Black Money, also known as Unaccounted Income, refers to wealth or assets that have

not been reported to d authorities at d time of generation or during possession. It

includes income from both legal & illegal activities that have evaded taxes or other
statutory contributions. Factors Leading to Generation of Black Money: 1- Illegal
Activities: Smuggling, counterfeiting, narcotics trade, corruption, & illicit trade
generate black money. 2- Failure to Disclose Permissible Economic Activities
contributes to black money. 2-Manipulation of Accounts & misrepresentation of
Financial Statements generate black money. 3- Mis- or Non-reporting of Transactions &
out-of-Book Transactions lead to tax evasion & black money generation. 4- Parallel
Books of Accounts enable manipulation & evasion of taxes. 5- Manipulation of
Sales/Receipts & Expenses helps evade taxes. 6- Land & Real Estate Transactions with
under-reported prices result in tax evasion & black money generation. -- Causes of
Creating Black Money: 1-Corruption in Govt. & Administration. 2- War Affairs
Situations: Situations create opportunities for black market activities & tax evasion. 3 -
Devaluation of Property. 4- People's Tendency Towards Physical Happiness leads to
illegal methods for increased expenditures & black money -- Remedies to Minimize or
Eradicate Black Money & Corruption: 1- Demonetization of High-Value Currency
controls black money circulation. 2- Mandatory Declaration of Gold & Property
Purchases helps prevent tax evasion. 3- Mandatory Declaration of Foreign Income &
taxation on it. 4- Govt. Initiatives like Self-Declaration Plans & amnesty schemes
convert black money to white money. 5- Revision of Tax Procedures to address
loopholes. 6- Promotion of Banking Business for minimizing black money generation.
7- Moral Values Training

Equality Before Law: According to Art. 14 of d Indian Const. , every person is entitled
to equality before d law & equal protection of d laws within d territory of India. d
principle of equality before d law ensures that d law treats all individuals equally &
without discrimination. It prohibits d state from denying any person d equal protection
of laws. -- Relation Between Art. 14 & Taxing Laws: d validity of taxing laws can be
examined based on d fundamental right of equality guaranteed by Art. 14. While d state
has wide discretion in selecting persons or objects to tax, taxing laws must still pass d
test of equality laid down in Art. 14. d classification made by a taxing law must have a
reasonable basis & should not result in arbitrary or discriminatory treatment. d law
should operate equally within its selected range of classification & not violate d
fundamental principles of equality. -- Leading Cases: Several cases have dealt with d
relationship between Art. 14 & taxing laws. In I.T. Officer, Shillong v. NTR Rambat, d
S.C. held that a taxation law will be struck down if there is no reasonable basis for d
classification made or if d same class of property, similarly situated, is subject to
unequal taxation. However, perfect equality in taxation is not required, as long as d
classification is based on intelligible differentia & has a rational relation to d object
sought to be achieved. --In other cases, such as E.J. Tobacco Co. v. State of A.P. &
Kerala Hotel & Restaurant Association v. State of Kerala, d courts upheld d validity of
classification made in taxing laws based on intelligible differentia & a rational nexus
with d objective of d laws. These cases demonstrate that taxing laws can be examined
for their compliance with d fundamental right of equality under Art. 14. -- Conclusion:
Based on d analysis of d aforementioned cases, d validity of taxing laws can be assessed
with reference to d fundamental right of equality under Art. 14 of d Indian Const. in
relevant instances.

