❖ Definition and Basic Concepts , Origin and Development of taxation

historical developments
Meaning of Taxation The term Taxation ‘ has been defined in many ways . Commonly heard
definition includes : It is the process by which the sovereign , through its law – making body ,
races revenues use to defray expenses of government , it is a means of government in
increasing its revenue under the authority of the law , purposely used to promote welfare and
protection of its citizenry . It is the collection of the share of individual and organizational
income by a government under the authority of the law .
According to Hugh Dalton , “ a tax is a compulsory contribution imposed by a public authority
. irrespective of the exact amount of service rendered to the taxpayer in return , and not
imposed as penalty for any legal offence .”
‘Taxation’ is the act of a taxing authority actually levying tax , Taxation as a term applies to
all types of taxes , from income to gift to estate taxes . It is usually referred to as an act ; any
revenue collected is usually called taxes .
‘Taxation’ is the act of laying a tax , or of imposing taxes , as on the subjects of a State , by
government , or by the proper authority;the raising of revenue.
Nature and Scope of Taxation Taxation is the inherent power of the State to impose and
demand contribution upon persons , properties , or rights for the purpose of generating
revenues for public purposes . The power of taxation upon necessity and is inherent in every
government or Sovereignty.

Taxation is an inherent power of sovereignty , essentially a legislative function , enforced for

public purpose , operates only within its territorial jurisdiction , exempts government agencies
from tax ( provided such agency performs governmental functions ) and is subject to
constitutional and inhered limitations .

Nature of taxation

• Inherent Power of Sovereignty .

• Legislative in nature ;
• Public purpose :
• Territorial in operation ,
• Exemption of the Government ;
• Strongest among the inherent power of the State .
• Subject of Constitutional and inherent Anonymous
Scope of Taxation In the absence of limitations provided by the Constitution , the power to
tax is essentially unlimited , plenary , comprehensive , far – reaching , and supreme Taxation
compasses every trade or occupation , every object or industry or possession of property . It
levies a burden which , in Case of failure to discharge , seizure or confiscation of property may
be enforced . subject to due process of law .
Purpose of Taxation The primary purpose of taxation is to provide funds or property with
which the government discharges its appropriate functions for the protection and general
welfare of its citizens.

Taxation is for the support of the government in exchange for the general advantages and
protection afforded by the government to the taxpayer and his or her property . The existence
of government is a necessity that cannot continue without financial means to pay its
expenses. therefore , the government has the right to compel all citizens and property within
its limits to share its costs . The State and federal governments both have the power to impose
taxes upon their citizens.
The following are some purposes of taxation
1. Financing government spending Taxes are justified as they fund government expenditure
and activities that are necessary and beneficial to society .
2. Reduce gap between rich and poor Progressive taxation can be used to reduce inequality
in a society.
3. Reduction of consumption of demerit goods Taxes can be used an effective tool to reduce
the consumption of demerit goods like alcohol and tobacco . Higher taxes on these goods
reduce the consumption of cigarettes , etc.
4. Control of Inflation One of the causes of inflation is too much money chasing too few goods
Government can take away the extra disposable income of the people through higher taxes
and thus reduce the Aggregate demand in die economy .

5. Balance of Payments Tariffs ( taxes ) are imposed on imports . Government can correct an
unfavourable balance of payment situation by increasing the tariffs . This will result in imports
becoming expensive and will cause a fall in demand for the imported goods
6. Protecting local industries Government uses taxes as a means to protect local / infant
industries may boost the demand for goods and services produced by domestic industry.
Origin and Development of Taxation -Tax History Chronology
ANCIENT PERIOD There is enough evidence to show that taxes on income in some form or
the other were levied even in primitive and ancient communities . References to taxes in
ancient India are found in Manusmriti and Kautilya’s Arthashastra . Manu the ancient sage
and law giver stated that king should levy taxes according to sastras . He advised that taxes
should be related to income and should not be excessive . He laid down that traders and
artisans should pay 1 / 5th of their profits in gold and silver , while the agriculturists were to
pay 1 / 6th , 1 / 8th and 1 / 10th of their produce depending upon their circumstances . The
detailed analysis given by Manu on the subject clearly shows the existence of a well – planned
taxation system , even in ancient times . Kautilya’s Arthasastra was the first authoritative text
on public finance , administration and the fiscal laws . Collection of income tax was well
organized during Mauryan Empire . Schedule of tax payment , time of payment , manner and
quantity were fixed according to Arthasastra . It is remarkable that the present day system of
taxation is in many ways similar to the system of taxation given by Kautilya 2300 years ago .
 • Medieval Era

The system of progressive taxation perhaps owes its origin to Emperor Krishna Devaraya of
Vijaynagar who maintained that taxes should not be levied at flat rates and the amount of tax
levied must depend upon the income of the farmer . Tax administration was further refined
by Sher Shah Sun later by Akbar . Tile Mughal emperors granted land revenue rights to di
Mansabdar in exchange for promises of soldiers in war time . The treaty of 1765 gave
Britishers the right to collect taxes on behalf of the emperor . Well before the dissolution of
the Mughal Empire in 1857 , the British system of District Collectors of land revenue was
established.

