Taxation Laws in India

Taxation in India gains its legitimacy from the constitution, and its provisions, which gives
the Central and State Governments the authority and the power to legislate on taxes and
collect them. These powers can be primarily be seen in Articles 246 and 265 of the Indian
Constitution. The chapter XII of the constitution, Finance, Property, Contracts and Suits,
have various provisions on this topic as well.

Article 265 reads, “ Taxes not to be imposed save by authority of law.—No tax shall be
levied or collected except by authority of law.” Therefore, taxes can only be levied and
collected in India when there is a clear and explicit authority by the way of a legislation.

We can find the distribution of legislative powers between the Parliament and the State
Legislature on subjects like taxation in Article 246 of the Indian Constitution. Taxation
includes various different heads and certain heads are under the Union List, while certain
heads are in the State List, under Schedule VII of the Constitution. Union List includes
important sources of revenue to the government like the Income Tax and Corporation tax.
Other important revenue streams like the Agricultural tax and Land Revenue fall under the
ambit of State List.

Taxation in India is broadly into two heads – Direct and Indirect Taxes. Direct Taxes are
the taxes which are directly imposed on individuals or organisations by an imposing
authority, which usually the government. It is said to be the type of tax that can’t be accepted
by anyone else. Examples of Direct Tax are Income tax and Wealth Tax. Indirect taxes are
the types of taxes which are imposed on the public indirectly through goods and services.
These are only collected on people who sell goods and services who later charge the people
for it. Goods and Services Tax is one of the major indirect taxes which the citizens pay.
Other examples include Value Added Tax.

In this article Income Tax and Goods and Services Tax will be discussed in more detail as
they are the two major taxes which everyone pays.

Income Tax
Income Tax is governed by The Income Tax Act, 1961 (ITA) which provides for the levy
and the collection of tax on income earned by a person. According to this act, every person
whose income is more than the maximum not chargeable amount to tax, shall be taxed a rate
which is prescribed in the Finance Act. There are different tax brackets into which each
person’s income is categorised and charged accordingly. As income increases the amount of
tax a person pays also increases accordingly. In Union Budget 2020, a new income tax
regime was introduced by the Finance Minister. Under this an individual or a HUF has the
option to pay taxes at a lower rate provided that they do use any deductions or benefits under
other provisions and various sections. Income tax is calculated based on the income in a
financial year, which is April to March in India.

The Income Tax Act has an inclusive definition of income. Income isn’t just the money
which is explicitly declared but can also be all things which the word signifies according to
its natural import. 1
It includes revenue or capital gains and even includes loses. It is
primarily defined in Section 2(24) of the Income Tax Act. This includes income from
salaries, house property, profits and gains from business or profession, capital gains and
income from other sources.

In India, only residents pay the income tax. Section 6 of the ITA contains criteria to
determine the residence of entities like companies and individuals. A company is regarded as
a resident in India if it is an Indian company i.e, incorporated in India, or its place of effective
management was India in the given financial year. A person who is resident in India, is taxed
based on his global income which includes the income arising in India and the income
received in India. Non-Indians located in India are only taxed on the income that has its
source in India.

Goods and Service Tax

Goods and Service is the major indirect tax charged in India. It is governed by the Goods and
Service Tax Act, 2017. It is an indirect tax which is levied on the supply of goods and
services as the name suggests. It has replaced many other indirect taxes such as excise duty,
VAT, service tax etc. It is a comprehensive, destination based tax that is levied on every
value addition. It is a single domestic Indirect Tax for the entire country. Before the Goods

1
Kanga Palkhivala and Vyas, The Law and Practice of Income Tax, Ninth Edition at p. 142
and Services Act, the indirect taxes was levied on different levels of production every time
value was added. For example considering the production of a book, value is added in form
of paper being taken from trees, made into papers, and information being printed there are
different stages. At every stage there was a value addition. This was taxed. Under the new
regime, the tax is levied only at every point of sale.

GST has two parts Central GST (CGST) and State GST (SGST) which are levied by the
central and state government respectively for intra-state sales. For interstate sales Integrated
GST is chargeable. There is a Union Territory GST (UTGST) which is only charged in the
union territories.

GST Bill was first introduced in 2014 as The Constitution (122 nd Amendment) Bill, and was
later passed in 2016 as The Constitution (101 st Amendment) Act. It included the creation of a
GST Council to administer and govern GST under Article 279A under the Constitution.

There are five different tax slabs under which all the items taxed are divided into. These tax
slabs are 0%, 5%, 12%, 18%, and 28%. There are certain items which aren’t taxed under
GST and still taxed by the State governments under the old regime. These items include
petroleum products, alcoholic drinks and electricity.

Conclusion

To conclude taxation laws in India are divided into Direct and Indirect taxes primarily.
Income Tax and Goods and Service Tax are among the main taxes which Indians pay along
with other taxes such as gift tax, corporate tax etc.

Income tax is levied on Indians and Indian residents on their income arising from various
sources. Foreigners have to pay income tax only on the income arising from India. GST is
paid on goods and services indirectly.