TAXATION LAW

MODULE 1
❖ Overview of Taxation system in India
The word tax is based on a latin word taxo which means to estimate. To Tax
means to impose a financial charge or other levy upon a tax payer, an
individual or legal entity, by a state or the functional equivalent of a state
such that failure to pay is punishable. Taxation is a payment from natural
persons or legal entity and it is levied by the government for which no goods
or services is received directly in return, so taxes is that amount of money,
the people pay which is not related directly to the benefit of people obtained
from the provision of a particular goods or services.
Taxes collected by the government to carry out many functions. Some of
them are:-
✓ Expenditures on war
✓ The enforcement of law and public order
✓ Protection of property
✓ Economic infrastructure
✓ Social engineering
✓ The operation of government itself
✓ Welfare and public services
▪ Education
▪ Health care systems
▪ Pensions for elderly
▪ Unemployment benefits
▪ Public transportations, energy, water and waste management
systems etc.
In the present time, taxation is not just a means of finance or transferring
money to the government to spend it for meeting public expenditures, or
raise government revenue, but has become a tool for the government.
✓ To reduce demand in the private sector
✓ Redistribution of income and wealth
✓ Means of economic development
✓ Stabilizing the purchasing power of the people
 ✓ Production of industrial homes for foreign industrialists
DEFINITIONS OF TAX
According to Bastable, “A tax as a compulsory contribution of the wealth
of a person, or body of persons for the service of public powers.”
Hugh Dalton, “A tax is a compulsory charges imposed by a public authority
irrespective of the exact amount of service rendered to the tax payer in
return and not imposed as a penalty for legal offence.”
Jom Bouvier defined a tax as “A pecuniary burden imposed for support of
the government, the enforced proportional contribution of persons and
property of the government and for all public needs”
According to Trussing, “The essence of Tax as distinguished from other
charges by government is the absence direct quid pro quo- tit for tat between
the tax payers and the public authority”.
From the above definitions we may conclude that a tax is compulsory
contribution, levied by government from owner of income without direct
benefit but for public benefit, and taxes should be arranged by the law.
CHARACTERSTICS OF TAXES
1. Tax is compulsory – A tax is imposed by law. So tax is compulsory
payment to the governments from its citizens. Tax is duty from every citizen
to bear his share for supporting the government. The tax is compulsory
payment, refusal or objection for paying tax due leads to punishment or is
an offence of the court of law. Government imposes tax when somebody
buys commodities, or when uses services or earns income or any other
condition for compulsion is found. The government practices its sovereign
when levying the tax from its citizens.
2. Tax is contribution – Contribution means in order to help or provide
something. Tax is contribution from members of community to the
Government. A tax is the duty of every citizen to bear their due share for
support to government to help it to face its expenditures. Some wants are
common to everybody in the society like defence and security, so these
wants cannot be satisfied by individuals. These social wants are satisfied by
governments, hence the people support government for these social wants.
Contribution involves loss or sacrifice from the side of contributor. These
sacrifices affect his income.
3. Tax is for public benefit – Tax is levied for the common good of society
without regard to benefit to special individual. Government proceeds are
spent to extend common benefits to all the people such as natural disaster -
like floods, famine - defence of the country, maintenance of law and
establish infrastructure and order. Such benefits are given to all people.
4. No direct benefit – Government is compulsorily collecting all types of
taxes and does not give any direct benefits to the tax payer for taxes paid.
The essence of tax as distinguished from other charges by governments is
the absence of a direct quid-pro-que between the taxpayer and the public
authority. Tax is different from another government charges which may
give direct benefits to payers such as prices, fees, fines etc where the direct
benefits are available. Taxes are for common benefits to all the members of
the society.
5. Tax is paid out of income of the tax payer – Income means money
received, especially on regular basis, for work or through investment. Tax
is paid out of income as long as the income becomes realized, here the tax
is imposed. Income owner has profit from any business, so he should pay
his share for support to the government.
6. Government has the power to levy tax – Governments are practicing
sovereign authority upon its citizens through levying of taxes. Only Govt.
can collect tax from the people. Tax is transferring resources from the
private sector to the public sector. Government is levying the tax to cover
its expenditures. The government use these taxes for increasing social
welfare & economy development.
7. Tax is not the cost of the benefit – Tax is not the cost of benefit
conferred by the government on the public. Benefit and taxpayer are
independent of each other, and payment of taxation is of course designed
for conferring of benefits on general public.
8. Tax is for the economic growth and public welfare – Major objective
of the government is to maximize economic growth and social welfare.
Developmental activities of the nations generally involve two operations,
the raising of revenue and the spending of revenue, so the government spent
taxes for economic benefit, for entire community and for aggregate welfare
of the society.
OBJECTIVES OF TAXATION
▪ REVENUE
▪ SOCIAL OBJECTIVES
➢ Redistribution of income and wealth
➢ Social Welfare (education, health etc.)
▪ Economic stability of taxes- helps in economic stability of the country
▪ Economic growth
▪ Enforcing government policy
▪ Directing limited scarce resources to effective and essential channels
▪ Economic stability
TYPES OF TAXES
Point of Direct taxes Indirect taxes
difference
Incidence & A tax is said to be direct If impact of tax is on one
Impact when impact and incidence person and incidence on
of a tax are on one and same the another, the tax is
person. called ‘indirect’
Burden Direct tax is imposed on the Indirect tax is imposed on
individual organisation and commodities and allows
burden of tax cannot be the tax burden to shift.
shifted to others.
Viability of Direct taxes are lesser Indirect taxes are borne by
payment burden then Indirect taxes the consumers of
to people as direct taxes are commodities and services
based on Income earning Irrespective of financial
ability of people. ability as the MRP
Includes all taxes.
Administrative The administrative cost of Cost of collecting Indirect
viability collecting direct taxes is taxes is very less as
more and Improper indirect taxes are wrapped
administration may result in up in prices of goods and
tax evasion.
 services and cannot be
evaded.
Penalty It is levied on the assesse. It is levied on supplier of
Goods & Services.

Merits of Direct Tax

1. Equity: - Direct taxes have equity of sacrifice, depend upon the volume
of income. They are based on the principle of progressive, so rates of tax
increase as the level of income of a person rises.
2. Elasticity and productivity: - Direct taxes have elasticity because when
the government faces some emergency, like earthquake, floods and famine
the government can collect money for facing those problems by direct tax.
3. Certainty:- Direct taxes have certainty on both sides‘ tax-payer and
government. The tax- payers are aware of the quantity of tax. They have to
pay and rate, time of payment, manner of payment, and punishment from
the side of government is also certain about the total amount they are
getting.
4. Reduce inequality: - Direct taxes follow progressive principles so it is
taxing the rich people with higher of taxation and the poor people with a
lower level of taxation.
5. Good instrument in the case of inflation:- Tax policy as fiscal
instrument plays important role in the case of the inflation, so government
can absorb the excess money by arising in the rate of existing taxes or
imposition of new taxes.
6. Simplicity:- Direct taxes are simplicity, while levy the rules, procedures,
regulations of income tax are very clear and simple.
Demerits of Direct Taxes
1. Evasion: - Direct tax is lump sum therefore tax payers try evasion.
2. Uneconomically.:-Expenses of collection are larger in the case of direct
taxes, because they require widely- spread staff for collection
3. Unpopular:-Direct tax is required to be paid in lump sum for the whole
year, so the tax payers feel the painful payment, these taxes are therefore
unpopular.
4. Little incentive to work and save:-In direct taxes, rates are of
progressive nature. A person with higher earning is taxed more, in turn he
is left little with amount. So the tax payer feels disincentive to work hard
and save money after reaching a certain level of income.
5. Not suitable for a poor country:- Direct taxes are not enough to meet
its expenditure.
6. Arbitrary:-Due to absence of logical or scientific principle to determine
the degree of progression in the taxation, the direct taxes are arbitrary.
Merits of Indirect Taxes
1. High revenue production :-Nature of indirect taxes is imposition on the
commodities and services. Here indirect taxes cover a large number of
essential goods and luxurious goods which are consumed by the mass both
rich and poor people, these help in collecting large revenue.
2. No evasion. Nature of indirect tax is that, it is included in the price of
commodity, so tax evasion or tax avoid is difficult.
3. Convenient:-Indirect taxes are small amount and indirect taxes are
hidden in the price of goods and service, hence the burden of these taxes is
not felt very much by the tax-payers, and not lump sum like direct taxes.
4. Economy - Indirect taxes are economical in collection and the
administrations costs of collection are very low, also the procedure of
collection of these taxes is very simply.
5. Wide coverage:-Indirect taxes cover almost all commodities like
essential commodities, luxuries, and harmful ones.
6. Elasticity:-Since a large number of commodities and services are
covered by indirect taxation there is great scope for modification of taxes,
goods and tax rate, much depends on nature of goods and on its demands.
Demerits of Indirect Taxes
1. Regressive in effect:-Essential commodities are used from all members
of community. When taxing these commodities the burden would be equal,
and no distinction is made between the rich and poor people.
2. Uncertainty in collection- Discourage savings and Increase inflation:-
Indirect taxes are payable when people spent their income or when people
buy goods and services, so tax authorities cannot accurately estimate the
total yield from different indirect taxes.
3. Discourage savings- Increase inflation:-Indirect taxes are included in the
price of commodity, so people have to spend more money on essential
commodities, when levied indirectly. In this case that means the customers
cannot save some of their money.
4. Increase inflation:-Indirect taxes increase the cost of input and output,
increase in production cost, push the price of goods. These reflect in
increase in the wages of the workers.
HISTORY OF TAXATION IN INDIA
Ancient times
In India, the system of direct taxation as it is known today, have been in
force in one form or another even from ancient times. There are references
both in Manu Smriti and Arthasastra to a variety of tax measures.
According to Manu Smriti, the king should arrange the collection of taxes
in such a manner that the subjects did not feel the pinch of paying taxes. He
laid down that traders and artisans should pay 1/5th of their profits in silver
and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their
produce depending upon their circumstances.
Kautilya, has also described in great detail the system of tax administration
during the reign of Mauryan Empire, the glimpse of which can been seen in
the present tax system. His concept of taxation emphasized on equity and
justice. He suggested that during emergencies taxes can be increased to
meet the emergency expenses.
Arthashastra, mentioned that each tax was specific and there has no scope
for arbitrariness. Tax collectors determined the schedule of each payment,
and its time, and quantity being all pre-determined.The land revenue was
fixed at 1/6th share of the produce and import and export duties were
determined on advalorem basis.The import Duties on foreign goods were
roughly 20 % of their value. Similarly, tolls, roads, cess, ferry charges and
other levies were all fixed.
Most of the taxes of Ancient India were highly productive. The combination
of direct and indirect tax system, secured elasticity in the Tax system, but
more emphasis were made on direct taxes.
TAXES IN MODERN TIMES
✓ INCOME TAX ACT, 1860
The Tax was introduced for the first time by Sir James Wilson. India’s First
“Union Budget” Introduced by Pre-independence finance minister, James
Wilson on 7 April, 1860. The Indian Income Tax Act of 1860 was enforced
to meet the losses sustained by the government on account of the military
mutiny of 1857. Income was divided into four schedules taxed separately:
(1) Income from landed property;
(2) Income from professions and trades;
(3) Income from Securities;
(4) Income from Salaries and pensions.
✓ INCOME TAX ACT, 1886
Separate Income tax act was passed. This act remained in force up to, with
various amendments from time to time. Under the Indian Income Tax Act
of 1886, income was divided into four schedules taxed separately:
(1) Salaries, pensions or gratuities;
(2) Net profits of companies;
(3) Interests on the securities of the Government of India;
(4) Other sources of income.
The tax was levied on income of residents as well as non-residents.
Agricultural income was exempted from taxes as land revenue is a direct
tax paid already. Life insurance premium were exempted from taxes and
HUF was treated as a distinct taxable entity.
✓ INCOME TAX ACT, 1918
The Act of 1918 brought under change also receipts of casual or non
recurring nature pertaining to business or professions. Although income tax
in India has been a charge on net income since inception, it was in the Act
of 1918 that specific provisions were inserted for the first time pertaining
to business deductions for the purpose of computing net income. The Act
of 1918 remained in force for a short period and was replaced by new Act
(Act XI of 1922) in view of the reforms introduced by the Govt. of India
Act, 1919 .
✓ INCOME TAX ACT, 1922
It laid down the basis, the mechanism of administrating the tax and the rates
at which the tax was to be levied would be laid down in financial acts. The
Act gave specific nomenclature to various income tax authorities. The Act
remained in force for 40 years. it had been become very difficult on account
of innumerable amendments. The GOI therefore, referred it to the law
commission in 1956 with a view to simplify and prevent the evasion of tax.
✓ INCOME TAX ACT, 1961
In consultation with the Ministry of Law finally the Income Tax Act, 1961
was passed. The Income Tax Act 1961 has been brought into force with 1
April 1962.It applies to the whole of India (including Jammu and Kashmir).
Since 1962 several amendments of far-reaching nature have been made in
the Income Tax Act by the Union Budget every year which also contains
Finance Bill. After it is passed by both the houses of Parliament and
receives the assent of the President of India, it becomes the Finance act.
At present, there are five heads of Income:
(1) Income from Salary;
(2) Income from House Property;
(3) Income from Profits and Gains of Business or Profession;
(4) Income from Capital Gains;
(5) Income from Other Sources.
There are XXIII Chapters, 298 Sections and Fourteen Schedules in the
Income Tax Act.
TAX REFORM COMMITTEE IN INDIA
The efforts to reform India’s tax system began in mid 1980s when the
government announced a Long Term Fiscal Policy, 1985. This policy
recognized that the fiscal position of the country is going downhill and there
was a need to make changes in the taxation system. In that decade, a
technical group to review and rationalize the central excise duties was
established and this led to introduction of Modified System of Value-Added
Tax (MODVAT) in 1986. To rationalize the custom duties, the harmonized
system (HS) of the classification of goods was introduced.
Raja Chelliah Committee
The Government appointed a Tax Reforms Committee under Prof Raja
Chelliah to lay out agenda for reforming India’s tax system. This TRC came
up with three reports in 1991, 1992 and 1993 with several measures, which
can be summarized in these points:
1. Reforming the personal taxation system by reducing the marginal tax
rates.
2. Reduction in the corporate tax rates.
3. Reducing the cost of imported inputs
4. by lowering the customs duties.
5. Reduction in the number of Customs tariff rates and its rationalization.
6. Simplifying the excise duties and its integration with a Value-Added
Tax (VAT) system.
7. Bringing the services sector in the tax net within a VAT system.
8. Broadening of the tax base.
 9. Building a tax information and computerization.
10. Improving the quality of tax administration.
The tax reforms that began with the Chelliah Committee recommendations
are still going on. Later on, government appointed the Vijay Kelkar
Committee in 2002 which further provided direction to the tax reforms in
the country.
Vijay Kelkar Committee
The latest Impetus to direct tax reforms in India came with the
recommendations of the Task Force on Direct & Indirect Taxes under the
chairmanship of Vijay Kelkar in 2002. The main recommendations of this
task force related to the direct taxes related to increasing the income tax
exemption limit, rationalization of exemptions, abolition of long term
capital gains tax, abolition of wealth tax etc. Its key recommendations were
as follows:
Administration of Direct Tax
• The taxpayer services should be extended both in quality and quantity
and taxpayers should get easy access through internet and email.
• PAN (Permanent Account Number) should be expanded and it should
cover all citizens.
• Block assessment of search and seizure cases should be abolished.
• To clear the backlog, the department should outsource the data entry
work.
• All returns and issue of refunds should be completed in a four month
period. Dispatch of refunds should be outsourced.
• Government should establish a Tax Information Network to
modernize, simplify and rationalize tax collection, particular TDS and
TCS.
• Abolish the requirement of Tax Clearance Certificate on leaving the
country.
 • Empower CBDT with appropriate administrative and financial
powers.
Personal income tax
• Increase in exemption limit to Rs.1 lakh for the general categories of
taxpayers and further exemption for senior citizens and widows.
• Rationalize income tax slabs, eliminate surcharge on personal income
tax.
• Incentivise home loans by providing interest subsidy on home loans
@2%.
• Increase deduction under Section 80CCC for contribution to pension
funds.
Corporation Tax
• Reduce the Corporate tax to 30% for domestic companies and 35%
for foreign companies.
• The listed companies should be exempted from tax on dividends and
capital gains.
• Increase rate of depreciation for plant and machinery.
• Abolish Minimum Alternate Tax.
Wealth Tax
• Abolition of wealth tax.
The above recommendations were made 13 years ago. Today, we see that
many of them have been implemented. The DTC and GST have been so far
biggest reforms initiated by the Government in direct and indirect tax
regime respectively. However, DTC has never arrived and government does
not seem to go seriously after it because most of its provisions are already
incorporated in the Income Tax Act. GST is now coming into force from
July 1, 2017.
CONCLUSION
The above recommendations were made more than a decade ago. Today we
see that many of them have been implemented. The DTC and GST have
been so far the biggest reforms initiated by the government in direct and
indirect tax regime respectively. However, DTC has never arrived and the
government doesn’t seem to go seriously after it because most of its
provisions are already incorporated in the Income Tax Act, 1961. The GST
has come into force from July 1, 2017.
❖ Fundamental Principles relating to Tax Laws
Benefit Principle in Taxation :
The principle of benefit requires that the burden of tax must be in proportion
to the benefit received by a person from the expenditure done by the
government. This principle shows that the common desire that the taxes
should not exceed the benefit received by the tax-payer. Finally, according
to this principle, every person should be taxed according to his ability to
pay taxes. In regard to this principle Adam Smith observes". The subjects
of every state ought to contribute towards the support of the government as
nearly as possible, in proportion to their respective abilities'.
Ability to pay principle
The ability to pay principle is the most generally accepted principle. This
approach is based on the broad assumption that those who possess income
or wealth, should contribute to the support of public functions according to
their relative abilities. The idea of a just and equitable taxation. The
distribution of tax burdens should be just has been associated with the
earliest concept of "ability to pay"
According to this principle, every citizen should pay the tax to meet the cost
of government expenditure according to his ability to pay. If every citizen
pays' the taxes to their ability to pay, such a system of taxation would be an
ideal system. Ability is the ideal ethical basis of taxation. Ability commands
universal allegiance and fits in admirably with the modern conception of
the state. Finally according to Cohen". It is a special application of the
broad principles of the moral solidity".
Equity principle in taxation
Equity principle is the most important principle or Approach of taxation, "
Equity means that the burden of taxation is spread more or less uniformly
among the tax payers". There are two types of equity:
(i)Horizontal and ii) Vertical Equity Taxation
According to ability to pay calls for people with equal capacity to pay
(horizontal equity) the same , and for people with greater ability to pay
(vertical equity) more. The former is referred to as horizontal equity and the
letter as vertical equity. The horizontal equity rule merely applies the basic
principle of equality under the law. If income is used as index of ability to
pay, income taxation is the appropriate instrument and people with the same
income should pay the same tax.
The vertical equity rule is also in line with equal treatment but proceeds on
the premise that this calls for different amount of tax to be paid by people
with different ability to pay person A, whose income is higher should pay
more than 'B'. In this since, both equity rules follow from the same principle
of equal treatment and neither is more basic
❖ Canons of taxation
Canons of taxation refer to the administrative aspect of a tax. They are
related to the rate, amount, method of levy, and collection of a tax. Despite
the modern development of economic sciences, Adam smith‘s canons of
taxation, still continue to be widely accepted as providing a good basis by
which to judge taxes and these principles still apply today. The fundamental
canons of taxation are as follows:
1. Canon of equity: This canon implies that any tax system should be based
on the principle of social justice. Equity refers to both horizontal and
vertical equity. Horizontal equity describes the concept that, taxpayers with
equal abilities to pay should pay the same amount of tax. Vertical equity
means that taxpayers with a greater ability to pay should pay more tax.
2. Canon of Certainty : The tax rules should clearly specify when the tax
is to be paid, how it is to be paid, and how the amount to be paid is to be
determined. Objective of this canon is to create trust between two parties,
first party taxpayer who is to pay the tax and second party the authority
whom receipt tax. If taxpayers have difficulty measuring the tax base or
determining the applicable tax rate or the tax consequences of a transaction,
then certainty doesn‘t exist. Certainty might also be viewed as the level of
confidence a person has that the tax is being calculated correctly.
3. Canon of Convenience : A tax should be due at a time or in a manner
that is most likely to be convenient for the taxpayer. Convenience in paying
a tax helps to ensure compliance. The appropriate payment mechanism
depends on the amount of the liability and the how easy or difficult it is to
collect. Discussion of this principle in designing a particular rule or tax
system would focus on whether it is best to collect the tax from the
manufacturer, wholesaler, retailer or customer, as well as the frequency of
collection.
4. Canon of Economy : This canon implies that decreasing the
administrative cost of collection of the tax at the lowest level. The costs to
collect a tax should be kept to a minimum for both the government and
taxpayers. This principle considers the number of revenue officers needed
to administer a tax. Compliance costs for taxpayers should also be
considered. This principle is closely related to the principle of simplicity.
Additional Canon or Principle of taxation
 (1) Canon of productivity: The canon of productivity indicates that
a tax when levied should produce sufficient revenue to the
government. If a few taxes imposed yield a sufficient fund for the
state, then they should be preferred over a large number of small taxes
which produce less revenue and are expensive in collection.
 (2) Canon of elasticity: Canon of elasticity states that the tax system
should be fairly elastic so that if at any time the government is in need
of more funds, it should increase its financial resources without
incurring any additional cost of collection. Income tax, railway fares,
postal rates, etc., are very good examples of elastic tax. The
government by raising these rates a little, can easily meet its rising
demand for revenue.
  3) Canon of simplicity: Canon of simplicity implies that the tax
system should be fairly simple, plain and intelligible to the tax payer.
If it is complicated and difficult to understand, then it wilt lead to
oppression and corruption.
 4)Canon of flexibility tax system should be flexible.
 (5) Canon of diversity: Canon of diversity says that the system of
taxation should include a large number of taxes whish are economical.
The government should collect revenue from its citizens by levying
direct and indirect taxes. Variety in taxation in desirable from the
point of view of equity, yield and stability.
❖ Taxing power and constitutional limitations
Even though the customs act 1962 regulates the duties and taxation, The
Constitution of India provides for the provisions relating to the taxation.
Article 265 to Article 289 deals with the constitutional provisions relating
to taxation.
✓ Taxation Only By Authority of Law:
Article 265 provides that no tax shall be levied or collected except by the
authority of law .No tax can be imposed by an executive order. In the case
of Chhotabhai v/s Union of India, it was held that the law providing for
imposition of tax must be a valid law that it should not be prohibited by any
provisions of the constitution.
✓ Restriction On The States Taxing Power
The state has like the union, power to levy tax on supply of goods or
services or both other than of newspapers. Article 286 however imposes the
following restrictions on the state power to impose sales tax on goods.
I. Sale Or Purchase of Goods Which Take Place Outside The State:
Article 286 (1) (a) prohibits a state to impose a tax on the supply of goods
or services or both which take place outside the state.
II. Sale Or Purchase of Goods In The Course of Import And Export
Article 286(1)(b) prohibits state to impose tax in the course of import of
goods and services or export of goods and services out of the territory of
India.

