Principles of Taxation Law: Notes On

NOTES ON
PRINCIPLES OF TAXATION LAW

For
7th Semester BBA LLB(Hons.)
Prepared By on 03/08/2017
AJAY RATNAN
8/5 BBA LLB(Hons.)
GLCK
CONTENTS
Title Page No.
Chapter 1 2
Chapter 2 6
Chapter 3 14
Chapter 4 16
Chapter 5 20
Chapter 6 24
Chapter 7 29
Chapter 8 Removed
Chapter 9 48
Chapter 10 51
Chapter 11 56
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NOTES ON PRINCIPLES OF TAXATION
CHAPTER 1
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
1. Inherent Power of Sovereignty,
2. Legislative in nature;
3. Public purpose;
4. Territorial in operation,
5. Exemption of the Government;
6. Strongest among the inherent power of the State.
7. 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
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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
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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 d
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
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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.
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CHAPTER 2
Canons of Taxation- Adam Smith, Arthasasthra, social aspects of taxation.
CANONS OF TAXATION
Canons of Taxation are the main basic principles (i.e. rules) set to build a 'Good Tax System'.
Canons of Taxation were first originally laid down by economist Adam Smith in his famous
book "The Wealth of Nations".
In this book, Adam smith only gave four canons of taxation. These original four canons are
now known as the "Original or Main Canons of Taxation".
As the time changed, governance expanded and became much more complex than what it was
at the Adam Smith's time. Soon a need was felt by modern economists to expand Smith's
principles of taxation and as a response they put forward some additional modern canons of
taxation.
Adam Smith's Four Main Canons of Taxation

A good tax system is one which is designed on the basis of an appropriate set of principles
(rules). The tax system should strike a balance between the interest of the taxpayer and that of
tax authorities. Adam Smith was the first economist to develop a list of Canons of Taxation.
These canons are still regarded as characteristics or features of a good tax system.
1. CANON OF EQUITY
The principle aims at providing economic and social justice to the people. According to this
principle, every person should pay to the government depending upon his ability to pay. The
rich class people should pay higher taxes to the government, because without the protection of
the government authorities (Police, Defence, etc.) they could not have earned and enjoyed their
income. Adam Smith argued that the taxes should be proportional to income, i.e., citizens
should pay the taxes in proportion to the revenue which they respectively enjoy under the
protection of the state.
2. CANON OF CERTAINTY
According to Adam Smith, the tax which an individual has to pay should be certain, not
arbitrary. The tax payer should know in advance how much tax he has to pay, at what time he
has to pay the tax, and in what form the tax is to be paid to the government. In other words,
every tax should satisfy the canon of certainty. At the same time a good tax system also ensures
that the government is also certain about the amount that will be collected by way of tax.
3. CANON OF CONVENIENCE
The mode and timing of tax payment should be as far as possible, convenient to the tax payers.
For example, land revenue is collected at time of harvest income tax is deducted at source.
Convenient tax system will encourage people to pay tax and will increase tax revenue.
4. CANON OF ECONOMY
This principle states that there should be economy in tax administration. The cost of tax
collection should be lower than the amount of tax collected. It may not serve any purpose, if
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the taxes imposed are widespread but are difficult to administer. Therefore, it would make no
sense to impose certain taxes, if it is difficult to administer.
Canons of Taxation- Bastable
1. CANON OF PRODUCTIVITY
Bastable's first canon of taxation is the canon of productivity. The productivity of a tax
may be observed in two ways. In the first place, a tax should yield a satisfactory amount
for the maintenance of a Government Secondly, the taxes should not obstruct and
discourage production in the short as well as in the long run.
2. CANON OF ELASTICITY
Bastable also laid stress on the principle of elasticity, i.e., the yield of the taxes may be
increased or decreased according to the needs of the Government. Taxes on property
and commodities are not so elastic as income tax.
3. CANON OF DIVERSITY
There should be all types of taxes, direct and indirect, so that every class of citizens
may be called upon to contribute something towards the State Revenue. The burden of
taxation should be widely distributed on the entire economy without causing much
harm to anyone
4. CANON OF SIMPLICITY
It means that a tax should easily be understood by the tax-payer, i.e. its nature, its aim,
time of payment, method and basis of estimation should all easily followed by each tax-
payer Obviously the canon may remove several difficulties of the tax-payer, and,
therefore, it is in the interest of his convenience
5. CANON OF NEUTRALITY
The taxes should be neutral in the sense that they should not have adverse effect on
production or distribution
6. CANON OF EXPEDIENCY
It implies that the possibility of imposing a tax should be taken into account from
different angles, i.e., its reaction upon the tax payers. Sometimes, it is seen that a tax
may be desirable and may have most of the characteristic of a good tax but the
government may not find it expedient to impose it. For example, progressive
agricultural income tax is very much desirable in India, but it has not been imposed so
far in the manner it should have been imposed. Hence, this canon is of vital importance
in democratic countries.
7. CANON OF ECONOMIC STABILIZATION
It may be interpreted, as to promote full employment and if possible stable financial
level. The stabilization of the balance of payments may be subsidiary objective of a
well-organized tax system.
8. CANON OF COORDINATION
In democratic countries taxes are imposed by Federal and Local Governments. It is,
therefore, very much desirable that there must be coordination between the different
taxes that are imposed by different tax authorities.
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INTRODUCTION TO ARTHASHASTRA
 Arthashastra literally means “the science of wealth” or “economics”
 The Arthashastra contains nearly 6000 sutras divided into 15 books, 150 chapters, and
180 sections.
 The 15 books contained in the Arthashastra can be classified in the following manner:
Book 1 on ‘Fundamentals of Management’, Book 2 dealing with ‘Economics’,
Books 3, 4 and 5 on ‘Law’, Books 6, 7 and 8 on Foreign Policies and Books 9 to 14
dealing with ‘war’. Book 15 deals with the methodology and devices used in writing
the Arthashastra.
 Arthashastra is believed to have been written around 4th Century, B.C.
 This vast treatise was written by Vishnugupta who was also known as Chanakya and
Kautilya.
 He was the advisor to Emperor Chandragupta Maurya.
 His works were lost near the end of the Gupta dynasty and not rediscovered until 1905.
One of the first translations of Arthashastra was done by R. Shamasastry in the year
1915.
 Taxation is an important part of governance. Means by which governments finance
their expenditure by imposing charges on citizens and corporate entities.
 The Kautilyan State had a very adept mechanism for taxation. Kautilya knew the
importance of collecting the right amount of taxes at the right time from the right
people.
 According to Kautilya, "Taxation should not be a painful process for the people. There
should be leniency and caution while deciding the tax structure. Ideally, governments
should collect taxes like a honeybee, which sucks just the right amount of honey from
the flower so that both can survive. Taxes should be collected in small and not in large
proportions".
 Kautilya advocated taxation on the basis of the income of the person. The following
taxes were identified by Kautilya:
 Corporate Taxes: These taxes were collected from the guilds of artisans and the
merchants.
 Income Taxes: These taxes were collected by farmers and agriculturists as a part of
their produce.
 Indirect Taxes: These were levied on liquor, slaughter houses, mining, transportation,
etc.
 Land and Property Tax: These included taxes on houses, agricultural or any other
material property.
 Customs Duty: All imported goods had to bear customs duty.
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 Entertainment Taxes: Gambling, entertainment, etc had to part with a specific amount
of taxes.
 Special Taxes: These were levied during special occasions such as wars, famines,
draughts, etc.
Kautilya’s method of taxation involved the element of sacrifice by the taxpayers, direct
benefits to them, redistribution of income and tax incentives.
AMOUNT OF TAXATION
The income structure during the Mauryan Empire was as follows:
• Current Income: It refers to the income which is steady. Normally, 1/6th of the income
had to be paid in the form of taxes.
• Transferred Income: This is the income which has been transferred to an individual.
For instance, the wealth transferred to the son due to the death of his parents comes
under transferred income. 1/4th of this income had to be paid as taxes.
• Miscellaneous Income: This category again had three subdivisions. Which included
recovery of previously written off debts, realisable economies made in investment
against planned budgets any other value added income.
• Every individual had to compulsorily maintain an account book which had to be
presented to the superintendent of commerce while paying the taxes.
• Every transaction had to be recorded on the date of transaction in the account book.
• Not maintaining such a book was considered fraudulent and was punishable.
• Also, the accounting system had to be uniform and as prescribed by the
superintendent of commerce from time to time.
EXEMPTIONS AND WAIVERS
 In case of a widow with children to look after, the transferred income due to the death
of her husband is exempt from taxation.
 In case of faulty rainfall or draught, agricultural produce is exempted from taxation.
 Taxes were exempted for soldiers with exemplary record.
 Taxes were also exempted in case of serious medical illness.
 The family of martyrs in war did not have to pay taxes.
CHANAKYA’S NORMS OF TAXATION
1) It is the duty of citizen to pay tax and that of king to use the collected tax for nation
building.
2) Tax is not to be seen as a compulsory contribution. It is the king’s sacred duty to
protect his citizens with the tax collected. If the king fails in this duty the citizens will
get a right to stop paying taxes and claim refund of already paid taxes.
3) Ability of tax payer must be taken into account.
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4) Limitation of taxing power of a state, Low rates of taxation, maintaining gradual

increase in tax and effective compliance mechanism.
5) There should be effective redistribution of Income.
6) Emphasized fairness and stability of tax structures.
7) Subsidies and tax-incentives should be given to encourage capital formation.
8) Emphasis on Indirect Taxes
9) Import of beneficial foreign goods must be encouraged with tax concession.
10) Special measures to hike taxes should be taken in emergency situations i.e war,
drought, natural disasters. It says that normal methods of taxation may be deviated in
such situations.
11) He favours a surplus budget.
PRACTICAL APPLICATIONS OF TAX LAWS LAID DOWN IN ARTHASHASTRA
1) Tax and toll collection centres should be established at the gates of cities and towns.
2) Efficient officials should be appointed at such points to collect tax from traders after
recording in detail about the whereabouts and transactions of the dealers.
3) Tax evasion, supplying false information, manipulation of stamp duty should be
punished with heavy fines and seizure of property.
4) It lays down a categorical list of unexportable goods.
5) Import of harmful and worthless goods should be prevented.
6) Goods for religious rituals, marriages, social festivities and the like should be
exempted from tax.
7) In addition to normal taxes, traders should also pay road cess as security insurance
against theft, damage or loss of goods in transit.
8) Prostitutes should pay double income tax and an entertainment tax on musical
instruments used by them for entertaining clients.
9) Prescribes a community based tax of 5%-20% advalorem. For certain commodities an
additional surcharge of 5%-9% to be imposed. Prescribed different tax rates for
different kinds of commodities and services.
10) Taxes could be paid in form of Goods.
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Social and Economic Objectives of Taxation