Tax Planning: Arrangement to minimize tax liability by utilizing provisions of tax law.
Eg: Investing in specified permissible avenues eligible for deduction under Section 80C
of d Income Tax Act, 1961. Objective: Reduce tax burden legally within d framework
of d law. -- Tax Avoidance: Reducing tax liability within legal boundaries by exploiting
loopholes. It aims to benefit from tax laws in unexpected ways. Example: Structuring
transactions for maximum tax advantage. Objective: Minimize tax burden within d
confines of d law. -- Tax Evasion: Illegally reducing tax liability by hiding income or
inflating expenses. It violates tax laws & may involve cash transactions. Example:
Concealing income in unreported cash transactions. Objective: Evade taxes unlawfully.
-- Distinguishing Factors: Tax Planning: Legal, uses provisions of d law to reduce tax
burden (e.g., Section 80C). Tax Avoidance: Legal, exploits loopholes in d law for tax
advantage. Tax Evasion: Illegal, involves breaking tax laws to evade taxes. Objectives:
Tax Planning: Reduce tax liability lawfully by applying tax provisions (e.g., Section
80C). Tax Avoidance: Minimize tax liability within legal boundaries. Tax Evasion:
Reduce tax liability through unfair means, risking penalties.-- Consequences of Tax
Avoidance: 1. Loss of public revenue, impacting a welfare state. 2. Disturbance to d
economy, contributing to inflation. 3. Waste of resources in d battle between avoiders &
tax authorities. 4. Sense of injustice & inequality among non-avoiders. 5. Burden
transferred from avoiders to honest citizens. -- Causes of Tax Evasion & Avoidance: 1.
High tax rates increase temptation for evasion & avoidance. 2. Inadequate powers of tax
department personnel. 3. Complexity of tax laws, making compliance difficult. 4. Lack
of deterrent punishment for tax evaders. 5. Lack of transparency in tax laws &
procedures. 6. Moral & psychological factors influencing compliance. 7. Lack of
integrity among some tax department officers. 8. Influence of political donations on tax
officials. 9. Suspicious attitude of d income tax department. --------- Scheme of
Distribution of Revenues between Union & States: Acc to Art.268 of d Indian
Constitution, taxes in d State List are under d exclusive jurisdiction of d States, while
taxes in d Union List belong to d Union. However, some taxes in d Union List may be
assigned to d States. –

Duties Levied by d Union but Collected & Appropriated by d States: Art.268 allows for
d collection of stamp duties & excise duties on medicinal & toilet preparations by d
States, even though they are levied by d Central Govt. -- Service Tax Levied by Union
& Collected & Appropriated by Union & States: Art.268-A empowers d Union to levy
service taxes, which are collected & appropriated by both d Union & d States based on
principles formulated by Parliament. -- Taxes Levied & Collected by d Union &
 Assigned to d States: d 80th Amendment Act, 2000, amended Art.269 & recommended
assigning a portion (29%) of certain Central taxes & duties to d States. - Taxes Levied
& Collected by d Union but Distributed between d Union & States: d 80th Amendment
Act, 2000, substituted a new Art.for Art.270, specifying that taxes & duties mentioned
in d Union List (except those in Art.271 & specific-purpose cess) are levied & collected
by d Union but distributed between d Union & States based on prescribed percentages.
-- Taxes for d Purposes of d Union: Art.271 states that if Parliament increases any
duties or taxes mentioned in Articles 269 & 270 by imposing a surcharge, d entire
proceeds of d surcharge go to d Consolidated Fund of India. -- Grants-in-Aid: d
Constitution provides grants-in-aid to States through: Art. 273: Grants-in-aid in lieu of
export duty on jute products for certain States. -- Art. 275: Grants deemed essential for
financially needy States, including special grants for d welfare of Scheduled Tribes or
administration in scheduled areas. Art 282: Grants for public purposes by both d Union
& d States. -- Taxes for d Purposes of States: Articles 276 & 277 preserve d authority
of d States to levy taxes on subjects that were previously under their jurisdiction.
Art.276 allows States to impose taxes on professions, trades, callings, & employment
for their benefit. -- Evaluation of d Scheme of Distribution of Revenues: d scheme
displays a tendency towards centralization, with d Centre having significant resources
compared to d States. This reliance on d Centre for funds affects d implementation of
State welfare schemes. While this centralization may conflict with federalism
principles, it serves to maintain economic unity & national welfare. d Planning
Commission plays a significant role in distributing central grants to d States, but
transforming it into a statutory body is suggested to address concerns.