INITIAL PERIOD ( 1860-1886 ) Income tax in its modern form was introduced in India for first
time in 1860 by the British Government to overcome the financial crisis following the events
of 1857. Initially Government introduced it as a temporary measure of raising revenue under
the Income Tax Act 1860 for a period of five years . Different tax rates were prescribed for
different heads of income . In the year 1867 , it was transformed as licence tax on trade and
profession . In the year 1869. The licence tax was replaced by Income Tax again . The
assessments were made on arbitrary basis leading to inequality , unpopularity and
widespread tax evasion . Income Tax was withdrawn in the year 1874. After the great famine
of 1876-78 , the Government introduced local Acts for income tax in different provinces . With
several amendments , these Acts remained in force till 1886. Thus , the period from 1860 to
1886 was a period of experiments in the context of income tax in India .
PRE – INDEPENDENCE PERIOD ( 1886-1947 ) In 1886 , a new Income Tax Act was passed with
great improvements than the previous Acts . This Act with several amendments in different
years continued till 1918. In 1918 , a new Act was passed repealing all the previous Acts . For
the first time , this Act introduced the concept of aggregating income under different heads
for charging tax . In 1921 , the Government constituted ..All India Income Tax Committee “
and on the basis of recommendation of this committee a new Act ( Act XI of 1922 ) was
enacted . This Act is a landmark in the history of Indian Income Tax system . This Act made
income tax a central subject by shifting the tax administration from the Provincial
Governments to the Central Government . During this period , the Board of Revenue ( Central
Board of Revenue ) and Income Tax Department with defined administrative structure came
into existence .
POST INDEPENDENCE PERIOD The Income Tax Act 1922 continued to be applicable to
independent India . During the early post – independence period , the Income Tax legislation
had become very complicated on account of innumerable changes . During this period tax
evasion was wide spread and tax collection was very expensive . In 1956 , the Government of
India referred the Act to a Law Commission to make the Income Tax Act simpler , logical and
revenue oriented . The Law Commission submitted its report in September 1958 and in the
meantime the Govt . also appointed a Direct Taxes Administration Enquiry Committee to
suggest the measures for minimizing the inconvenience to the assessees and prevention of
tax evasion . This committee submitted its report in 1959. The recommendations of the Law
Commission and the Enquiry Committee were examined and extensive tax reform
programme was undertaken by the Government of India under the supervision of Prof.
Nicholas Kaldor . The Income Tax Bill 1961. Prepared on the basis of the Committee’s
recommendations and suggestions from Chamber of Commerce , was introduced in the Lok
Sabha on 24.4.1961 . It was passed in September 1961 by Lok Sabha . The Income Tax Act
1961 came into force on April 1 , 1962. It applies to whole of India including the state of
Jammu and Kashmir . It is a comprehensive piece of legislation having 23 Chapters , 298
Sections , various sub sections and 14 schedules . Since 1962 , it has been subjected to
numerous amendments by the Finance Act of each year to cope with 5 changing scenario of
India and its economy . Moreover the Central Board of Direct Taxes is empowered to amend
rules and to clarify instructions as and when it becomes necessary . Besides this , amendments
have also been made by various Amendment Acts e.g Taxation Laws Amendment Act 1984 ,
Direct Taxes Amendment Act 1987 , Direct Taxes Law ( Amendment ) Acts of 1988 and 1989 ,
Direct Taxes Law ( Second Amendment ) Act 1989 and at last the Taxation Law ( Amendment)
Act 1991. As a matter of fact , the Income Tax Act 1961 . has been amended drastically . It has
therefore become very complicated both for administration and taxpayers .
RECENT TAX REFORMS The economic crisis of 1991 led to structural tax reforms in India with
main purpose of correcting the fiscal imbalance . Subsequently , the Tax Reforms Committee
headed by Raja Chelliah ( Government of India , 1992 ) and Task Force on Direct Taxes headed
by Vijay Kelkar ( Government of India , 2002 ) made several proposals for improving Income
Tax System . These recommendations have been implemented by the government in phases
from time to time . As regarding the personal income tax , the maximum marginal rate has
been drastically reduced . tax slabs have been restructured with low tax rates and exemption
limit has been raised . In addition to this , government rationalised various incentive
provisions and widened TDS scope . In case of corporate tax , the government has reduced
rates applicable to both domestic and foreign companies , introduced depreciation on
intangible assets and rationalised various 6 incentive provisions . Some new taxes have been
introduced such as Minimum Alternative Tax and Dividend Distribution Tax , Securities
Transaction Tax , Fringe Benefit Tax and Banking Cash Transaction Tax . However . Fringe
Benefit Tax and Banking Cash Transaction Tax were withdrawn by Finance Act , 2009. The
Income tax administration was restructured with effect from August 1 , 2001 to facilitate the
introduction of computer technology . Further , keeping in mind the global developments ,
the department has made considerable efforts for reforming the tax administration in recent
years . Some important measures in this direction are introduction of mandatory quoting of
Permanent Account Number ( PAN ) , e – filing of returns , e – TDS , e payment , Tax
Information Network ( TIN ) , Annual Information Return ( AIR ) for high value transaction .
Integrated Taxpayer Profiling System ( ITPS ) . Refund Banker Scheme in certain cities etc. The
main objective of these reforms has been to enhance tax revenue by expanding the taxpayer
base , improving operational efficiency of the tax administration , encouraging voluntary tax
compliance , creating a taxpayer friendly atmosphere and simplifying procedural rules .
 Indian Taxation History
As we all know that evolution means the process of developing by gradual changes. Taxation
history in India as it stands today has developed over the years since ancient times to modern
day tax laws. The first Income tax Act was introduced in India in Feb 1860 by James Wilson
who was India’s first Finance Minister under the British Rule. He also quoted the authority of
Manu for levying Income Tax in India. The salient feature of the then Income Tax Act was that
it consisted of 259 sections and other salient features of the Act were as under:-
“Income was classified under four schedules as follows:

• Income from landed property;

• Income from professions and trade;
• Income from securities, annuities and dividends;
• Income from salaries and pensions.

A tax was imposed on each one of these sources.

