India signs with another country. An
individual can avoid being taxed twice by utilizing the provisions of this treaty. DTAAs can either be
 comprehensive agreements, which cover all types of income, or specific treaties, targeting only certain
types of income.

1. Unilateral relief: Section 91 of the Income Tax Act, 1961 provides for unilateral relief against
double taxation. According to the provisions of this section, an individual can be relieved of being
taxed twice by the government, irrespective of whether there is a DTAA between India and the
foreign country in question or not. However, there are certain conditions that have to be satisfied in
order for an individual to be eligible for unilateral relief. These conditions are:
1. The individual or corporation should have been a resident of India in the previous year.
2. The income should have been accrued to the taxpayer and received by them outside India in
the previous year.
3. The income should have been taxed both in India and in the country with which there is no
DTAA.
4. The individual or corporation should have paid tax in that foreign country.
2. Bilateral relief:Bilateral relief is covered under section 90 of the Income Tax Act, 1961. It offers
protection from double taxation through a DTAA. This type of relief is offered in two different ways.
o Exemption method: The exemption method offers full and complete protection from being
taxed twice. That is, if an income earned outside India has been taxed in the relevant foreign
country, it is not subject to tax in India.
o Tax Credit method: According to this method, the individual or the corporation can claim a
tax credit (deduction) for the taxes paid outside India. This tax credit can be utilized to set-off
the tax payable in India, thereby reducing the assessee’s overall tax liability.

Doctrine of substantial compliance

 The doctrine of substantial compliance is a judicial invention,equitable in nature, designed to avoid

hardship in cases where a party does all that can reasonably expected of it, but failed or faulted in some
minor or inconsequent aspects which cannot be described as the "essence" or the "substance" of the
requirements.
 Like the concept of "reasonableness", the acceptance or otherwise of a plea of "substantial compliance"
depends upon the facts and circumstances of each case and the purpose and object to be achieved and the
context of the prerequisites which are essential to achieve the object and purpose of the rule or the
regulation.
 Such a defence cannot be pleaded if a clear statutory prerequisite which effectuates the object and the
purpose of the statute has not been met.
 Certainly, it means that the Court should determine whether the statute has been followed sufficiently so
as to carry out the intent for which the statute was enacted and not a mirror image type of strict
compliance.
 Substantial compliance means "actual compliance in respect to the substance essential to every
reasonable objective of the statute" and the court should determine whether the statute has been followed
sufficiently so as to carry out the intent of the statute and accomplish the reasonable objectives for which
it was passed.