Characteristics Good Tax System Any State: 1. Taxes Should Bear All d Canons of

Taxation- 2. Max. Social Benefit- 3. Equality in d Distribution of Tax Burden- 4. Multi-

Taxation System or Diversity System- 5. Productivity of d Tax System- 6. Rights of
Tax-Payers- 7. Instrument of Social Control. Conclusion: Prof. Shirras, a tax which
brings in large net revenue without protest from tax payers & without any political
influence can be regarded as a good tar system. -- DIRECT& INDIRECT TAX: Direct
Tax-Dalton>is really paid by a person on whom it is legally imposed. A tax is said to be
a direct tax when impact & d incidence of a tax are on one & d same person. E.g;
income tax, wealth tax & gift tax are a direct tax because their impact & incidence fall
on one d same person.-- Indirect Tax>Dalton "An indirect tax is imposed on one
person, but paid partly or wholly by another owing to a consequential changes in terms
of some contract or bargaining between them. Indirect tax impact on one person,
incidence on another; direct taxes on property/income, indirect taxes paid by consumers;
direct taxes: burden on taxpayers, indirect taxes: different payer & bearer; Merits
Direct Taxes: economy, certainty, equity, reduction in inequalities, elasticity, civil
consciousness; Demerits DT: unpopular, inconvenient, possibility of injustice, evasion,
exemption of low income group; Merits IndrctT: convenience, difficult to evade,
elasticity, equitable, progressive, productive, wide coverage, social welfare; Demerits
Indrect Taxes: regressive, heavy administrative cost, reduction in savings, uncertainty,
lack of civil consciousness; conclusion: indirect taxes burden d poor, direct taxes burden
d rich, both complement each other. ---TAX: compulsory contribution imposed by
public authority, regardless of exact amount of service rendered to taxpayer in return, &
not imposed as a penalty for any legal offense. Compulsory exaction of money by a
public authority for public purposes, enforceable by law, & is not a payment for
services rendered. d essence of a tax is d absence of a direct