The exemption limit for the general public was fixed at Rs. 200, against the exemption limit
of Rs. 4980 to the military and the police officials, and Rs. 2100 for the naval and marine
officers.
Agricultural income was subject to tax. The rate of tax was 2 percent for income between rs.
200 and Rs. 499 and over that, 4 percent, out of the 4 percent charge 1 percent was to be
retained by the provincial Governments and 3 percent was to go to the Central Government.
Compulsory returns were required to be submitted by all who were liable to tax. The
administration of the tax was left in the hands of the land revenue officers except in Calcutta
and the financial year commenced on 1st of August, 1860.
In addition to above certain other taxes were levied like Custom tax, Salt tax. The Salt Tax was
abolished after Salt Satyagrah started after Dandi March by Mahatma Gandhi.Urban local
bodies’ taxation was brought by Lord Rippon in 1882 which was aimed at decentralization
which gave power to municipal taxes for development and infrastructure of local areas.The
Act of 1860 was revised in 1886 to improve on some categories for which tax can be levied.
The next important revision was in the form of Income Tax Act 1922 which was very
important because it was only then that Income Tax Department came into existence.
After independence the Indian Income Tax Act 1961 came into existence after consultation
with the Ministry of Law effective from 1st April 1962. This Act was amended from time to
time through Union Budgets and amendments Acts.
It is noteworthy that in the tax history of India at one time the rate of personal income tax
was as high as 97.5 percent which has gradually been brought down to 30 percent with
additional surcharges etc which varied from time to time. The rate of tax at 30% is lower even
than some advanced countries in the world. The corporate taxes has also been reduced
considerably upto 15% for certain categories of corporate tax payers.
Amnesty Schemes It is a well-known fact that people have tendency to under- report their
income to avoid paying Income Tax, which lead to loss in tax revenue. To counter the tax
evasion the Government from time to time announces the tax Amnesty Schemes. Such
schemes generally allow the tax payers to voluntarily disclose their income in exchange for
avoiding penalty for tax evasion and sometimes interest also. The waiver of penalty and
interest is beneficial to those taxpayers who had hidden their assets and income. Sometimes
the schemes are also launched to resolve the disputes and to reduce the litigation and to
collect the due taxes. The various schemes which were announced in the past are as under-

• High currency notes demonetization in 1946 VDS 1951.

• VDS 1976.
• High currency notes demonetization 1978 Special bearer bonds 1981 1985 Amnesty
Scheme.
• Remittance of Foreign Exchange and investment in foreign exchange bonds
(immunities and exemptions) Act, 1991
• Voluntary Deposits (immunities and exemptions) Act, 1991. Gold Bonds Act
(immunities and exemptions). 1993 Voluntary Disclosure of income Scheme, 1997.
• Kar Vivad Samadhan Scheme 1998
• Income Declaration Scheme 2016
• Direct Taxes Vivad se Vishwas Scheme 2020.

Some of these schemes were aimed at resolution of tax disputes and realization of due taxes.
These schemes were also challenged in High Courts and Supreme Court being violative of
Article 14 and 123 of the Constitution. When the Voluntary Discloser Income Scheme 1997
(VDIS) was challenged by AIFTP the Honorable Supreme Court sought commitment from the
Government that in future Government would not resort to such schemes favoring dishonest
taxpayers.
Demonetization The present Government also demonetized Rs. 500/- and Rs. 1000/- notes
to curtail the shadow economy, to increase cashless transactions and to reduce to use of
counterfeit cash used to fund illegal activity and terrorism. This scheme also had very limited
impact but failed to achieve the desired results. Out of total demonetized currency notes of
Rs. 15.44 lakh crore, currently worth Rs. 15.28 lakh crore had returned to the RBI Treasury.
The reasons are well known to each of us.
Direct and Indirect Taxes The foregoing discussion mainly related to Income Tax which is a
direct tax. Taxes can be broadly categorized into Direct Taxes and Indirect Taxes. Direct Taxes
are mainly those taxes which are paid by the people to the authority which imposes the tax
and are based on income or spending power.
Direct Taxes are currently levied by the Centre and State separately.
Central Direct Taxes

• Personal Income Tax

• Corporate Income Tax
The Central Board of Direct Taxes (CBDT) is the statutory body which deals with the levy and
collection of Direct Taxes under the Ministry of Finance.
State Direct Taxes

• Land Revenue Tax

• Property TaxIndirect Taxes

In contrast to Direct Taxes, Indirect Taxes are levied on transactions relating to Goods and
Services.
Goods and Services tax (GST) was introduced w.e.f. 1 st of July 2017. A large number of Indirect
Taxes levied and collected by the Central Government and various State Governments were
subsumed into this single tax. Some of the goods and services are still out of the purview of
GST Act. The Central Board of Indirect Taxes & Customs (CBIC) is now the statutory body which
deals with the levy and collection of GST. GST Council constituted under Article 279-A of the
Constitution of India is the governing body for the implementation of GST in India. GST Council
is headed by the Ministry of Finance and includes the other members from the Centre and
the States. GST Council has the duty to make recommendations about GST to the Union
Government as well as the State Governments regarding creation of Laws and principles of
implementation and administration of GST.
Conclusion It is the sacred duty of every citizen to honestly pay the direct and indirect taxes
for the smooth functioning of the Government. It is only then that the country can prosper
and have strong defence system, education system, health system and a strong infrastructure
which is necessary for development of the Country.

❖ Evaluation of the Tax System : (Fundamental Principles)

Evaluation of Indian tax system can be made with along the following criteria.Which are
necessary to sub-serve the objective of planned economic development.
Adequacy and productivity : Contrary to the earlier phase , tax system has exhibited a good
deal of buoyancy in recent years . The tax revenue has been continuously increasing along
with an increase in national income . However , the increase in tax revenue has not been
adequate cough to meet the growing requirements of the developing economy.
Efficiency : Indian tax system falls short of the criterion of efficiency . On account of
complicated laws and rapid changes in their provisions , the tax system has lost the of
simplicity and certainty . As a result , on the one hand , this has led to tax evasion and
avoidance . This has generated massive black money which , in turn , has given rise to serious
distortions in the economic and socio-political Set–up . On the other , the taxpayers have to
incur high costs in paying up takes.
Equity : Our tax system also falls short of the criterion of equity . Although our direct taxes
are highly progressive , undue reliance on indirect taxes has more than counter balanced that
effect Leaving agricultural income out of the tax net has been a source of additional inequity.
Likewise , the proliferating unorganised industrial sector is providing complete , tax haven.
Certainty : The scheme of taxes in India has been considerably fluctuating , resulting in
frequent tampering with tax exemptions , incentives and concessions leading to uncertainty.
Even the goals of taxation have been changing . For instance , at one time the goal was to
have a large number of taxes , so as to widen the tax base , whereas currently , the goal is to
reduce the multiplicity of taxes and duplicity of the laws.

