Unit 1 Latest Taxation PDF

TAXATION Taxes are mandatory contributions levied on individuals or corporations by a government entity. The collected fund is then used to fund different public expenditure programs. Taxation is the means by which a government or the taxing authority imposes...

TAXATION Taxes are mandatory contributions levied on individuals or corporations by a government entity. The collected fund is then used to fund different public expenditure programs. Taxation is the means by which a government or the taxing authority imposes or levies a tax on its citizens and business entities. The word ‘tax’ is derived from the Latin word taxare or taxo. It means ‘to assess the worth of something’. Taxes are imposed by government for the use and service of the State. They are levied and collected by the State for the purchase or sale of merchandise or a service. Taxes provide revenue to the state, and is therefore one of the most significant aspects of any system of administration by any form of government. History of Tax in India Income is the money that an individual or business receives in exchange for providing a good or services. A formal tax system was in existence in India since the time of Maurya dynasty. The income tax as we know today was first introduced in India in 1860 by the British. It was introduced to compensate for the losses sustained by the government due to the rebellion of 1857. Income tax is defined as the annual charge levied on both earned income (wages, salaries or commission) and unearned income like dividends, interest or rent. 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; (1) Income from landed property; (2) Income from professions and trades; (3) Income from Securities; (4) Income from Salaries and pensions. Time to time this act was replaced by several license taxes 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: (1) Salaries, pensions or gratuities; (2) Net profits of companies; (3) Interests on the securities of the Government of India; (4) Other sources of income. 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. After the first World War, a new Income Tax Act was passed, in 1918. 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. 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: (1) Income from Salary (2) Income from House Property (3) Income from Profits and Gains of Business or Profession (4) Income from Capital Gains (5) Income from Other Sources Direct Taxes Advisory Committee set up - Direct Taxes Administrative Enquiry Committee constituted. Income-tax Act, 1961 came into existence w.e.f. 1-4-1962. Revenue Audit introduced for the first time in the Department. New system for evaluation of work done by Income-tax Officers introduced. The Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent the evasion of tax. The Goods and Services Tax (GST), which has replaced the Central and State indirect taxes such as VAT, excise duty and service tax, was implemented in India on July 1, 2017. 2021 - Launch of New e-filing Portal. - Introduction of JSON utility for filing of Income-tax returns. - The exemption provided to senior citizens from the filing of Income-tax returns in certain situations. - New scheme launched for reassessment and search assessments. - Introduction of faceless proceedings before the ITAT. - Constitution of the Board for Advance Ruling. - Discontinuance of Settlement Commission. Characteristics of Taxation The main characteristic features of a tax are as follows: (1) A tax is a compulsory payment to be paid by the citizens who are liable to pay it. Hence, refusal to pay a tax is a punishable offence. (2) There is no direct quid-pro-quo between the tax payers and the public authority. (3) A tax is levied to meet public expenditure incurred by the government in the general interest of the nation. (4) A tax is payable regularly and periodically as determined by the taxing authority. (5) A tax is a legal correction. Any tax imposed by the government (Central, state or local) has the following important characteristics: It is mandatory: since any form of tax is imposed by the government for the benefit of the country, it is required by law to pay taxes It is a contribution: tax is a contribution made by citizens for the betterment of their country. The government of India provides basic healthcare, infrastructure, defence, etc. with the money collected from taxes It is for public benefit: the purpose of collecting taxes is for the benefit and upliftment of the society in general. Taxes are not supposed to favour specific individuals. Disaster maintenance and rescue is an important aspect of the money collected in the form of taxes It is paid out of income earned or wealth: you pay tax only when you generate income. If an individual does not generate a minimum threshold income (defined and modified from time to time by the government), they need not pay some taxes like income tax. It boosts economy: this is one of the most important aspects of collecting taxes. Since the government provides for infrastructure in the form of roads, trains, power stations, damns, etc., it utilizes the tax revenue for economic growth of the nation A good tax system as a whole should be equitable and be fairly leading to equal distribution of wealth in the community.  