quid pro quo between d taxpayer & d public authority. -- Fee: payment to defray d cost
of each recurring service undertaken by d government, primarily in d public interest but
conferring a measurable special advantage on d fee-payer. It is a charge imposed by a
governmental agency for special services rendered to individuals. Fees are characterized
by more or less free choice on d part of d payer as to whether or not they should pay
more or less for d direct benefit conferred upon them. -- Distinction bw Tax & Fee>
Tax: Levied & collected only with d authority of law. Compulsory exaction of money
for public purposes. Enforced by law & collected for d Consolidated Fund of India. No
direct correlation between tax payments & d services rendered. Can be expropriatory in
nature. Object is to bring about social order. Based on d capacity to pay principle.
Applied to various transactions as a means of raising revenue or incentivizing behavior.
No requirement of a direct relationship between d tax & services rendered. -- Fee: Not
always compulsory. Payment for services rendered, with correlation to d benefits
received. Collected separately from taxes & not merged with d Consolidated Fund of
India. Quid pro quo is an essential element; fee charged according to d magnitude of
benefits received. Cannot be expropriatory. Object is d regulation of social order.
Uniform fees; capacity to pay is not d basis. Directly linked to d cost of providing a
service. Reasonable relationship required between fee & services rendered. --
Conclusion: d distinction between tax & fee should be examined on a case-by-case
basis, as some impositions labeled as fees may actually be taxes. d key factors to
consider are d benefit conferred, d purpose of d collection, & whether d amounts
collected are merged with d public revenue or used specifically for d services rendered.
d Supreme Court has emphasized d importance of quid pro quo & d non-merging of fee
collections with public funds in determining whether an imposition is a fee or a tax.
Taxation:-Acc. Art. 366 (28) of Ind. Const., "Taxation includes d imposition of any
tax or impost, whether general or local or special & tax shall be construed Accodingly."
"Tax" has not defined under Ind. Const.. d S.C. of India, in Commissioner HR & C.E.
Vs. Laksmendra (1954) cited with approval d def. of Tax giver by Australian High
Court as " A tax is a compulsory exaction of money by public authority for public
purposes enforceable by law & is not payment for services rendered." Acc. to Lothan
C.J., "A tax is a compulsory exaction of money by a public authority for public
purposes enforceable by law & is not a payment for services rendered." Principles of
Taxation- Adam Smith, 1976, book "The Wealth of Nations": 1. Canon of Equality—
contrib. Govt support. Equal/Proportionate to Income 2.Certainty: certain & told in
advance. 3. Convenience: Long Que/Long Tax Forms. 4.Economy-to collect tax without
expenditure. Bastable given more canons> 5. Productivity: 2 ways. yield satisfactory
amount for maintenance of Govt.& should not obstruct & discourage production in
short & long run. 6. Elasticity: yield of taxs may be increased or decreased Acc. to
needs of Govt. 7. Diversity-- direct & indirect. 8. Simplicity 9. Neutrality. 10.
Expediency 11. Contribution to Economic Stabilization. 12. Coordination. – Incidence
of Tax>point of t. collection -- Impact of Tax> point of burden tax felt. -- History
Growth Dev. Income Tax Law India: Since 1860- 3 periods.> 1. 1st Period: 1860-1885-
experiment, tax twice introduced in 1860& 1869, twice abandoned in 1865& 1873. Tax
1860 imposed July, 31, 1860: Scoy Mutiny in 1857 to overcome d financial losses of d
East India Company. levied tax 2% on income b/w 200-500Rs. & 4% on higher
incomes. imposed 4 type Income.1-Income from landed property, 2-trade &
professions, 3-securities, 4-pay & pensions. In 1862 exemption limit enhanced to Rs.
500. It expired in 1865. In 1867 levied tax as licence tar. 1868 d certificate tax in place
of licence-tax. These changes proved a failure & Govt. was revive income-tax in 1869.
1870 rates tax enhanced & 1871 exempted limit to Rs. 750 p.a. In 1872 enhanced to
Rs1000. 1873 imposition of income-tax was abandoned, in yr., 1878 it was re-
introduced as licence fee by Provincial Govt.s. lasted upto 1885. 2. 2nd Period:1886-
1914 - tax on income became permanen. Inc. T. Act, 1886 was passed: 1) Pensions &
Salaries. 2) Income from Companies, 3) Income from interest on securities, 4) Income