I. PREVENTION OF CONCENTRATION OF WEALTH Article 39(c) of the Constitution
of India says 'that the operation of the economic system does not result in the concentration of
wealth and means of I production to the common detriment.' Prof. Musgrave provided the
following devices to prevent the concentration of wealth:
a) A tax-transfer scheme, combining progressive income taxation of high income
households with a subsidy to low income households.
b) A combination of taxes on goods purchased largely by high income consumers and
subsidies to other goods which are used chiefly by low income consumers.
II. TO SECURE ECONOMIC STABILITY
The tool of taxation may be used to secure economic stability or to remove economic
fluctuations. The economic fluctuations may be due to changes in the overall level of
employment, prices and aggregate demand. The measures are:
• If involuntary unemployment prevails, the level of taxation should be reduced.
• If inflation prevails, the level of taxation should be increased.
• If full employment and price stability prevail, then, there is no need to change the
present level of taxation.
III. TO SECURE ADJUSTMENT IN ALLOCATION OF RESOURCES
All wants cannot be satisfied through the market. Public Sector is used to make provision of
social wants or collective wants, i.e., defence, justice, railways and roads, social and cultural
welfare, etc. As social life became more complex and the civil sense of the people developed,
the State found it necessary and possible to take upon itself some further obligations, such as
those of protection against internal disorders, regulation of trade and commerce, etc. To meet
the expenditure, for these functions, revenue is to be raised through taxes.
IV. TO ACCELERATE ECONOMIC GROWTH
For the purpose of promoting a country's economic development, taxation may be used to
achieve the following objectives:
1. to curtail consumption and, thus, transfer resources from consumption to investment.
2. to increase the incentives to save and invest.
3. to transfer the resources from the hands of the public to the hands of the government in
order to make public investment possible.
4. to modify the pattern of investment into socially desirable manner.
5. to reduce economic inequalities, and to make equitable distribution and wealth in
society.
V. AN INSTRUMENT OF SOCIAL CONTROL
Taxation is a recognised instrument of social control and not merely a source of raising revenue.
In fact, an argument that the taxes can be raised only for the purpose of revenue and not for
any other purpose was raised before the Supreme Court in the case of RMDC (Mysore) P. Ltd.
v. State of Mysore.1 It was submitted before the Court that the real object was the control of
betting and gambling and, therefore, the enactment was a colourable piece of legislation. The
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court held that taxation was in the power of the legislature and that the motives which propelled
it were irrelevant. H.M. Seervai has commented on it by highlighting the well-accepted
principle that tax is a recognised instrument of social control and that any assumption that a tax
cannot be used for purposes other than revenue is ill-founded.
VI. NON-REVENUE OBJECTIVES
The following are the non-revenue objectives:
1. to strengthen anemic enterprises by granting them tax exemptions or other conditions
or incentives for growth;
2. to protect local industries against foreign competition by increasing local import taxes,
3. as a bargaining tool in trade negotiations with other countries;
4. to counter the effects of inflation or depression;
5. to promote science and invention, finance educational activities or maintain and
improve the efficiency of administration;
6. to implement police power and promote general welfare.
Effects of Taxes:
The most important objective of taxation is to raise required revenues to meet expenditures.
Apart from raising revenue, taxes are considered as instruments of control and regulation with
the aim of influencing the pattern of consumption, production and distribution. Taxes thus
affect an economy in various ways, although the effects of taxes may not necessarily be good.
There are same bad effects of taxes too.
Economic effects of taxation can be studied under the following headings:
1. Effects of Taxation on Production:
Taxation can influence production and growth. Such effects on production are analysed under
three heads:
(i) effects on the ability to work, save and invest
(ii) effects on the will to work, save and invest
(iii) effects on the allocation of resources.
Effects on the Ability to Work Save:
Imposition of taxes results in the reduction of disposable income of the taxpayers. This will
reduce their expenditure on necessaries which are required to be consumed for the sake of
improving efficiency. As efficiency suffers ability to work declines. This ultimately adversely
affects savings and investment. However, this happens in the case of poor persons.
Taxation on rich persons has the least effect on the efficiency and ability to work. Not all taxes,
however, have adverse effects on the ability to work. There are some harmful goods, such as
cigarettes, whose consumption has to be reduced to increase ability to work. That is why high
rate of taxes are often imposed on such harmful goods to curb their consumption.
But all taxes adversely affect ability to save. Since rich people save more than the poor,
progressive rate of taxation reduces savings potentiality. This means low level of investment.
Lower rate of investment has a dampening effect on economic growth of a country.
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Thus, on the whole, taxes have the disincentive effect on the ability to work, save and invest.
Effects on the will to Work, Save and Invest:
The effects of taxation on the willingness to work, save and invest are partly the result of money
burden of tax and partly the result of psychological burden of tax.
Taxes which are temporarily imposed to meet any emergency (e.g., Kargil Tax imposed for a
year or so) or taxes imposed on windfall gain (e.g., lottery income) do not produce adverse
effects on the desire to work, save and invest. But if taxes are expected to continue in future, it
will reduce the willingness to work and save of the taxpayers.
Taxpayers have a feeling that every tax is a burden. This psychological state of mind of the
taxpayers has a disincentive effect on the willingness to work. They feel that it is not worth
taking extra responsibility or putting in more hours because so much of their extra income
would be taken away by the government in the form of taxes.
However, if taxpayers are desirous of maintaining their existing standard of living in the midst
of payment of large taxes, they might put in extra efforts to make up for the income lost in tax.
It is suggested that effects of taxes upon the willingness to work, save and invest depends on
the income elasticity of demand. Income elasticity of demand varies from individual to
individual.
If the income demand of an individual taxpayer is inelastic, a cut in income consequent upon
the imposition of taxes will induce him to work more and to save more so that the lost income
is at least partially recovered. On the other hand, the desire to work and save of those people
whose demand for income is elastic will be affected adversely.
Thus, we have conflicting views on the incentives to work. It would seem logical that there
must be a disincentive effect of taxes at some point but it is not clear at what level of taxation
that crucial point would be reached.
Effects on the Allocation of Resources:
By diverting resources to the desired directions, taxation can influence the volume or the size
of production as well as the pattern of production in the economy. It may, in the ultimate
analysis, produce some beneficial effects on production. High taxation on harmful drugs and
commodities will reduce their consumption.
This will discourage production of these commodities and the scarce resources will now be
diverted from their production to the other products which are useful for economic growth.
Similarly, tax concessions on some products are given in a locality which is considered as
backward. Thus, taxation may promote regional balanced development by allocating resources
in the backward regions.
However, not necessarily such beneficial effect will always be reaped. There are some taxes
which may produce some unfavourable effects on production. Taxes imposed on certain useful
products may divert resources from one region to another. Such unhealthy diversion may cause
reduction of consumption and production of these products.
2. Effects of Taxation on Income Distribution:
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Taxation has both favourable and unfavourable effects on the distribution of income and
wealth. Whether taxes reduce or increase income inequality depends on the nature of taxes. A
steeply progressive taxation system tends to reduce income inequality since the burden of such
taxes falls heavily on the richer persons.
But a regressive tax system increases the inequality of income. Further, taxes imposed heavily
on luxuries and nonessential goods tend to have a favourable impact on income distribution.
But taxes imposed on necessary articles may have regressive effect on income distribution.
However, we often find some conflicting role of taxes on output and distribution. A progressive
system of taxation has favourable effect on income distribution but it has disincentive effects
on output.
A high dose of income tax will reduce inequalities but such will produce some unfavourable
effects on the ability to work, save, investment and, finally, output. Both the goals—the
equitable income distribution and larger output—cannot be attained simultaneously.
3. Other Effects of Taxation:
If taxes produce favourable effects on the ability and the desire to work, save and invest, there
will be a favourable effect on the employment situation of a country. Further, if resources
collected via taxes are utilized for development projects, it will increase employment in the
economy. If taxes affect the volume of savings and investment badly then recession and
unemployment problem will be aggravated.
Again, effect of taxes on the price level may be favourable and unfavourable. Sometimes, taxes
are imposed to curb inflation. Again, as an imposition of commodity taxes lead to rising costs
of production, taxes aggravate the problem of inflation.
Thus, taxation creates both favourable and unfavourable effects on various parameters.
Unfavourable effects of taxes can be wiped out by the judicious use of progressive taxation.
CHAPTER 3
Various Forms of Revenue Generation- Tax, Cess, Fee, Toll, Excise,
Duties, Customs
A tax is a compulsory exaction of money by public’s authority for public purposes enforceable
by law and is not payment for services rendered.
CHARACTERISTICS OR ELEMENTS OF TAXES
From the above definitions, the following elements of taxes are visible:
1. Taxes are imposed by the Government on persons and property within its jurisdiction.
2. A tax is a compulsory contribution of the tax-payer.
3. In the payment of a tax, the element of sacrifice is involved.
4. Payment of a tax is the personal obligation of the tax-payer.
5. The aim of taxation is the welfare of the community as a whole
6. A tax is a legal collection
7. An element of force of State is there
8. A tax is not Imposed to realise the cost of benefit
9. Taxes may be assessed on Income or capital, but they are actually paid out of income
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10. A tax may be imposed upon property or occupation or commodities, but they are
actually paid by individuals
11. Tax does not involve quid pro quo between the tax payers and the public authority.
12. The purpose of the tax is raising public revenue
13. Tax by the State is used/received for public purpose or common benefit of all.
14. Tax involves appropriation of private property.
15. Tax is generally payable in money
16. Tax is commonly required to be paid at regular intervals.
17. Tax is proportionate in character, usually based on the ability to pay.
Tax, Custom, Duty, Toll
1. Tax is the most general of these terms and applied to or implied whatever is paid by
the people to the government, according to a certain estimate,
2. Duty is a species of tax more positive and binding than the custom, being a specific
estimate of what is due upon goods, according to their value; hence, it is not only
applied to goods that are imported; but also to many other articles in land,
3. Toll is that species to tax which serves for the repair of roads, at some of places you
need to pay tax in order to use infrastructure (road, bridge etc.) build from your money
given to government as Tax. This tax is called as toll tax. This tax amount is very small
amount but, to be paid for maintenance work and good up keeping.
4. A cess imposed by the central government is a tax on tax, levied by the government for
a specific purpose. Generally, cess is expected to be levied till the time the government
gets enough money for that purpose. For example, a cess for financing primary
education – the education cess (which is imposed on all central government taxes) is to
be spent only for financing primary education (SSA) and not for any other purposes.
5. Fee is a payment for covering the expenses of regulation or to recompensate the service
rendered by the State.
6. Custom Duty is a type of indirect tax charged on goods imported into India. One has to
pay this duty, on goods that are imported from a foreign country into India. This duty is
often payable at the port of entry (like the airport). This duty rate varies based on nature
of items.
7. Octroi is tax applicable on goods entering in to municipality or any other jurisdiction for
use, consumption or sale. In simple terms one can call it as Entry Tax.
8. An excise or excise duty is a type of tax charged on goods produced within the country.
This is opposite to custom duty which is charged on bringing goods from outside of
country. Another name of this tax is CENVAT (Central Value Added Tax).
If you are producer / manufacturer of goods or you hire labor to manufacture goods you
are liable to pay excise duty.
Tax Fee
1) Tax is a compulsory levy and is 1) Fee is not always compulsory.
enforced by law
2) The collections are routed to the 2) The amount collected by way of fees are
Consolidated Fund. not merged with the Consolidated Fund
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3) it is left to the discretion of the 3) It is set apart only to cover the expenses
Government to use the tax for any for which it is collected
public benefit
4) There is no element of quid pro quo 4) In the case of fee quid pro quo is an
between the tax payments and the essential element The fee is charged
public authority according to the magnitude of the benefits
received by the citizens
5) Tax may be expropriatory in nature 5) Fee cannot be discriminatory
6) Tax is levied as a part of common 6) A fee is payment for special benefit or
burden privilege
7) The ultimate object of tax in a 7) The ultimate object of fee can at the most
welfare state is to bring about social only be for the regulation of social order
order.
8) Tax change when base changes and 8) Fees are uniform and the capacity to pay
the capacity to pay principle is does not form the basis.
followed.
CHAPTER 4
Types of Taxes- Direct and Indirect- Merits and Demerits.
Direct taxes
Definition: Direct tax is a type of tax where the incidence and impact of taxation
fall on the same entity.
Description: In the case of direct tax, the burden can't be shifted by the taxpayer to
someone else. These are largely taxes on income or wealth. Income tax, corporation
tax, property tax, inheritance tax and gift tax are examples of direct tax.
A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to
the government by the person (juristic or natural) on whom it is imposed. A direct tax is one
that cannot be shifted by the taxpayer to someone else. Atkinson states that’ ’direct taxes may
be adjusted to the individual characteristics of the taxpayer."
The most common form of direct tax is income-tax, which has to be paid by the individuals;
Hindu Undivided Families (HUF), cooperative societies and trusts on the total income they
earn. This can include income from salary, income from house property, business and
professional income, capital gains and income from other sources such as interest. The tax
liability depends on the residential status and gender of the person being taxed. Companies are
also taxed on the income they earn. The onus of declaring income for the purpose of calculating
direct tax liability is on every taxpayer.
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MERITS OF DIRECT TAXES