Coffee Board Banglore v/s Joint Commercial Tax Officer in this case it
was held that there must be a sale the goods must be actually exported and
the sale must be part and parcel of export.
State Of Orissa v/s MMTC export of sale become complete only after
reaching the destination. Article 287 prohibits state from imposing tax on
consumption or sale of electricity supplied to government utilized for
constructions, maintenance of railway.
✓ Levy of duty or tax:
Article 268 - duties levied by union but collected and appropriated by
states. Example :stamps duties mentioned in union list shall be levied by
central government but collected by the state .
Article 269 deals with taxes levied and collected by the union and assigned
to the states that is money collected will not go to the consolidated fund but
used and distributed among state in accordance with principle formulated
by the parliament. Article 270 deals with the tax levied and collected by the
state example: taxes and duties referred in the union list shall be distributed.
✓ Grants In Aid:
• Article 273 grants in aid will be given to the states of Assam, Bihar
and West Bengal in lieu of export of duty on the jute products.
• Article 275 empowers the parliament to make such grants.
• Article 275 empowers the parliament to make such grants.
• Article 282 “both the union and the state makes grant for any public
purpose
• Article 274 deals with the prior recommendations of the president is
required to bills affecting taxation in which states are interested
 ✓ Taxes For The Purpose of State:
Articles 276 and 277 are saving provisions.
Article 276 empowers the state to impose taxes on profession, trades,
callings and employment for the benefit of state or municipality, district
board etc. But the provision of Article 277 does not extend to taxes levied
under a law passed after the constitution came into force.
✓ Taxes For The Purpose of The Union:
Article 271 provides that if parliament at any any time increases any of the
duties or taxes mentioned in Article 269 and 270 except Article 246A by
imposing a surcharge.
At last Article 279 deals with the calculation of net proceeds and Article
284 deals with custody of suitor deposits and other moneys received by
public servants and courts. These are the constitutional provisions regarding
taxation embodied in the constitution.
Article 289
State Governments are exempted from Union taxation as regards their
property and income but if there is any law made by the parliament in this
regard then the Union can impose the tax to such extent.
Some other tax-related provisions
1. Article 301 which states that trade, commerce and inter-course are
exempted from any taxation throughout India except for the
provisions mentioned in Article 302, 303, and 304 of the Indian
Constitution, 1949.
2. Article 302 empowers the parliament to impose restrictions on trade
and commerce in view of public interest.
3. Article 303– Whenever there is the scarcity of goods this article comes
in play. Discrimination against the different State Governments is not
permitted under the law except when there is a scarcity of goods in a
particular state and this preference to that state can be made only by
the Parliament and in keeping with the law.
 4. Article 304– permits a State Government to impose taxes on goods
imported from other States and Union Territories but it cannot
discriminate between goods from within the State and goods from
outside the State. The State can also exercise the power to impose
some restrictions on freedom of trade and commerce within its
territory.
Article 366
Apart from all these provisions, there are other provisions also that require
mention such as Article 366 which gives the definition of:
• Goods;
• Services;
• Taxation;
• State;
• Taxes that are levied on the sale/purchase of goods;
• Goods and service tax etc.
❖ DIFFERNCE BETWEEN CESS, TAX AND FEE
Differences between tax and fees:
In the first place, a tax is a compulsory contribution made by a taxpayer. A
fee, by definition, is a voluntary payment.
Secondly, as far as tax is concerned, there is no direct give-and-take
relationship between the taxpayer and the tax-levying authority.
A taxpayer cannot demand any special favour from the authority in return
for taxes paid by him. A fee is a direct payment by those who receives some
special advantages or the government guarantees the services who pays
fees. Fees are, therefore, deemed to be the by-products of the administrative
activities of the government.
Thirdly, fees are mostly imposed to regulate or control various types of
activities. But the objectives of taxation are many. It has no separate
objective. Taxes are levied in the greater interests of the country.
Difference between cess and tax
Cess
▪ A cess is imposed as an
additional tax besides the
existing tax (tax on tax).
▪ While, the revenue coming
from cess is first credited to
the Consolidated Fund, and
the government may then,
after due appropriation from
Parliament, utilise it for the
specified purpose.
▪ The proceeds of a cess may
or may not be shared with the
state governments.
DISTINCTION BETWEEN TAX, FEE & CESS
TAX FEE
Any money the Fee is nothing but This is a tax on tax,
government takes amount charged for levied
from you (legally) for providing
doing any economic services,
activity is referred to
as tax.
Tax
▪ It is a compulsory
contribution to state revenue,
levied by the government on
workers' income and
business profits, or added to
the cost of some goods,
services, and transactions.
▪ revenue from taxes like
income tax is kept in the
Consolidated Fund of India
(CFI) and the government
can use it for any purposes it
deems fit.
▪ The proceeds of central taxes
have to be divided at central
and state level and shared.
CESS
by the
the Government for a
specific purpose.
Generally, Cess is
expected to be levied
till the time the
Government gets
enough money for
that purpose.
If tax is imposed on a Fee is not paid if the It is charged over and
person he has to pay it person does not want above the existing
to get the service taxes.
Examples- Income Examples- Stamp fee, Cess is generally
tax, gift tax, wealth driving license fee, levied for promoting
tax, VAT, etc. Govt. registration fee, services like health,
etc. education, etc.
Taxes go to the Fees directly goes to Cess may initially go
Consolidated Fund of Consolidated Fund of to the CFI but has to
India India be used for the
purpose for which it
was collected.
Tax is the Fee is the voluntary A Cess is imposed as
compulsory payment payment for getting an additional tax
to the government service. besides the existing
without getting any tax (tax on tax).
direct benefits.

❖ TAX AVOIDANCE AND TAX EVASION

Tax Avoidance
Tax avoidance is a mechanism used by individuals and businesses in order
to avoid the payment of taxes. Tax avoidance is done by complying with
the rules and regulations, yet at the same time by finding any loopholes in
the laws of taxation and taking advantage of such shortcomings. Tax
avoiders will find a way to exploit the taxation system and laws legally in
order to avoid paying or reduce the amount of taxes. Examples of tax
avoidance includes tax deductions, artificial transactions created with the
aim of gaining a tax advantage, changing business structures to reduce tax
rates, establishing companies in countries that offer reduced tax rates also
known as tax havens, etc. Even though, tax avoidance is legal, in some
instances it may be seen as unethical in that the aim of tax avoidance is to
find shortcomings of the tax system in order to reduce taxes paid.
Tax Evasions
Tax evasion is an illegal mechanism used in order to avoid the payment of
taxes. Tax evasion goes against any taxation laws set in the country and is
done in an unfair manner. Tax evaders can be imprisoned for illegal
activities that they undertake to avoid the payment of taxes. Tax evaders
mislead authorities by concealing their financial information through
practices such as window dressing accounts in order to show low taxable
income figures. Tax evasion can result in large financial penalties, payment
of the entire amount of taxes due and may even result in criminal
prosecution.
Besides legality, the other significant difference between evasion and
avoidance of tax is the time at which the act occurs. Usually, tax avoidance
takes place before the calculation of tax liability, as it is meant to reduce the
total amount beforehand or defer the payment date. Tax evasion, however,
often occurs after the imposition of tax liability, since its motive is to avoid
paying tax debts entirely.
From an ethical perspective, tax evasion is entirely unacceptable, since it
involves heinous acts such as falsification, understatement, and so on.
Alternately, tax avoidance consists of the use of legal methods, making it
morally acceptable.
Difference between tax avoidance and tax evasion
TAX AVOIDANCE TAX EVASION
(i) Where the payment of tax is
avoided though by complying Where the payment of tax is avoided
with the provisions of law but through illegal means or fraud is
defeating the intension of the termed as tax evasion.
law is known as tax Avoidance.
(ii) Tax Avoidance is
Tax evasion is undertaken by
undertaken by taking
employing unfair means
advantage of loop holes in law
(iii) Tax Avoidance is done
Tax Evasion is an unlawful way of
through not malafied intention
paying tax and defaulter may
but complying the provision of
punished.
law.
(iv) Tax Avoidance looks like a
Tax evasion is blatant fraud and is
tax planning and is done before
done after the tax liability has arisen.
the tax liability arises.
❖ Tax Planning and Tax Management

Definition of Tax Planning

Tax Planning can be understood as the practice of minimizing tax liability

by making the effective use of all applicable allowances, deductions,
exemptions, concessions, and rebate, within the framework of law, to
lessen the overall income and/or capital gain of the assesse. For this
purpose, the financial activities of the person or entity are thoroughly
analyzed, to seek the maximum possible tax benefit, which is feasible as
per the statute.

In finer terms, tax planning is a legal method of reducing the tax burden
that covers all kinds of efforts made by the assesse to save taxes, through
ways and means that conform to the legal obligations and are not intended
to deceive the law, by false pretenses. The primary objective of tax
planning is to reduce tax liability, maximizing productive investment,
minimize litigation, etc.

So, in tax planning arrangements are made in a way that maximum

possible tax benefits can be availed, by making use of all favorable
provisions in the act, which facilitates the assesse to get rebates and
allowances, without violating the law.

Methods of tax planning

Short Term Tax Planning: Short range Tax Planning means the planning
thought of and executed at the end of the income year to reduce taxable
income in a legal way.
Example: Suppose, at the end of the income year, an assessed finds his
taxes have been too high in comparison with last year and he intends to
reduce it. Now, he may do that, to a great extent by making proper
arrangements to get the maximum tax rebate u/s 88. Such plan does not
involve any long term commitment, yet it results in substantial savings in
tax.

Long Term Tax Planning: Long range tax planning means a plan
chalked out at the beginning or the income year to be followed around the
year. This type of planning does not help immediately as in the case
of short range planning but is likely to help in the long run.

Definition of Tax Management

Tax management connotes the effective management of finances of a

person, to file the returns and pay taxes on time while complying with the
provisions of the relevant Income tax law and allied rules regularly and
timely, so as to avoid the imposition of interest and penalties.

Tax Management is the complete management of tax-related activities,

that took place at any point in time, as in:

• Past: Assessment Proceedings, Appeal to the Commissioner,

Revisions of return etc.,
• Present: Proper maintenance of the books of accounts, getting the
accounts audited periodically, preserving data and vouchers that
support the transactions, timely filing of income tax return,
deducting tax at source, collecting tax at source, self-assessment tax,
payment of advance taxes, following procedural requirements,
responding to notices received (if any), etc.
• Future: Taking corrective actions and planning investments to save
taxes.