A more fundamental change in the tax perspective is the emphasis in the recent years on
thrift , productivity and wealth accumulation as compared to the almost single most
important goal of avoidance of concentration of income and wealth pursued in earlier years .
Neutrality : Taxation should seek to be neutral and equitable between forms of business
activities . A neutral tax will contribute to efficiency by ensuring that optimal allocation of the
means of production is achieved . A distortion , and the corresponding deadweight loss , will
occur when changes in price trigger different changes in supply and demand than would occur
in the absence of tax . In this sense , neutrality also entails that the tax system raises revenue
while minimising discrimination in favour of , or against , any particular economic choice . This
implies that the same principles of taxation should apply to all forms of business , while
addressing specific features that may otherwise undermine an equal and neutral application
of those principles .
Effectiveness and fairness : Taxation should produce the right amount of tax at the right time,
while avoiding both double taxation and unintentional non – taxation . In addition , the
potential for evasion and avoidance should be minimised . Prior discussions in the Technical
Advisory Groups ( TAGS ) considered that if there is a class of taxpayers that are technically
subject to a tax , but are never required to pay the tax due to inability to enforce it , then the
taxpaying public may view the tax as unfair and ineffective . As a result , the practical
enforceability of tax rules is an important . consideration for policy makers . In addition ,
because it influences . the collectability and the administer ability of taxes , enforceability is
crucial to ensure efficiency of the tax system .

Flexibility : Taxation systems should be flexible and dynamic enough to ensure they keep pace
with technological and commercial developments . It is important that a tax system is dynamic
and flexible enough to meet the current revenue needs of governments while adapting to
changing needs on an ongoing basis . This means that the structural features of the system
should be durable in a changing policy context , yet flexible and dynamic enough to allow
governments to respond as required to keep pace with technological and commercial
developments , taking into account that future developments will often be difficult to predict.
Simplicity : Taxpayers must be able to clearly understand the nature and extent of their
obligation and consequences of non – compliance.

Transparency : Taxpayers must know how and when they are paying tax , and how much tax
they are paying .
Cost : Compliance and collection costs must be minimised .
Anti - avoidance : The tax scheme should be so framed that there would be minimal incentive
and potential for avoidance of taxation .

❖ Taxing power and constitutional limitations

The primary purpose of taxation is to raise revenue and to fund government expenditure. The
government collects this tax to further the goal of developmental activities like building
schools, hospitals, highways, flyovers, bridges, ports, housing projects for the
underprivileged, etc. Further, in order to discourage the production and use of certain
harmful commodities, the government imposes a heavy tax on the production of such
commodities. Taxation can also be used by governments as a weapon to reduce income
inequality.
Taxation Power of Union and State Governments Article 246 of the Constitution deals with
the division of powers between Union and State Governments. It provides for the division of
power into three lists, namely, Union List, State List, and Concurrent List.

Union List- Article 246(1) of the Indian Constitution states that Parliament has exclusive
power to make laws with respect to any of the matters enumerated in List I in the Seventh
Schedule.
State List- Article 246(3) of the Indian Constitution states that State Government has exclusive
power to make laws with respect to any of the matters enumerated in List II in the Seventh
Schedule.
Concurrent List- Article 246(2) of the Indian Constitution states that the Parliament and State
Government both have the jurisdiction to make laws with respect to any of the matters
enumerated in List III in the Seventh Schedule.

If there is a conflict between the laws passed by Parliament and state legislatures on the same
subject matter, the Constitution provides for a Union law to override State law. Also, the
residuary powers are left for the Parliament to make laws.
Power of taxes is distributed among the several taxing authorities in India. Central
Government powers are enumerated in Entries 82-92B, 92 & 96 in List I of the 7th Schedule
to the Constitution. For example- Income (except tax on agricultural income), Corporation Tax
& Service Tax Currency, Coinage, legal tender, Foreign Exchange Custom duties (except export
duties) Excise on tobacco and other goods, Property of Union, etc. Falls within the domain of
Central governments.
List II of the 7th Schedule mentions the powers of the state government to levy taxes. (Entry-
45-63 and 66). For example- Taxes and duties related to agricultural lands, Capitation Taxes,
Excise on liquors, opium, Fees on matters related to state list except for court fee, Land
Revenue, Land and buildings related taxes, etc. Falls within the domain of state governments.

In List III (Entry- 35, 44 & 47), Union and the State Governments have the concurrent powers
to fix the principles on which taxes on motor vehicles shall be levied and to impose stamp
duties on non-judicial stamps. The property of the Union is exempted from State Taxation,
and the property of the states is exempted from the Union Taxation. But the parliament of
India can pass legislation for taxation by the Union Government of any business
activities/trade of the state which are not the ordinary functions of the state.

In the 7th Schedule, Entry 97 List 1 provides residuary powers of taxation that belong solely
to the central government.