from other sources. 3. 3rd Period 1914 & Onwards- World War: vital reforms in
income tax law. introduction of graduation in tax. In 1917, a Super tax on Rs, 50,000
imposed. In 1918 Amendment Act enacted, brought substantial change system of
assessment. A peculiar feature of this Act was taxation on d income of d year in d same
year. d Act of 1918 for d first time introduced d concept of aggregating d income of a
person from all d sources for d purpose of fixing d tax incidence at d rate (s) applicable
to d total income. In 1919 d Montague Chelmsford Reforms. d Cent.Govt: revise law of
IT > tax ;aw simple & esily understandable. Tod Hunter Committee appointed in 1921>
suggest improvement 4 implementation of ITAct1922. Modern Times: 1 Apr. 1937:
Govt India Act, 1935 adapted. 1946 Cabinet Mission came India: discuss transfer of
power from the British to Indian Political Leadership. 26 Nov. 1949> Const India
passed & adopted by Assembly. 26 Jan. 1950> Const became effective & replaced Govt
India Act, 1935. 15 Nov. 1939> C. Rajgopalachari voiced demand Constituent
Assembly, accepted in Aug. 1940. 9 Dec. 1946>Assembly began its first session.
24 Jan. 1950> Const. of India was signed and accepted by all. -- Income Tax Bill, 1961
drafted & placed before Parliament & `finally passed on 13.9.1961. came force
1.4.1962. Thereafter ITAct 1961 undergone numerous changes by way of amendments..
Is Indian Income Tax Act Exhaustive? It is to be noted that d present Income Tax Act
contains 298 Sections & 11 Schedules. It is divided in 26 Chapters. Besides this, d Act
is supplemented every year by d Finance Act which provides rates of tax. d rates are not
given in d Principal Act. There is no liability to pay unless d Finance Act is passed by d
Parliament. Indian Income Tax Act is perfectly exhaustive & complete in all respects.
Privy Council in Commission of Income Tax Vs. Tribunal Trust (1948 ITR 214) held
that d Act fully defines d obligations & remedies of Taxpayers & provisions concerning
appeal against assessment & refund have been provided within d four walls of d Act
itself. This decision of Privy Council is reflected by S.293 of d Income Tax Act, 1961
which provided that "no suit shall be brought in any civil court to set aside or modify
any assessment order made under this Act & no prosecution, suit or processing shall lie
against d Govt. or any office of d Govt. for any thing done in good faith or intended to
be done under this Act' The Income Tax Act is a fiscal enactment & in case of an
ambiguity it is to be construed strictly in favour of d subject. In case of doubt d
construction most beneficial to d subject should be adopted where d language is not
capable of a meaning favourable to d assessee, d court must give effect to d statute &
leave it to d legislature to amend d statute. d provision of law has to be carried out as it
is & d court is not to consider what d law ought to have been. Thus, d Act is full &
exhaustive. It is complete in itself. It prescribes d remedies & Procedure Through which
d substantive portion of d Act shall be implemented.
Preparing Questions:

1> Discuss the historical development of tax law in India with the Salient features of Present
Income Tax Act.
2> 1-b-Discuss the origin of the Law of Taxation. Why is taxation need in our society? '

2>Explain the difference between tax and fee. Can tax be imposed under the Concurrent List?

3>What is the procedure of distribution of tax revenues between centre and states? Explain.

4>Describe and differentiate between Direct and Indirect tax.

5-The Tax-evasion and Tax-Avoidance both are deemed to be illegal in Tax Laws. Discuss.

6-Different slabs of taxes for different income groups does not violate right to equality under Article
14. Explain.

7-There are certain incomes which are totally exempted and there are certain incomes which are
partially exempted from tax under section 10 of Income Tax Act, 1961? Explain such incomes.

8-Discuss the provisions relating to taxation on freedom of trade, commerce and intercourse with in
the country, Refer to case laws.

Q.2. Briefly, explain the various characteristics of a good or sound tax system of any state.

Ans. Characteristics of a Good Tax System of Any State- The characteristics of a good tax system of any
State may be provided as follows-

1. Taxes Should Bear All the Canons of Taxation- The first and foremost characteristic of a good tax
system is that the taxes imposed should bear all the canons of taxation given by Adam Smith: that is to
say, (i) canon of equality or equity. (il) canon of certainty, (iti) canon of convenience and (iv) canon of
economy and canons of other economists also such as that (v) canon of elasticity, (vi) canon of flexibility,
(vii) canon of diversity, (viii) canon of smiplicity and (ix) canon of neutrality etc. must be applied for
taxation.

Note- For further detail PI. See Q. No. 1.

2. Maximum Social Benefit- The second characteristic of a sound tax system of any state is that the
taxation should bring the maximum social advantage. To achieve this, the taxes should be levied on
different sections of the people in such a way that the marginal sacrifice of different taxes should

To What Extent Adam Smith's Canons of Taxation are Included in Indian Tax System ? It may be noted
that we may apply Adam Smith's canons to Indian tax system and see how far they are applicable? The
basic principle of Adam Smith is his canon of ability according to which the tax burden should fall more
heavily upon the rich people. This principle is followed in the case of be the same.