BASIS FOR
TAX PLANNING TAX MANAGEMENT
COMPARISON

Meaning Tax planning devises a Tax Management implies

person's financial affairs well timed and regular
by taking advantage of adherence to the tax laws
BASIS FOR
TAX PLANNING TAX MANAGEMENT
COMPARISON

all the allowable and arrangement of

deductions, exemptions, financial affairs, in a way
allowances and rebates, that reduces the taxes.
legitimately, so that the
tax liability is the least.

Deals with Planning of taxable Maintaining accounting

income and planning of records, filing of returns,
investments. audit of accounts and
payment of taxes on time.

Objective To reduce the tax To adhere to the provisions

liability to a minimum. of tax laws.

Emphasis It lays emphasis on It lays emphasis on

reducing tax liability. reducing taxes and
penalties.

Obligation It is not compulsory. It is compulsory for every

assessee.

MODULE 2
❖ Income not included in the Total Income
Various categories of income are exempt from income tax under section 10.
The assessee has to establish that his case clearly and squarely falls within
the ambit of the said provisions of the act.
1. Agriculture Income:
We can still consider India is the country mostly depending upon the
agriculture and income generated from the activities of agriculture.
Agriculture income shall be excluded from the assessee total income
(section 10, (1)) however, it shall be taken for considering rate to tax non-
agriculture income.
2. Share Of Profit From A Firm:
A partners share in the total income of the firm is totally exempted from the
total income of the hands of the partner because firm is separately assess as
such. However, any salary interest commission paid or payable to the
partner which was deductible from the total income of the firm shall be
included in the income of the partners total income as his business.
3. Leave Travel Concession:
If an employee goes on travel (on leave) with his family and traveling cost
is reimbursed by the employer, then such reimbursement is fully exempted.
But some provisions for it was as bellow;
1) Journey may be performed during service or after retirement.
2) Employer may be present or former.
3) Journey must be performed to any place within India.
4) In case, journey was performed to various places together, then
exemption is limited to the extent of cost of journey from the place of origin
to the farthest point reached, by the shortest route.
5) Employee may or may not be a citizen of India.
6) Stay cost is not exempt.
4. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:
Any allowance or perquisite paid outside India by the Government to a
citizen of India for Rendering Services Outside India.
5. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:
Gratuity is a retirement benefit given by the employer to the employee in
consideration of past services. Sec. 10(10) deals with the exemptions from
gratuity income. Such exemption can be claimed by a salaried assessee.
Gratuity received by an assessee other than employee shall not be eligible
for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India
is not eligible for exemption u/s 10(10) as agents are not employees of LIC
of India.
6. Compensation For Any Disaster [Sec. 10(10bc)]
Any amount received or receivable from the Central Government or a State
Government or a local authority by an individual or his legal heir by way
of compensation on account of any disaster, except the amount received or
receivable to the extent such individual or his legal heir has been allowed a
deduction under this Act on account of any loss or damage caused by such
disaster.
7. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:
Any sum received under a life insurance policy including bonus on such
policy is wholly exempt from tax. However, exemption is not available on
– 1. any sum received u/s 80DD(3) or u/s 80DDA(3); or 2. any sum received
under a Keyman insurance policy; or 3. any sum received under an
insurance policy issued on or after 1-4-20121 in respect of which the
premium payable for any of the years during the term of the policy exceeds
10%2 of the actual capital sum assured.
8. Payment From National Pension Trust [Sec. 10(12a) & 10(12b)]:
Any payment from the National Pension Scheme Trust to an assessee on
closure of his account or on his opting out of the pension scheme referred
to in sec. 80CCD, to the extent it does not exceed 60% of the total amount
payable to him at the time of such closure or his opting out of the scheme
[Sec. 10(12A)] Any payment from the National Pension System Trust to an
employee under the pension scheme referred to in sec. 80CCD, on partial
withdrawal made out of his account in accordance with the terms and
conditions, specified under the Pension Fund Regulatory and Development
Authority Act, 2013, to the extent it does not exceed 25% of the amount of
contributions made by him [Sec. 10(12B)]
9. Payment From Approved Superannuation Fund [Sec. 10(13)]:
Any payment from an approved superannuation fund made – • on the death
of a beneficiary; or • to an employee in lieu of or in commutation of an
annuity on his retirement at or after a specified age or on his becoming
incapacitated prior to such retirement; or • by way of refund of contributions
on the death of a beneficiary; or • by way of refund of contributions to an
employee on his leaving the service (otherwise than by retirement at or after
a specified age or on his becoming incapacitated prior to such retirement)
to the extent to which such payment does not exceed the contributions made
prior to 1-4-1962 and any interest thereon. • by way of transfer to the
account of the employee under a pension scheme referred to in sec. 80CCD
and notified by the Central Government.
10. Income Of Mutual Fund [Sec. 10(23D)].
Any income of – a. A Mutual Fund registered under the Securities and
Exchange Board of India Act, 1992 or regulation made thereunder; b. A
Mutual Fund set up by a public sector bank or a public financial institution
or authorised by the Reserve Bank of India and subject to certain notified
conditions.
11. Income Of Business Trust [Sec 10(23FC)]:
Any income of a business trust by way of a) interest received or receivable
from a special purpose vehicle; or b) dividend referred to in sec. 115-O(7)
Ø “Special purpose vehicle” means an Indian company in which the
business trust holds controlling interest and any specific percentage of
shareholding or interest, as may be required by the regulations under which
such trust is granted registration.
12. Income Of Specified Boards [Sec. 10(29A)]:
Any income accruing or arising to The Coffee Board; The Rubber Board;
The Tea Board; The Tobacco Board; The Marine Products Export
Development Authority; The Coir Board; The Agricultural and Processed
Food Products Export Development Authority and The Spices Board.
13. Subsidy Received From Tea Board [Sec. 10(30)]:
Any subsidy received from or through the Tea Board under any scheme for
replantation or replacement of tea bushes or for rejuvenation or
consolidation of areas used for cultivation of tea as the Central Government
may specify, is exempt.
14. Awards And Rewards [Sec. 10(17A)].
Any payment made, whether in cash or in kind – a. in pursuance of any
award instituted in the public interest by the Central Government or any
State Government or by any other approved body; or b. as a reward by the
Central Government or any State Government for approved purposes.
15. Income Of Scientific Research Association [Sec. 10(21)]:
Any income of a scientific research association [being approved for the
purpose of Sec. 35(1)(ii)] or research association which has its object,
undertaking research in social science or statistical research [being
approved and notified for the purpose of Sec. 35(1)(iii)], is exempt provided
such association— a. applies its income, or accumulates it for application,
wholly and exclusively to the objects for which it is established; and b.
invest or deposit its funds in specified investments.
16. Expenditure Related To Exempted Income [Sec. 14A]:
For the purposes of computing the total income, no deduction shall be
allowed in respect of expenditure incurred by the assessee in relation to
income, which does not form part of the total income under this Act. Where
the AO is not satisfied with the correctness of the claim of such expenditure
by assessee, he can determine the disallowable expenditure in accordance
with the method prescribed by the CBDT.
❖ Residential status
It is important to determine the residential status of a person since the
taxability of income of a person depends on his residential status during that
financial year. For example, a person resident in India is liable to pay tax in
India on his global income.
As per section 6 of the Income-tax Act, 1961, all the assessees are divided
into the following categories for the purpose of determining their residential
status:

I. Individual,
II. Hindu undivided family,
III. Company, and
IV. Every other person
Types of Residential Status:
An assessee can be categorized into the following residential status during
the previous year: A) Resident in India B) Non-Resident in India A resident
individual and HUF are further sub-categorized into the following status:
A) Resident and Ordinarily Resident
B) Resident but Not-ordinarily Resident
1. Individual:
The residential status of an individual for the purpose of taxation is
determined on the basis of his physical presence in India during the previous
year (April 1 to March 31) and preceding previous years. An individual is
said to be a resident of India if he is:
• Physically present in India for a period of 182 days or more in
the previous year, or
• Physically present in India for a period of 60 days or more
during the relevant previous year and 365 days or more in
aggregate in four preceding previous years.
If a person doesn’t meet any of the above two conditions then he is said to
be a non-resident in India for the purpose of taxation in India. A resident
individual is further classified into ‘Resident but not Ordinarily Resident’
if
• His stay in India is of 729 days or less in previous 7 years; and
• He was considered as ‘non-resident’ in 9 out of previous 10
years.
2. HUF:
An HUF is said to be resident in India if the control and management of
HUF is in India. A resident HUF is further classified into ‘Resident but not
Ordinarily Resident’ if:
 1. Stay of Karta in India is 729 days or less in previous 7 years;
and
2. Karta was considered as ‘non-resident’ in 9 out of the previous
10 years. If the control and management of HUF are situated
wholly outside India then HUF shall be treated as non-resident.
3. Company:
An Indian Co. is always treated as resident in India. However, in the case
of a Foreign Co., it shall be treated as a resident in India if the Place of
Effective Management (POEM) of Foreign Co. is in India. If POEM of
Foreign Co. is outside India then it shall be treated as non-resident in India.
4. Every other Person:
In case of every other person, i.e., Firm/BOI/AOP, they will be treated as
resident in India if control and management of person is situated in India.
If it is situated outside India then status will be non-resident. It must be
noted that if a person is resident in India in a previous year in respect of any
source of income, he is deemed to be resident in India in respect of all other
sources of income. An assessee is not allowed to claim different residential
status for his different sources of income. So, before calculating income
during the year, it is most important to calculate the residential status of the
assessee during the previous year.
Taxability of income in case of an ordinary resident person:
A resident assessee shall be liable to pay tax in India on the following
incomes:
1. Income received or is deemed to be received by him in India in
the previous year.
2. Income accrues or arises or is deemed to accrue or arise to him
in India during such year.
3. Income accrues or arises to him outside India during such year.
Taxability of income in case of non-ordinary resident person:

A resident but not ordinarily resident individual and HUF shall be liable to
pay tax in India on the following incomes:

1. Income received or is deemed to be received by him in India in

the previous year.
2. Income accrues or arises or is deemed to accrue or arise to him
in India during such year.
3. Income accrues or arises to him outside India during such year
if it is derived from a business controlled from India or from a
profession setup in India.

Taxability of income in Case of non-resident person:

In the case of a non-resident assessee, being an individual, HUF,

partnership firm, company, or other people, the following incomes shall
be taxable in India:

1. Income received or is deemed to be received in India by such

person in the previous year.
2. Income accrues or arises or is deemed to accrue or arise to
such person in India during such year.