1. Economy. —The administrative cost of collecting these taxes is low because the same
officers who assess small income or properties can assess larger incomes and properties.
Moreover, the taxpayers make the payment of these taxes direct to the State and,
therefore, every paise that is taken out of the pocket of the taxpayer is deposited in the
State treasury.
2. Certainty. —These taxes also satisfy the canon of certainty. I he tax payer is certain as
to how much he is expected to pay, and similarly, the State is certain as to how it has
to receive income from direct taxes.
3. Equity. —Direct taxes are considered to be just and equitable, because they are
generally based on the principle of progression. Therefore, they fall more heavily on
the rich than on the poor.
4. Reduction in Inequalities. —As the direct taxes are progressive, rich people are
subjected to higher rates of taxation. These taxes help to reduce inequalities in incomes.
5. Elasticity. —The taxes also satisfy the canon of elasticity as the government revenue
may be increased simply by raising the rate of taxation Moreover, the Income from
direct taxes will also increase with the increase ii income of the people
6. Civil Consciousness. -It is said that direct taxes create civil consciousness among the
tax-payers. The tax-payer may take intelligent ml keep interest in the method of public
expenditure, and observe whether flu revenue raised is properly utilised or not. In a
democratic country, this civil consciousness checks the wastage in the public
expenditure.
DEMERITS OF DIRECT TAXES
1. Unpopular. - The direct taxes are generally not shifted, and, therefore, they are painful
to the taxpayer. Hence, such taxes are unpopular in nature ml are generally opposed by
the tax-payers
2. Inconvenience. -These taxes are also inconvenient in nature because tax-payer has to
submit the statement of his total income along with the source of income from which it
is derived, which is generally subject to complications. Moreover, the payment of these
taxes in lump sum is not as convenient to the tax-payer as the frequent payment of small
amounts of indirect taxes.
3. Possibility of Injustice. —In practice, it is difficult to assess the income of all classes
accurately. Hence, the direct taxes may not fall with equal weight on all classes.
Moreover, the rates of direct taxes are arbitrarily fixed by the Government and they
may not be on the basis of ability to pay.
4. Possibility of Evasion. —A direct tax is said to be a tax on honesty, it is not evaded
only when the tax-payer is honest, otherwise it can be evaded through fraudulent
practices. The progressiveness of direct taxes induces the tax-payer to evade the
payment of taxes.
5. Exemption of Low Income Group. —If only direct taxation is resorted, the low-
income group people cannot be approached by direct taxes, as they are normally
exempted from such taxes on the basis of ability or equality.
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Indirect tax
Definition: Indirect tax is a type of tax where the incidence and impact of taxation
does not fall on the same entity.
Description: In the case of indirect tax, the burden of tax can be shifted by the
taxpayer to someone else. Indirect tax has the effect to raising the price of the products
on which they are imposed. Customs duty, central excise, service tax and value added
tax are examples of indirect tax.
An indirect tax is a tax levied by the Government and collected by an intermediary (such as a
retail stores) from the person who bears the ultimate economic burden of the tax (such as the
customer. What this means is that if you are purchasing goods or services from anywhere and
you are the final consumer, then the tax levied on the manufacturer will ultimately get passed
on to the consumer. The reason why these are called indirect taxes is because unlike direct
taxes, the person paying the tax to the government can pass it on to another person. They are
charged first at seller or manufacturer's level, but ultimately get passed on to the consumer.
Atkinson states that "indirect taxes are levied on transactions irrespective of the circumstances
of buyer or seller." An indirect tax is one that can be shifted by the taxpayer to someone else.
An indirect tax may increase the price of a good so that consumers are actually paying the tax
by paying more for the products. Sometimes an indirect tax may be represented separately from
the price of the item or may be shown together with the cost of the product itself For example,
the service tax paid on a food bill is shown separately, but tax paid on fuel is included in the
product price. There are many forms of indirect taxes. Customs duty is a tax levied on items
imported (and exported out of) into a country.
MERITS OF INDIRECT TAXES
1. Convenient. —They are imposed at the time of purchase of a commodity or the
enjoyment of a service so that the taxpayer does not feel the burden of the tax as it is
hidden in the price of the commodity bought They are also convenient because they are
paid in small amounts and in intervals and not in one lump sum
2. Difficult to Evade, —Indirect taxes are generally included in the price of commodities
purchased. Evasion of an indirect tax will mean giving up the satisfaction of a given
want
3. Elastic, —Taxes imposed on commodities with inelastic demand are elastic
4. Equitable, —Indirect taxes enable everyone, even the poorest citizens to contribute
towards the expenses of the State. Since direct taxes leave lower income groups from
their scope, indirect taxes make them share in the financial burden of the State.
5. Can be Progressive. —Indirect taxes can be made progressive by imposing heavy
taxes on luxuries and exempting articles of common consumption.
6. Productive. —The income from indirect taxes can be made highly productive, by
imposing few taxes each yielding a substantial amount of revenue.
7. Wide Coverage. —Through indirect taxes every member of the community can be
taxed, so that everyone may provide something to the government to finance the
services of public utilities.
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8. Social Welfare. —Heavy taxation on articles which are injurious to the health and
efficiency of the people may restrict their consumption.
DEMERITS OF INDIRECT TAXES
1. Regressive. —The indirect taxes are generally regressive in nature as they fall more
heavily upon the poor than upon the rich.
2. Administrative Cost—The administrative cost of collecting such taxes is generally
heavy, because they have to be collected from millions ol individuals in small amounts.
Hence, they are un-economical.
3. Reduction in savings. —Indirect taxes discourage savings because they are included
in price and people have to spend more on essential commodities and left less to save.
4. Uncertainty. —The income from indirect taxes is said to be uncertain, because the
taxing authority cannot accurately estimate the total revenue from indirect taxes.
5. No civil consciousness. —Indirect taxes are collected through middle-men like traders
and hence they have no direct impact.
Differences Between Direct and Indirect Taxes
1. The tax, which is paid by the person on whom it is levied is known as the Direct tax
while the tax, which is paid by the taxpayer indirectly is known as the Indirect tax. The
direct tax is levied on person’s income and wealth whereas the indirect tax is levied on
a person who consumes the goods and services.
2. The burden of the direct tax is transferable while that of indirect tax is non-transferable.
3. the incidence and impact of direct tax falls on the same person, but in the case of indirect
tax, the incidence and impact falls on different [persons.
4. The evasion of tax is possible in case of a direct tax if the proper administration of the
collection is not done, but in the case of indirect tax, the evasion of tax is not possible
since the amount of tax is charged on the goods and services.
5. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family),
Company, Firm, etc. On the other hand, the indirect tax is levied on the consumer of
goods and services.
6. The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.
7. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in
promoting the inflation.
8. Direct tax is collected when the income for the financial year is earned or the assets are
valued at the date of valuation. As against this, the indirect taxes are collected, when
the purchase or sale of goods or services are rendered.
9. Direct tax is imposed on and collected from the assessee. Unlike indirect tax is imposed
on and collected from consumer but deposited to the exchequer by the dealer of goods
or provider of services.
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CHAPTER 5
Methods of Taxation- Proportional, Progressive, Regressive,
Digressive
Taxes may also be divided into three categories called regressive, proportional and progressive.
A regressive tax tends to increase inequality of income as its direct financial impact on the
tax-payer decreases, with the increase in income. Indirect taxes, as levied in India, are
ordinarily regressive in nature.
P.E. Taylor defines : "A schedule of proportional tax rates is one in which the rates of taxation
remains constant as the tax base changes." The amount of tax payable is calculated by
multiplying the tax base with the fixed rate. Thus, in proportional tax system the multiplied
remains constant with the change in multiplicand (income).
P.E. Taylor defines : "A schedule of progressive tax rate is one in which the rate of taxation
increases as the tax base increases". In the case of progressive tax, the multiplier increases as
the multiplicant (income) increases.
Proportional Tax
Proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable
base amount increases or decreases. The amount of the tax is in proportion to the amount
subject to taxation. "Proportional” describes a distribution effect on income or expenditure,
referring to the way the rate remains consistent (does not progress from "low to high" or "high
to low" as income or consumption changes), where the marginal tax rate is equal to the average
tax rate. A proportional tax system is also called the 'flat-rate tax'.
It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime.
Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift
the incidence disproportionately to those with a higher or lower economic well-being.
Flat taxes, implemented as well as proposed, usually exempt from taxation household income
below a statutorily determined level that is a function of the type and size of the household. As
a result, such a flat marginal rate is consistent with a progressive average tax rate. A progressive
tax is a tax imposed so that the tax rate increases as the amount subject to taxation increases.
The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount
subject to taxation increases.
Examples
A poll tax is a fixed tax for each person. Since each person pays the same amount of money, it
is proportional to the taxed service, neither increasing or decreasing.
Television licences that are implemented in many countries, especially in Europe, are
proportional taxes when they consist of a flat annual payment for the use of a television.
Merits and Demerits of Proportional Tax:
The principle of equality in tax levy can be secured by taxing all taxpayers at a uniform equal
rate. This is known as proportional tax. Whatever the level of income or any other bases of
taxation, the rate of tax remains a single uniform rate under proportional tax.
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Merits
1. A proportional tax is simple, easy to understand and easy to calculate as a uniform rate
is charged.
2. Under proportional tax, the relative economic status of all taxpayers remains unchanged
because all pay tax at a uniform rate regardless of their incomes.
3. Proportional tax does not have any serious or adverse effects on the incentive to work
and save of the taxpayers.
Demerits
1. Proportional tax does not satisfy the canon of equality and justice since the burden of
this tax falls heavily on the poor persons. Both the rich and the poor pay the same rate
of tax. Thus, poor people sacrifice more than the rich though they have lower incomes.
2. Proportional taxation cannot bring social justice. It widens inequality in the distribution
of income and wealth as the burden of this tax is borne mostly by the poor people.
3. It is inelastic and, therefore, less productive. In other words, proportional tax
contributes little to the state exchequer.
PROGRESSIVE TAX
By the turn of the 19th century, the proportional concept had been crumbling to pieces, giving
place to the new; the conservatives of England gave way to the liberal or progressive variant
of 'equal sacrifice' or 'ability to pay' and Lloyd George was the first British Prime Minister to
adopt this new invention.
Prof.AG Pigou in his book 'Economics of Welfare' has developed the new concept in great
depth. After pointing out that poor people in civilized countries are usually given help through
the agency of the State, he thinks that for a variety of reasons income tax is the best means of
doing so. According to him, this tax really,
"Represents what is in effect a transfer of income from relatively rich for the benefit of the
relatively poor persons”
Taxes in which the rate of tax increases are called progressive taxes. Thus, in a progressive
tax, the amount of tax paid will increase at a higher rate than the increase in tax base or income,
for the taxation amount is the product of multiplying the base by the rate and both these increase
in a progressive tax. Thus, a progressive tax extracts an increasing proportion of rising income.
Indian income tax is a typical example of a progressive tax. In India, less tax is levied on people
who earn less and high on people who earn more. On the other hand, such a method discourages
individuals to earn more as there arises a feeling of a loss and hence, it results in low levels of
growth and development because a feeling of unfairness develops. The poor seem to be
rewarded while the rich are punished for working hard and earning more. This might lead to
tax evasion also.
Merits of Progressive Taxes
The merits of progressive taxes are given below:
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1. Principle of Equality Since the rich gets less utility from additional units of money as
compared to the poor, rich must be taxed more than the poor so as to develop equality.
Hence, the biggest advantage of a progressive tax is that the wealthier individuals pay
more of the tax burden.
2. Equal Distribution of Income. It is more just and impartial as it aims to achieve a
reduction in the inequality in earnings of the citizens in an economy.
3. Economical. It is inexpensive to collect progressive taxes, as the cost of collection of
taxes does not increase in the same proportion as the rate of tax increases which make
the progressive tax economical.
4. Elastic. The revenue collection of a government can be augmented by increasing the
tax rate. Its rate can be altered as per the changing needs of the country, thereby
displaying its elasticity.
5. Opportunities of Employment. The marginal propensity to consume increases as the
wealth shifts from the rich to the poor by imposing progressive taxation. Hence, it leads
to more investment and creates opportunities of employment.
6. More Just.These taxes are more just as the burden is shifted from the rich to the poor,
thereby, serving the purpose of morality in taxation.
7. Recession. Progressive taxation helps protect people during a recession because if their
income drops, they fall into a lower tax bracket. This means they will owe less money
to the government.
Demerits of Progressive Taxes
1. Tax Evasion. It encourages high-income earners to hide their wealth from government
taxes.
2. Loss of Revenue. Tax evasion leads to false statements in the tax return form, leading
to loss of revenue.
3. Socialism. As the taxes levied on the rich are redistributed to the poor through
government-aided programs, some see it as socialism.
4. Invasion of Individual Rights. Progressive taxes are an invasion of individual rights
as they are punished for their success.
Regressive Taxes:
A regressive tax is a tax that takes a larger percentage of income from low-income earners than
from high-income earners. It is in opposition with a progressive tax, which takes a larger
percentage from high-income earners. A regressive tax is generally a tax that is applied
uniformly to all situations, regardless of the payer.
A regressive tax affects people with low incomes more severely than people with high incomes.
While it may be fair in some instances to tax everyone at the same rate, it is seen as unjust in
other cases. As such, most income tax systems employ a progressive schedule that taxes high
earners at a higher percentage rate than low earners, while other types of taxes are uniformly
applied. Examples of regressive taxes include sales taxes, user fees and, arguably, property
taxes.
Progressive Tax follows the principle of ‘ability to pay’ because they are levied on the basis of
individual’s income and wealth. Since, ability to pay can be measured, the direct taxes are
imposed at progressive rate whereby richer persons pay higher taxes in comparison to the poor
person. A regressive tax is generally a tax that is applied uniformly and is indirect in nature.
This means that it hits lower-income individuals harder.
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Thus, regressive taxation is unjust and inequitable. It does not comply with the canon of equity.
It tends to accentuate inequalities of income in the community.
Merits of Regressive tax:
1. Convenient: These taxes are paid in the shape of price of commodities. People pay
these taxes when they buy commodities.
2. Increase in investment: The poor section of the economy bears the burden of these taxes.
The aggregate demand increases which encourages the more investment.
3. No Evasion: The poor section of the economy is not in a position to evade these taxes.
Demerits of Regressive Taxes:
1. All Taxes are not regressive: All indirect taxes are not regressive in nature. Many
expensive articles that are taxed being many expensive articles that are taxed being beyond the
means of people in the lower income group.
2. In Justice: The tax burden decreases with increase of income. The incident of tax is greater
on poor than on the rich. Therefore, it is unjust method of taxation.
3. Non-Productive: These taxes are usually implemented or low-priced commodities. These

commodities are consumed by low income consumers. There is a discouragement in the
production of theses commodities.
Digressive Taxes:
A digressive tax is partly progressive since tax rate increases as income increases; and partly
proportional because tax rate remains unchanged even if income increases. Thus, digressive
tax is an admixture of progressive and proportional tax. Under digressive tax, tax payable
increases only at a diminishing rate but up to a certain limit beyond which a flat rate of tax is
charged. In digressive taxation, thus, the tax payable increases only at a diminishing rate.
Diagrammatically, differences in progressive, proportional, regressive and digressive taxation
are shown in Fig. 1.
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The proportional tax rate has a constant slope, graphically, while the progressive tax rate
has a rising positive slope. The steeper the slope of the tax line, the progressive the tax regime.
The regressive tax rate line has a declining negative slope. The steeper the negative slope of
the tax line, the more regressive the taxation. The digressive tax rate line has a rising slope
initially, but it becomes constant after a point.
CHAPTER 6
Tax Avoidance, Evasion, Planning, Management.
Tax Avoidance
The term 'tax avoidance' is taken to refer to arrangements by which a person acting within the
letter of the law, reduces his true tax liability, infringing in the process, both the spirit and
intention of law. Tax avoidance covers a host of behavioural responses to the tax Code that fall
within the letter of the law. A person who switches from whisky to milk consumption because
of tax related price differentials is practicing tax avoidance. Tax avoidance can also be used to
describe the behaviour of a person who buys tax-exempt municipal securities. Such behaviour
should not be regarded as socially harmful. On the contrary, quite often the purpose of tax
legislation is to induce such behaviour. However, when people begin to make extraordinary
use of complicated tax features to minimize their taxes, the tax avoidance can violate the spirit
if not the letter of the law. Sheltering large amount of income by investing in herds of cattle or
apartment houses is certainly not illegal. Yet the availability of specialized tax provisions may
allow people, other than those for whom the provision was intended, to reduce their tax burden
to levels below that which can be justified under reasonable tax criteria. A complicated tax law
is a good hunting ground for the discovery of new tax loopholes. People will always seek new
openings for tax minimization.
In a world of high inflation and high progressive tax rates, it is reasonable to expect that the
more anti-social forms of tax avoidance will be stimulated. Professional people who insist on
being paid in cash, executives who want to take more of their income in kind, people who
collect retirement benefits but who wish to continue to work and arrange to be paid 'under the
table'—all hope to hide portions of their income from the tax collector. Learning how to beat
the tax system certainly takes effort, and the resources used in this pursuit must certainly be
counted as one of the costs of inflation. These activities are all part of the growing underground
economy. People who practice such behaviour do not think of themselves as lawbreakers but
rather simple avoiders of the tax. Unfortunately, these people are not engaging in ordinary
avoidance. Arthur Seldon coined the new term 'tax avoision' which is a type of tax avoidance
that may be illegal.
Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting mistakes
for reducing tax liability and thus avoiding payment of tax which is lawfully payable.
Generally, it is done by twisting or interpreting the provisions of law and avoiding payment of
tax. Tax avoidance takes into account the loopholes of law. Though it has a legal sanction, it
means following the provisions of law in letter but killing the spirit of the law.
Tax Evasion
Tax evasion is an expression used to describe illegal behaviour. A person who did not report
large amount of income could be fined or thrown into jail for evading taxes. An individual who
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attempts to sell tobacco products without having the proper stamps would also be avoiding
taxes.
Evasion denotes down right detracting of revenue through illegal acts, deliberate suppression
or falsification of the facts relating to one’s true tax liability.
Tax evasion is practised in a number of ways. It is a matter of public knowledge that it is sought
to be achieved through benami transactions, under-invoicing of exports and over-invoicing of
imports, inflation of expenditure and suppression of sales, purchase of bogus or fictitious
losses, and/or hawala transactions and variety of such subterfuges.
Tax evasion means avoiding tax by illegal means. Generally, it involves suppression of facts,
falsifying records, fraud or collusion. It is an attempt to evade tax liability with the help of
unfair means. Tax evasion is illegal and would result in punishment by way of penalty, fines
and sometimes prosecution.
Difference Between Tax Avoidance and Tax Evasion
Tax Planning
It is the duty of every citizen to pay legitimate tax but at the same time it is his right not to pay
taxes which are not due.
Tax planning means reducing tax liability by taking advantage of the legitimate concessions
and exemptions provided in the tax law. It involves the process of arranging business operations
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in such a way that reduces tax liability. If more two methods are possible to achieve an
objective, select one which results in lower tax liability.
Examples of Tax Planning in Indirect Taxes • Correct Classification of the goods. • Claiming
permissible deductions like discounts, freight etc from the assessable value. • Determining
correct cost of production of captively consumed goods.
Objectives of Tax Planning
• Claim Deductions under sections 80C to 80U,
• It will reduce your tax liability and you have to pay less tax,
• Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay
less tax and Tax Administrator wants to extract most of the tax, by using Tax Planning
this war is minimized as tax payer is using all legal ways to reduce tax liability,
• Makes Investments: - By tax planning, a Tax payer will invest his money in some good
funds which will result in productive returns for tax payer and transfer money to
government for investment too.
• Helps in growth of economy,
• Makes society grow,
• Money saved by you will result in investment which will result in employment
generation.
Tax Management
Tax management is managing the tax affairs which envelops a host of steps such as hiring a
professional to take care of tax compliance, timely payment of tax etc.
Tax management helps an individual or organization to plan their finances and able to pay tax.
Illustration of difference between tax planning, tax avoidance and tax evasion.
The Government has issued Notifications No. 49/2003-CE, 50/2003-CE granting exemption
from excise duty for ten years if industry is set up in the specified area such as Himachal
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Pradesh, Uttarakhand, North East India. The purpose behind these notifications is to encourage
industrialization in these areas.
If a manufacturer sets up manufacturing unit in Himachal Pradesh, it is a tax planning.
However, if he sets up manufacturing facility somewhere else and brings almost ready product
to Himachal Pradesh for carrying out minor operations like, testing, packing, repacking etc and
sells from Himachal Pradesh, it can be said as tax avoidance, because the intention of the
government to encourage industrialization in Himachal Pradesh is defeated. Thus, the
manufacturer follows the letter of the law but defeats the purpose of behind the law. If a
manufacturer manufactures and dispatches the goods from somewhere else and only raises
invoices of sale from Himachal Pradesh to show that goods have been manufactured and sold
from Himachal Pradesh, this is a tax evasion.
McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230 (SC 5 Members Bench)1
In tax planning principle set in McDowell’s case is always referred. The principle set by Hon.
Court that tax planning is permissible but not subterfuges is allocable universally to all the
taxes.
Facts of the case: - McDowell & Co. Ltd (hereinafter referred to as the appellant) was a
licensed manufacturer of Indian Liquor. Buyers of liquor used to obtain passes for release of
liquor after making payment of excise duty directly to excise authorities and present said passes
before appellant whereupon bill of sale was prepared by the appellant showing price of liquor
but excluding excise duty. Sales tax was paid by appellant to sales tax authorities on basis of
turnover but excluding excise duty. The method followed by the appellant resulted in reduction
of sales tax amount on liquor. The issue before Hon. Supreme Court (5 Member Bench) was
whether excise duty which was payable by appellant but had been paid by buyer was actually
a part of turnover of appellant and was, therefore liable to be so included for determining
liability to sales tax. In the instant case appellant followed this method to reduce burden of
sales tax. The liability to pay excise duty is on the manufacturer at the time of removal of the
goods from the factory, though he can recover it from the customer. However, in the instant
case, the duty burden was directly transferred to buyer and the value of the excise duty, which
should have been part of the taxable value for the purpose of sales tax, was not included in the
taxable value. Hon. Supreme Court, on this issue , held that excise duty, which was payable by
appellant but had been paid buyer was actually a part of turnover of appellant and therefore
liable to be included for determining liability of sales tax. 51 On the other issue i.e. whether it
is open to everyone to so arrange his affairs as to reduce burden of taxation to minimum and
such a process does not constitute tax evasion, Hon. Apex Court held that the process will
amount to tax evasion.
Decision :- In the said case of McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230
(SC 5 Members Bench), Hon. Supreme Court, observed that “ Tax planning may be legitimate
if it is within the framework of law , but colorable devices cannot be part of tax planning. It is
wrong to say that it is honourable to avoid payment of tax by dubious methods. It is obligation
of every citizen to pay tax honestly without resorting to subterfuges”. This view was expressed
in majority judgment delivered By Hon. Justice Rangnath Mishra.
However, in the separate judgment, Justice Chinnapa Reddy, expressed that “ In our view, the
proper view to construe a taxing statute , while considering a device to avoid tax , is not to ask
whether a provision should be construed liberally or principally, nor whether the transaction is
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not unreal and not prohibited by the statute , but whether the transaction is a device to avoid
tax and whether the transaction is such that the judicial process may accord approval to it .-
The series of transactions has to be viewed as a whole and then the court should see the real
purpose of the transaction. – It is neither fair nor desirable to expect the legislature to intervene
and take care of every device and scheme to avoid taxation. It is upto the court to take stock
and determine the nature of the new and sophisticated devices to avoid tax and expose for what
they really are and refuse to give judicial benefication”.
Justice Chinnapa Reddy in Mc Dowell and Co. Ltd. v. Commercial Tax Officer} listed the
evil consequences of tax avoidance as follows:
1. First, there is substantial loss of much needed public revenue, particularly in a welfare
State like ours.
2. Next, there is the serious disturbance caused to the economy of the country by the piling
up of mountains of black money, directly causing inflation.
3. Then there is 'the large hidden loss to the community by some of the best brains in the
country being involved in the perpetual war waged between the tax avoider and his
expert team of advisers, lawyers and accountants on the one side and the tax gatherer
and his, perhaps not so skilful, advisers, on the other side.
4. Then again there is the sense of injustice and inequality which tax avoidance arouses in
the breasts of those who are unwilling or unable to profit by it.
5. Last, but not the least, is the ethics of transferring the burden of tax liability to the
shoulders of the guideless, good citizens from those of "the artful dodgers."
Causes for Tax Evasion & Tax Avoidance
Tax evasion and avoidance is a global problem. The causes for tax evasion and avoidance are
as follows:
1. High Rates of Taxation. —The higher the rates of tax, the greater will be the
temptation for evasion and avoidance.
2. Inadequacy of Powers. —The inadequacy of powers vested in the personnel of the
department is yet another cause of tax evasion.
3. Complexity in Tax Laws. —The complicated provisions of the Direct Taxes Acts, not
all of which are easily intelligible, were also stated to be responsible to some extent.
4. Absence of Deterrent Punishment
One important reason for the prevalence of evasion is stated to be that in actual practice,
no deterrent punishment like imprisonment is being meted out to tax evaders when they
are caught.
5. Lack of Publicity. —Another reason for widespread evasion is said to be the secret
provisions of the Direct Taxes Acts. At present, the department is statutorily prohibited
from disclosing any information relating to a person's return or assessment.
6. Moral and Psychological Factors. —Unfortunately, all citizens do not realise their
duties to the State and the necessity of paying the correct amount of taxes and paying
them in time.
7. Lack of Integrity of Officers. —It has also been said that lack of integrity in some of
the officers of the department is partly responsible for tax evasion.
8. Donations to Political Parties. —People and companies donate to political party in
power and try to influence the tax officials through leaders of political parties.
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9. Attitude of Income-tax Department—It has been said that even when the assessee's
returns are correct in respect of income, wealth, etc., and produce evidence in support,
the assessing officers do not always accept them.
RECOMMENDATIONS OF THE DIRECT TAXATION ENQUIRY COMMITTEE