• Important Constitutional Provisions Related 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 “No tax shall be levied or collected except by the authority of law”. Therefore,
each tax levied or collected has to be backed by an accompanying law, passed either by the
Parliament or the State Legislature.”
The Constitution of India is the supreme law of the land and all laws in India must be
consistent with its provisions. The constitutional provisions relating to taxation in India are
contained in Articles 265 to 289 of the Constitution of India. These articles outline the powers
of the Union and the States to levy taxes, as well as the procedures for assessing and collecting
taxes.
Some of the key constitutional provisions relating to taxation include:

Article 265: This article states that no tax can be levied or collected except by the authority
of law. This means that all taxes must be imposed by a valid law and that no tax can be levied
or collected without the authority of law.
Articles 268 to 270: These articles deal with the levy of duties of customs, excise and other
taxes on goods imported into or exported out of India. These taxes are levied by the Union
government and the proceeds are shared between the Union and the States.
Article 286: This article restricts the power of the States to levy taxes on goods and services
that are imported into or exported out of India. This is to prevent States from taxing goods
that are in transit between different States.

Articles 276 and 277: These articles deal with taxes that can be levied by the States for the
benefit of the State or for the benefit of a municipality, district board or other local authority.
These taxes are known as “cess” taxes and they can be levied on a variety of subjects, such as
professions, trades, callings and employment.

Articles 271 and 279: These articles deal with taxes that can be levied by the Union and the
States concurrently. This means that both the Union and the States can levy taxes on the same
subject, but the Union government has the power to override any State law that conflicts with
a Union law.
Articles 273, 275, 274 and 282: These articles deal with grants-in-aid that can be given by the
Union government to the States. These grants are given to help the States meet their financial
needs and they can be used for a variety of purposes, such as education, health and
infrastructure development.
The constitutional provisions relating to taxation are complex and have been interpreted by
the courts in a number of cases. However, these provisions provide the basic framework for
the taxation system in India.
Article 265 Article 265 of the Constitution of India states that no tax can be levied or collected
except by the authority of law. This means that all taxes must be imposed by a valid law and
that no tax can be levied or collected without the authority of law.
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 against
arbitrary tax extraction.
In the case of Tangkhul v. Simerei Shailei, the Supreme Court held that the practice of
villagers paying Rs. 50 a day to the headman in place of a custom to render free a day’s labour
was a collection of tax and that no law had authorised it. Therefore, it violated Article 265.
Article 266 Article 266 of the Constitution of India deals with the Consolidated Funds and
Public Accounts of India and the States. It states that the following shall form one
consolidated fund to be entitled the Consolidated Fund of India:

• 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
• Loans or ways and means of advances

The same holds for the revenues received by the Government of a State which it is called the
Consolidated Fund of the State. Money out of the Consolidated Fund of India or a State can
be taken only in agreement with the law and for the purposes and of the Constitution.

Article 268 Article 268 of the Constitution of India deals with duties levied by the Union
government but collected and claimed by the State governments. These duties include stamp
duties, excise on medicinal and toilet preparations, etc. These duties collected by states do
not form a part of the Consolidated Fund of India but are with the state only.
Article 269 Article 269 of the Constitution of India provides the list of various taxes that are
levied and collected by the Union and the manner of distribution and assignment of Tax to
States. These taxes include taxes on income other than agricultural income, taxes on
corporation tax and duties of customs.
The taxes mentioned in Article 269 are levied and collected by the Union government, but the
proceeds are assigned to the States. This is done to ensure that the States have a fair share
of the tax revenue and that they are able to raise the resources they need to provide essential
services to their citizens.
The case of M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others is
an example of how Article 269 has been interpreted by the courts. In this case, the Supreme
Court held that the State Sales Tax Act was not applicable to sale or purchase in the course of
interstate trade or commerce. This is because Article 269 prohibits the levy and collection of
tax on sale or purchase in the course of interstate trade or commerce.
Article 269(A) Article 269(A) of the Constitution of India was inserted by the 122nd
Amendment of the Constitution in 2017. This article gives the power to collect goods and
services tax (GST) on supplies in the course of inter-state trade or commerce to the
Government of India. The proceeds of this tax are then apportioned between the Union and
the States in the following manner:

• 50% of the proceeds are directly apportioned to the States.

• The remaining 50% is credited to the Consolidated Fund of India (CFI). Out of this
amount, a prescribed percentage is then distributed to the States.
Article 270 Article 270 of the Constitution of India deals with the taxes levied and distributed
between the Union and the States. It states that the following taxes are levied and collected
by the Union government and the proceeds are distributed between the Union and the States
in the following manner:

• All taxes and duties mentioned in the Union List, except the duties and taxes
mentioned in Articles 268, 269 and 269A.
• Taxes and surcharges on taxes, duties and cess on particular functions are specified in
Article 271 under any law created by Parliament.
The proceeds from these taxes are distributed between the Union and the States in the
following manner:

• The proceeds of taxes levied on the sale or purchase of goods and services in the
course of inter-state trade or commerce are distributed to the States in the ratio of
their population.
• The proceeds of other taxes are distributed to the States in such manner as may be
prescribed by the Parliament.
The Supreme Court of India has set a famous judicial precedent under Article 270 of the
Constitution of India in the case T.M. Kanniyan v. I.T.O. In this case, the Supreme Court held
that the income tax collected forms a part of the Consolidated Fund of India. The income tax
thus collected cannot be distributed between the centre, union territories and states which
are under the presidential rule.
Article 271 Article 271 of the Constitution of India allows the Parliament to increase any of
the taxes or duties mentioned in Articles 269 and 270 by levying an additional surcharge for
a particular purpose. The proceeds from the surcharge are credited to the Consolidated Fund
of India.
Cess and surcharge surcharge is collected by the Union government and the States have no
role to play in its collection. The surcharge is an exception to Articles 269 and 270, which
specify the taxes and duties that are levied and collected by the Union and the States.
The surcharge is similar to a cess, which is a tax levied for a specific purpose. However, the
surcharge is an additional tax on an existing tax, while a cess is a separate tax.