❖ Clubbing of Income
Clubbing of income means including the income of any other person in
assesses total Income. The Income Tax Act has specified certain cases
where income of one person is statutorily required to be included in the
income of another person if some conditions are satisfied. This inclusion is
known s “Clubbing of Income”.
Clubbing of Income for transfer of Income without transfer of Assets.
[Sec. 60] Section 60 is applicable if the following conditions are satisfied –
 The Taxpayer owns an assets.
 The ownership of assets is not transferred by him.
 The Income from the assets is transferred to any person under a
settlement, or agreement. If the above conditions are satisfied, the income
from the assets would be taxable in the hands of the transferor.
Clubbing of Income for Revocable transfer of Assets (Sec. 61)
Revocable transfer means the transferor of assets assumes a right to re –
acquire asset or income from such an asset, either whole or in parts at any
time in future, during the lifetime of transferee. It also includes a transfer
which gives a right to re- assume power of the income from asset or asset
during the lifetime of transferee. If the following conditions are satisfied
section 61 will become applicable.
 An asset is transferred under a “Revocable Transfer”.
 The Transfer for this purpose includes any settlement or agreement. Then
any income from such an asset is taxable in the hands of the transferor.
Exception to Section – 61
 Where the income arises to any person by virtue of transfer by way to
trust which is not revocable during the life time of the beneficiary, & in case
of any other transfer which is not revocable during the life time of the
transferee
 Where the income arises to any person by virtue of transfer made before
01.04.1961 which is not revocable for the period of 6 years or more.
Clubbing of Income of Spouse [ Section 64(1)(ii)]
The following incomes of spouse of an individual shall be included in the
total income of the Individual. Remuneration from a concern in which
spouse has substantial Interest –
Concern – Concern could be any form of business or professional concern.
It could be a sole proprietor, partnership, company etc.
Substantial Interest – An individual is deemed to have substantial interest,
if he/she beneficially holds equity shares carrying not less than 20% voting
power or is entitled to not less than 20% profits at any time during the
previous year.
If the following conditions are fulfilled this section [ 64(1)(ii)] becomes
applicable] If spouse of an individual gets any salary, commission, fees etc
( remuneration) from a concern.
• The Individual has a substantial interest in such a concern.
• The remuneration paid to the spouse is not due to technical or professional
knowledge of the spouse.
• Then such remuneration shall be considered as income of the individual
& not for the spouse.
When both husband & wife have substantial Interest
Where both the husband & wife have substantial interest in a concern &
both are in receipt of the remuneration from such concern, both the
remuneration will be included in the total income of husband or wife whose
total income excluding such remuneration is greater.
Income from Asset transferred to Spouse [section 64(1) (iv)]
Income from assets transferred to spouse becomes taxable under provision
64(1) (iv) as per following conditions –
• The taxpayer is an individual.
• He / She has transferred (directly/indirectly) an asset (other than a house
property). The asset is transferred to his/ her spouse.
• The asset is transferred without adequate consideration. Moreover there is
no agreement to live apart.
If the above conditions are satisfied any income from such asset shall be
deemed to be the income of the taxpayer who has transferred the asset.
When section 64(1) (iv) is not applicable
• If assets are transferred before marriage
• If assets are transferred for adequate consideration
• If on the date of accrual of income, transferee is not spouse of the
transferor.
• If assets are transferred in connection with an agreement to live apart.
• If property is acquired by the spouse out of pin money (i.e. an allowance
given to the wife by her husband for her dress & usual household expenses.)
Clubbing of Income from Assets transferred to son’s wife [ SECTION
64(1)(vi)] Income from assets transferred to son’s wife attract the
provisions of section 64(1)(vi) as per conditions below –
• The taxpayer is an individual.
• He / She has transferred an asset after May 31, 1973. The asset is
transferred to son’s wife.
• The asset is transferred without adequate consideration. In the case of such
individuals, the income from the asset is included in the income of the
taxpayer who has transferred the asset.
Clubbing of Income from Assets transferred to a person for the benefit
of spouse. [Section 64(1) (VII)]
Income from the assets transferred to a person for the benefit of spouse
attract the provisions of section 64(1) (VII) on clubbing of income. If
• The taxpayer is an individual.
• He / She has transferred an asset to a person or an association of persons.
Asset is transferred for the benefit of spouse.
• The Transfer of asset is without adequate consideration. In case of such
individuals income from such an asset is taxable in the hands of the taxpayer
who has transferred the asset.
Clubbing of Income from asset transferred to a person for the benefit
of son’s wife [section 64(1) (VIII) ]
Income from the assets transferred to a person for the benefit of son’s wife
attract the provisions of section 64(1) (VII) on clubbing of income. If
• The taxpayer is an individual.
• He / She has transferred an asset after May 31, 1973.
• He / She has transferred an asset to a person or an association of persons.
Asset is transferred for the benefit of son’s wife.
• The Transfer of asset is without adequate consideration In case of such
individual’s income from such an asset is included in the income of the
person who has transferred the asset.
Clubbing of Income of Minor Child [Section 64(1A)]
All income which arises or accrues to the minor child shall be clubbed in
the income of his parents, whose total income (excluding minor’s income)
is greater. However, in case parents are separated, the income of minor child
will be included in the income of that parent who maintains the minor child
in the relevant previous year.
Exemption to parent[ sec. 10(32)]
An individual shall be entitled to exemption of Rs.1,500 p.a. in respect of
each minor child if the income of such minor as included u/s 64(1A)
exceeds that amount. However if the income of any minor child is less than
Rs. 1,500 p. the aforesaid exemption shall be restricted to the income so
included in the total income of the individual.
When Section 64(1A) is not applicable
In case of income of minor child from following sources, the income of
minor child is not clubbed with the income of his parent.
• Income of minor child on account of any manual work.
• Income of minor child on account of any activity involving application of
his skills, talent or specialized knowledge & experience.
• Income of minor child suffering from any disability specified u/s 80U.
PREVENTING CLUBBING OF INCOME:
Though the provision of clubbing of Income under the Income tax act is
enacted for the purpose to prevent tax evasion, we can still do some
financial and tax planning to save taxes and prevent income from being
clubbed under our hands.
• One such way is to give gifts during the wedding of a relative which
is not taxable. The gifts given by relatives during marriage cannot be
 taxed how much ever the value of the gift is i.e. there is no upper limit
for making such gift to the person getting married.
• Moreover, instead of giving away money or assets as gifts to our
relatives, we can do the same transaction in the form of a loan or lease.
• More often income is clubbed because the husband would have
transferred some asset to his wife which leads to income from such
asset being clubbed under the husband’s name.
• The danger of this is as the income of two people is clubbed together
and considered as one, the higher the income is the higher the tax rate
that is applied on such income.
For example, instead of transferring our house property to our relative we
can lease it to him for a rate, and the relative can even sublease such
property and earn income from it. Moreover, one can make certain
investments under his child’s name who is a major, and save taxes on the
income earned from such investment. It is also pertinent to note that
lending of money between relatives like spouse, children does not attract
the provisions of Section 64 of the Income Tax Act, 1961, which leads to
clubbing of income under the Individual’s name.
❖ Tax Rate
A tax rate is the percentage at which an individual or corporation is taxed.
In India (both the central and state) uses a progressive tax rate system, in
which the percentage of tax charged increases as the amount of the person's
or entity's taxable income increases. A progressive tax rate results in a
higher amount collected from taxpayers with greater incomes.
To help build and maintain the infrastructures used in a country, the
government usually taxes its residents. The tax collected is used for the
betterment of the nation, of society, and of all living in it. In India and many
other countries around the world, a tax rate is applied to some form of
money received by a taxpayer. The money could be income earned
from wages or salary, investment income (dividends, interest), capital gains
from investments, profits made from goods or services rendered, etc. The
percentage of the taxpayer’s earnings or money is taken and remitted to the
government.
When it comes to income tax, the tax rate is the percentage of an
individual's taxable income or a corporation's earnings that is owed to state,
federal and, in some cases, municipal governments. In certain
municipalities, city or regional income taxes are also imposed. The tax rate
that is applied to an individual’s earnings depends on the marginal tax
bracket that the individual falls under. The marginal tax rate is the
percentage taken from the next dollar of taxable income above a pre-defined
income limit.
Tax rates don’t only apply to earned income and corporate profits. Tax rates
can also apply on other occasions when taxes are imposed, including sales
tax on goods and services, real property tax, short-term capital gains tax,
and long-term capital gains tax. When a consumer purchases certain goods
and services from a retailer, a sales tax is applied to the sales price of the
commodity at the point of sale. Since sales tax is governed by individual
state governments, the sales tax rate will vary from state to state.
Since additional income gained from investments is categorized as
earnings, the government also applies tax rates on capital gains and
dividends. When the value of an investment rises and the security is sold
for a profit, the tax rate that the investor pays depends on how long s/he
held the asset.
Tax rates vary from country to country. Some countries implement a
progressive tax system, while others use regressive or proportional
tax rates. A regressive tax schedule is one in which the tax rate increases as
the taxable amount decreases.
The proportional or flat tax rate system applies the same tax rates to all
taxable amounts, that is irrespective of income levels.
❖ Heads of Income, Salaries, Income from House Property, Income
from Business or Profession, Capital Gains, Income from Other
sources
As per Section 14 of the Income Tax Act, for the purpose of charging of tax
and computation of total income, all incomes are classified under the
following 5 Heads of Income:-
1. Salaries
 2. House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Other Sources
The total income under all these 5 heads of Income is then added and
disclosed in the Income Tax Return. The tax on the total taxable income
(after allowing deductions) is then calculated as the Income Tax Slab Rates
of the taxpayer.
Under these 5 heads of Income, there are several incomes which are tax free
and there are several incomes from which deductions are also allowed
which help a taxpayer in reducing his tax liability substantially.
Different Heads of Income
Although there is only one tax on the income calculated under various
heads, but, there are different rules of computation of income under each
head and income has to be computed under that head of income after
applying the rules applicable to that head only.
The 5 Heads of Income have been briefly explained here under
1. Income from Salaries
An Income can be taxed under head Salaries if there is a relationship of an
employer and employee between the payer and the payee. If this
relationship does not exist, then the income would not be deemed to be
income from salary.
If there is no element of employer-employee relationship, the income shall
be not assessable under this head of income.
2. Income from House Property
Tax on Income from House Property is the tax on rental income which is
being earned from the House Property. However, in case the property is not
being rented out, tax would be levied on the expected rent that would have
been received if this property was rented out.
Income from House Property is perhaps the only income that is charged to
tax on a notional basis. Tax under this head does not only include Income
from letting out of House Property but also includes Income from letting
out of Commercial Properties and all types of properties. Various
Deductions like Standard Deduction, Deduction for Municipal Taxes paid
and Deduction for Interest on Home Loan is also allowed under this head
of income.
TDS on Rent @ 10% is also to be deducted in case the value of rent is more
than a specified limit. Service Tax on Rent is also to be levied in certain
cases.
3. Profits and Gains from Business or Profession
Any income earned from any trade/commerce/manufacture/profession shall
be chargeable under this head of income after deducting specified expenses.
4. Income from Capital Gains
Any profits or gains arising from the transfer of a capital asset effected in
the financial year shall be chargeable to Income Tax under the head ‘Capital
Gains’ and shall be deemed to be the income of the year in which the
transfer took place unless such capital gain is exempt under section 54, 54B,
54D, 54EC, 54ED, 54F, 54G or 54GA.
5. Income from Other Sources
Any Income which is not chargeable to tax under the above mentioned 4
heads of income shall be chargeable under this head of income provided
that income is not exempt from the computation of total income.
Why are there 5 different heads of Income?
Although there is only one tax on the income calculated under various
heads, but, there are different rules of computation of income under each
head and income has to be computed under that head after applying such
rules only.
Judicial Pronouncements
1. Income under each head has to be determined in the manner provided
by the appropriate sections mentioned against each head above [CIT
v Dr. Ramesh Lal Pahwa (1980) 123 ITR 86 (Cal)].
2. If there is an income which cannot be brought to tax by computation
under the above heads, it would not be included in the total income
for the purpose of taxability [CIT v Justice R.M. Datta (1989) 180 ITR
86 (Cal)]
3. The computation of income under each of the above 5 heads of income
will have to be made independently and separately. There are specific
rules of deduction and allowance under each head. No deduction or
adjustment on account of any expenditure can be made except as
provided by the act. [Tuticorin Akali Chemical and Fertilizers Ltd v
CIT (1997) 227 ITR 172 (SC)]
4. The above mentioned 5 heads of income are mutually exclusive of
each other. Thus, where an item of income falls specifically under one
head, it has to be charged under that head only and not under any other
head. [United Commercial Bank v CIT (1957) 32 ITR 688 (SC)].
❖ DEDUCTIONS ALLOWED
The Income-tax Act provides various tax exemptions and deductions. The
incomes which are exempt from tax, i.e. which are not included in total
income are provided under Sections 10 to 13A. Chapter VI A contains
deductions from gross total income under section 80C to 80U in respect of
certain payments, investments, incomes and other deductions. Deduction
helps in reducing the taxable income. It decreases the overall tax liabilities
and helps to save tax. However, depending on the type of tax deduction
claim, the amount of deduction varies.
The deductions are available only to the assessees where the gross total
income is positive. If however, the gross total income is nil or negative, the
question of any deduction from the gross total income does not arise. For
this purpose, the expression ‘gross total income’ means the total income of
the assessee computed in accordance with the provisions of the Income-Tax
Act, before making any deduction under Chapter VIA, i.e., the aggregate
income computed under each head, after giving effect to the provisions for
clubbing of income and set off of losses, is known as “Gross Total Income”.
Sections 80C to 80U of the Income- tax Act lay down the provisions relating
to the deductions allowable to assessees from their gross total income. The
income arising after deduction under section 80C to 80U is called Total
Income.
The Chapter VI A of Income Tax Act contains the following sections:
✓ 80C: Deduction in respect of life insurance premium, deferred
annuity, contributions to provident fund (PF), subscription to certain
equity shares or debentures, etc. The deduction limit is Rs 1.5 lakh
together with section 80CCC and section 80CCD(1).
✓ 80CCC: Deduction in respect of contribution to certain pension
funds. The deduction limit is Rs 1.5 lakh together with section 80C
and section 80CCD(1).
✓ 80CCD(1): Deduction in respect of contribution to pension scheme
of Central Government – in the case of an employee, 10 per cent of
salary (Basic+DA) and in any other case, 20 per cent of his/her gross
total income in a FY will be tax free. Overall limit is Rs 1.5 lakh
together with 80C and 80CCC.
✓ 80CCD(1B): Deduction up to Rs 50,000 in respect of contribution to
pension scheme of Central Government (NPS).
✓ 80CCD(2): Deduction in respect of contribution to pension scheme
of Central Government by employer. Tax benefit is given on 14 per
cent contribution by the employer, where such contribution is made
by the Central Government and where contribution is made by any
other employer, tax benefit is given on 10 per cent.
✓ 80D: Deduction in respect of Health Insurance premium. Premium
paid up to Rs 25,000 is eligible for deduction for individuals, other
than senior citizens. For senior citizens, the limit is Rs 50,000 and
overall limit u/s 80D is Rs 1 lakh.
✓ 80DD: Deduction in respect of maintenance including medical
treatment of a dependent who is a person with disability. The
maximum deduction limit under this section is Rs 75,000.
✓ 80DDB: Deduction in respect of expenditure up to Rs 40,000 on
medical treatment of specified disease from a neurologist, an
 oncologist, a urologist, a haematologist, an immunologist or such
other specialist, as may be prescribed.
✓ 80E: Deduction in respect of interest on loan taken for higher
education without any upper limit.
✓ 80EE: Deduction in respect of interest up to Rs 50,000 on loan taken
for residential house property.
✓ 80EEA: Deduction in respect of interest up to Rs 1.5 lakh on loan
taken for certain house property (on affordable housing).
✓ 80EEB: Deduction in respect of interest up to Rs 1.5 lakh on loan
taken for purchase of electric vehicle.
✓ 80G: Donations to certain funds, charitable institutions, etc.
Depending on the nature of the donee, the limit varies from 100 per
cent of total donation, 50 per cent of total donation or 50 per cent of
donation with a cap of 10 per cent of gross income.
✓ 80GG: Deductions in respect of rent paid by non-salaried individuals
who don’t get HRA benefits. Deduction limit is Rs 5,000 per month
or 25 per cent of total income in a year, whichever is less.
✓ 80GGA: Full deductions in respect of certain donations for scientific
research or rural development.
✓ 80GGC: Full deductions in respect of donations to Political Party,
provided such donations are non-cash donations.
✓ 80TTA: Deductions in respect of interest on savings bank accounts
up to Rs 10,000 in case of assessees other than Resident senior
citizens.
✓ 80TTB: Deductions in respect of interest on deposits up to Rs 50,000
in case of Resident senior citizens.
✓ 80U: Deduction in case of a person with disability. Depending on type
and extent of disability maximum deduction allowed under this
section is Rs 1.25 lakh.
MODULE 3
❖ Income Tax Authorities: Power and Functions
Income tax or the tax taken by the government on an individual on his
earnings is income tax. The government has set up various authorities for
lawful execution of the income Tax Act and to oversee the righteous
functioning of the income tax department. The various income tax
authorities for the purposeful existence of the Act are
1. CBDT or the Central Board of Direct Taxes which has been constituted
under the Central Board of Revenue Act 1963
2. Director general of income tax
3. Chief commissioner of income tax
4. Directors and commissioner of income tax
5. Additional directors and additional commissioners of income tax
6. Joint directors and joint commissioners of income tax
7. Deputy directors and deputy commissioners of income tax
8. Assistant directors and assistant commissioners of income tax
9. Income tax officers
10. Income tax inspectors It is a joint role of all these authorities that tax
payer abide by the rule mentioned in the beginning of every financial year
and pay their taxes accordingly.
The supreme body with reference to the direct tax setup in India is the
Central Board of Direct Taxes. This board comprises of a leading
Chairperson and a body of 6 members.
THE CBDT OR CENTRAL BOARD OF DIRECT TAXES
Consolidate under the Department of Revenue in the Ministry of Finance
the CBDT holds the highest position on the direct tax world in the country.
It lays down the policies and planning’s for all direct tax related matters in
India. With the help of the Income Tax Department it makes sure that direct
taxes are properly administered on the workforce of the country. The
Chairperson along with the 6 members of the body of the CBDT are all ex
officio Special Secretaries in the government and function as a division of
the ministry that deals with levy and collection of all direct taxes in India.
APPOINTMENT OF CBDT MEMBERS AND CHAIRPERSON
A person who desires to work with the CBDT board as the chair person or
the body needs to clear IRS i.e. Indian Revenue Services. The central
government has full rights to decide who the members shall be.
The office memorandum of the government states the following
requirements for the post of members of the CBDT
1. Officer shall be an office holder in the central government with a
minimum of one year regular service in level 15
2. Officer shall have minimum of 15 years of experience in administration
and running direct tax administration in the central government along with
10 years of experience in field of CBDT
3. High professional merit and excellence
4. High impeccable reputation of integrity
5. Maximum age limit of 56 although exemptions provided in case of
absorption
6. The person shall have at least 1 year of residual service on the date of
occurrence of vacancy.
All the posts for income tax authorities and filled by the central government
as per the income tax ordinance. The government has to decide as to who is
fit, has proper professional skills and experience to hold office.
POWER OF INCOME TAX AUTHORITIES
The Income Tax Act prescribes certain powers to each level of income tax
authorities for proper functioning of the direct tax organization in India. The
powers can be categorized as
POWER OF DIRECTOR GENERAL
1. POWER TO DISCOVER AND PRODUCE EVIDENCE
As per the civil procedure of 1908 the director general can ask any assessing
officer, chief commissioner, commissioner, or the joint commissioner to
suit for the following
• Discovery
 • Inspection
• Examination of individual on oath
• Issue of commissions
• Compelling the individual to produce book of accounts and related
document
2. POWER TO SEARCH AND SEIZURE
In an unlikely scenario of tax evasion the government has given rights to
the income tax authority to search and seize the evaded revenue under
default in taxes.
3. TAKE POSSESION OF BOOK OF ACCOUNTS
4. TO MAKE AN INQUIRY
5. TO SURVEY
POWERS OF INCOME TAX COMMISSIONERS
1. HEAD INCOME TAX ADMINISTRATION
At any given time they are designated with areas to foresee the functioning
of direct taxes
2. POWER TO TRANSFER ANY CASE
He enjoys the power to transfer a certain case from one assessing officer to
another
3. POWER WITH REGARDS TO ORDERS
He enjoys the powers to grant approval to an order issued, or even revise an
order passed by assessing officers
4. JUDICIAL AND ADMINISTRATIVE POWERS
POWER TO JOINT COMMISIONNERS
Main duty is to detect tax invasion and supervise the subordinate officers.
They also get power to adopt fair market value as full consideration and are
given power to inspect company registers
POWER TO INCOME TAX OFFICERS
They are provided the
1. POWER OF SEARCH, SEIZURE.
2. POWER TO ASSESS AND CALL FOR INFORMATION from any
individual
3. POWER OF SURVEY
POWER OF INCOME TAX INSPECTOR
They are given functional powers by the person under whom they are
appointed. They work specific to the task given to them by their seniors.
Therefore the powers given to the income tax authorities can be summed up
under the following sections
Sections Power
Section 131 Power to discover, and production of evidence
a. Compelling individual to produce book of
accounts

b. Enforce individual for attendance

c. Issuing commission

d. Inspect and discover

Section 132 Power of search and seizure

Section 132 A Possession of books of accounts
Section 133 Power to call for information
a. Can call any individual to produce details about
partners and firms
b. Hindu undivided families can be called upon for
details
c. Can ask any trustee, agent etc. to provide details
of clientele

Section 133 A Power of survey for discovery of

a. New assesses
b. Information regarding purpose of assessment
 c. Verification of account books
Section 133 B Power to collect information
They have right to enter any place within the designated
area of the officer for the purpose of resolving tax
evasions