(WANCHOO COMMITTEE) TO FIGHT THE PROBLEM OF (TAX EVASION
1. The committee recommended reduction in the present tax rates as they are very high
and due to this, the tax-payer feels that the tax evasion is profitable and attractive in
spite of the attendant risks.
2. It recommended minimisation of controls and licences in the economy.
3. It recommended regulation of donations to political parties.
4. The practice of being too meticulous in small cases, where no worthwhile revenue is
involved, has done much to damage the image of the department in the public eye.
5. The committee recommended the entertainment expenditure which is incurred
primarily for the furtherance of the taxpayer's business be allowed to be deducted up to
a certain ceiling.
6. The committee recommended the minimum penalty imposable for concealment of
income should be the amount of tax sought to be evaded and the maximum penalty'
imposable should be fixed at twice the said amount.
7. The committee recommended that public consciousness is to be aroused against tax
evasion and tax evaders should be ostracized by the society.
8. The committee also recommended that the department should completely re-orient
itself to a more vigorous prosecution policy in order to install a wholesome respect for
the tax laws in the minds of tax-payers.
CHAPTER 7.
Constitutional Provisions, Federal Polity and Taxation issues, budget,
Finance Act, Money Bill, Limits on Taxing Power.
Constitutional Provisions
In India's federal Constitution the powers of the centre and the constituent units are well
defined. The legislative powers of the Union are enumerated in list I of the seventh schedule
and those of the states in list II, the concurrent powers being found in list III.
Power of Taxation under Constitution of India is as follows:
(a) The Central Government gets tax revenue from Income Tax (except on Agricultural
Income), Excise (except on alcoholic drinks) and Customs.
(b) The State Governments get tax revenue from sales tax, excise from liquor and alcoholic
drinks, tax on agricultural income.
(c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and
house property tax.
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Article 265 provides that no tax shall be levied or collected except by Authority of Law.
The authority for levy of various taxes, as discussed above, has been provided for under
Article 246 and the subject matters enumerated under the three lists set out in the Schedule-
VII to the Constitution.
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Entry No. 6 – Transfer of Property other than agricultural land, registration of deeds amd
documents.
Entry No. 44- 'Stamp duties other than duties on fees collected by means of judicial stamps
but not including rates of stamp duty
Taxation and Fundamental Rights

(Constitutional Remedies Against Illegal Taxation)
Article 13 .
A taxing statute must pass the test of fundamental rights and the charge of discrimination. In
order that the law (imposing tax) to be valid, the tax must be within the legislative competence
(Art. 265) and secondly, the tax must be s subject to the conditions laid down in Art. 13. One
such condition envisaged by. Art. 13(2) is that "The State shall not make any law which takes
any or abridges the rights conferred by this Part and any law made in contravention of this
clause shall, to the extent of the contravention, be void.' Thus, the legislature shall not make
any law which takes away or abridges the equality clause of Art. 14 The State shall not deny
to any person equality before the law or the equal protection of the laws within the territory of
India." The guarantee of equal protection of the laws must be extended to the taxing statutes.
Article 14
Article 14 does not mean that every person should be taxed equally. But it does not mean that
if property of the same character has to be taxed the taxation must be of the same standard, so
that the burden of taxation may fall equally on all persons holding that kind and extent of
property. It is common ground that the tax has no reference to income, either actual or potential,
from the property sought to be taxed. Hence, it may be rightly remarked that the Act obliges
every person who holds land to pay the tax at the flat rate prescribed whether or not he makes
any income out of the property or whether or riot the property is capable of yielding any
income. It is clear, therefore, that inequity is inherent in the very provision of the taxation. It is
one of those cases where lack of classification creates inequality.
What the court has to see is the time and actual effect of the law, as a law appearing to be
discriminatory may not be so in operation. In the case of State of Andhra Pradesh v. Raja
Reddi, land revenue was imposed at a flat rate on land without taking into account the
productivity of the soil. In the case of Moopil Nair, there was no proper procedure laid down
for assessment and collection. The Supreme Court held that Article 14 is violated in both the
cases when a statutory provision finds differences where there are none or makes no difference
where there is one.
A taxation will be struck down as violative of Art. 14 if there is no reasonable basis behind the
classification made by it, or if the same class of property, similarly situated, is subject to
unequal taxation. This requirement does not preclude the classification of property, trades,
profession, and events for taxation subjecting one kind to one rate of taxation and another to a
different rate. Perfect equality in taxation is impossible and unattainable.
In E.I Tobacco Co. v. State of A.P., Sales Tax on virgina tobacco but not on country tobacco
has been held to be valid. In Western Indian Theatre v. Cantonment Board, a higher tax on
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cinema-house containing large seating accommodation and situated in fashionable and busy
localities where the number of visitors are more numerous, than the tax imposed on smaller
cinema-house containing less accommodation and situated in a locality where visitors are poor
and less numerous, was held not to be violative of the equal protection clause of Art. 14. The
classification was based on income of cinema-houses.
In Indian Express Newspaper v. Union of India, it has been held that the classification of
newspapers into small, medium and big newspapers on the basis of their circulation for the
purpose of levying customs duty on newsprint is not violative of Art. 14. The object of
exempting all small newspapers from payment of customs duty while levying full customs duty
on big newspapers is to assist the small and medium newspapers in bringing down their cost
of production. Such papers do not command large advertisement revenue.
Article 19(1) g
A tax, if not levied through a valid law, would be an illegal impost and would constitute an
unreasonable restriction on a citizen's right. Sales tax imposed under an unconstitutional law is
without the authority of law and a threat to trade thus infringing Article 19(l)(g) 'All citizens
shall have the right to practise any profession, or to carry on any occupation, trade or business').
The court, however, would not intervene and strike down a taxing statute merely on the ground
that the taxes would come large scale erosion of the profits. Particularly where a tax is
compensatory, it cannot operate as an un-reasonable restriction on the right to carry on
business. Even where the tax is not compensatory, a taxing statute cannot be struck down as
offending Article 19 (l)(g) unless there is an imminent threat to or immediate burden on the
carrying on of the business or a trade which becomes unreasonable in the circumstances.
Art 27
To maintain the secular character of the Indian Nation, the Constitution, no doubt, guarantees
freedom of religion, to groups of individuals. However, any tax which has gone into the public
fund cannot be utilised for promoting or maintaining any particular religion. Article 27 lays
down that” 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”. A fee can be levied to meet the expenses of
governmental supervision over the administration of religious endowments but the State cannot
levy a tax as there is no such entry in List ll and List III. Only Parliament can levy such a tax
and the States can levy only a fee. Art. 27 will not invalidate the levy of a fee by a State because
the object of such a levy is not to support or preserve any particular religion but to provide a
secular administration to religious institutions.
FEDRAL POLITY: DISTRIBUTION OF REVENUE IN THE LIGHT OF THE

CONSTITUTION OF INDIA: TAXATION PROVISIONS
Yet another feature of Indian Federalism could be very well reflected by the manner it lays
down the provisions regarding Distribution of Revenues between the Centre and the States.
Part XII of the Constitution of India deals with the Finance, Property, Contracts and Suits
whereby the second Chapter specifically deals with the Distribution of revenues between both
the governments. The provisions explicitly mention the powers as to who levies the tax, who
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collects it, and who uses it. While certain provisions are specific with respect to the taxation
areas, other is an exception.
Nature of the Provisions
The nature of these provisions is general and financial. This is so because all these provisions
are associated with the levying, collection and appropriation of taxes. By tax, it is meant a
compulsory constraint on the individuals’ income, profits earned, or a contribution added to
the cost in goods and services or any transaction related whereof a certain amount has to be
paid mandatorily.
Hence, it derives its financial character from the purpose for which it has been envisaged
therein. Furthermore, these articles are to be considered as general in nature as there are certain
specific enactments which prevail over these general provisions.
The subject matter of the taxation is to be derived from the Seventh Schedule wherein the
powers have been distributed on the subject matters as per the Union List, State List and the
concurrent List.
Fundamental Principles on basis of which these Articles are envisaged
A federal structure has one of its features as ‘Dual Polity’ which means that there are two
political governments governing the nation; one is at the Centre and the other at the Provincial
level. But ‘Dual Polity’ does not merely concern about the existence of two separate
governments for the purpose of administration, but it also attracts one of the essential needs for
Financial Resources. Both of them need resources to execute their functions. Thus, one must
understand that these provisions are essentially required to maintain the Federal Structure.
Need for the Distribution of powers concerning revenue from tax
The problem of allocating the resources becomes difficult as there is single entity paying tax
and both the governments need the funds. If both the governments were to impose tax as
according to its own discretion, the citizens would have ended up paying tax twice in degree
or in quantity. Also, not all and everything could be legislated by the Parliament alone upon
the matters of tax. Had it been so, there might arise a situation when the Centre would have
reserved all the resources up to itself. Thus, in order to have a just distribution of resources
between the two and to simplify the chaos, the Constitution of India lays down a basis of
distinction between the powers of the Central and the Provincial Governments.
Article 268
Nature
The article provides a mandate on the Government of India as is evident by “…shall be
levied…Government of India…”. Thus, it grants an exclusive power to the Union to levy
stamp-duties and excise duty related to medicinal and toilet preparations.
Subject Matter
The Subject matter of this article concerns the charge on medicinal and toilet purposes which
falls under the sole authority of the Centre to legislate. This is because this article explicitly
mentions as, “…mentioned in the Union list…” To be more precise, Entry 84 of List I, Seventh
Schedule takes note of the power to Union upon this subject. It states that duties of excise
including medicinal and toilet preparations are a part of the inclusive powers of the Central
government.
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Roles of each Government with respect to Collection