The Supreme Court in the case of M/s SRD Nutrients Private Limited v. Commissioner of
Central Excise, Guwahati has ruled that the education cess and the higher education cess are
surcharges, not cess. This is because they are additional taxes on existing taxes and they are
not levied for a specific purpose.
Grants-In-Aid The Constitution also provides for grants-in-aid to the States. Grants-in-aid are
financial assistance provided by the Union government to the States to help them meet their
financial needs. Grants-in-aid are charged to the Consolidated Fund of India and the
Parliament has the authority to grant them.
The grants-in-aid are intended to help the States to provide essential services to their citizens,
such as education, health and infrastructure. They also help to reduce disparities between the
rich and poor States.
Article 273 This article provides for grants to the States of Assam, Bihar Orissa and West
Bengal in lieu of any share of the net proceeds of the export duty on jute and jute products.
The grants are charged to the Consolidated Fund of India and are to be made for a period of
ten years from the commencement of the Constitution.
Article 275 This article provides for grants-in-aid to the States by the Union government. The
grants are to be made on the recommendation of the Finance Commission. The grants are to
be used for the development of the States and for the welfare of the people.
Article 276 This article provides for taxes that are levied by the States. The taxes are to be
levied and collected by the States. The taxes that can be levied by the States include sales tax,
value-added tax (VAT), professional tax and stamp duty.

Article 277 Article 277 of the Constitution of India provides that cesses, fees, duties or taxes
which were levied immediately before the commencement of the Constitution by any
municipality or other local authority 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.

The case of Hyderabad Chemical and Pharmaceutical Works Ltd. V. State of Andhra Pradesh
is an example of how Article 277 has been interpreted by the courts. In this case, the Supreme
Court held that the State government could continue to levy a fee on the appellant for the
supervision of the use of alcohol in the manufacture of medicines, even though the
Parliament had passed a law that prohibited the levy of fees on the manufacture of medicines.
The Court held that the fee levied by the State government was a “cess” and not a “tax”. A
“cess” is a tax that is levied for a specific purpose, while a “tax” is a tax that is levied for general
revenue. The Court held that the fee levied by the State government was for the specific
purpose of supervising the use of alcohol in the manufacture of medicines and therefore it
was a “cess” and not a “tax”.
Article 277 is an important article that protects the interests of the States and the local
authorities. It ensures that they can continue to raise revenue from taxes that were already
being levied before the commencement of the Constitution. This revenue can then be used
for the benefit of the people of the State or the local area.
Article 279 Article 279 of the Constitution of India deals with the calculation of “net
proceeds”. Net proceeds are the proceeds of a tax or duty after deducting the cost of
collection, as ascertained and certified by the Comptroller and Auditor-General of India.
Article 282 Article 282 of the Constitution of India provides for grants by the Union
government to the States for any public purpose. The grants can be made for special,
temporary or ad hoc schemes. The power to grant sanctions under Article 282 is not
restricted.
In the case of Bhim Singh v. Union of India & Ors, the Supreme Court held that the Member
of Parliament Local Area Development Scheme (MPLAD) falls within the meaning of “public
purpose”. The MPLAD scheme is a scheme by which Members of Parliament can use funds to
undertake development projects in their constituencies. The Supreme Court held that the
MPLAD scheme is a public purpose because it helps to improve the lives of people in the
constituencies of Members of Parliament.
Article 286 Article 286 of the Constitution of India restricts the power of the States to tax. It
states that the States cannot:

• Impose taxes on imports or exports.

• Impose taxes on sales or purchases that take place outside the territory of the State.
• Impose taxes on goods that are of special importance, unless the Parliament has
authorised them to do so.
The Parliament has the power to lay down principles to determine when a sale or purchase
takes place during import or export or outside the territory of the State. The Parliament can
also restrict the power of the States to tax goods of special importance.
The case of K. Gopinath v. The State of Kerala is an example of how Article 286 has been
interpreted by the courts. In this case, the Supreme Court held that the sale of cashew nuts
by the Cashew Corporation of India to local users was not in the course of import and did not
come under an exemption of the Central Sales Tax Act, 1956.
The issue before the court was to decide whether the purchases of raw cashew nuts from
African suppliers made by the appellants from the cashew corporation of India) fall under the
nature of import and, therefore protected from liability to tax under Kerala General Sales Tax
Act, 1963. The judgement here went against the appellants.
Article 286 is an important article that protects the interests of the Union government. It
ensures that the States cannot impose taxes on goods that are of national importance and
that they cannot tax imports or exports. This helps to create a level playing field for businesses
across the country and it helps to promote economic growth.
Article 289 Sure, here is a rewritten version of the text that removes plagiarism:

Article 289 of the Constitution of India states that the property and income of the States are
not liable to taxation by the Union government, except in the following cases:

• If the Parliament makes a law to that effect.

• If the State government consents to such taxation.

The Parliament can make a law to tax the property and income of the States if it is necessary
for the purpose of implementing a constitutional provision. For example, the Parliament can
make a law to tax the property and income of the States in order to raise revenue for the
Union government.

Some Other Tax-Related Provisions in the Constitution of India

Article 301 of the Constitution of India guarantees freedom of trade, commerce and
intercourse throughout the territory of India. This means that goods and services can be freely
transported and sold across the country, without any restrictions.
Article 302 empowers the Parliament to impose restrictions on trade, commerce and
intercourse in the interest of the general public. For example, the Parliament can impose
restrictions on the import of goods that are harmful to public health or safety.
Article 303 allows the Parliament to give preference to one State over another in the matter
of trade, commerce and intercourse if there is a scarcity of goods in that State. For example,
the Parliament can give preference to a State that is facing a drought, so that the people of
that State can get foodgrains at a cheaper price.