Section 134 Power to inspect company registers

❖ Filing of returns and procedures of assessments

The taxpayer has to communicate the details of his taxable income/loss to
the Income-tax Department. These details are communicated to the Income-
tax Department in the form of return of income. Under the Income-tax Law,
different forms of return of income are prescribed for different classes of
taxpayers. The return forms are known as ITR forms (Income-tax Return
Forms).
The steps involved in the filing of an income tax return are:
1. Calculation of Income and Tax
2. Tax Deducted at Source (TDS) Certificates and Form 26AS
3. Choose the right Income Tax Form
4. Download ITR utility from Income Tax Portal
5. Fill in your details in the Downloaded File
6. Validate the Information Entered
7. Convert the file to XML Format
8. Upload the XML file on the Income Tax Portal and Filing
Assessments
The process of examination of ITR by the Income Tax Department is called
“Assessment”. The assessment also includes re-assessment and best
judgment assessment under section 147 and 144 respectively and the
different type of income tax assessment.
Types of Income Tax Assessment:
 1. Self Assessment –u/s 140A
2. Summary assessment –u/s 143(1)
3. Scrutiny assessment –u/s 143(3)
4. Best Judgment Assessment –u/s 144
5. Protective assessment
6. Re-assessment or Income escaping assessment –u/s 147
7. Assessment in case of search –u/s 153A
Self Assessment u/s 140A
This type of Income Tax Assessment is the one in which the assessee
calculate the tax by himself, usually to accompany his calculation with
payment of the amount he regards as due.
Tax payable is required to be furnished under section 139 or section 142 or
section 148 or section 153A, after taking TDS and deducting Advance
tax paid.
Time limit:
There are no specific dates to pay Self Assessment Tax. Payment of Self
Assessment Tax and non-filing of the returns should be paid
within 31st July of every year.
Procedure
• Direct Mode of Payment
Self Assessment Tax can be paid by filling a tax payment challan, ITNS
280. Challans are available in the designated branches of banks associated
with the Income Tax Department.
• Online Mode of Payment
Assessee can pay tax online through different websites.
Summary assessment u/s 143(1)
Assessment under section 143(1) is like initial checking of the return of
income. Under this section, Income tax department sent intimation u/s
143(1) to the taxpayer. A Comparative Income Tax computation is sent by
the Department. In income tax assessment, total income or loss incurred is
computed.
Time Limit:
Assessment u/s 143(1) can be made within a period of one year from the
end of financial year in which the return is filed.
Scrutiny Assessment u/s 143(3)
Scrutiny assessment is the assessment of the return filed by the assessee
by giving an opportunity to the assessee to substantiate the declared income
and expenses and the claims of deductions, losses, exemptions, etc. in the
return with the help of evidence.It is managed by the Committee through a
single work plan. Specific work is undertaken through the committee and
by establishing informal panels (for in-depth activities) or working groups.
The assessing officer gets the opportunity to conduct an inquiry and aims at
ascertaining whether the income in the return is correctly shown by the
assessee or not. The claims for deductions, exemptions etc. are legally and
factually.
If there is any omission, discrepancies, inaccuracies, etc. Then the assessing
officer makes an own assessment for the assessee by taking all facts in
mind.
Type of cases
• Manual scrutiny cases.
• Compulsory Scrutiny cases.
Manual scrutiny cases as follows:
• Not filing Income Tax Return.
• State lesser income or more tax as compared to earlier year.
• Mismatch in TDS credit between claim and 26AS.
• Non-declaration of exempted income.
• Claiming for large refunds in return of Income.
 • Taking double benefit due to the Job change.
Compulsory Scrutiny cases as follows:
• Case 1: relating addition in the earlier assessment year of Rs. 10
lakhs/Rs. 10 crore excess on a substantial and recurring question of
law or fact which is confirmed in appeal or is pending before an
appellate authority may come under compulsory scrutiny.
• Case 2: CASS (Computer Added Scrutiny Selection) cases are also
selected under compulsory cases. All such cases are separately
intimated by DGIT (system) to the jurisdictional concerned.
• Case 3: Where specific and verifiable information pointing on tax
evasion is given to Government Department/ Authorities.
• Case 4: Rejection of the approval u/s 10 (23C) of the Act or
withdrawing the approval already is passed by the authority, yet the
assessee found claiming tax exemption under the aforesaid provision
of the Act.
Best Judgment Assessment u/s 144
The best judgment assessment means evaluation or estimation in the
context income tax law of income of the assessee by the assessing officer. In
the case of best judgment assessment, the assessing officer will make the
assessment based on best reasoning i.e. they will not act dishonestly. The
assessee will neither be dishonest in assessment nor have a bitter attitude
towards the officer. This is a type of income tax assessment which involves
the input of both the assessee and the officer equally.
Types
• Compulsory Assessment: Assessing officer (AO) finds that there is
non-cooperation by the assessee or found to be a defaulter in
supplying information to the department.
• Discretionary/optional assessment: When AO is dissatisfied with
the authenticity/validity of the accounts given by the assessee or
where no regular method of accounting has been followed by the
assessee.
Cases
• Case 1: If a person fails to make return u/s 139(1) and has not made
a return or a revised return under sub-section (4) or (5) of that section;
or
• Case 2: If any person fails to comply with all the terms of notice under
section 142(1) or fails to follow directions mentioned to get account
audited u/s section 142(2A); or
• Case 3: If a person after filing a return fails to comply with all the
terms of notice received under section 143(2) requiring presence or
production of evidence and documents; or
• Case 4: If the Assessing Officer is not satisfied with the correctness
or completeness of the accounts or documents.
• Case 5: A person has a right to file an appeal u/s 246 or to craft an
application for revision u/s 264 to the commissioner.
Also keep in mind, after giving a chance to the assessee of being
heard, then only best judgment assessment can be made.
Protective assessment
This is a type of assessments that focus on those assessments which are
made to ‘protect’ the interest of the revenue.
Though, there is no provision in the income tax act authorizing the levy of
income tax on a person other than whom the income tax is payable. It is
open to the authorities to make a protective or an alternative assessment if
it is not ascertainable who is really liable to pay the tax among a few
possible persons.
Re-Assessment (or) Income escaping assessment u/s 147
Income Escaping Assessment under section 147 is the assessment which is
done by the Assessing Officer if there is a reason for him to believe that
income chargeable to tax has escaped assessment for any assessment year.
It gives power to him to re-assess or re-compute income, turnover etc.
which has escaped assessment.
Objective
The objective of carrying out assessment u/s 147 is to bring them under the
tax net, any income which has escaped assessment in the original
assessment.
Time limit
• Completion of assessment under section 147
Under section 147, notice is issued within 9 months from the end of the
financial year in which notice u/s 148 is also served.
• Notice issued under section 148
Under section 148, notice can be issued within a period of 4 years from the
end of the relevant assessment.
Case 1: If escaped income amounts to Rs. 1, 00,000 or more and then notice
can be issued for up to 6 years from the end of the relevant assessment year.
Case 2: If escaped income is associated with any assets (including financial
interest in any entity) i.e. located outside India, and then notice can be
issued up to 16 years from the end of the relevant assessment year.
Notice u/s 148 can be issued by AO only after getting prior approval from
the prescribed authority mentioned in section 151.
Assessment in case of search u/s 153A
Under this type of Income Tax Assessment, the Assessing Officer will:
• Issue notice to such person requires furnishing within such period, as
specified in the notice. Clause (b) referred to the return of income of
each assessment year falling within six assessment years and is
verified in prescribed form. Setting forth such other particulars as may
be prescribed and the provisions of this Act shall, so far as may be,
apply accordingly as if such return were a return required to be
furnished under section 139;
• Assessor re-assess the total income of six assessment
years immediately preceding the assessment year relevant to the
 previous year in which such search is conducted or requisition is
made.
Note: Section 153A issues a notice for 6 years, preceding the search not for
the year of search and no return is required to be filed (for the year of search)
u/s 153A. File only a regular return u/s 139.
Time limit for completion of assessment u/s 153A/153C: [153B]
Case 1: Person searched under section 153A
• 21 months from the end of the financial year this does not include the
last authorization for search u/s 132 or requisition u/s 132A.
• Similar time limits shall apply in respect of the year of search also.
Case 2: Any other person 153C
As provided in above clause (a) or clause (b) or 9 months from the end of
the Financial Year where BOA/documents/assets seized/requisitioned are
handed over to the assessing officer (AO), whatever is latest.
❖ CALLING FOR INFORMATION
Section 133(6) of the Income Tax Act enables the Income Tax
Authorities to compel Banks and other Authorities to furnish such
information which will be useful in connection with any pending
proceeding or an enquiry.
When the information is obtained in connection with a pending
proceeding, it would generally relate to a single person or an entity. But
when it is in connection with an inquiry, large amounts of data or
voluminous information in respect of a number of persons could be
obtained. Such large scale information can then be verified and utilized
for initiating proceedings, wherever called for. However, for ensuring
that there is adequate control on the use of this power, when the
information is sought to be obtained for an inquiry and not in
connection with a pending proceeding in a particular case, the approval
of a Senior Officer of the rank of a Commissioner or Director of
Income Tax is required to be obtained.
 The Assessing Officers can invoke this power during ongoing
assessment proceedings when it becomes necessary for them to obtain
information about the assessee from a Bank or any other Authority for
verifying the facts presented before them. The Officers in the Central
Information branches invoke this Power to Call for data on a large
number of persons from Banks, Registrars Of Property, Municipal
Authorities, Registrar Of Co-Operative Societies, Automobile
Companies and various other Authorities and Agencies.
❖ Regulatory Mechanism And appeal provisions under Tax Laws
Appeal is a proceeding resorted to rectify an erroneous decision of a court
by submitting the question to a higher court, or court of appeal. It means
‘making a request’ and in legal parlance, it means ‘apply to a higher court
for a reversal of the decision of a lower court.
Income tax liability is primarily determined at the level of Assessing
Officer. Where the Income Tax department (the government) disagrees with
the tax computed by the taxpayer, they can levy an additional tax. In such a
situation, as per Income Tax Act, 1961 the liability is determined at the level
of Assessing Officer. Where a taxpayer is aggrieved certain action of
Assessing Officer, he can move an appeal.
APPEALS BEFORE COMMISSIONER:
WHEN CAN IT BE FILED:
As provided by S. 246 of the IT Act, an assessee who is aggrieved by an
order, passed by Assessing Officer may prefer an appeal to the
Commissioner of Income- Tax. Such Commissioner may admit an appeal,
even beyond period of limitation, if satisfied that there was a sufficient
cause for not presenting the appeal. Within time.
An appeal before ITAT can be filed by a taxpayer against;
• an intimation issued u/s 143(1)/ (1B), where adjustments have been
made in income offered to tax in the return of income,
• an assessment order passed u/s 143(3) except in case of an order
passed in pursuance of directions of the Dispute Resolution Panel,
• an assessment order passed u/s 144 or an order assessment,
reassessment or re- computation passed after reopening the
assessment u/s 147 except an order in pursuance of directions of the
Dispute Resolution Panel,
• an order referred to inspection u/s150,
• order passed against the taxpayer in a case where the taxpayer denies
the liability to be assessed under Income Tax Act,
• intimation issued u/s 200A(1) where adjustments are made in the filed
statement,
• an order of assessment or reassessment passed u/s 153A or 158BC in
case of search/seizure,
• an assessment or reassessment order passed u/s 92CD(3),
• a rectification order passed u/s 154 or 155,
• an order passed u/s 163 treating the taxpayer as agent of non-resident,
• an order passed u/s 170(2)/(3) assessing the successor of the business
in respect of income earned by the predecessor,
• an order passed u/s 171 recording the finding about partition of a
Hindu Undivided Family,
• an order passed by Joint Commissioner u/s 115VP(3) refusing
approval to opt for tonnage-tax scheme to qualifying shipping
companies,
• an order passed u/s 201(1)/206C(6A) deeming person responsible for
deduction of tax at resource as assessee-in-default due to failure to
deduct tax at source or to collect tax at source or to pay the same to
the credit of the Government,
• an order determining refund passed u/s 237,
• an order imposing penalty u/s 221/ 271/ 271A/ 271AAA/ 271F/
271FB/ 272A/ 272AA/ 272B/ 272BB/ 275(1A)/ 158B FA(2)/ 271B/
271BB/ 271C/ 271CA/ 271D/ 271E/ 271AAB,
• an order imposing a penalty under Chapter XXI.
An appeal to the Commissioner of Income-tax must be filed within 30 days
from the date of service of notice of demand relating to assessment or
penalty order.
PROCEDURE FOR APPEAL:
An appeal to Commissioner of Income-tax must be in Form No. 35 along
with details of “Relief claimed in appeal”, “Statement of Facts” and
“Grounds of appeal”, signed and verified by the individual taxpayer himself
or by a person duly authorized by him holding valid power of attorney.
Further, e-filing of Form has been made mandatory by Income-tax (3rd