While the Union levies the duties, it is the responsibility of the State Governments to collect
wherein such duties are leviable and of the Government of India in case of Union territories.
Appropriation of Funds
Furthermore, the second clause is also a mandatory clause as it requires the proceeds of any
such duty within that state in a financial year necessarily should not to be included in the
consolidated fund of India. Rather, the fund so generated to assigned to that particular state
itself. This is evident by “…shall not…part of …Consolidated Fund of India…shall be
assigned…State”.
Article 268-A
Nature
The article provides a mandate on the Government of India as is evident by “…shall be
levied…Government of India…” Thus it grants an exclusive power to the Union to levy service
tax.
Subject Matter
The subject matter is related to the service tax which falls under the sole authority of the Centre
to legislate. This power is covered under Entry 92-C of List I, Seventh Schedule wherein it is
mentioned as ‘taxes on services’. Service tax basically refers to the constraint on services
provided by the service providers, although the same is ultimately borne by service-users.
Although, the Union imposes service tax, both governments at centre and state have powers
to collect the same. An important keynote is that such collection of taxes is subjected to
principles as laid down by Parliament.
Similar to the collection, both governments are authorised to appropriate the funds generated
from such tax in a financial year, subjected to the principles and law formulated by Parliament.
Article 269
Nature
The article provides a mandate on the Government of India as is evident by “…shall…levied
and collected…Government of India…” Thus it grants an exclusive power as well as
responsibility on the Union related to taxes on purchase or sale of goods and consignment of
goods.
Subject Matter
The subject matter is related to taxes on purchase or sale save newspapers which are sold and
purchases as a part of inter-state trade or commerce. The taxation provision also extends to
consignment of goods wherein any such consignment is to the person who makes it or any
other as a part of the inter-state trade or commerce. Entries 92-A and 92-B of List I, Seventh
Schedule states such powers of the Union.
Union imposes the tax on purchase, sale or consignment of goods, but the state does not play
any role in the collection mechanism. The collection of tax is also done by the Union itself.
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Whatever net proceeds have been generated by the way of collection in a financial year has to
be assigned to the State, except those attributable to the Union Territories, in which the tax was
leviable in that year. An important keynote is that such assignment to the states is subjected to
principles as laid down by Parliament. However, the parliament may make laws with regards
tax for the inter-state trade or commerce.
Article 270
Nature
The article grants an exclusive power as well as responsibility on the Union to tax in subject
matters as provided in List I, Seventh Schedule save Article 268, 268-A, 269 and 271.
Subject Matter
The subject matter is related to the tax entries as mentioned in the Union List, i.e., from Entry
82 to 92-C except those four articles as mentioned previously.
Union imposes the tax and duties, but the state does not play any role in the collection
mechanism. The collection of tax is also done by the Union itself.
Whatever net proceeds have been generated by the way of collection in a financial year have
to be appropriated by both the governments. The percentage of distribution of net proceeds is
applicable to only those states wherein these tax provisions are applicable, and is subjected to
recommendations made by the Finance Commission so set up by the President. However, the
net proceeds do not form a part of the Consolidated Fund of India.
Article 271
Nature
This article is an exception to the preceding two articles, namely, Article 269 and Article 270.
It provides discretion to the Parliament to make laws in matter of surcharge.
Subject Matter
The subject matter of this article concerns surcharge. Surcharge is an additional charge over
the cost of the goods or service.
There is no involvement of the State Governments with respect to surcharges. These are
imposed by the Union at its discretion, i.e., when there arises a requirement for the purposes of
Union.
The whole proceeds of surcharge are to be appropriated by the Union only. The state neither
possesses a right nor can it demand for such surcharges. An important keynote is that the
surcharges form a part of the consolidated fund of India.
Article 272. Taxes which are levied and collected by the Union and may be distributed
between the Union and the States
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Union duties of excise other than such duties of excise on medicinal and toilet preparations as
are mentioned in the Union List shall be levied and collected by the Government of India, but,
if Parliament by law so provides, there shall be paid out of the Consolidated Fund of India to
the States to which the law imposing the duty extends sums equivalent to the whole or any part
of the net proceeds of that duty, and those sums shall be distributed among those States in
accordance with such principles of distribution as may be formulated by such law
Article 275. Grants from the Union to certain States.
Such sums as Parliament may by law provide shall be charged on the Consolidated Fund of
India in each year as grants-in-aid of the revenues of such States as Parliament may determine
to be in need of assistance, and different sums may be fixed for different States:
Article 276. Taxes on professions, trades, callings and employments
1. Notwithstanding anything in Article 246, no law of the Legislature of a State relating
to taxes for the benefit of the State or of a municipality, district board, local board or
other local authority therein in respect of professions, trades, callings or employments
shall be invalid on the ground that it relates to a tax on income
2. The total amount payable in respect of any one person to the State or to any one
municipality, district board, local board or other local authority in the State byway of
taxes on professions, trades, callings and employments shall not exceed two thousand
five hundred rupees per annum
3. The power of the Legislature of a State to make laws as aforesaid with respect to taxes
on professions, trades, callings and employments shall not be construed as limiting in
any way the power of Parliament to make laws with respect to taxes on income accruing
from or arising out of professions, trades, callings and employments
Holistic Interpretation of Articles

Although it is necessary to understand all of these Articles in their own sense, yet they have to
be read in totality from a holistic point of Interpretation. In India, it is the Judiciary who plays
a role in the interpretation of the statute and other enactments as made by the legislature. In
this section, the researcher tries to bring out the synthesized meaning of all these provisions
from view point of various lenses.
By Hon’ble Supreme Court of India
The Supreme Court of India has rendered two famous judicial precedents under Article 270.
One of them is Devinatha case wherein it has pronounced that although the income tax is to be
levied and collected by the state, yet the States may prescribe for such contribution
distinguished from income tax. Furthermore, the Corporation tax, levied and collected by the
centre is not to be distributed among the states. This is because corporate tax is a super tax on
such profits earned by the Companies and other Corporations.
In yet another case of Kanniyan , this Hon’ble court propounded that the income tax is a part
of the Consolidated Fund of India, and thus, it cannot be distributed among the states and Union
territories and to those which are administered by the Presidential Rule.
In totality, those taxes and duties which are levied and collected by the Government of India
form a part of the consolidated fund of India while those collected by the state do not.
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Scanning articles through lenses of Federalism

Articles 268, 2868-A, 269 and 270 depict the true essence of Cooperative Federalism wherein
both the taxes and duties are appropriated by both the Central and the Provincial Government,
irrespective of who collects it. Thus, both of them are complementary to each other in their
existence with regard to the matters of revenue distribution through taxes.
While on the other hand, Article 271 helps to retain a degree of strong Union even in
Cooperative federal structure. This is also well evident from the levying authority in all the
previously mentioned articles whereby the power rested solely with the Union.
The objective of these provisions is to acquire financial resources by the way of taxation. Such
taxation provisions are laid down by the Centre and collected & appropriated by State, or
Centre, or both. But it is also important to see that such funds or net proceeds are distributed to
only those states where such taxes and duties are applicable. This very well brings out this
aspect, or rather a question, as to what about those states where these provisions do not apply.
Well, may be our constitution makers knew about this query, hence, they also envisaged Article
269 where the net proceeds are assigned to the states as per the proportion so prescribed by the
Parliament.
Consolidated Fund
The consolidated fund is covered under Article 266. Both the governments have their separate
consolidated funds in the name of ‘Consolidated fund of India’ and ‘consolidated fund of that
state’. Under this, all revenues generated by the Union, loans raised and the net proceeds form
a part of it. It is just similar to any personal bank account wherein that natural or artificial
person may be equated with Union of India or that particular state.
However, no money can be appropriated out of the consolidated fund unless the Constitution
provides so.
Contingency Fund
The contingency fund is covered under Article 267. This is not constitutionally born but is
established by law made by the Parliament or the States with respect to the ‘Contingency Fund
of India’ or ‘Contingency Fund of that state’ respectively. Such type of Fund is creating for
meeting any unforeseen expenditure. It is obviously determined by law, but is kept at the
disposal of President or Governor, as the case may be.
Budget
Budget is an Annual financial statement of the estimated receipts and expenditure of the
Government for the financial year. (1st April –31st March). It is presented by the Union
Finance Minister in the parliament. Once passed by both the houses of parliament and approved
by the President of India, the Budget comes into effect from 1st April.
Importance of Budget
The Budget is formulated to optimally allocate the Government’s resources to different sectors
and schemes, so that the broad objectives of the government could be achieved. It presents
government’s proposed revenues and expenditure for the coming financial year. It also
determines how adequately the financial and resource management responsibilities have been
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discharged in the last financial year. Budget is also a means to ensure financial accountability
of the Government to the Parliament. There by maintaining legislative prerogative over
taxation and expenditure.
Preparation of Budget
Budget is prepared by the Budget Division, Department of Economic Affairs, Ministry of
Finance.
a) The budget division issues an annual budget circular to all the Union Government ministries/
departments containing guidelines on how to prepare budget estimates.
b) The Ministries/departments prepare and present their estimates for budget allocation.
c) The ministries also provide the estimates for their revenue receipts in the current financial
year and next financial year to the finance ministry.
d) The finance minister then examines the proposals received from various ministries and
makes necessary changes, if any. The finance minister also consults the prime minister, and
briefs the Union Cabinet, about the budget.
e) The budget division then consolidates all the estimates received and prepares the budget
documents.
Procedure for approval of Union Budget by the Parliament
Budget is approved by the parliament in the following way:
a) First and foremost, President’s recommendation is obtained under Article 117(1) and 117(3)
for introduction and consideration of the Budget in the Lok Sabha.
b) After President’s recommendation, Budget is then laid before the Lok Sabha by the Finance
Minister with the "Budget speech".
c) It is then laid before the Rajya Sabha for discussion, but Rajya Sabha does not have the
power to vote on the demands for grants.
d) The Discussion on Budget in the Lok Sabha is conducted in two stages
(i) General Discussion This includes discussion on the broad aspects of the Budget. No voting
takes place at this stage.
(ii) Detailed Discussion After the general discussion, Parliament is adjourned for a period,
during which the Department Related Standing Committees examine the detailed estimates of
ministries’ expenditure, called Demands for Grants. These committees then prepare the reports
on each ministry’s Demands for Grants and submit them to the Lok Sabha. Then, a detailed
discussion takes place in Parliament on each Ministry’s demands for grants.
e) Following the detailed discussion, voting on demands for grants takes place.
f) After the voting, an Appropriation Bill is introduced and voted on, which authorizes the
government to spend money from the Consolidated Fund of India.
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g) The Finance Bill, which contains provisions for giving effect to financial proposals of
Government, is then introduced immediately in the Lok Sabha. The introduction of this Bill
cannot be opposed. This completes the budgetary process.
Only the Lok Sabha has the power to approve the budget; the Rajya Sabha can only propose
amendments which the Lok Sabha may or may not accept.
The Government receipts categorized in the budget
Government receipts are the income receipts of the government from all the sources in a
particular financial year. These are divided in to two different categories:
a) Revenue receipts: Revenue receipts are those receipts, which neither create liability nor
reduce the assets of the Government. These include revenue received from taxes, cess, interest
payments, dividend on investments etc. They are generally recurring in nature.
b) Capital Receipts: Capital receipts are those which either create liability or reduce the assets
of the Government. These include Government borrowings, disinvestment etc.
The Government expenditure categorized in the budget
Government expenditure is categorized in two ways:
a) Revenue Expenditure: Expenditure that does not lead to creation of any assets or any
reduction in existing liabilities of the government. This includes Salary payments, Pensions,
interest payments, other administrative expenditures etc. These are generally recurring in
nature and deal with day-to-day administrative costs of the government.
b) Capital Expenditure: This refers to the expenditure that leads to creation of assets or
reduction in liabilities of the Government. Examples include infrastructure building, acquiring
assets, repayment of loans etc.
Article 112 of the Constitution of India stipulates that Government should lay before the
Parliament an Annual Financial Statement popularly referred to as ‘Budget’.
Since Parliament is not able to vote the entire budget before the commencement of the new
financial year, the necessity to keep enough finance at the disposal of Government in order to
allow it to run the administration of the country remains. A special provision is, therefore, made
for "Vote on Account" by which Government obtains the Vote of Parliament for a sum
sufficient to incur expenditure on various items for a part of the year. Normally, the Vote on
Account is taken for two months only. But during election year or when it is anticipated that
the main Demands and Appropriation Bill will take longer time than two months, the Vote on
Account may be for a period exceeding two months.
Charged expenditure includes the emoluments of the President and the salaries and allowances
of the Chairman and Deputy Chairman of Rajya Sabha and the Speaker and Deputy Speaker
of Lok Sabha, Judges of Supreme Court, Comptroller and Auditor General of India and certain
other items specified in the Constitution of India under Article 112(3). Discussion in Lok Sabha
on ‘charged’ expenditure is permissible but such expenditure is not voted by the House.
Under provisions of Article 266(1) of the Constitution of India, Public Account is used in
relation to all the fund flows where Government is acting as a banker. Examples include
Provident Funds and Small Savings. This money does not belong to government but is to be
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returned to the depositors. The expenditure from this fund need not be approved by the
Parliament.
The annual accounts of the Government, comprising of Union Government Finance Accounts
and the Appropriation Accounts, are prepared by the Controller General of Accounts. These
documents are presented before the Parliament after their statutory audit by the Comptroller
and Auditor General of India. Preparation and submission of Appropriation Accounts to the
Parliament completes the cycle of budgetary process. Through Appropriation Accounts, the
Parliament is informed about the expenditure incurred against the appropriations made by the
Parliament in the previous financial year. All the expenditures are duly audited and excesses
or savings in the expenditure are explained. The Finance Accounts show the details of receipts
and expenditures for all the three funds (the Consolidated Fund of India, the Contingency Fund
of India and the Public Account) in the form of various statements including liabilities of the
government such as guarantees and loans given to the States, Union Territories and Public
Sector Undertakings.
Budget
Union Budget is prepared by the Department of Economic Affairs of Ministry of Finance.
Earlier the budget was presented in two categories i.e. Railway budget and General budget.
This article will help you understand the step by step process of preparation of the Union
Budget of India. Budget 2017-18 will be presented on 1st February 2017 by the Finance
Minister of India.
From this year onwards, there will be no separate budget for Indian Railway which has been
"merged" with the General Budget. The decision, taken on the recommendation of a NITI
Aayog committee headed by its member Bibek Debroy, reflects the decrease over time in the
relative size of the Rail Budget compared to some of the other components in the General
Budget, such as defence and roads and highways, reducing it to a mere “ritual". According to
Article 112 of the Indian Constitution, the President is responsible for presenting the budget to
the Lok Sabha. The annual financial statement takes into account a period of one financial year.
According to Article 77 (3), the Union Finance Minister has been made responsible by the
President to prepare the budget also called as the annual financial statement and pilot it through
the parliament. Budget embodies the estimated receipts and expenditure of the Government of
India for one financial year. The financial year commences on 1st April each year.
Stages of Budget
In parliament, the budget goes through 5 stages
1. Presentation of budget with Finance Minister’s speech
2. General discussion of the budget. After this, there is an adjournment of houses so that
standing committees scrutinises the demand for grants for a month.
3. Voting on demand for grants in Lok Sabha
4. Passing of appropriation bills

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5. Passing of Finance bills.
Budget Presentation
The budget is presented to the parliament on the date fixed by the President. Generally, it was
presented on the last working day of February, a month before the commencement of the
financial year but this 92 years old practices of presenting budget has been changed now.
During general elections, the budget is presented twice, first to secure a vote on account for 4
months and later completely. Budget speech of finance minister is in two parts, Part A
constitute a general economic condition of the country while part B relates to taxation
proposals.
The general budget is presented in the Lok Sabha by Minister of Finance. At the conclusion of
the speech of the finance minister in Lok Sabha, annual financial statement is laid on the table
of Rajya Sabha.
Discussion of Budget
It is done in two stages. In the first stage, broad outlines of the budget, principle and policies
underlying it are to be discussed in general discussion of the budget which lasts for about 4-5
days. In second stage discussion is held based on reports of concerned Departments/Ministries
standing committees, which is usually done after a month of a general discussion of the budget.
Standing committees submit reports to the house which are persuasive in nature.
Vote on Account
Since the passing of the budget takes almost 2 months, the Government requires the sanction
of an amount to maintain itself for this period. According to Art 116, a special provision called
'Vote on Account' is created by which vote of parliament is obtained by the government for a
sum sufficient generally for 2 months to incur expenditure. During the election year a vote on
an account may exceed from 2-4 months expenditure.
Discussion and Voting on Demand for Grants
After standing committee reports are presented to the house, the house proceeds with a Ministry
wise discussion of committee reports and voting on demand for grants. The time for discussion
and voting on demand for grants is allocated by the speaker in consultation with the leader of
the house.
Guillotine
The guillotine is passing the Demand for Grants without discussion. On the last day of the
period allotted by speaker due to the paucity of time, speaker puts all the outstanding Demands
for grants to vote of the house. It is a device used for want of time.
Powers of both the Houses
Introduction and voting on Demands for Grants is confined only to the Lok Sabha. The Lok
Sabha has the power to assent, refuse to assent and even to reduce the amount of the Demand
for Grant. In Rajya Sabha, there is only general discussion of the budget. The upper house does
not vote on the Demands for Grants.
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Cut Motions
Cut motions are motions for reduction in various demand for grants. Cut motions seek a
reduction of an amount of demands of grants on the following grounds: economy, policy cut
and token cut.
Categories of Cut motions
Economy cut
Economy cut motion demands reduction of a specified amount from the demand for Grant
representing the welfare of the economy.
Policy cut
According to policy cut motion, the demand for a grant is reduced to Re.1 representing the
disapproval of the policy underlying the demand. A member giving such notice should indicate
precise terms, the particulars of the policy which he proposes to discuss. It is open to the
member to advocate alternative policy.
Token cut
Token cut motion is used to voice a grievance. In token cut, the amount of the Demand for
Grant is reduced by Rs.100 in order to express a specific grievance.
Types of Bills
Finance bill
It is introduced in the Lok Sabha immediately after the presentation of the general budget. The
finance bill contains fresh taxation proposals and variations in existing duties. They are
contained in Article 117 of Indian constitution. Finance bill is of two types. Provisions of the
first type relate to the money bill. Provisions of the second type of Finance bill are same as that
of an Ordinary bill.
Money bill
No bill is money bill unless it satisfies the requirements of Article 110. A bill is money bill
only if it contains provisions dealing with all or any of six matters specified in Article 110. A
Financial bill, which receives the certificate of the speaker, is a money bill. The decision of
speaker of House of the people is final and his certificate that a particular bill is money bill is
not liable to be questioned.
Appropriation Bill
An appropriation bill is intended to give authority to the Government of India to incur
expenditure from the consolidated fund of India. After the voting of Demand for grants has
been completed, the government introduces an appropriation bill. Appropriation bill includes
charged expenditure and sums granted by voting on demand for grants. The procedure for
passing the appropriation bill is same as that of the money bills.
Types of Expenditure
Charged expenditure
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It includes expenditure specified in the constitution. There is no voting on charged expenditure.