It should be effective and yield the required revenue for the government. The collection of taxes is a major task and it should be economical. The development of trade and industry should not be hampered by the burden of taxes. The taxes levied should give a clear picture to the government of its revenue. The tax system should be based on comprehensive and up-to-date statistical information enabling accurate forecasting. The tax system should also be simple and elastic so that it can respond to the new needs of the State. While distributing the burden of taxes, the ability of the tax-payers should be considered - Fairness or Equity One of the primary characteristics of tax planning by the government is fairness. This means that the authorities must ensure that the tax system is designed to ensure that everyone pays a fair share of taxes. To determine a fair share, the tax planning committee must factor in two aspects: - Horizontal equity This means that people with similar financial conditions must pay similar taxes regardless of their geographical location, gender, race, or any other dissimilarity. - Vertical equity This means that people who are earning better must pay the same proportion of earnings in * taxes as the ones who are earning lesser. - Adequacy * An efficient tax system must be able to generate enough revenue for the government to meet * the fundamental needs of society. Since tax is one of the main sources of income for the government, it relies on it for offering public services, health services, and investing in the development of the nation. The government also needs to ensure that there is adequate * economic activity to keep tax rates lesser. - Transparency When citizens pay taxes, they expect certain amenities from the administration. They also deserve to know how the government is spending the tax money. Hence, a good tax system offers transparency and allows citizens to know what the government is doing with the taxpayers’ money. They can also look at the subsidies and grants given to certain sections of society for their betterment. - Ease of administration An efficient tax system should allow taxpayers to pay taxes and file returns with ease and also allow tax collectors to manage records in a hassle-free manner. Tax rules should be simple and communicated regularly to citizens. Also, the authorities should be able to conduct audits efficiently. Lastly, the cost of tax collection should be very low. - Simplicity Simplicity is also one of the most important characteristics of a good tax system. Taxpayers must be able to understand the tax slabs and rates and calculate their tax liabilities with ease. The processes for paying taxes and filing returns should be simple and hassle-free. This can ensure maximum compliance with tax laws. Constitutional provisions relating to tax Constitutional Background Taxes in India are levied by the Central Government and the State Governments by virtue of powers conferred to them from the Constitution of India. The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Union Government and the State Governments. Article 265 of the Constitution which 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. India has three-tier federal structure consists of Union Government, the State Governments, and the Local Bodies. They are empowered with the responsibility of the different taxes and duties. 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. Law made by Union Government prevails whenever there is a conflict between the Centre and state concerning entries in the concurrent list. Distribution of powers of taxation List 1 in the 7th schedule to the constitution has the powers of the Central Government listed in Entries 82-92B. List 2 in the schedule has the powers of the State Government listed in Entries 45-63. As regards list 3, it doesn’t deal with taxation and hence both centre and state do not have any concurrent powers of taxation. Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to the centre. 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: Only by the authority of law can taxes be levied. (Article 265) Levy of duty on tax and its distribution between centre and states (Article 268, Article 269, and Article 270) Restriction on power of the states to levy taxes (Article 286) Sale/purchase of goods which take place outside the respective state Sale/purchase of goods which take place during the import and export of the goods Taxes imposed by the state or purpose of the state (Article 276, and Article 277) Taxes imposed by the state or purpose of the union (Article 271, Article 279, and Article 284) Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282) Some other tax-related provisions 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 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. The percentage of the proceeds that are distributed to the States through the CFI is determined by the Goods and Services Tax Council (GST Council). The GST Council is a  body that is constituted by the Union and the States to recommend the principles that should be followed in determining the rates of GST, the exemptions from GST and the distribution of the proceeds of GST between the Union and the States. The direct apportionment of 50% of the proceeds of GST to the States is intended to ensure that the States have a fair share of the revenue generated by GST. The distribution of the remaining 50% of the proceeds through the CFI is intended to take into account the relative needs of the States. The introduction of Article 269(A) has had a significant impact on the taxation system in India. It has simplified the taxation system by removing the need for multiple taxes on goods and services that are in transit between different States. It has also helped to ensure that the States have a fair share of the revenue generated by GST. 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. 1. 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. 2. Article 302 empowers the parliament to impose restrictions on trade and commerce in view of public interest. 3. 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. 4. 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. Taxation system in India India’s tax system is a three-tier federal structure which is made up of the following: 1. Union List (List 1 of the 7th schedule to the Constitution of India) contains those matters on which the Central Government has the power to make laws [Article 246(1)]. 