Amendment) Rules, 2016, for persons for whom e-filing of return of
income is mandatory.
The prescribed fees for any such appeal is as under:
• Rs. 250, where the assessed income is Rs 1lakh or less
• Rs. 500, where assessed income is more than Rs. 1 lakh but less than
Rs. 2 lakhs
• Rs.1,000, where assessed income is more than Rs. 2 lakhs
On receipt of Form no. 35, Commissioner of Income-tax fixes date and
place for hearing the appeal by issuing notice to the taxpayer and the
Assessing Officer, against whose order appeal is preferred. Before passing
the order, the Commissioner of Income-tax may make such further inquiries
as he thinks fit, or may direct the Assessing Officer to make further inquiry
and report the result to him.
As a rule, a taxpayer is not entitled to produce any evidence, whether oral
or documentary other than what was already produced before the Assessing
Officer. However, in certain exceptional circumstances as provided below,
additional evidence are accepted by the Commissioner of Income-tax
(Appeals);
• Where the Assessing Officer has refused to admit evidence which
ought to have been admitted; or
 • Where the appellant was prevented by sufficient cause from
producing the evidence which he was called upon to be produced by
the Assessing Officer; or [As amended by Finance Act, 2016]
• Where the appellant was prevented by sufficient cause from
producing any evidence before the Assessing Officer which is
relevant to any ground of appeal; or
• Where the Assessing Officer has made the order appealed against
without giving sufficient opportunity to the appellant to adduce
evidence relevant to any ground of appeal.
ORDER OF COMMISSIONER OF INCOME- TAX:
After hearing the case/arguments, the Commissioner of Income-tax passes
his order, and the same is recorded in writing. Where the order passed is
that for disposal of the appeal and the Commissioner must supply reasons
for the same. While disposing of an appeal, the Commissioner of Income-
tax may consider and decide any matter arising out of the proceedings in
which order appealed against was passed, even if such matter was not raised
by the taxpayer before the Commissioner of Income-tax. The order should
be issued within 15 days of last hearing.
APPEALS BEFORE INCOME TAX APPELLATE TRIBUNAL:
Income Tax Appellate Tribunal (ITAT) is the second appellate authority in
order after The Commissioner of Income Tax. This body is constituted by
the Central Government, and functions under the Ministry of Law. It
consists of 2 classes of member, i.e., Judicial and Accountant. An appeal to
ITAT can be filed either by the taxpayer or by the Assessing Officer.
WHEN CAN IT BE FILED:
An appeal before ITAT can be filed by a taxpayer against;
• an order passed by the Commissioner of Income-tax (Exemption), u/s
10 (23C)(vi), which provides for filing of application by the
educational institute or hospital for the purpose of grant or exemption;
 • an order passed by the Principal Commissioner of Income-tax or
Commissioner of Income-tax with respect to registration application
made by a charitable or religious trust as provided u/s 12AA
• an order passed by the Principal Commissioner of Income-tax or
Commissioner of Income-tax with respect to the approval of a
charitable trust for donations made to it which would be eligible for
deductions in the hands of the donor, as provided u/s 20G(5)(vi)
• an order passed by the assessing officer u/s 143(3) or 147 or 153A or
153C, either in pursuance of direction given by Dispute Resolution
Panel or with approval of the Principal Commissioner of Income- Tax
or Commissioner of Income- Tax as provided u/s 144BA(12);
• a ratification order passed by the Commissioner of Income- tax u/s
154;
• an order passed by a Principal Commissioner of Income- Tax or
Commissioner of Income- Tax u/s 263, which relates to revision of
the order of Assessing Officer which is considered as prejudicial to
the interest of revenue;
• An order by the Assessing Officer u/s 115VZC(1), which provides for
order of excluding the taxpayer from tonnage tax scheme;
• an order passed by the Commissioner of Income-tax u/s 250, 270A,
271, 271A or 272A;
• an order of penalty by a Principal Commissioner of Income- Tax or
Commissioner of Income- Tax u/s 270A, 271 or 272A;
• an order or penalty by a Principal Chief Commissioner or Chief
Commissioner or a Principal Director General a Director General or a
Principal Director or Director under section 272A.
A Principal Commissioner of Income-Tax or Commissioner of Income-
Tax, may direct the Assessing Officer to make an appeal to ITAT, if he
objects the order passed by the Commissioner of Income-Tax (in appeals)
under section 154 or section 250. Such an appeal is also called
a Departmental Appeal, i.e., the Income-Tax department moving to ITAT
against the order of the Commissioner of Income-Tax. However,
Departmental Appeals are allowed only in cases where the tax effect
involved in the appeal exceeds Rs. 10,00,000.
Notwithstanding the limit above mentioned, adverse judgements relating to
following issues should be contested on merits, even when the tax effect is
less than the mandatory limits specified above;
• Where the Constitutional validity of the provisions of an Act or Rule
is under challenge, or
• Where Board’s order, Notification, Instruction or Circular has been
held to be illegal or ultra-vires, or
• Where Revenue Audit’s objection in the case has been accepted by
the Department.
• Writ matters
• Matters pertaining to other direct taxes, i.e., other than Income-Tax
• Where the tax effect is not quantifiable or not involved, such as case
of registration of trust or institution under section 12A.
• Where the addition relates to undisclosed foreign assets/bank
accounts.
Any appeal to ITAT must be filed in 60 days of the date on which order
appealed against is communicated to the taxpayer or the Commissioner.
PROCEDURE FOR APPEAL:
An appeal to ITAT must be in Form No. 36- in triplicate. The prescribed
fees for any such appeal is as under:
• Rs. 500, where the assessed income is Rs 1lakh or less
• Rs. 1,500, where assessed income is more than Rs. 1 lakh but less than
Rs. 2 lakhs
• 1% of assessed income, subject to maximum of Rs.10, 000, where
assessed income is more than Rs. 2 lakhs
Where the subject matter of appeal relates to any other matter, fee of Rs
500/- is to be paid. An application for stay of demand is to be accompanied
by fee of Rs. 500
The appellant may submit a paper book in duplicate containing documents
or statements or other papers referred to in the assessment or appellate
order, which it may wish to rely upon, at least a day before the hearing of
the appeal along-with proof of service of copy of the same on the other side
at least a week before. Parties to the appeal are neither entitled to produce
additional evidence of any kind, nor oral or documentary before the
Tribunal.
The Appellate Tribunal then fixes the date for hearing the appeal and
notifies the parties specifying date and place of hearing of the appeal. A
copy of memorandum of appeal is sent to the respondent either before or
along with such notice. The appeal is heard on the date fixed and on other
dates to which it may be adjourned.
ORDER OF ITAT:
The Appellate Bench comprises of one judicial member and one accountant
member. Appeals where total income computed by the Assessing Officer
does not exceed Rs. 5lakh may be disposed of by single member Bench.
If members are equally divided in their opinion, the points of difference are
stated by each member and the case is referred by the President of the ITAT
for hearing such points by one or more of other members of the ITAT. Such
point or points is decided according to opinion of majority of the members
of ITAT who have heard the case, including those who first heard it.
APPEALS BEFORE HIGH COURT:
Where the High Court is satisfied that the case involves substantial question
of law, an appeal shall lie against the order/ judgment of ITAT. Such appeal
may be filed either by the taxpayer or the Chief
Commissioner/Commissioner. An appeal against order of ITAT shall lie
only within 120 days of receipt of such order and in the form of
memorandum of appeal, precisely stating the substantial question of law.
The High Court then goes on to formulate the question. An appeal filed
before the High Court is heard by a bench of not less than two judges.
APPEALS BEFORE SUPREME COURT:
Appeal against an order of High Court in respect of Appellate Tribunal’s
order lies with the Supreme Court. Appeal lies only against cases, which
are certified to be fit one for appeal to the Supreme Court. Special leave can
also be granted by the Supreme Court under Article 136 of the constitution
of India against the order of the High Court.
❖ Offences and penalties
A timely and consistent paying of taxes and filing of returns ensures the
government has money for public welfare at any point of time. To make
sure that taxpayer does not default in paying taxes or disclosing the
information, there are several penalties prescribed under the Act. A
penalty a punishment imposed on the taxpayer for being non-compliant.
Listed below is a summary of some of the important and most common
penalties.
Default in making payment of tax
The amount of penalty leviable will be as determined by the Assessing
Officer. However, the amount will not exceed the amount of tax in arrears
Under-reporting of income
• If the income assessed/ re-assessed exceeds the income declared by
the assessee, or in cases where return has not been filed and income
exceeds the basic exemption limit, penalty at 50% of tax payable on
such under reported income shall be levied.
• 200% of the tax is payable if under-reporting results from
misreporting of income
Failure to maintain books of accounts and other documents
• Normally, the amount of penalty leviable is ₹25,000
• In case, the assessee is a person who has entered into international
transaction, the penalty will be 2% of the value of such
international transactions or specified domestic transactions
Penalty for false entry such as fake invoices
In case the income tax officer finds that the books of accounts provided by
the asseessee in the proceeding contains the following:
• forged or falsified documents such as a fake invoice or a false piece
of documentary evidence
• an invoice in respect of supply or receipts of goods or services issued
by any person without actual supply or receipt of goods or services
• an invoice of supply or receipt of goods or services received from a
person who does not exist
• an omission of any entry which is relevant for computation of total
income.
Then, the assessee might have to pay a penalty of the amount equal to sum
of such false or omitted entries.
Undisclosed income
• Where the income determined includes undisclosed income, a
penalty @10% is payable. However, no such penalty will be leviable,
if such income was included in the return and tax was paid before the
end of the relevant previous year.
• Where Search has been initiated on/ after 1/7/2012 but before
15/12/2016,
• If undisclosed income is admitted during the course of search
and assessee pays tax and interest and files return, a penalty
@ 10% of such undisclosed income is payable.
• If undisclosed income is not admitted but the same is furnished
in the return filed after such search, 20% of such undisclosed
income is payable.
• In all other cases, penalty is leviable @ 60%
• Where Search has been initiated on/ after 15/12/2016,
• If undisclosed income is admitted during the course of Search
and assessee pays tax and interest and files return, a penalty
@ 30% of such undisclosed income is payable.
 • In all other cases, penalty is leviable @ 60%
Audit and Audit Report
• If the assessee fails to get his accounts audited, obtain audit report,
or furnish report of such auditor, a penalty will be leviable at
the ₹1,50,000 or ½% of the total sale/ Turnover/ gross
receipts whichever is lesser.
• Failure of assessee to furnish Audit report related to foreign
transaction, a penalty @ ₹1,00,000 will be payable
TDS/TCS
• Where a person fails to deduct tax at source, he will be liable to pay
a penalty equal to the amount of tax which he has failed to deduct/
pay.
• Where a person fails to collect tax at source, he will be liable to pay
a penalty equal to the amount of tax which he has failed to collect.
• Failure to furnish TDS/TCS statement or furnishing incorrect
statements, shall attract a penalty ranging from ₹10,000 to ₹1,00,000
• Failure to furnish information/ furnishing inaccurate information
related to TDS deduction related regarding Non residents shall
attract a penalty of ₹100,000
Penalty for using modes other than Account payee cheque/ draft/ ECS
• If a person takes/ accepts loan/ deposit except by way of Account
payee cheque/ account payee draft/ ECS, and if the aggregate
amount exceeds ₹20,000, he shall be liable to pay a penalty of an
amount equal to such loan/ deposit.
• If, an amount of ₹2,00,000 or more is received in aggregate from a
person in a day/ single transaction/ relating to one event, a
penalty equal to such amount will be payable.
• If a person repays loan/ deposit and such amount so repaid
exceeds ₹20,000 and such amount has been repaid except by way of
 Account payee cheque/ account payee draft/ ECS, an
amount equal to such loan/ deposit shall be payable.
Failure to furnish statements/ information
• Failure to furnish a statement of financial transaction or reportable
account shall attract a penalty of ₹500 for each day of failure. And if
the failure is in response to a notice to report on specified financial
transaction, the penalty shall be ₹1,000 for each day of failure
• A penalty of ₹50,000 shall be attracted for furnishing inaccurate
statement of a financial transaction/ reportable account
• Failure of an eligible investment fund to furnish any statement /
information/ documents within the prescribed time shall attract a
penalty of ₹5,00,000
• Failure to furnish any information/ document in relation to
international transaction shall attract a penalty of 2% of the value of
such transaction
• Failure to furnish any information/ document by an Indian Concern
related with international transaction, shall attract a penalty of 2% of
the value of transaction or ₹50,000 in some cases.
• If a report/ certificate is required to be furnished by an Accountant/
Merchant Banker/ Registered Valuer and such information is found to
be incorrect, a penalty of ₹10,000 for each incorrect report/
information is payable
• Failure to furnish information by any person who is attending/ helping
carrying the business/ profession of any person, in whose building/
place the income tax authority has entered for collecting information
shall attract a penalty of upto ₹1,000
• Non furnishing of report by any reporting entity which is obliged to
furnish Country by Country report will attract penalty as follows:
 Period of delay Penalty