It includes emoluments of the president and the salaries and allowances of the chairman and
deputy chairman of the Rajya Sabha, speaker and deputy speaker of Lok Sabha, Judges of the
Supreme Court, CAG, and certain other bodies/agencies specified in the constitution.
Non-Charged Expenditure
It is the votable expenditure. It is the sum required to meet other expenditure proposed to be
made from the consolidated fund of India. In other words amount of expenditure incurred
through Demand for Grants.
Types of Grants
The provisions related to supplementary, additional and excess grants are specified in Art.115.
Supplementary Grant
If the amount authorised in the original budget for a particular service for a current financial
year is found to be insufficient, supplementary grant may be made by the Parliament.
Excess grant
It is a grant to retrospectively authorise excess of expenditure committed by an executive. The
public accounts committee recommends such retrospective regularisation on the basis of CAG
report.
Additional Grant
It is the grant made by the parliament for expenditure on new service not contemplated in the
annual financial statement that year.
Token grant
Spending money sanctioned for one head on another head within the same ministry with the
permission of finance ministry is done through a token grant. In the token grant, it seeks a token
sum of Rs.1 from Lok Sabha to spend on a new service.
Exceptional Grant
Through exceptional grant money is sought for service that is not part of the current service of
any financial year.
Indian constitution under Article 112-117 enshrines powers of parliament in the enactment of
the Budget. According to article 112-117, any proposal for expenditure and demand for a grant
can be made only on the recommendation of the President. The parliament has to pass a
financial bill within 75 days of its introduction. After discussion in both the houses on demand
for Grants, Financial bill and appropriation bill and voting of the Lok Sabha Budget is enacted
and expenditure can be incurred from the consolidated fund of India.
MONEY BILL
HOW A BILL BECOMES AN ACT
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A Bill is the draft of a legislative proposal. It has to pass through various stages before
it becomes an Act of Parliament.
First Reading
The legislative process starts with the introduction of a Bill in either House of
Parliament—Lok Sabha or Rajya Sabha. A Bill can be introduced either by a Minister
or by a private member. In the former case it is known as a Government Bill and in the
latter case it is known as a Private Member’s Bill.
It is necessary for a member-in-charge of the Bill to ask for leave to introduce the Bill.
If leave is granted by the House, the Bill is introduced. This stage is known as the
First Reading of the Bill. If the motion for leave to introduce a Bill is opposed, the
Speaker may, in his discretion, allow brief explanatory statement to be made by the
member who opposes the motion and the member-in-charge who moved the
motion. Where a motion for leave to introduce a Bill is opposed on the ground that the
Bill initiates legislation outside the legislative competence of the House, the Speaker
may permit a full discussion thereon. Thereafter, the question is put to the vote of the
House. However, the motion for leave to introduce a Finance Bill or an Appropriation
Bill is forthwith put to the vote of the House.
Publication in Gazette
After a Bill has been introduced, it is published in the Official Gazette. Even before
introduction, a Bill might, with the permission of the Speaker, be published in the
Gazette.
In such cases, leave to introduce the Bill in the House is not asked for and the Bill is
straightaway introduced.
Reference of Bill to Standing Committee
After a Bill has been introduced, Presiding Officer of the concerned House can refer
the Bill to the concerned Standing Committee for examination and make report
thereon.
If a Bill is referred to Standing Committee, the Committee shall consider the general
principles and clauses of the Bill referred to them and make report thereon. The
Committee can also take expert opinion or the public opinion who are interested in
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the measure. After the Bill has thus been considered, the Committee submits its report
to the House. The report of the Committee, being of persuasive value shall be
treated as considered advice given by the Committees.
Second Reading
The Second Reading consists of consideration of the Bill which is in two stages.
First Stage: The first stage consists of general discussion on the Bill as a whole when
the principle underlying the Bill is discussed. At this stage it is open to the House to
refer the Bill to a Select Committee of the House or a Joint Committee of the two
Houses or to circulate it for the purpose of eliciting opinion thereon or to straightaway
take it into consideration.
If a Bill is referred to a Select/Joint Committee, the Committee considers the Bill

clause-by-clause just as the House does. Amendments can be moved to the various
clauses by members of the Committee. The Committee can also take evidence of
associations, public bodies or experts who are interested in the measure. After the Bill
has thus been considered, the Committee submits its report to the House which
considers the Bill again as reported by the Committee. If a Bill is circulated for the
purpose of eliciting public opinion thereon, such opinions are obtained through the
Governments of the States and Union Territories. Opinions so received are laid on the
Table of the House and the next motion in regard to the Bill must be for its reference
to a Select/Joint Committee. It is not ordinarily permissible at this stage to move the
motion for consideration of the Bill.
Second Stage: The second stage of the Second Reading consists of clause-by-clause
consideration of the Bill as introduced or as reported by Select/Joint Committee.
Discussion takes place on each clause of the Bill and amendments to clauses can be
moved at this stage. Amendments to a clause have been moved but not withdrawn
are put to the vote of the House before the relevant clause is disposed of by the House.
The amendments become part of the Bill if they are accepted by a majority of members
present and voting. After the clauses, the Schedules if any, clause 1, the
Enacting Formula and the Long Title of the Bill have been adopted by the House, the
Second Reading is deemed to be over.
Third Reading
Thereafter, the member-in-charge can move that the Bill be passed. This stage is
known as the Third Reading of the Bill. At this stage the debate is confined to
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arguments either in support or rejection of the Bill without referring to the details thereof
further than that are absolutely necessary. Only formal, verbal or consequential
amendments are allowed to be moved at this stage. In passing an ordinary Bill, a
simple majority of members present and voting is necessary. But in the case of a Bill
to amend the Constitution, a majority of the total membership of the House and a
majority of not less than two-thirds of the members present and voting is required in
each House of Parliament.
Bill in the other House
After the Bill is passed by one House, it is sent to the other House for concurrence
with a message to that effect, and there also it goes through the stages described
above except the introduction stage.
Money Bills
Bills which exclusively contain provisions for imposition and abolition of taxes, for
appropriation of moneys out of the Consolidated Fund, etc., are certified as Money
Bills. Money Bills can be introduced only in Lok Sabha. Rajya Sabha
cannot make amendments in a Money Bill passed by Lok Sabha and transmitted to it.
It can, however, recommend amendments in a Money Bill, but must return all Money
Bills to Lok Sabha within fourteen days from the date of their receipt. It is open to Lok
Sabha to accept or reject any or all of the recommendations of Rajya Sabha with
regard to a Money Bill. If Lok Sabha accepts any of the recommendations of Rajya
Sabha, the Money Bill is deemed to have been passed by both Houses with
amendments recommended by Rajya Sabha and accepted by Lok Sabha and if Lok
Sabha does not accept any of the recommendations of Rajya Sabha, Money Bill is
deemed to have been passed by both Houses in the form in which it was passed by
Lok Sabha without any of the amendments recommended by Rajya Sabha. If a Money
Bill passed by Lok Sabha and transmitted to Rajya Sabha for its recommendations is
not returned to Lok Sabha within the said period of fourteen days, it is deemed to have
been passed by both Houses at the expiration of the said period in the form in which
it was passed by Lok Sabha.
DISTINCTION BETWEEN MONEY BILL, FINANCE BILL AND BILLS

INVOLVING EXPENDITURE
1. A Money Bill is a Bill which contains only matters mentioned in Art110(1)
A Financial Bill, apart from dealing with one or more of the matter* mentioned in Art.
110(1) deals with other matters also. Thus, ’Finance Bill" is a Money Bill to which
provisions of general legislation are also added apart from one or more matters of Art.
110(1). All Money Bills are Financial Bills but all Financial Bills are not Money Bills
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2. In two matters, the Money Bills and the Financial Bills do not differ: (1)A Financial
Bill, like the Money Bill, can only originate in the Lok Sabha, (2) Like Money Bill, the
Financial Bill also cannot be introduced without the recommendation of the President.
[(Art. 117(1)].
3. Financial and other Bills involving expenditure differ from a Mona Bill in so far as the
former can be amended or rejected by the Rajya Sabha like any Ordinary Bill. The
Rajya Sabha cannot amend or reject a Money Bill and if there is a deadlock between
the Houses, it can be resolved by the joint session of the Houses. Thus, the Rajya Sabha
has some control over Financial and other I Bills involving expenditure.
4. As regards the procedure for its passage, a Financial Bill is as good as I an ordinary bill
except that a Financial Bill cannot be introduced without the President's
recommendation and it can only be introduced in the Lok Sabha Thus, a Financial Bill
is passed according to the ordinary procedure provided I for passing of an Ordinary
Bill.
5. As far as Presidential assent is concerned in case of Money Bill, the President may
either give his assent or refuse his assent. In case of a Financial Bill, he may, however,
in addition, refer it back to the House with a measure for reconsideration (Art. 111).
CONSTITUTIONAL LIMITATIONS UPON THE TAXING POWER
Apart from Art 265 and the limitations imposed by the division of the taxing power between
the Union and the State Legislature by the relevant entries in the Legislative list, the taxing
power of either Legislature is particularly subject to the following limitation imposed by
particular provision of our constitution.
(i) It must not contravene Art 13.
(ii) It must not deny equal protection of the laws (Art 14).
(iii) It must not constitute an unreasonable restriction upon the rights of business [Art
19(l)(g)].
(iv) No tax shall be levied the proceeds of which are specifically appropriated in
payment of expenses for the promotion or maintenance of any particular religion or
religious denomination. (Art 27).
(v) A State legislature or any authority within the State cannot tax the property of the
Union (Art 285).
(vi) The Union cannot tax the property and income of a State (Art 289).
(vii) The power of a State to levy tax on sale or purchase of goods is subject to Art 286.
(viii) Save in so far as Parliament may by Law otherwise provide a State shall not tax the
consumption or sale of electricity in the case specified in Art 287.
(ix) Imposition of tax should not impede the free flow of trade. Commerce and
intercourse (Art 301).
(x) Levy of tax must not offend Art 304 (a).
Finance Act
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Finance Act is an annual Act passed regularly by the parliament every year. It fixes the tax
rates, tax exemptions and tax- deductions for each year. Amendments to taxation laws are also
made through the Finance Act. If in any particular year, the Financial Act is not passed by 1 st
April, then the tax rates for that year shall be charged according to the tax rates prevalent in the
previous year or at the rates proposed in the new unpassed Finance Bill, whichever is more
favourable to the assesse. Finance Act is also accompanied by the Annual Budget.
CHAPTER 9
Tax Reforms In India, Overview Of Suggestions Of Various Tax Reforms
Committees In India.
TAXATION ENQUIRY COMMISSION REPORT 1954
This was the first attempt to Reform the tax system in India post-independence. It was headed
by John Mathai former Finance Minister of the Union.
Main Recommendations
• Tax Holiday and incentives to new industrial undertakings, in order to trigger
industrialisation and capital formation in crucial areas.
• Development rebate to be allowed
• Widening and deepening of tax structure at centre and state levels to reduce inequalities
KALDOR COMMITTEE REPORT, 1957
Headed by Nicholas Kaldor of Cambridge University who was invited by Indian government
to India in order to study the existing tax system in India and suggest reforms. Kaldor made an
in-depth study and arrived at the conclusion that the then existing tax system in India was
inequitable unscientific and inefficient. Crores of money where been evaded under Income
Tax. Therefore he suggested the introduction of Wealth Tax to supplement the Income Tax
Act.So that revenue which was being evaded under Income Tax law could be harnessed through
wealth tax law. This is due to a logic that even though it may be easy for a person to conceal
his income it would be relatively more difficult to conceal his wealth. Even though Kaldor had
recommended only individuals and HUF as assessees for the purpose of wealth tax; the
government also included companies under the purview of wealth tax Act.
WANCHOO COMMITTEE REPORT 1971
Also known as Direct Taxes Enquiry Committee headed by Justice Wanchoo of Supreme
Court. Main focus of this committee was on tax evasion and black money. Reasons for large-
scale tax evasion where held to be:
• High tax rates
• High controls and licences
• Inadequate information system
Wanchoo committee disapproved Voluntary Disclosure Scheme as a measure to curb tax
evasion, and favoured more severe measures like search and seizure.
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Settlement Commission system was introduced as per recommendations of Wanchoo

committee. Under Settlement Commission system an assessee who's tax cases are pending
before tax authorities can withdraw these cases and settle them for once and all before the
settlement Commission. However, he should fulfil certain conditions like payment of
additional tax, true and full disclosure of liabilities etc. Settlement Commission will give him
conditional immunity from penalty and prosecution. Wanchoo Committee also recommended
reduction in tax rates and simplification and rationalization of tax system.
JHA COMMITTEE REPORT 1991
Also known as Indirect Taxation Enquiry Committee headed by L K Jha, former governor of
RBI. The committee recommended the following features of an ideal tax system
• Elasticity with reference to National Income. As National Income rises, revenues
should go up proportionately
• From a social angle, tax burden should be made progressive. It should effect more
heavily on the rich than on the poor.
• Indirect taxes have impact on production, employment, investment costs and prices.
Hence, should not be so heavy so as to adversely affect efficient use of economic
resources.
• Procedures for levy and collection of tax should involve minimum cost and harassment
of tax so as to minimise litigation
• In order to avoid cascading effect of indirect taxes, excise duty should be lowered and
VAT introduced.
RAJA CHELLIAH COMMITTEES REPORT, 1991
Raja Chelliah is also known as the father of India's tax reforms. Chairman of TRC [Taxation
Reforms Committee]. The following where the main recommendations of Raja Chelliah
Committee:
• Introduction of VAT. This would lead to efficiency, equal competition and fairness in
the tax system.
• More Reliance on indirect taxes. As the majority of Indians have low incomes and high
consumption.
• Conduct tax-payer education programs, workshops, distribute pamphlets etc.
• Give refunds in time.
• Conduct periodic inspection to detect tax evasion.
• Introduce scientific audit system.
• Identify unregistered potential tax payers.
• Prevent misuse of input tax credit by dealers.
The following recommendations of Raja Chelliah Committee were implemented:
• Drastic reduction in Customs and Excise duty.
• Lowering of Corporation tax. Differentiating between closely held and widely held
companies for tax purpose was abolished. Dividend stocks reduced to 10 percentage by
2001 to 2002. By 2003 to 2004 there was a reversal in the starting system from the
hands of shareholders to the companies.
• By 1997-98 maximum rates of income tax was fixed at 30 %
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• Wealth tax on shares security etc were abolished