2. The State List has only those matters on which the State Government has the power to make laws [Article 246(3)]. 3. The Concurrent List has those matters on which both the Central and State Governments have the power to make laws [Article 246(2)]. Law made by Union Government prevails whenever there is a conflict between the Centre and state concerning entries in the concurrent list. But if any provision repugnant to earlier law made by parliament is part of law made by the state, if the law made by the state government gets the assent of the President of India, it prevails. 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. 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). 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) 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. Sr Points Direct Tax Indirect Tax No 1. Meaning Direct tax is a tax wherein the In this the levy of tax is made on one levy of tax is made on a person person and the responsibility of paying and the responsibility of paying the tax to the Government is fixed on such tax is fixed on that person. some other person 2. Levy Direct tax is levied on person. Indirect tax is levied on goods and services. 3. Transfer of The burden of direct tax cannot The burden of indirect tax can be tax be transferred to other person. transferred to the end users. 4. Nature Direct tax is considered Indirect tax is considered as regressive progressive tax tax 5. Effect The purpose of direct tax is to Indirect tax increases the price of goods redistribute the wealth of a nation or services. 6. Examples Income Tax, Wealth Tax, Gift Tax Excise Duty, Customs Duty, Sales Tax, VAT, etc GST After GST came into force, direct and indirect taxes were collected by the three bodies of the government until 1 July 2017. Various indirect taxes which were imposed by the central and state government are incorporated by GST. Both the central and state government collect indirect tax through the intrastate supply of goods and services. FEE A fee is a voluntary payment to the government for the special services rendered by it in the public interest, but conferring a specific advantage on the person paying it. Quid Pro Quo – Something for something Difference between Tax and Fee Sr Tax Fee No 1. A tax is a compulsory contribution made A fee, by definition, is a voluntary payment. by a taxpayer. 2. There is no direct give-and-take There is direct give-and-take relationship relationship between the taxpayer and the between the taxpayer and the tax-levying  tax-levying authority. authority. “Quid pro quo” factor is involved means something for something. 3. A taxpayer cannot demand any special A fee is a direct payment by those who favour from the authority in return for receives some special advantages or the taxes paid by him. government guarantees the services who pays fees. Fees are, therefore, deemed to be the by-products of the administrative activities of the government. 4. Taxes are levied in the greater interests Fees are mostly imposed to regulate or of the country. control various types of activities. CESS A 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). Educational Cess, Health Cess, Clean Energy Cess, etc Difference between Tax and Cess Sr Tax Cess No 1. A tax is a compulsory contribution made A cess is different from taxes as it is imposed by a taxpayer. as an additional tax besides the existing tax 2. Revenue from taxes like income tax is Lies in the way the revenue recovered from kept in the Consolidated Fund of India cess is maintained. Revenue coming from (CFI) and the government can use it for cess is first credited to the Consolidated any purposes it deems fit Fund, and the government may then, after due appropriation from Parliament, utilise it for the specified purpose. 3. Proceeds of a tax is mandatorily be Proceeds of a cess may or may not be shared shared with the state governments with the state governments Overview of Taxation in India India is a big country with people belonging to different communities and different wealth groups and income. Taxation to all cannot be the same. This is the reason for the tax system in India being a complicated one for long. India has been grappling with the problem of tax evasion which seems to be making our taxation system hollow from the core. India has a high tax rate but a low yield of direct taxes. So, over the years the government has made an attempt to reduce the taxes. Also, for a nation to prosper its tax collection system has to be strong and efficient even if the tax rates are not high else its coffers will be depleted and developmental programmes truncated. One of the biggest problems faced by India’s taxation system is the power of the government to make retrospective amendments regarding the tax statues. The practice began with the judgement given by the supreme court in the case of Chhotabhai Jethamal Patel & Co v. UOI & Others after which an amendment bill was passed for retrospective levy of excise duties. After the implementation of the GST which is an all-inclusive indirect tax, the process has become smoother and helped prevent the cascading effect it had earlier. The Constitution of India has provisions with respect to the distribution of financial resources under chapter two of part twelfth which is in rhythm with the Federal, State and Concurrent list under 7th Schedule. To sum up, the Parliament rights are not bound and the Indian Constitution gives wide powers to the Parliament and it is neither rigid nor the same. So, according to future needs, there are provisions that can change the said rules of law. Paying taxes may not be the best task, however, it pays for all the development and infrastructure that one enjoys.