Less than or equal to 1 month ₹5000 per day

Continuing default ₹50,000 per day from the beginning of

service of order

Submission of inaccurate ₹5,00,000

information

Others
• Failure to apply/quote/ intimate PAN/ quoting false PAN shall attract
a penalty of ₹10,000
• Failure to apply/quote TAN/ quoting false TAN shall attract a penalty
of ₹10,000
• In case of the following defaults, ₹10,000 will be the penalty leviable,
• Refusal to answer questions put by the department
• Refusal to sign statements made in income tax proceedings
• Non compliance with summons to give evidence/ produce books
of accounts
• Failure to comply with a notice
❖ DOUBLE TAXATION
Double taxation is a situation where an income is subject to tax twice. This
can occur in one of two ways - economic or juridical. Economic double
taxation occurs if an income or a part of it is taxed twice in the same country,
in the hands of two individuals. Alternatively, juridical double taxation
occurs if income earned outside India is taxed two times in the hands of the
same individual, once abroad and once in their home country. This unique
situation puts an undue burden on the taxpayer when their income is taxed
twice.
How can double taxation be avoided?
While there is little that the individual taxpayer can do to avoid double
taxation, the Income Tax act itself offers certain provisions to give relief to
an individual whose income is likely to be taxed twice. The foundation of
this relief measure lies in a Double Taxation Avoidance Agreement
(DTAA).
What is a DTAA?
A Double Taxation Avoidance Agreement is a tax treaty that India signs
with another country. An individual can avoid being taxed twice by utilizing
the provisions of this treaty. DTAAs can either be comprehensive
agreements, which cover all types of income, or specific treaties, targeting
only certain types of income.
For instance, there is a DTAA between India and Singapore under which
income is taxed based on the residential status of the individual. This
streamlines the flow of taxation and ensures that the individual is not taxed
twice for the income earned outside India. Currently, India has DTAAs in
place with more than 80 countries.
How is relief against double taxation provided under the Income Tax
Act?
Relief against double taxation can be unilateral or bilateral.
 Unilateral relief: Section 91 of the Income Tax Act, 1961 provides
for unilateral relief against double taxation. According to the provisions of
this section, an individual can be relieved of being taxed twice by the
government, irrespective of whether there is a DTAA between India and the
foreign country in question or not. However, there are certain conditions
that have to be satisfied in order for an individual to be eligible for unilateral
relief. These conditions are:
The individual or corporation should have been a resident of India in the
previous year.
The income should have been accrued to the taxpayer and received by them
outside India in the previous year.
The income should have been taxed both in India and in the country with
which there is no DTAA.
The individual or corporation should have paid tax in that foreign country.
 Bilateral relief:Bilateral relief is covered under section 90 of the
Income Tax Act, 1961. It offers protection from double taxation through a
DTAA. This type of relief is offered in two different ways.
Exemption method: The exemption method offers full and complete
protection from being taxed twice. That is, if an income earned outside India
has been taxed in the relevant foreign country, it is not subject to tax in
India.
Tax Credit method: According to this method, the individual or the
corporation can claim a tax credit (deduction) for the taxes paid outside
India. This tax credit can be utilized to set-off the tax payable in India,
thereby reducing the assessee’s overall tax liability.
Thus, by utilizing the provisions of DTAAs and the relief measures offered
under the Income Tax Act, individuals earning income from other countries
can minimize their tax liabilities and avoid the burden of double taxation.
MODULE 4
❖ GST
The goods and services tax (GST) is a value-added tax levied on most goods
and services sold for domestic consumption. The Goods and Service Tax
Act was passed in the Parliament on 29th March 2017 and came into effect
on 1st July 2017. It is usually taxed as a single rate across a nation. The
GST is paid by consumers, but it is remitted to the government by the
businesses selling the goods and services.
Before implementation of Goods and Service Tax (GST), Indian taxation
system was a farrago of central, state and local area levies. By subsuming
more than a score of taxes under GST, road to a harmonized system of
indirect tax has been paved making India an economic union. GST is the
biggest reform for indirect taxes in India in the post independence period.
It has replaced all the indirect taxes levied on goods and services by the
union and state governments that existed in the country such as the excise
duty, VAT, services tax, etc.
GST is aimed at being comprehensive for most goods and services with few
tax exemptions. It is a multi-stage, destination-based tax that is levied on
every value addition. GST is a single domestic indirect tax law for the entire
country.
SALIENT FEATURES OF GST:
• Equal distribution of powers to Union and State Legislature.
• Creation of GST Council.
• Removal of imposition of entry tax/ Octroi across India.
• Taxes levied by State on movies, theatre etc. as Entertainment tax will be
subsumed in GST, but levy of the same at panchayat, municipality or
district level will continue.
❖ CONSTITUTIONAL BACKGROUND OF GST
INCLUDINGGST COUNCIL
The Constitution contains the Union List and the State List within which
the power to levy separate taxes is given to the Centre and States
respectively. GST was to be levied in such a way that both the Centre and
the States received the power to levy and collect it. To provide for this, a
few amendments were made in the Constitution by Constitution (One
Hundred and First Amendment) Act, 2016. The most important of which is
insertion of Article 246A.
Thus, the various articles in the Constitution talking about GST, whether
directly or indirectly are as follows:
1. Article 246A: Special Provision for GST-
The newly inserted Article 246A gives power to Union and State
government to make the law relating to matter covered under List I (Union
List), List II (State List) and List III (concurrent List). Under Article
246A(1), power has been given to the Parliament and the respective
State/Union Legislatures to make laws on GST respectively imposed by
each of them. However, the Parliament of India is given the exclusive power
to make laws with respect to inter-state supplies. The Article 246A(2)
covers the provision of Interstate supply of goods or services or both. The
IGST Act deals with inter-state supplies. Thus, the power to make laws
under the IGST Act will rest exclusively with the Parliament.
Further, the article excludes the following products from the scope of GST
until a date recommended by the GST Council:
a) Petroleum Crude
b) High-Speed Diesel
c) Motor Spirit
d) Natural Gas
e)Aviation Turbine Fuel
2. Article 248: Residuary Power of legislation-
Under Article 248(1) Parliament has exclusive power in to make any law in
respect of any item not covered under State List and Concurrent List. The
Constitution (One Hundred and First Amendment) Act, 2016 introduced an
amendment to Article 248 on 16 September 2016. The amendment
subjected Parliament's power under Article 248 to the provisions of Article
246A.
3. Article 249: Power of Parliament to legislate with respect to a
matter in the State List in the national interest-
Parliament under article 249(1) can make the law in respect of any item
specified in the state list in the national interest, if the Council of States has
declared by resolution and supported by 2/3rd of member present and vote.
A minor amendment to Article 249 was adopted on 16 September 2016 by
the constitution one hundred and first amendment act,2016, whereby
permitting the Parliament to make laws on in relation to goods and services
tax. This means, now this also includes goods and service tax under article
246A i.e. Parliament of India can make the GST law for the whole or any
part of India subject to approval 2/3rd members of each state.
 4. Article 269 and Article 269A: Inter State Sale and Purchase-
Article 269(1) facilitates the levy and collection of tax on sale of goods or
consignment of goods in the course of Interstate trade or Commerce. Now,
the provision of this clause is subject to new article 269A. While Article
246A gives the Parliament the exclusive power to make laws with respect
to inter-state supplies, the manner of distribution of revenue from such
supplies between the Centre and the State is covered in Article 269A.
As per newly inserted Article 269A (amended by constitution one hundred
and first amendment act,2016) Goods and Service tax shall be levied and
collected by Government of India and apportioned between States in the
manner as provided in the law by parliament on the recommendation of
GST council. This article basically gives the Parliament the exclusive
power to make laws with respect to inter-state supplies, the manner of
distribution of revenue from such supplies between the Centre and the State
is covered in Article 269A. It allows the GST Council to frame rules in this
regard.
Further, Import of goods or services will also be called as inter-state
supplies. Parliament of India will formulate the law in respect of tax on
interstate trade of goods and services. In addition to above import of goods
or Services or both will also be equally treated as Supply of the goods and
services in the course of Inter-State trade or Commerce. This gives the
Central Government the power to levy IGST on import transactions. Import
of goods was subject to Countervailing Duty (CVD) in the earlier scheme
of taxation. IGST levy helps a taxpayer to avail the credit of IGST paid on
import along the supply chain, which was not possible before.
5. Article 279A: GST Council-
With insertion of Article 279A in 2016, President of India has power to
constitute Goods and Service tax Council (GST Council) within 60 days
from the date of commencement of this act. This Article gives power to the
President to constitute a joint forum of the Centre and States called the GST
Council. The GST Council is an apex member committee to modify,
reconcile or to procure any law or regulation based on the context of Goods
and Services Tax in India.
The Council shall consist following members
1. Chairman :- The Union Finance Minister
2. Member:- Union Minister of State Revenue/Finance
3. Member:- Minister in charge of Finance/taxation of each State
government.
6. Article 286: Restrictions on Tax Imposition-
This article which restricted states from passing any law that allowed them
to collect tax on sale or purchase of goods either outside the state or in the
case of import transactions. It was further amended in 2016 to restrict the
passing of any laws in case of services too. Further, the term ‘supply’
replaces ‘sale or purchase’. Now, Supply of goods or service or both will
be covered under this article. This article will restrict the states from
imposition of Interstate GST and same will be levied by union government
under Article 269A as mentioned earlier.
7. Article 366: Addition of Important definitions-
Article 366 was an existing article which was amended in 2016. As per new
clause 12A to Article 366 “Goods & Service tax” means any tax on supply
of Goods or Services or both except taxes on supply of the alcoholic liquor
for human consumption. The term service is also defined by inserting new
clause 26A as, anything other than goods. The definition of service is much
broader now as compared to the earlier one which is defined in finance act
1994. The definition of ‘state’ was also amended. Thus, the following three
definitions have been amended to Article 366:
a) Goods and Services Tax means the tax on supply of goods, services
or both. It is important to note that the supply of alcoholic liquor for
human consumption is excluded from the purview of GST.
b) Services refer to anything other than goods.
c) State includes Union Territory with legislature.
 8. Seventh Schedule-
Seventh schedule to the constitution covers the basic structure of Indian
taxation. The rights of taxation are given to both i.e. Central government
under List I (Union List) and to the State under List II (State List). Due to
insertion of Article 246A it is imperative to amend union list and state list
to make the proper arrangement of GST. The amendments are as follow-
a) Amendment in Entry No 84, 92, 92C to Union List: As per Entry
No 84 Duties of excise shall be levied on tobacco and other goods
manufactured or produces in India except alcoholic liquor for human
consumption, opium, Indian hemp and narcotics. Now the excise
duty is been subsumed by Article no 246A. Hence now new Entry no
84 will cover Excise duty on petroleum crude, high speed, petrol,
natural gas and aviation turbine fuel, tobacco and tobacco products.
It means even after introduction of GST, Central Excise duty on
above product shall remain in force till the time as GST council
thinks fit. Further Entry no 92 and 92 C covering tax on sale or
purchase of newspaper and Service tax respectively have been
omitted as already they are merged Into GST.
b) Amendment in Entry No 52, 54, 55 and 62 to State List:- Entry no
52 gives power to levy the entry tax. Now, the entry has been omitted.
It means now local bodies can’t levy and collect the entry taxes like
octroi, LBT etc.
Under Entry No 54 state government can collect tax on sale or purchase of
goods other than newspaper. Now, the state government can only collect
the taxes on sale of petroleum crude, high speed, petrol, natural gas and
aviation turbine fuel and alcoholic liquor for human consumption. Further
Now State government can’t levy the tax on advertisement under Entry No
55.
In addition to above now Panchayat, Municipalities, Regional or District
council can levy and collect taxes on entrainment and amusement under
entry 62.
GST COUNCIL:
Article 279A provides for constituting a council called the Goods and
Services Tax council within 60 days from date of commencement of 101st
Constitution Amendment Act, 2016. GST Council is a constitutional body
for making recommendations to the Union and State Government on issues
related to Goods and Service Tax. It is an apex member committee to
modify, reconcile or to procure any law or regulation based on the context
of Goods and Services Tax in India. The Council is chaired by the Union
Finance Minister and other members are the Union State Minister of
Revenue or Finance and Ministers in-charge of Finance or Taxation of all
the States.
As per Article 279A (4), the Council will make recommendations to the
Union and the States on important issues related to GST, like the goods and
services that may be subjected or exempted from GST, model GST Laws,
principles that govern Place of Supply, threshold limits, GST rates
including the floor rates with bands, special rates for raising additional
resources during natural calamities/disasters, special provisions for certain
States, etc.
Members of the council are as follows :-(a) the Union Finance Minister as
Chairperson; (b) the Union Minister of State in charge of Revenue or
Finance; (c) the Minister in charge of Finance or Taxation or any other
Minister nominated by each State Government. (d) Vice Chairperson to be
chosen among the members.
One-half of the total number of Members of the Council shall constitute the
quorum at its meetings and every decision shall be taken at a meeting, by a
majority of not less than three- fourths of the weighted votes of the members
present and voting, in accordance with the following principles, namely: —
• the vote of the Central Government shall have a weightage of
one third of the total votes cast, and
• the votes of all the State Governments taken together shall have
a weightage of two-thirds of the total votes cast, in that meeting.
While discharging the functions conferred by this article, the Council shall
be guided by the need for a harmonized structure of goods and services tax
and for the development of a harmonized national market for goods and
services, and the Council shall also devise mechanisms to adjudicate
disputes arising between the Centre and States.
❖ STRUCTURE OF GST
1.CGST Act, 2017 – CGST Stands for Central Goods and Services Tax.
The central government collects this tax on an intrastate supply of goods or
services and this is governed by the CGST Act, 2017. This implies that both
the Central and the State governments will agree on combining their levies
with an appropriate proportion for revenue sharing between them.
However, it is clearly mentioned in Section 8 of the GST Act that the taxes
be levied on all Intra- State supplies of goods and/or services but the rate of
tax shall not be exceeding 14%, each.
The Act has been enacted to make a provision for levy and collection of
such taxes and the matters connected therewith or incidental thereto. The
Act comprises of 174 Sections in 21 Chapters and three Schedules on
supplies without consideration, treatment of activities as to goods or
services and activities which shall be considered as neither goods or
services.
The features of Central Goods and Services Tax Act, 2017, are as follows :
• to levy tax on all intra-State supplies of goods or services or both
• to broaden the base of the input tax credit by making it available in
respect of taxes paid on supply of goods or services or both used or intended
to be used in the course or furtherance of business;
• to provide for self assessment of the taxes payable by the registered
person;
• to provide for powers of inspection, search, seizure and arrest to the
officers;
2. SGST Act, 2017: SGST Stands for State Goods and Services Tax.
The state government collects this tax on an intrastate supply of goods or
services and it is governed by SGST Act, 2017. This means on the same
intra-state goods or service, both CGST and SGST are levied but collected
by central and state governments respectively.
When SGST is being introduced, the present state taxes of State Sales Tax,
VAT, Luxury Tax, Entertainment tax (unless it is levied by the local
bodies), Taxes on lottery, betting and gambling, Entry tax not in lieu of
Octroi, State Cesses and Surcharges in so far as they relate to supply of
goods and services etc. are subsumed into one tax in GST called SGST.
This kind of tax is levied on the transaction value of the goods or services
supplied as per section 15 of the SGST Act.
For ex.- Let’s suppose Rajesh is a dealer in Maharashtra who sold goods to
Anand in Maharashtra worth Rs. 10,000. The GST rate is 18% comprising
of CGST rate of 9% and SGST rate of 9%. In such case, the dealer collects
Rs. 1800 of which Rs. 900 will go to the Central Government and Rs. 900
will go to the Maharashtra Government.
3.IGST Act, 2017: IGST Stands for Integrated Goods and Services Tax.
The central government collects this for inter-state sale of goods or services
and is governed by IGST Act,2017. The Act is designed to ensure seamless
flow of input tax credit from one state to another. The IGST Act comprises
of the following 11 Chapters, 33 Sections and 8 Definitions.
IGST shall be levied and collected by Centre on inter- state supplies. IGST
would be broadly CGST plus SGST and shall be levied on all inter-State
taxable supplies of goods and services. The inter-State seller will pay IGST
on value addition after adjusting available credit of IGST, CGST, and SGST
on his purchases. The Exporting State will transfer to the Centre the credit
of SGST used in payment of IGST. The Importing dealer will claim credit
of IGST while discharging his output tax liability in his own State. The
Centre will transfer to the importing State the credit of IGST used in
payment of SGST.
An example for IGST: Consider that a businessman Rajesh from
Maharashtra had sold goods to Anand from Gujarat worth Rs. 1,00,000. The
GST rate is 18% comprised of 18% IGST. In such case, the dealer has to
charge Rs. 18,000 as IGST. This IGST will go to the Centre.
4.UTGST Act,2017- UTGST, the short form of Union Territory Goods and
Services Tax, is nothing but the GST applicable on the goods and services
supply that takes place in any of the five territories of India, including
Andaman and Nicobar Islands, Dadra and Nagar Haveli, Chandigarh,
Lakshadweep and Daman and Diu called as Union territories of India, and
it shall be governed by UTGST Act,2017. It is an Act which makes
provision for levy and collection of tax on intra-State supply of goods or
services or both by the Union territories and for matters connected therewith
or incidental thereto.
UTGST shall be charged along with the CGST. It shall be charged at a rate
not exceeding 20% which is notified by the Central Government as per the
suggestions given by the GST Council. In addition to this, UT Tax is
collected in a manner as suggested by the Council and is paid by the taxable
person under the UTGST Act.
5.Compensation to States Act,2017- GST(Compensation to States)Act,
2017 was introduced in Lok Sabha on March 27, 2017. The Act provides
for compensation to states for any loss in revenue due to the implementation
of GST. According to the Act, the period of compensation shall be of 5
years which means that compensation shall be provided to a state for a
period of five years from the date on which the state brings its State.
The compensation payable to a state has to be provisionally calculated and
released at the end of every two months. Further, an annual calculation of
the total revenue will be undertaken, which will be audited by the
Comptroller and Auditor General of India.
MODULE 5
❖ MEANING OF GST
The goods and services tax (GST) is a value-added tax levied on most goods
and services sold for domestic consumption. The Goods and Service Tax
Act was passed in the Parliament on 29th March 2017 and came into effect
on 1st July 2017. It is usually taxed as a single rate across a nation. The
GST is paid by consumers, but it is remitted to the government by the
businesses selling the goods and services. It has replaced all the indirect
taxes levied on goods and services by the union and state governments that
existed in the country such as the excise duty, VAT, services tax, etc.
GST is aimed at being comprehensive for most goods and services with few
tax exemptions. It is a multi-stage, destination-based tax that is levied on
every value addition. GST is a single domestic indirect tax law for the entire
country.
This tax reform aims at creation of a single national market, common tax
base and common tax laws for the Centre and States. Another very
significant feature of GST is that input tax credit is available at every stage
of supply for the tax paid at the earlier stage of supply. This feature helps
in mitigating cascading or double taxation in a major way. This has also
ensured transparency in tax burden, accountability of the tax
administrations of the Centre and the States and also in improving
compliance levels at reduced cost of compliance for taxpayers has also
paved the way for economic growth.
Components of GST:
GST has three components-
• CGST- Stands for Central Goods and Services Act. The central
government collects this tax on an intrastate supply of goods or
services.
• SGST: Stands for State Goods and Services Tax. The state
government collects this tax on an intrastate supply of goods or
services.
• IGST: Stands for Integrated Goods and Services Tax. The central
government collects this for inter-state sale of goods or services.

❖ LEVY OF GST

Section 9 of CGST Act/SGST Act and Section 5 of IGST Act are the
Charging Sections for the purposes of levy of GST.
CGST and SGST shall be levied on all intra-state supplies of goods and/or
services and IGST shall be levied on all inter-state supplies of goods and/or
services respectively.
Levy and Collection of GST Under CGST Act. (Section 9)
 1. Levy of central goods and service tax [Section 9(1)]:
Under CGST Act, central tax called as the central goods and services
tax (CGST) shall be levied on all intra-State supplies of goods or services
or both, except on the supply of alcoholic liquor for human consumption.
It shall be levied on the value determined under section 15 and at such
rates, not exceeding 20%, as may be notified by the Government on the
recommendations of the Council and collected in such manner as may be
prescribed and shall be paid by the taxable person. [Similar rates have been
prescribed under SGST/UTGST]
2. Central tax on petroleum products to be levied from the date to
be notified [Section 9(2)]:
The central tax on the supply of petroleum crude, high speed diesel, motor
spirit (commonly known as petrol), natural gas and aviation turbine fuel
shall be levied with effect from such date as may be notified by the
Government on the recommendations of the Council.
3. Tax payable on reverse charge basis [Section 9(3)]:
The Government may, on the recommendations of the Council,
by notification, specify categories of supply of goods or services or both,
the tax on which shall be paid on reverse charge basis by the recipient of
such goods or services or both.
Further, all the provisions of this Act shall apply to such recipient as if he
is the person liable for paying the tax in relation to the supply of such goods
or services or both.
4. Tax payable on reverse charge if the supplies are made to a
registered person by unregistered person [Section 9(4)]:
The central tax in respect of the supply of taxable goods or services or both
by a supplier, who is not registered, to a registered person shall be paid by
such person on reverse charge basis as the recipient and all the provisions
of this Act shall apply to such recipient as if he is the person liable for
paying the tax in relation to the supply of such goods or services or both.
[Section 9(4) has been deferred till 30.6.2018]
 5. Tax payable on intra-State supplies by the electronic commerce
operator on notified services [Section 9(5)]
As per section 2(45) of the CGST Act, 2017, “electronic commerce
operator” means any person who owns, operates or manages digital or
electronic facility or platform for electronic commerce.
Further, “electronic commerce” means the supply of goods or services or
both, including digital products over digital or electronic network.
Thus, Electronic Commerce Operators (ECO), like flipkart, uber, makemy-
trip, display products as well as services which are actually supplied by
some other person to the consumer, on their electronic portal.
The consumers buy such goods/services through these portals. On placing
the order for a particular product/service, the actual supplier supplies the
selected product/service to the consumer. The price/consideration for
the product/service is collected by the ECO from the consumer and passed
on to the actual supplier after the deduction of commission by the ECO.
The Government may, on the recommendations of the Council, by
notification, specify categories of services the tax on intra-State supplies
of which shall be paid by the electronic commerce operator (ECO), if such
services are supplied through it.
Further, all the provisions of this Act shall apply to such electronic
commerce operator (ECO) as if he is the supplier liable for paying the tax
in relation to the supply of such services.
However, where an electronic commerce operator (ECO) does not have a
physical presence in the taxable territory, any person representing such
electronic commerce operator (ECO) for any purpose in the
taxable territory shall be liable to pay tax.
Where an electronic commerce operator (ECO) does not have a physical
presence in the taxable territory and also he does not have a representative
in the said territory, such electronic commerce operator shall appoint
a person in the taxable territory for the purpose of paying tax and such
person shall be liable to pay tax.
The Government vide Notification No. 17/2017 CT (R) dated 28.06.2017
has notified the following categories of services supplied through ECO for
this purpose—
1. services by way of transportation of passengers by a radio-taxi,
motorcab, maxicab and motor cycle;
2. services by way of providing accommodation in hotels, inns, guest
houses, clubs, campsites or other commercial places meant for
residential or lodging purposes, except where the person supplying
such service through electronic commerce operator is liable for
registration under section 22(1) of the CGST Act.
Levy and Collection of GST Under IGST Act. (Section 5)
The provisions under section 5 of the IGST Act are similar to section 9
of CGST Act except—
1. the word CGST has been substituted by IGST under IGST Act
2. under IGST Act, tax called integrated tax is to be levied on all
interState supplies and on goods imported into India.
3. maximum rate under section 5(1) of the IGST Act is 40% (i.e.
20% CGST + 20% UTGST).
Levy and Collection of GST Under UTGST Act. (Section 7)
The provisions under section 7 of the UTGST Act are similar to section
9 of CGST Act except—
1. the word CGST has been substituted by the word UTGST
under the UTGST Act.
2. under UTGST Act, tax called UT tax is be levied on all intra-
State supplies,
3. maximum rate 7(1) of UTGST Act is 20%.
Taxability of ECO for specified services