• Tax reforms since 1991 were initiated as a part of structural reforms process following
the economic crisis in 1991
KELKAR COMMITTEE REPORT, 2012
Headed by Vijay Kelkar also known as Report On Fiscal Consolidation or Task Force. Also
suggested some tax reforms.
1. To bring tax GDP ratio to a higher level of 11.9 %
2. To implement GST which would increase output, export and tax revenues. Central
Excise and service tax to be merged in GST.
3. National portal for taxpayers to file application for rectification and appeals.
4. Amendment of the relevant laws to ensure mandatory quoting of Pan [Permanent
Account Number] and UID [Unique Identification Number] in all economic
transactions, like bank accounts, fixed deposit, salary payments, immovable property
transactions etc.
5. Subsidy on diesel is main cause of India's fiscal deterioration. Recommended increase
in price of diesel, kerosene and LPG.
6. Tax system should be made simple so as to promote voluntary compliance.
7. Abolished dividend distribution tax and MAT [Minimum Alternate Tax].
8. Abolish exemptions given without appreciating the logic and objectives.
9. Give power to Central Government to impose tax on Agricultural Income. States should
pass resolution under article 252 of the Constitution for this purpose.
10. Two rates of taxes for customs and excise duties.
11. Exemptions from CENVAT to be given only for life saving drugs, security items.
12. Exempt public utility services from service tax etc.
13. Institution of simple, transparent tax system and widening tax base.
PARTHASARATHY SHOME COMMITTEE REPORT, 2012

Set up by Dr. Manmohan Singh. Headed by Parthasarathy Shome. Laid down GAAR [General
Anti Avoidance Rules]
Main recommendations of Shome Panel.
• Retrospectively in tax laws only in rarest of rare cases; to correct anomalies in tax
statutes, clarify technical/procedural defects and prevent tax-abuse under scheme of
tax-planning.
• Intensive training to tax officers in international taxation.
• Abolish tax on capital gains.
• Increase in STT [Securities Transactions Tax].
• Selection of CBDT and CBEC heads should be based on specialisation and policy
experience and not just seniority. Lack of cooperation between CBDT and CBEC
should be solved. Artificial separation between CBDT [Central Board of Direct taxes]
and CBEC [Central Board of indirect taxes] should be done away with and an integrated
authority of CBDIT [Central Board of Direct and Indirect Taxes] should be established.
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• Improve elasticity of tax system.

• Regular adjustment of tax-rates according to inflation-rates.
• Removal of unreasonable exemptions.
Shome panel focused mainly on preventing tax avoidance rather than
generation of tax revenue
TARC REPORT TAXATION ADMINISTRATION REFORMS COMMITTEE
REPORT, 2014
Main recommendations
• For consumer focus 10 percentage of tax administration budget should be spent on tax
payer services.
• Pre-filled tax returns with options should be introduced.
• Post of revenue secretary to be abolished. This function should be assigned to CBDT
and CBEC. There should be a governing Council to oversee them. This Council should
suggest tax policy and legislation.
• Human resource development- IRS Officers should specialise in particular areas of
taxation.
• Central Vigilance Commission should have an IRS officer as a member.
• Scheme of Pre-dispute consultation should be introduced.
• PAN {Permanent Account number} should be further developed into CBIN [Common
business identification number] which can be referred to by both CBDT and CBIT.
Other relevant tax committees
o Tyagi Committee 1958 also known as Direct Taxes Administration Enquiry
Committee
o Sir Srinivasa Vardhachiar Commission, 1947 one of the main forces behind
enactment of Income Tax Act, 1961.
o Boothalingam Committee 1961 also known as Committee for Rationalization and
Simplification of Tax Structure.
o K.N Raj Committee 1972 suggested to bring Agricultural Income Tax under Income
Tax net for calculation purpose.
CHAPTER 10
Recent Trends in Taxation
1. Introduction of GST
Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that
will be levied on every value addition.
Full form of GST is Goods and Services Tax. GST is defined in article 366 (12 A) to mean
“any tax on supply of goods and service or both except taxes on supply of the alcoholic liquor,
human consumption” It is a single indirect tax for the whole nation, one which will make India
a unified common market. It is a single tax on the supply of goods and services, right from the
manufacturer to the consumer. The GST Bill was introduced in Lok Saba in 2009 by erstwhile
UPA government but they failed to get it passed. The NDA government introduced a ‘slightly
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modified’ version of the GST Bill in the Parliament and both the Houses passed it. Through
GST, the government aims to create a single comprehensive tax structure that will subsume all
the other smaller indirect taxes on consumption like service tax, etc. Touted to be a major game
changer, in the words of Union Finance Minister Arun Jaitley ‘it will lead to the financial
integration of India’.
Currently, tax rates differ from state to state. GST will ensure a comprehensive tax base with
minimum exemptions, will help industry, which will be able to reap benefits of common
procedures and claim credit for taxes paid. GST, as per government estimates, will boost India's
GDP by around 2 per cent.
Why GST needed
GST will break the complicated structure of separate central and state taxes which often overlap
with each other to create a uniform taxation system which will be applicable across the country.
Taxes will be implemented more effectively since a network of indirect taxes like excise duty,
service tax, central sales tax, value added tax (VAT) and octroi will be replaced by one single
tax. The state will still have a say in taxation, as the number of taxes will be reduced to three
with Central GST, State GST and Integrated GST for inter-state dealings.
GST rates
The GST Council, headed by Jaitley and of which all states Finance Ministers are members,
has approved four main tax slabs -- 5 per cent, 12 per cent, 18 per cent and 28 per cent that
aims to lower tax incidence on essential items and to keep the highest rate for luxury and
demerits goods. The lowest rate of 5 per cent will be on items of mass consumption which are
used particularly by common people. The second and third category of standard rates of 12 and
18 per cent will accommodate most of the goods and services. The fourth slab of 28 per cent is
levied mainly on white goods such as refrigerators, washing machines etc.
GST Impact
On salaried employees, self-employed professionals
GST is applicable mainly for businesses and hence won’t directly affect the salaried class and
self-employed professionals such as doctors, lawyers etc. However, it will impact their
expenses due to the change in rates of goods and services they avail. Other than that, they will
continue to pay their income tax like before. The medical sector has been exempted from GST.
On businesses
The GST is all set to change the way businesses have operated until now. The elimination of
multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions
will improve the ease of doing business and reduce avoidable litigation. It also untangles a
complex web of taxes that businesses have been subjected to under the existing system.
However, these advantages are only going to be visible in the long run. At the moment,
businesses are clearly unsure about what the immediate impact will be. Other than the
unpredictability over the increase in the headline tax rate on many items being offset by the
extra tax credits on raw materials and services, as claimed by the government, adopting to a
whole new online system is a task in itself.
The taxes GST will subsume
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Industries and commercial enterprises were paying various taxes at various stages of a product
or service, such as manufacture, transport, wholesale, logistics and retail. The administration
of these taxes were often tangled in paperwork, resulting in slow inter-state movement of
products and increased costs for consumers. GST new replaces at least 17 existing indirect
taxes being levied by the Centre and states.
This includes Central Excise Duty, Duties of Excise (medicinal and toilet preparations),
Additional Duties of Excise (goods of special importance), Additional Duties of Excise
(textiles and textile products), Additional Duties of Customs (commonly known as CVD),
Special Additional Duty of Customs (SAD), Service Tax, Cesses and surcharges in so far as
they relate to supply of goods or services, State taxes that the GST will subsume (all Central
taxes); State VAT, Central Sales Tax, Purchase Tax, Luxury Tax, Entry Tax (all forms),
Entertainment Tax (not levied by local bodies), Taxes on advertisements, Taxes on lotteries,
betting and gambling, State cesses and surcharges (all state taxes).
All these taxes have been replaced by Central GST, State GST and Integrated GST (on every
inter-state supply of goods and services). After its implementation, consumers will not be
subjected to the burden of double taxation. The final consumer will bear only the GST charged
by the last dealer in the supply chain, with set-off benefits at all the previous stages.
GST Benefits:
Elimination of Multiple Taxes
The biggest benefit of GST is an elimination of multiple indirect taxes. All taxes that currently
exist will not be in picture. This means current taxes like excise, octroi, sales tax, CENVAT,
Service tax, turnover tax etc will not be applicable and all that will fall under common tax
called as GST.
Saving more Money
For a common man, GST applicability means the elimination of double charging in the system.
This will reduce the price of goods and services & help common man for saving more money.
It is expected that price of FMCG products, small cars, cinema tickets, electrical wires etc is
expected to reduce.
Ease of business
GST will bring one country one tax concept. This will prevent unhealthy competition among
states. It will be beneficial to do interstate business.
Easy Tax Filing and Documentation
For a businessman, GST will be a boon. No multiple taxes means compliance and
documentation will be easy. Return filing, tax payment, and refund process will easy and hassle
free.
Cascading Effect reduction
GST will be applicable at all stages from manufacturing to consumption. GST will provide tax
credit benefit at every stage in chain. Today at every stage margin is added and tax is paid on
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whole amount, in GST you will have tax credit benefit and tax will be paid on margin amount
only. It will reduce cascading effect of tax thereby reducing cost of product.
More Employment
As GST will reduce cost of product it is expected that demand of product will increase and to
meet the demand, supply has to go up. The requirement of more supply will be addressed by
only increasing employment.
Increase in GDP
As demand will grow naturally production will grow and hence it will increase gross domestic
product. It is estimated that GDP will grow by 1-2% due to GST.
Reduction in Tax Evasion
GST is a single tax which will include various taxes, making the system efficient with very
little chances of corruption and Tax Evasion.
More Competitive Product
As GST will address cascading effect of tax, inter-state tax, high logistics cost it will make
manufacturing more competitive. This will bring advantage to businessman and consumer.
Increase in Revenue
GST will replace all 17 indirect taxes with single tax. Increase in product demand will
ultimately increase tax revenue for state and central government.
Goods and service tax is a boon for the Indian economy and the common man. It is a welcome
step taken by the government.
Exemptions under GST:

Under GST, the government has fixed GST rates on 1,211 goods and 500 services in the range
of five to 28 per cent. Certain items such as alcohol, petrol, diesel and natural gas will be
exempt under the GST. In addition to these, the GST Council has also classified certain items
under the 0 per cent tax rate, implying that GST will not be levied on them. This list includes
items of daily use such as wheat, rice, milk, eggs, fresh vegetables, meat, fish, sindoor, bindi,
stamps, judicial papers, printed books, newspapers, bangles, handloom, bones and horn cores,
bone grist, bone meal, kajal, children's' picture, drawing or colouring books, human hair.
2. Wealth Tax in India Abolished

Wealth Tax in India was introduced in India in the year 1957 and is levied on Individuals,
HUFs and Companies if the Net Wealth of such person exceeds Rs. 30 Lakhs on the Valuation
Date i.e. last date of the previous year. For the purpose of computation of taxable net wealth,
only a few specified assets are taken into account.
Arun Jaitley while announcing Budget 2015 announced that the levy of Wealth Tax has now
been completely removed from Financial Year 2015-16 onwards. The loss of revenue due to
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the abolishment of Wealth Tax would be compensated by the levy of additional surcharge on
high income earning assessees.
The levy of surcharge is easy to collect & monitor and also does not result into any compliance
burden on the taxpayer as well as the administration department. The information pertaining to
assets which is currently required to be furnished in the Wealth Tax Return would now be
required to be mentioned in the Income Tax Return. The new Income tax return forms would
accordingly be amended so as to capture the details of assets.
Reason for Abolishment of Wealth Tax
The Wealth Tax Act which was introduced in 1957 was thoroughly revised in 1993 on
recommendations of the Chelliah Committee. The Chelliah Committee had recommended
abolition of Wealth Tax in respect of all items of wealth other than those which can be regarded
as unproductive forms of wealth or other items whose possession could legitimately be
discouraged in Social Interest.
The actual collection from the levy of wealth tax during the Financial Year 2011-12 was 788.67
Crores and during the Financial Year 2012-13 was Rs. 844.12 Crore only. The no. of Wealth
Tax assesses was around 1.15 Lakhs in 2011-12.
Although only a nominal amount of revenue is collected from the levy of wealth tax; this levy
creates a significant amount of compliance burden on the taxpayers as well as administrative
burden on the department. This is because the taxpayers are required to value the assets as per
the provisions of the Wealth Tax Rules for computation of net wealth and for Certain Assets
like Jewellery, they are required to obtain valuation report from the Registered Valuer.
Moreover, the assets which are specified for the levy of Wealth Tax, being unproductive like
Jewellery, Luxury Cars etc are difficult to be tracked and this gives an opportunity to the
assesses to under report/ under value the assets which are liable to wealth tax.
Due to this, the collection of wealth tax over the years has not shown any significant
improvement and has only resulted in disproportionate compliance burden on the taxpayers
and administrative burden on the department.
Due to the above-mentioned reasons, the levy of Wealth Tax in India has been abolished and
removed. The loss of revenue to the govt, due to removal of the levy of Wealth Tax would be
compensated by the additional surcharge levied on high income earning assessees.
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CHAPTER 11
INTERPRETATION OF TAXING STATUTES.
Interpretation means the art of finding out the true meaning of the words in a statute[law]. A
taxing statute is a law which compulsorily imposes a tax, fee, cess or duty. A taxing statute
consists of 3 main parts:
1. Charging Section- A section which declares the tax-liability of a person.
2. Assessment Sections- contains the methods of compiling/calculating the tax payable.
3. Recovery Sections- Contains provisions for recovery of tax from a person who does not
pay tax voluntarily.
Generally, Strict Rule of interpretation is to be followed in case of taxing statutes. It covers the
following principles:
1. There is no presumption or equity as to tax. If a person comes clearly within the scope
of the charging section of a taxing statute, he must be taxed no matter how great is
hardship maybe
2. A person can be taxed only if the words of the taxing statutes clearly, expressly and
unambiguously imposes tax liability upon him. Before taxing a person, it must be
shown that he falls within the ambit of the charging section by clear words used in that
section. There is no implied power to tax. The power to tax must be express and clear.
[Russell v. Scott(1948) 2 ALL ERI]
In Commissioner of Wealth Tax v. Ellison Bridge Gymkhana.
While integrating a taxing statute, if an ambiguity occurs; that is, if the words of the
taxing statute are open to double meanings; one in favour of the taxpayer and one
against him, then that meaning which is favourable to the taxpayer must be adopted.
In CIT v. Jalgaon Electric Supply Co.
It was held that there is nothing wrong or unjust, if the taxpayer escapes from the law
due to inability of the Legislature to express itself clearly.
3. Charging section and computation sections must be read together. If the computation
sections cannot be applied to a person's case; it can be safely interpreted that the
charging section also does not apply to him. [CIT v. Srinivasa Setty]
4. An interpretation which supports double taxation should be avoided as far as possible.