Article 304 allows a State government to impose taxes on goods imported from other States
and Union Territories. However, the State government cannot discriminate between goods
from within the State and goods from outside the State. The State government can also
impose some restrictions on freedom of trade and commerce within its territory, but these
restrictions must be reasonable and in the interest of the general public.
Article 366 defines the following terms:

• Goods: This includes all movable property, including animals and birds.
• Services: This includes any activity that is not the sale of goods.
• Taxation: This includes the imposition of taxes, duties, cess and tolls.
• State: This includes a Union territory, but does not include a Union territory that is a
part of a State.
Taxes that are levied on the sale/purchase of goods: This includes all taxes that are levied on
the sale or purchase of goods, including value-added tax (VAT).Goods and service tax (GST):
This is a single tax that is levied on the sale or purchase of goods and services.

Conclusion
The constitutional provisions relating to taxation in India are complex and have been
interpreted by the courts in a number of cases. However, the basic principles underlying these
provisions are clear: to ensure that both the Union and the States have the resources they
need to function effectively, while also protecting the interests of taxpayers.
The constitutional provisions relating to taxation are essential for the smooth functioning of
the Indian economy. They ensure that the government has the resources it needs to provide
essential services, while also protecting the interests of taxpayers.

❖ Classification of Tax
The tax levied on the individuals and business entities are divided into two categories :
Direct Tax : As the name suggests , it is paid directly to the government . Direct taxes are
levied on income and property , which are directly assessed by the government . The tax rates
are determined by the Ministry of Finance in the budget for the financial year . It includes
income tax , expenditure tax , and interest’s tax . The Income Tax Act , 1961 ( “ Act “ ) governs
the implication of direct taxes in India . Direct taxation in India is progressive as the tax rate
increases with the increase in income .
Indirect Tax : It is the indirect levy paid to the government on the sales of goods and services.
It is governed by the Goods and Services Act , 2017. The execution of the goods and services
act , plays an important role in the determination of India as a federal state wherein the
Central Goods and Services Tax ( CGST ) and Integrated Goods and Services Tax ( IGST ) is paid
to the Union and State Goods and Services Tax ( SGST ) is paid to the state . It includes the
Goods and Services Act , 2017 , The Central Excise Act 1944 , and The Customs Act 1962 .

Difference between direct tax and Indirect tax

• Direct tax is levied and paid for by individuals , Hindu undivided Families ( HUF ) , firms,
companies etc.Whereas indirect tax is ultimately paid for by the end consumer of
goods and services .
• The burden of tax cannot be shifted in case of direct taxes while burden can be shifted
for indirect taxes .
• Lack of administration in collection of direct taxes can make tax evasion possible ,
while indirect taxes cannot be evaded as the taxes are charged on goods and services
• Direct tax can help in reducing inflation , whereas indirect tax may enhance inflation .
5.Direct taxes have better allocative effects than indirect taxes as direct taxes put
lesser burden over the collection of amount than indirect taxes , where collection is
scattered across parties and consumers ‘ preferences of goods is distorted from the
price variations due to indirect taxes .
 • Direct taxes help in reducing inequalities and are considered to be progressive while
indirect taxes enhance inequalities and are considered to be regressive .
• Indirect taxes involve lesser administrative costs due to convenient and stable
collections , while direct taxes have many exemptions and involve higher
administrative costs .
• Indirect taxes are oriented more towards growth as they discourage consumption and
help enhance savings . Direct taxes , on the other hand , reduce savings and discourage
investments .
• Indirect taxes have a wider coverage as all members of the society are taxed through
the sale of goods and services , while direct taxes are collected only from people in
respective tax brackets .
• Additional indirect taxes levied on harmful commodities such as cigarettes , alcohol
etc. Dissuades over – consumption , thereby helping the country in a social context.

❖ Distinction between Tax & Fee

Tax is the compulsory payment to the government without getting any direct benefits . Fees
are generally obligatory to regulate or control various types of activities . However , a fee is
particularly applied for the use of a service . A tax is a compulsory contribution made by a
taxpayer . A fee is a voluntary payment . The difference between a tax and a fee generally
turns on the use of the revenue .
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 . 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 : This tax is often assessed as a percentage of the amount of money involved in the
transaction .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 tax is a levy collected for general government services . It is a way to
generate revenue by govt. 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 : 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 .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 : 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 . 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 .

❖ Difference between Tax and Cess

Depending on income earned during a financial year , income tax is levied on the taxable
income . The rate of income tax for individuals ranges between 5 % and 30 % , depending on
the amount of income . However , this is not the only tax liability you have to fulfil . You also
need to pay a cess , calculated as a percentage of the amount of tax that you have to pay .
All revenue received by the government by way of taxes – like income tax , central excise ,
customs and other receipts are credited into the Consolidated Fund , which has been
constituted under Article 266 ( 1 ) of the Constitution of India . The funds so collected are then
allocated to various purposes proposed in the Budget .
However , a cess is levied to develop only a particular service or sector , which is usually for
social welfare , for instance : Swacch Bharat Cess and Krishi Kalyan Cess ; which were levied
on Service Tax , and have now been subsumed under Goods and Services Tax . As the names
suggest in this case , these two cesses were for particular purposes .
Comparison between them-

• Tax is a type of fee and cess is a type of tax.