❖ REVERSE CHARGE MECHANISM

The concept of Reverse Charge Mechanism was introduced in erstwhile
Service Tax laws. Generally, tax is payable by the person who provides
services but under Reverse Charge Mechanism the liability to pay tax has
shifted to recipient of services. The concept of Reverse Charge Mechanism
is incorporated under GST, but in GST regime Government has notified not
only supply of certain services but also supply of certain goods under RCM.
The objective of Reverse Charge Mechanism is to widen the scope of levy
of tax on unorganized sectors and give exemption to specific class of
supplier of goods/services and import of services.
Therefore, under Reverse Charge Mechanism the liability to pay tax is fixed
on the recipient of supply of goods or services instead of the supplier or
provider in respect of certain categories of goods or services or both under
Section 9(3) or Section 9(4) of the CGST Act, 2017 and under sub-section
(3) or sub-section (4) of Section 5 of the IGST Act, 2017.
.Statutory provision of reverse mechanism
• Section 2(98) of the CGST Act, 2017 has defined the term “Reverse
Charge” and the same is reproduced as follows:
“reverse charge” means the liability to pay tax by the recipient of supply of
goods or services or both instead of the supplier of such goods or services
or both under sub-section (3) or sub-section (4) of Section 9, or under sub-
section (3) or sub-section (4) of Section 5 of the Integrated Goods and
Services Tax Act.
The plain reading of the cited definition of reverse charge under GST laws,
it is clearly stated that reverse charge is not only confined to services rather
the scope of reverse charge is extended to goods also. For more detailed
provisions of reverse charge as provided under section and sub-section of
the CGST Act, 2017 and IGST Act, 2017 is reproduced in the following
paras as under:
• Section 9(3) of the CGST Act, 2017 provides the provisions of reverse
charge and the same is reproduced as follows:
“The Government may, on the recommendations of the Council, by
notification, specify categories of supply of goods or services or both, the
tax on which shall be paid on reverse charge basis by the recipient of such
goods or services or both and all the provisions of this Act shall apply to
such recipient as if he is the person liable for paying the tax in relation to
the supply of such goods or services or both.”
• Section 5(3) of the IGST Act, 2017 provides the provisions of reverse
charge and the same is reproduced as follows:
“The Government may, on the recommendations of the Council, by
notification, specify categories of supply of goods or services or both, the
tax on which shall be paid on reverse charge basis by the recipient of such
goods or services or both and all the provisions of this Act shall apply to
such recipient as if he is the person liable for paying the tax in relation to
the supply of such goods or services or both.”
❖ INPUT TAX CREDITS
Input credit means at the time of paying tax on output, you can reduce the
tax you have already paid on inputs and pay the balance amount.
The concept is not entirely new as it already existed under the pre-GST
indirect taxes regime (service tax, VAT and excise duty). Now its scope has
been widened under GST.
Earlier, it was not possible to claim input tax credit for Central Sales Tax,
Entry Tax, Luxury Tax and other taxes. In addition, manufacturers and
service providers could not claim the Central Excise duty.
During the pre-GST era, cross-credit of VAT against service tax/excise or
vice versa was not allowed. But under GST, since these taxes will be
subsumed into one tax, there will not be the restriction of setting off this
input tax credit.
The conditions to claim Input Tax Credit under GST is a very critical
activity for every business to settle the tax liability.
Input Tax Credit can’t be applied to all type of inputs, each state or a country
can have different rules and regulations. Input Tax Credit is also viable to a
dealer who has purchased good to resale.
Tax Credit is the backbone of GST and for registered persons is a major
matter of concern. This is majorly in line with the pre-GST regime. These
rules are quite stringent and particular in their approach.
For example- you are a manufacturer: a. Tax payable on output (FINAL
PRODUCT) is Rs 450 b. Tax paid on input (PURCHASES) is Rs 300 c.
You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs
150 in taxes.
Who can claim ITC?
ITC can be claimed by a person registered under GST only if he fulfills
ALL the conditions as prescribed.
a. The dealer should be in possession of tax invoice
b. The said goods/services have been received
c. Returns have been filed.
d. The tax charged has been paid to the government by the supplier.
e. When goods are received in installments ITC can be claimed only when
the last lot is received.
f. No ITC will be allowed if depreciation has been claimed on tax
component of a capital good
Reversal of Input Tax Credit
ITC can be availed only on goods and services for business purposes. If
they are used for non-business (personal) purposes, or for making exempt
supplies ITC cannot be claimed . Apart from these, there are certain other
situations where ITC will be reversed.
ITC will be reversed in the following cases-
1) Non-payment of invoices in 180 days– ITC will be reversed for invoices
which were not paid within 180 days of issue.
2) Credit note issued to ISD by seller– This is for ISD. If a credit note was
issued by the seller to the HO then the ITC subsequently reduced will be
reversed.
3) Inputs partly for business purpose and partly for exempted supplies
or for personal use – This is for businesses which use inputs for both
business and non-business (personal) purpose. ITC used in the portion of
input goods/services used for the personal purpose must be reversed
proportionately.
4) Capital goods partly for business and partly for exempted supplies
or for personal use – This is similar to above except that it concerns capital
goods.
5) ITC reversed is less than required- This is calculated after the annual
return is furnished. If total ITC on inputs of exempted/non-business purpose
is more than the ITC actually reversed during the year then the difference
amount will be added to output liability. Interest will be applicable.
EXEMPTIONS FROM GST
Section II of the CGST Act and Section 6 of the IGST Act, gives the
power to grant exemption from GST as well as the State Act consists the
similar provisions relating to granting power to exempt SGST.
Under the previous Indirect Taxation regime, taxpayers were enjoying large
tax exemptions which are now limited under GST.
The Central or State Government are empowered to grant exemption to the
Goods or Services from tax either absolute or conditional, which should be
in the public interest on recommendation from the council by way of issue
of notification.
Under the previous Indirect Taxation regime, taxpayers were enjoying large
tax exemptions which are now limited under GST.
The Central or State Government are empowered to grant exemption to the
Goods or Services from tax either absolute or conditional, which should be
in the public interest on recommendation from the council by way of issue
of notification.
❖ EXEMPTED GOODS IN GST EXEMPTION LIST
1. Food
Fruits and vegetables, cereals, meat and fish, potatoes and other edible
tubers and roots, tender coconut, tea leaves, jaggery, coffee beans, ginger,
turmeric, milk, curd, etc.
2. Raw materials
Silk waste, raw silk, raw jute fibre, unprocessed wool, handloom fabrics,
cotton for khadi yarn, khadi, charcoal, and firewood
3. Tools/Instruments
Shovels, spades, agricultural tools, handmade musical instruments, hearing
aids, and tools used by physically challenged individuals.
4. Miscellaneous
Contraceptives, semen, human blood, vaccines, organic manure, earthen
pots, beehives, live animals (except horses), maps, books, journals,
newspapers, non-judicial stamps, kites, and pooja props.

Note: The above list of exempted goods is listed under GST rules but may
be subject to change as the council suggests. Also, the above mentioned are
examples of a few exempted goods, and more goods qualify for Nil GST.
❖ EXEMPTED SERVICES IN GST EXEMPTION LIST
1. All the services related to agriculture including harvesting,
cultivation, supply, packaging, warehouse, renting or leasing of
machinery, etc. are exempted from GST. However, this does not
include the rearing of horses.
2. Transportation of individuals via public transport, metered cabs,
auto-rickshaws, metro, etc.
3. Transport of agriculture produce and transportation of goods outside
of India.
4. Transportation of goods where the total amount of charges is less than
Rs 1500
5. Government and foreign diplomatic services
 6. Services provided by RBI or any foreign diplomatic mission in India
are also exempt from GST
7. Services provided to diplomats including the United Nations
8. Certain healthcare and educational services are also exempt from
GST such as mid-day meal catering services, services provided by a
Vet, clinic, or paramedics. Services by ambulances and charities are
also included in the list.
Some of the other exemptions of services under GST exemption list
Include:
1. Services provided by tour guides to foreign tourist.
2. Library services
3. Services for conducting religious ceremonies
4. Distribution of electricity
5. Services by authorised sports organizations.
❖ GST COMPOSITION SCHEME
The composition scheme under GST is optional and alternative method
specially designed for the small taxpayers whose turnover is up to 1.5
Crore (Increased from Rs. 1 Crore) & (Rs. 75 Lacs in case of few
states) and the main reason is to reduce the compliance cost (less returns,
maintaining books of account & no issuance of tax invoices), tedious
formalities under law & limited tax liability under this scheme. The eligible
taxpayer opting this scheme shall be required to pay tax quarterly at a
defined percentage of his turnover.
Conditions for availing Composition Scheme
The following conditions must be satisfied in order to opt for composition
scheme:
• No Input Tax Credit can be claimed by a dealer opting for composition
scheme
• The dealer cannot supply goods not taxable under GST such as
alcohol.
 • The taxpayer has to pay tax at normal rates for transactions under the
Reverse Charge Mechanism
• If a taxable person has different segments of businesses (such as
textile, electronic accessories, groceries, etc.) under the same PAN,
they must register all such businesses under the scheme collectively
or opt out of the scheme.
• The taxpayer has to mention the words ‘composition taxable person’
on every notice or signboard displayed prominently at their place of
business.
• The taxpayer has to mention the words ‘composition taxable person’
on every bill of supply issued by him.
• As per the CGST (Amendment) Act, 2018, a manufacturer or trader
can now also supply services to an extent of ten percent of turnover,
or Rs.5 lakhs, whichever is higher. This amendment will be applicable
from the 1st of Feb, 2019.
❖ STRUCTURE OF CUSTOMS LAWS IN INDIA INCLUDING
CUSTOM CESS
‘Customs Duty’ refers to the tax imposed on the goods when they are
transported across the international borders. The objective behind
levying customs duty is to safeguard each nation’s economy, jobs,
environment, residents, etc., by regulating the movement of goods,
especially prohibited and restrictive goods, in and out of any country.
Every good has a predefined rate of duty that is determined based on various
factors, including where such good was acquired, where such goods were
made, and what these goods is made of. Also, anything that you bring into
India for the first time should be declared as per the customs rules. For
instance, you need to declare the items purchased in a foreign country and
any gifts which you acquire outside India.
Under the customs Act 1962, Customs Duty is an indirect tax. The Article
265 of India's Constitution provides that “no tax shall be levied or collected
except by authority of law”. The customs Act 1962 and the Customs Tariff
Act, 1975 are the two primary statutes that govern the entry and exit of
goods into or from the country.
The object of customs Act 1962, which extends to the whole if India is:
i. To levy and collect Duties
ii. Regulation of Import and Export
iii. Prevention of illegal activities such as smuggling
iv. Protection of Domestic Trades
v. To Encourage and conserve Foreign exchange
How to Calculate Customs Duty ?
The customs duties are usually calculated on Ad valorem basis on the value
of the goods. The value of goods is calculated according to the regulations
stated under Rule 3(i) of the Customs Valuation Rules, 2007.
You can also make use of the customs duty calculator that is available on
the CBEC website. As part of the computerised and electronic service drive
in the year 2009, India started a web-based system known as ICEGATE.
ICEGATE is the abbreviation of Indians Customs Electronic
Commerce/Electronic Data Interchange gateway. It provides a platform for
the calculation of duty rates, import-export goods declaration, shipping
bills, electronic payment, verification of import and export licenses.
The Indian classification of the Customs Duty is based on the Harmonized
Commodity Description (HS) and Coding system. The HS codes are of 6
digits.
The IGST that applies to all imports and exports is charged on the value of
the good along with the primary customs duty on the good. The structure is
as follows:
Value of the imported goods+ Basics Customs Duty + Social Welfare
Surcharge = Value based on which IGST is calculated

In case there is a confusion regarding the common valuation factors, the

following factors are taken into consideration as per exception:
 • Comparative Value Method to calculate the transaction value of the
same items as per Rule 4.
• Comparative Value Method to calculate the transaction value of the
same items as per Rule 5.
• Deductive Value Method to calculate the sale price of an item in
importing country as per Rule 7.
• Computed Value Method that is used as per the fabrication materials
and profit as per Rule 8.
• Fallback Method used to calculate goods with higher flexibility as per
Rule 9.

The Central Board of Excise and Customs under the Ministry of

Finance manages the customs duty process in the country.
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❖ LEVY OF CUSTOM DUTY
There are four stages in any tax structure, viz., levy, assessment, collection
and postponement. The basis of levy of tax is specified in Section 12,
charging section of the Customs Act. It identifies the person or properties
in respect of which tax or duty is to be levied or charged. Under assessment,
the liability for payment of duty is quantified and the last stage is the
collection of duty which is may be postponed for administrative
convenience.
As per Section 12, customs duty is imposed on goods imported into or
exported out of India as per the rates specified under the Customs Tariff
Act, 1975 or any other law. On analysis of Section 12, we derive the
following points:
(i) Customs duty is imposed on goods when such goods are imported
into or exported out of India;
 (ii) The levy is subject to other provisions of this Act or any other law;
(iii) The rates of Basic Custom Duty are as specified under the Tariff
Act, 1975 or any other law;
(iv) Even goods belonging to Government are subject to levy, though
they may be exempted by notification(s) under Section 25.
Custom Tariff Act, 1975 has two schedules. Schedule I prescribes tariff
rates for imported goods, known as ―Import Tariff‖ and Schedule II
contains tariff for export goods known as ―Export Tariff‖.
❖ TERRITORIAL WATERS OF INDIA UNDER CUSTOM
Indian Customs Waters’
• Section2 (28) reiterates that ‘Indian Customs Waters’ means the water
extending into the sea up to the limit of the contiguous zone of India.
• Territorial waters stretch out up to 12 nautical miles from the standard
on the shoreline of India. Indian Customs waters stretch out up to the
contiguous zone of India which 24 nautical miles from the closest
purpose of the rule. In this manner, Indian Customs waters reach out
up to 12 nautical miles past territorial waters.
“Adjudicating Authority” which means any authority competent to pass an
order or decision under this Act, but is not inclusive of the Board,
Commissioner (Appeals) or Appellate Tribunal.
The Central Government is the rulemaking Authority, and the Central
Board of Excise and Customs (CBEC) has the delegated power of making
regulations.
In the past expense administration, laws of customs duty, Excise and
Service Tax and VAT set out the duty treatment of imports and fares. In the
present Goods and Service Tax (GST) organization, Excise, Service Tax,
and VAT will require submission into GST, and custom obligation will
continue its imposition independently.
The GST is a general destination-based tax leviable on the manufacture,
sale, and utilization of goods and services at what would be considered a
national level which subsumed other circuitous duty, in this way keeping
up a vital separation from different layers of tax evaluation that by and by
existing in India. It has made a solitary, brought together Indian market to
make the economy more grounded. The embodiment of GST is that the
falling impacts of both CENVAT and administration charge are anticipated
that would be evacuated with set-off, and a logical chain of set-off from
original producer’s point and service provider’s point up to the retailer’s
level will be established.
❖ TYPES OF CUSTOM DUTIES
While Customs Duties include both import and export duties, but as export
duties contributed only nominal revenue, due to emphasis on raising
competitiveness of exports, import duties alone constituted major part of
the revenue from Customs Duties and include the following:
• Basic Customs Duty (BCD)
• Countervailing Duty (CVD)
• Export Duties
• Auxiliary Duty of Customs
• Additional Customs Duty or Special CVD
• Protective Duty,
• Anti-dumping Duty
• Education Cess on Custom Duty
1. Basic Customs Duty
All goods imported into India are chargeable to a duty under Customs Act,
1962 .The rates of this duty, popularly known as basic customs duty, are
indicated in the First Schedule of the Customs Tariff Act, 1975 as amended
from time to time under Finance Acts. The duty may be fixed on ad -
valorem basis or specific rate basis. The duty may be a percentage of the
value of the goods or at a specific rate. The Central Government has the
power to reduce or exempt any good from these duties.
2. Additional (Countervailing) Duty of Customs
This countervailing duty is livable as additional duty on goods imported
into the country and the rate structure of this duty is equal to the excise
duty on like articles produced in India. The base of this additional duty is
c.i.f. value of imports plus the duty levied earlier. If the rate of this duty is
on ad-valorem basis, the value for this purpose will be the total of the value
of the imported article and the customs duty on it (both basic and auxiliary).
3. Export Duties
Under Customs Act, 1962, goods exported from India are chargeable to
export duty The items on which export duty is chargeable and the rate at
which the duty is levied are given in the customs tariff act,1975 as amended
from time to time under Finance Acts. However, the Government has
emergency powers to change the duty rates and levy fresh export duty
depending on the circumstances.
4. Auxiliary Duty of Customs
This duty is levied under the Finance Act and is leviable all goods imported
into the country at the rate of 50 per cent of their value. However this
statutory rate has been reduced in the case of certain types of goods into
different slab rates based on the basic duty chargeable on them.
5. Cesses
Cesses are leviable on some specified articles of exports like coffee, coir,
lac, mica, tobacco (unmanufactured), marine products cashew kernels,
black pepper, cardamom, iron ore, oil cakes and meals, animal feed and
turmeric. These cesses are collected as parts of Customs Duties and are
then passed on to the agencies in charge of the administration of the
concerned commodities.
6. Education cess on customs duty
An education cess has been imposed on imported goods w.e.f. 9-7-2004.
The cess will be 2% and wef 01.03.2007 2%+1% of the aggregate duty of
customs excluding safeguard duty, countervailing duty,Anti Dumping
Duty.
 7. Protective Duties
Tariff Commission has been established under Tariff Commission Act,
1951. If the Tariff Commission recommends and Central Government is
satisfied that immediate action is necessary to protect interests of Indian
industry, protective customs duty at the rate recommended may be imposed
under section 6 of Customs Tariff Act. The protective duty will be valid till
the date prescribed in the notification.
8. Countervailing Duty on Subsidized goods
If a country pays any subsidy (directly or indirectly) to its exporters for
exporting goods to India, Central Government can impose Countervailing
duty up to the amount of such subsidy under section 9 of Customs Tariff
Act.
9. Anti Dumping Duty on dumped articles
Often, large manufacturer from abroad may export goods at very low prices
compared to prices in his domestic market. Such dumping may be with
intention to cripple domestic industry or to dispose of their excess stock.
This is called 'dumping'. In order to avoid such dumping, Central
Government can impose, under section 9A of Customs Tariff Act, anti-
dumping duty up to margin of dumping on such articles, if the goods are
being sold at less than its normal value. Levy of such anti-dumping duty
is permissible as per WTO agreement. Anti dumping action can be taken
only when there is an Indian industry producing 'like articles'.
10. Safeguard Duty
Central Government is empowered to impose 'safeguard duty' on specified
imported goods if Central Government is satisfied that the goods are being
imported in large quantities and under such conditions that they are causing
or threatening to cause serious injury to domestic industry. Such duty is
permissible under WTO agreement. Safeguard duty is a step in providing
a need-based protection to domestic industry for a limited period, with
ultimate objective of restoring free and fair competition.