But if the double taxation is legally maintainable(if it is imposed by competent
authorities through a clear law and does not violate fundamental rights) then it can be
upheld.
5. If there is a Casus Omisus (a point missed or not provided for by the legislature) in a
taxing statute, then the courts should not try to fill in such gaps as it feels like. [J.
Srinivasa Rao v. Government of AP]
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6. Logic or reason is of not much use in the interpretation of taxing statutes. For eg. In
Azamjha v. Expenditure Tax Officer the issue was the interpretation of the word
"dependent". According to words in the Act "dependent" means the assessees' spouse,
minor child or any person wholly or mainly dependent on the assessees. The court held
that the words “wholly or mainly dependant on the assessee” is not applicable to spouse
and minor child. Hence, spouse and minor child can be treated as dependents even if
they have separate incomes are not actually dependent on the assessee.
In Forage & Co Ltd. v. Municipal Corporation of Bombay the schedule of the Act laid
down a list of items taxable under the head of “Materials used for road construction and
repair”. Zinc Oxide was one of the items mentioned in the list. The assessee contented
that zinc oxide was not a material used for road construction or repair. But the court
held that where the words of the Act are clear and express; then it should be followed
strictly. Hence zinc oxide is taxable under the head of “Materials used for road
construction and repair’ even though it is not actually used for that purpose.
7. While classifying taxable goods under the taxing statute, specific headings should be
given more preference then general headings. For eg. In Alpine Industries v. CCE the
question was, under which heading is lip-balm taxable. Court held that it would not
come under the general heading of “Medicament” but under the specific head of
“preparation for skin care”.
If there is a change in the meaning of a taxable good as a result of which it comes under
a different classification head, then the burden of proof is on the tax department to prove
it. For example, in Mauri Yeast India private limited v. State of UP. The tax department
accepted the classification of the assessees’ goods under a particular entry for over 20
years. Later, the department tried to tax it under a different entry. Court held that it is
up to the department to prove that the meaning of the goods has changed in order to
classify it under a different entry.
8. If there are penalty/punishment provisions in a taxing statute, the court should follow
the doctrine of mens rea while interpreting such provisions. [Gujarat Travancore
Agency v. CIT.]
9. While intepreting the classification of a good that is, while deciding whether a particular
good is taxable or not, it's common parlance meaning should be adopted unless the Act
gives a special meaning to that good.
Eg. [Motipur Zamindary v. State of Bihar]

The issue was whether sugarcane was a ‘green-vegetable’ for the purpose of tax
exemption under the Bihar Sales Tax Act. The court held that though sugarcane is a
‘green-vegetable’ botanically yet it cannot be treated as a green vegetable in its popular
meaning. Hence, it is taxable.
10. While interpreting tax-exemption provisions, the object of the tax-exemption should be
considered. If the object of the tax exemption is public good or social welfare then
liberal interpretation which favours the exemption should be followed. Eg. Tax
exemptions for non-profit making educational institutions. [Oxford University press
v. CIT]. If the tax-exemption does not involve much public welfare objects or other
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beneficent objects; then it should be interpreted strictly. That is, if two views are
possible; the one which is against the assesse should be followed. Otherwise it may lead
to increase the burden on society.
11. And interpretation which is likely to lead to large-scale tax-evasion and tax-avoidance
should be avoided. [CCE v. Acer India Ltd. ]
12. Even though equity and tax are strangers, when two views are possible; the view which
is equitable should be adopted and the view which results in injustice should be avoided.
In CIT v. J.H Gottayadgiri -Under the Income Tax Act, the income from business of a
wife or minor child of the assesse is treated as the income of the assesse himself the
court held that in such a situation the business losses of the assessees’ wife or minor
child can be treated as the loss of assessees and can be deducted by the assesse.
SOME TERMS FROM PREVIOUS QUESTION PAPERS (2016,

2015)
What is Consumption Tax?
Consumption tax refers to the 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.
Consumption Tax Features:
• 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:
• 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.
• 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.
• 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.
Regulatory And Compensatory Tax:
Tax is a compulsory Contribution and is the sovereign attribute of the State. It is a branch of
Public Finance of every Economy. Taxation is collection of revenue and Public expenditure
is the application of the revenue so collected. Tax is necessary for the Functioning of Every
Economy of the World, without it all the duties and the obligations of the state will be undone
and power unused.
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To smoothen the movement of interstate trade and commerce, the state has to provide many
facilities by way of roads etc.. The concept of regulatory and compensatory taxation has been
evolved with a view to reconcile the freedom of trade and commerce guaranteed by Art. 301
with the need to tax such trade at least to the extent of making it pay for the facilities
provided to it by the state, e.g., a road net-work. If a charge is imposed not for the purpose of
obtaining a proper contribution to the maintenance and upkeep of the road, but for the
purpose of adversely affecting trade or commerce, then it would amount to, a restriction on
the freedom of trade, commerce and intercourse.
The concept of regulatory and compensatory taxation has been applied by the Indian courts to
the state taxation under entries 56 and 57 of List II.
Atiabari Tea Co. V. State of Assam:

Facts: A tax levied by the State of Assam on the carriage of tea by road or inland waterways
was held bad for "the transport or movement of goods is taxed solely on the basis that the goods
are thus carried or transported, and thus "directly affects the freedom of trade as contemplated
by Art. 301."
The Supreme Court took the view that the freedom guaranteed by Art. 301 would become
illusory if the movement, transport, or the carrying of goods were allowed to be impeded,
obstructed or hampered by the taxation without satisfying the requirements of Art. 302 to 304.
The court did not take into consideration the quantum .of tax burden, which by no means was
excessive. Simply because the tax was levied on 'movement' of goods, from one place to
another, it was held to offend Art. 301.
The view propounded in Atiabari was bound to have great adverse effect upon the financial
autonomy of the states. It would have rendered their taxing power under entries 56 and 57, List
II.
Accordingly, the matter came to be re-considered by the Supreme Court in Automobile
Transport v/s Rajasthan:
Facts: The State of Rajasthan had levied a tax on motor vehicles ( Rs. 60 on a motor car and
Rs. 2000 on a goods vehicle per year) used within the state in any public place or kept for use
in the state. The validity of the tax was challenged. Taking the view that freedom of trade and
commerce under Art. 301 should not unduly cripple state autonomy, and that it should be
consistent with an orderly society, the Supreme Court now ruled that regulatory measures and
compensatory taxes for the use of trading facilities were not hit by Art. 301 as these did not
hamper, but rather facilitated, trade, commerce and intercourse.
Issue: A working test to decide whether a tax is compensatory or not would be to enquire
whether the trades people are having the use of certain facilities for the better conduct of their
business and paying not patently much more than what is required for providing the facilities?
A tax does not cease to be compensatory because the precise or specific amount collected is
not actually used in providing facilities.
The concept of compensatory tax evolved in this case was something new as in Atiabari, the
court had dismissed the argument that the money realized through the tax would be used to
improve roads and waterways rather curtly by saying that there were other ways, apart from
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the tax in question, to realize the money, and that if the said object was intended to be achieved
by levying a tax on the carriage of goods, the same could be done only by satisfying Art. 304(b).
Decision: The court ruled that Art.301 did not hit the tax, as it was a compensatory tax having
been levied for use of the roads provided for and maintained by the state. Thus, to this extent,
the majority view in Atiabari was now overruled by Automobile.
Since then the concept of regulatory and compensatory taxes has become established in India
with reference to entries 56 and 57, List II, and the concept has been applied in several cases,
and progressively the courts have liberalized the concept so as to permit state taxation at a
higher level.
The Direct Taxes Code (DTC)

Background on the Direct Taxes code
The Direct Taxes Code (DTC) is an attempt by the Government of India (GOI) to simplify
the direct tax laws in India. DTC will revise, consolidate and simplify the structure of direct
tax laws in India into a single legislation. The DTC, when implemented will replace the
Income-tax Act, 1961 (ITA), and other direct tax legislations like the Wealth Tax Act, 1957.
The Regime so far: 2009 - 2014
The first draft bill of DTC was released by GOI for public comments along with a discussion
paper on 12 August 2009 (DTC 2009) and based on the feedback from various stakeholders, a
Revised Discussion Paper (RDP) was released in 2010. DTC 2010 was introduced in the Indian
Parliament in August 2010 and a Standing Committee on Finance (SCF) was specifically
formed for the purpose which, after having a broad-based consultation with various
stakeholders, submitted its report to the Indian Parliament on 9 March 2012.
Recent action: As a follow-up on this initiative and as stated by the Finance Minister (FM) in
his Interim Budget Speech in February 2014, after taking into account the recommendations of
the SCF, a “revised” version of DTC (DTC 2013) has been released on 31 March 2014.
The DTC 2013 proposes to introduce:
• General Anti Avoidance Rules (GAAR),
• Taxation of Controlled Foreign Companies (CFC),
• Place of Effective Management (POEM) rule as a test to determine residency and tax
indirect transfer of Indian assets.
• Also contains expanded source rules for taxation of royalty, fees for technical services
(FTS) and interest.
Further certain novel provisions are also included such as additional tax levy on certain persons
having high net worth such as dividend tax levy on dividend income earned by resident
shareholders in excess of INR10 million. It also proposes a tax rate of 35% for
individuals/HUFs where the total income exceeds INR100 million.
The DTC 2013 is presently a draft version which can be implemented only after it is presented
before the Indian Parliament where. The fate of the DTC 2013 continues to be is uncertain.
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Nevertheless, DTC 2013 provides an opportunity to assess the impact of the proposals on
current structures and business models.
The Central Board of Direct Taxes
The Central Board of Direct Taxes (CBDT) is a part of Department of Revenue in the Ministry
of Finance. The CBDT provides inputs for policy and planning of direct taxes in India, and is
also responsible for administration of direct tax laws through the IT Department. The CBDT is
a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials
of the Board in their ex officio capacity also function as a division of the Ministry dealing with
matters relating to levy and collection of direct taxes. The CBDT is headed by Chairman and
also comprises six members, all of whom are ex officio Special Secretary to the Government
of India.
The Chairman and members of the CBDT are selected from the Indian Revenue Service (IRS),
whose members constitute the top management of the IT Department. The Chairman and every
member of CBDT are responsible for exercising supervisory control over definite areas of field
offices of IT Department, known as Zones. Various functions and responsibilities of the CBDT
are distributed amongst Chairman and six members, with only fundamental issues reserved for
collective decision by the CBDT. The areas for collective decision by the CBDT include policy
regarding discharge of statutory functions of the CBDT and of the Union Government under
the various direct tax laws. They also include general policy relating to:
• Set up and structure of Income Tax Department;
• Methods and procedures of work of the CBDT;
• Measures for disposal of assessments, collection of taxes, prevention and detection of
tax evasion and tax avoidance;
• Recruitment, training and all other matters relating to service conditions and career
prospects of all personnel of the Income-tax Department;
• Laying down of targets and fixing of priorities for disposal of assessments and
collection of taxes and other related matters;
• Write off of tax demand exceeding Rs.25 lakhs in each case;
Finance Commission
THE CONSTITUTION OF INDIA has laid down elaborate and detailed provisions for the
division of financial resources between the Union and the states. the scheme of division of
resources makes a clear bifurcation of taxes to be levied by the Union and the states.
Consequently, there is no overlapping tax jurisdiction as is common in most of the older
federations. The above scheme of distribution has tended to give the Union more flexible
sources of revenue and, as a result, created a gap between the needs and resources of the states.
It is an important problem of federal finance to bridge this gap between functions and resources.
In India, the Constitution has attempted a three-fold scheme to bridge this gap. Firstly, the
states are entitled to a share in federal taxes, namely, taxes on income (other than corporation
tax) and Union excise duties on some commodities. Secondly, the states are assigned the entire
proceeds of certain taxes levied by the Union, namely, estate duty, the tax on railway fares and
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additional excise duties levied in lieu of sales tax. Finally, the Constitution provides a system
of grants-in-aid of revenues.
Having made provisions for federal assistance to the states, both as grants-in-aid and as a share
of specified taxes, the Constitution visualised the necessity for a machinery independent of
Union Government to determine the measure of assistance that should be afforded and also the
principles on which this assistance should be made available. This machinery was created in
the form of Finance Commission to be appointed by the President every five years so that
such periodical adjustments can be made in the union-state financial relationship as are needed
in the light of the emerging situation.
The Finance Commission is a unique experiment in the Indian federal system. It has been
envisaged by the framers of the Indian Constitution as "a quasi-arbitral body whose funtion is
to do justice between the centre and the states". It is an authority without parallel in other
federations. The only other body which, bears some resemblance to it is the Commonwealth
Grants Commission of Australia. However, there are significant differences between the two
institutions as regards their status and the scope of their competence. The Indian Finance
Commission is created by the Constitution and it is not a standing body. It sits only once in
five years.
Article 280 of the Constitution which provides for the constitution of the Finance Commission
authorized Parliament to determine the qualifications required for appointment as members of
the commission, manner in which they should be selected and to prescribe the powers of the
commission for the performance of their functions.
Article 280 (3) of the Constitution lays down the functions of the Finance Commission. The
commission is required to make recommendations to the President as to (a) the distribution
between the Union and the states of the net proceeds of taxes which are to be or may be divided
between them and the allocation between the states of the respective shares of such proceeds,
(b) the principles which should govern the grants-in-aid of the revenues of the states out of the
Consolidated Fund of India, and (c) any other matter referred to the commission by the
President in the interests of sound finance. Under the Constitution, the decisions on the
commission's recommendations with respect to income tax is taken by the President and with
respect to other taxes, grants-in-aid, etc., by Parliament.
Powers of the Finance Commission:

• The Finance Commission is considered a quasi-judicial body because it has
powers of the civil court according to the Court of Civil Procedure.
• The Commission can summon and enforce the attendence of any witness
• It can ask any person to share information or produce a document, which it
deems relevant for carrying out its work.
• The Commission can ask for any public record or document from any court or
office in the country.
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NOTES ON

PRINCIPLES OF TAXATION LAW

7th Semester BBA LLB(Hons.)

Disclaimer: This document is a product of extracts from various sources. It is

INITIAL PERIOD (1860-1886)

Adam Smith's Four Main Canons of Taxation

4) Limitation of taxing power of a state, Low rates of taxation, maintaining gradual

Social and Economic Objectives of Taxation

MERITS OF DIRECT TAXES

Demerits of Regressive Taxes:

3. Non-Productive: These taxes are usually implemented or low-priced commodities. These

RECOMMENDATIONS OF THE DIRECT TAXATION ENQUIRY COMMITTEE

Taxation and Fundamental Rights

FEDRAL POLITY: DISTRIBUTION OF REVENUE IN THE LIGHT OF THE

Roles of each Government with respect to Collection

Holistic Interpretation of Articles

Scanning articles through lenses of Federalism

3. Voting on demand for grants in Lok Sabha

4. Passing of appropriation bills

5. Passing of Finance bills.

It includes expenditure specified in the constitution. There is no voting on charged expenditure.

HOW A BILL BECOMES AN ACT

Reference of Bill to Standing Committee

If a Bill is referred to a Select/Joint Committee, the Committee considers the Bill

Bill in the other House

DISTINCTION BETWEEN MONEY BILL, FINANCE BILL AND BILLS

Settlement Commission system was introduced as per recommendations of Wanchoo

• Wealth tax on shares security etc were abolished

PARTHASARATHY SHOME COMMITTEE REPORT, 2012

• Improve elasticity of tax system.

Exemptions under GST:

2. Wealth Tax in India Abolished

4. An interpretation which supports double taxation should be avoided as far as possible.

Eg. [Motipur Zamindary v. State of Bihar]

SOME TERMS FROM PREVIOUS QUESTION PAPERS (2016,

Atiabari Tea Co. V. State of Assam:

The Direct Taxes Code (DTC)

Powers of the Finance Commission:

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