 • In tax A mandatory fee charged by a government on a product , income , or
activity .Technically ,cess is just another word for tax . The term might be used
in regard to a specific type of tax .
• The purpose of tax is to generate revenue for the government and The purpose
of cess is also to generate revenue for the government.
• There are two types of tax. Direct Tax - tax levied directly on personal or
corporate income Indirect Tax - tax levied on the price of a good or service.
Cess is Usually used in regard to Local tax and / or Land and Property tax .
• The word tax is used all over the world and in all manners to refer to any type
of tax .The term cess is still frequently used in a few countries including Britain
, Ireland , to indicate a local tax , Scotland , to indicate a land tax , and India .
applied as a suffix to a indicate a category of tax such as ‘ property – cess ‘ .
❖ Tax Evasion
Tax Evasion is an illegal activity in which person or being knowingly avoids paying a true tax
liability . To wilfully fail to pay taxes is a federal offense under the Internal Revenue Service
(IRS ) tax code . Tax evasion applies to both the illegal non – payment as well as the illegal
underpayment of taxes . Generally , a person is not considered to be guilty of tax evasion
unless the failure to pay is deemed intentional .
Tax Evasion in India : In India there are various ways through which people evade tax are
Smuggling , evasion of sales and Value Added Tax , Evasion of Income Tax , Evasion of Wealth
Tax , Evasion of Customs Duty and Evasion of Excise Duty . Also , officials takes bribery and
helps in making fabricated statements instead of reporting to tax authorities . Idealist wilfully
fails to file return , submit false returns , submits false certificates to get deduction ,
exemptions and claim low income , charging personal expenses to revenue , fails to pay dues
within due date and so on to evade tax .

Measures Taken by Indian Government to Curb Tax Evasion : Several steps as below have
been taken by Indian government to avoid tax evasion . In India , tax evasion is regarded as a
crime . Prosecution and Penalties are imposed under different acts by government . Income
tax reward scheme has been introduced by Income Tax Department which gives rewards to
informers about tax evasion . Recently , India has entered into pact with US to avoid tax
evasion by Americans through Indian financial organizations . Special Bearer Bond Scheme (
Immunities and Exemptions Act , 1981 ) enable person in possession of black money to invest
in special bonds . Voluntary Compliance Scheme ( Amnesty Scheme ) was another one .
Government increased the tax slab , reduced deduction rate , and increased legal tax
avoidance measures . Most recently , Tax Administration Reform Commission was set up by
Government to make structural reform to tax matters to simplify and streamline tax
procedures . Earlier India had set up several committees like Taxation Enquiry Committee ,
Indian Tax Reforms Committee , and Direct Taxes Enquiry Committees etc. Transfer Pricing
Audit was introduced by Finance Bill to audit undisclosed transactions to curb tax evasion .
Effect of Tax Evasion in India : Taxes are the major source of revenue of India government .
Tax evasion causes economic inequality that is how some people are getting richer and others
are getting poorer . Many reform measures and initiatives of government have to be set aside
and welfare activities are getting affected . Black money causes inflation and value erosion .
Tax Evasion Distinguished With Tax Avoidance and Tax Planning

Tax Evasion : Tax Evasion is an illegal way to minimize tax liability through fraudulent
techniques like deliberate under statement of taxable income or inflating expenses . It is an
unlawful attempt to reduce one’s tax burden . Tax Evasion is done with a motive of showing
fewer profits in order to avoid tax burden . It involves illegal practices such as making false
statements , hiding relevant documents , not maintaining complete records of the
transactions , concealment of income , overstatement of tax credit or presenting personal
expenses as business expenses . Tax evasion is a crime for which the assesse could be
punished under the law .

Tax Planning : Tax planning is process of analysing one’s financial situation in the most
efficient manner . Through tax planning one can reduce one’s tax liability . It involves planning
one’s income in a legal manner to avail various exemptions and deductions . Under Section
80C , one can avail tax deduction if specific investments are made for a specific period up to
a limit of Rs 1 , 50,000 . The most popular ways of saving tax are investing in PPF accounts ,
National Saving Certificate , Fixed Deposit , Mutual Funds and Provident Funds . Tax planning
involves applying various advantageous provisions which are legal and entitles the assesse to
avail the benefit of deductions , credits , concessions , rebates and exemptions . Or we can
say that Tax planning is an art in which there is a logical planning of one’s financial affairs in
such a manner that benefits the assesse with all the eligible provisions of the taxation law .
Tax planning is an honest approach of applying the provisions which comes within the
framework of taxation law .
Limitations of Tax Planning : Tax planning comes with certain limitations . For the salaried
class , the employers are responsible for correct deduction of tax . In the case of a business ,
the business owners are responsible for declaring the right and factual income . People with
taxable income may hide income to avoid taxes , or claim excess expense claims and
deductions to lower down the tax burden . In such cases , tax evasion / avoidance takes center
stage .
Tax Avoidance : Tax avoidance is an act of using legal methods to minimize tax liability . In
other words , it is an act of using tax regime in a single territory for one’s personal benefits to
decrease one’s tax burden . Although Tax avoidance is a legal method , it is not advisable as
it could be used for one’s own advantage to reduce the amount of tax that is payable . Tax
avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by
finding new ways to avoid the payment of taxes that are within the limits of the law . Tax
avoidance can be done by adjusting the accounts in such a manner that there will be no
violation of tax rules . Tax avoidance is lawful but in some cases it could come in the category
of crime .
Features and differences between Tax evasion , Tax avoidance and Tax Planning :

• Nature : Tax planning and Tax avoidance is legal whereas Tax evasion is illegal
• Attributes : Tax planning is moral . Tax avoidance is immoral . Tax evasion is illegal and
objectionable .
• Motive : Tax planning is the method of saving tax .However tax avoidance is dodging
of tax . Tax evasion is an act of concealing tax .
• Consequences : Tax avoidance leads to the deferment of tax liability . Tax evasion
leads to penalty or imprisonment .
• Objective : The objective of Tax avoidance is to reduce tax liability by applying the
script of law whereas Tax evasion is done to reduce tax liability by exercising unfair
means . Tax planning is done to reduce the liability of tax by applying the provision
and moral of law .
• Permissible : Tax planning and Tax avoidance are permissible whereas Tax evasion is
not permissible .

Tax liability of an individual can be reduced through 3 different methods- Tax Planning , Tax
avoidance and Tax evasion . All the methods are different and interchangeable . Tax planning
and Tax avoidance are the legal ways to reduce tax liabilities but Tax avoidance is not
advisable as it manipulates the law for one’s own benefit . Whereas tax planning is an ideal
method .