Equality in the Distribution of Tax Burden- It is to be noted with respect to the equality in the
distribution of tax burden that there are two aspects to the problem of equality. The first is the proper
treatment of persons in like circumstances. The rule in this case is equal treatment of equals. All those
persons who are placed in similar circumstances should bear the same burden of taxation. The second
aspect of equality in taxation is the desirable relative treatment of persons in unlike circumstances. That
is, those who are better off should pay more taxes and they should bear a great burden of taxation.

Multi-Taxation System or Diversity System A multiple tax system refers to the tax system in which taxes
are levied on various items. The tax system should be diversified instead of being concentrated in one or
two taxes.

At the same time, care should be taken to avoid multiplicity of taxes, Arthur Young says, "If I were to
define a good system of taxation, it should be that of bearing lightly on an infinite number of points,
heavily on none."

Productivity of the Tax System - It is to be noted that main purpose of the taxation is to collect revenue,
though it can have other regulatory and non-revenue uses. As the needs of the public authorities
increase continually the tax system should yield increased revenues. Tax productivity does not mean
simply revenue returns. Adequency, regularity and flexibility are important aspects of tax productivity.
The revenue yield of any tax will depend upon a variety of factors, such as the tax base, the rate of tax,
the various exemptions given to the tax-payer etc.

Rights of Tax-Payers_ It may be noted that a sound tax system will have to safeguard the interests of the
tax-payers, In a democratic set-up the rights of tax-payers have to be continuously kept in mind. Besides,
the present level of taxation as well as the further prospects of taxation necessitate that the interest and
rights of tax-payers should be given adequate recognition.
The authorities should (i) make efforts to broaden their understanding of particular tax measure, (ji)
provide for prompt and fair treatment of his complaints, and (ili) reduce the inconvenience to the
minimum.

Universal Application of Taxes-Another important characteristic of a good tax system is that, each
individual should pay according to his ability to pay, and the individuals, possessing the same ability to
pay, should contribute the same amount by way of taxes without any discrimination. In India, Income
Tax is lacking this characteristic because income from agriculture is not taxed to the extent the incomes
have been taxed in the non-agriculture sector.

Instrument of Social Control--As a matter of fact, taxation is a recognised instrument of social control
and not merely a source of raising revenue. Although an argument may be given that the taxes can be
raised only for the purpose of revenue and not for any other purpose. H.M. Seervai on this point
commented that tax is a recognised instrument of social control and that any assumption that a tax
cannot be used for purposes other than revenue is ill-founded.

To achieve social control the following objectives should be achieved :

de.,

(i) Prevention of concentration of wealth (ji) Redistribution of wealth for the common good, (iii)
Maintenance of welfare state, (iv) Equality between persons subject to reasonable classification. It must,
however, be noted that the attainment of the above objectives of taxation may perhaps amount to the
destruction of wealth of few, but the destruction is for the public and common good.

Besides the above, Prof. Musgrave summarised the characteristics of a good tax system in the following
way:

(i) The distribution of the tax burden should be equitable. Every one should be made to pay his or her
'faireshare'

(ji) Taxes should be chosen so as to minimise interference with economic decisions of efficient markets.
Such interference imposes 'excess burden' which should be minimised.

(iii) Where tax policy is used to achieve other objectives such as to grant investment incentives. this
should be done so as to minimise interference with the equality of the system.
(iv) The tax structure should facilitate the use of fiscal policy for stabilisation and growth.

(v) The tax system should permit fair and non-arbitrary administration and it should be easily
understandable to the tax-payer.

(vi) Administration and compliance cost should be as low as is compatible with the other objectives of
the tax.

By quoting the recommendations of Indirect Taxation Enquiry Committee

(The Jha Committee, 1976), we can also conclude that -

(i) It should have an adequate measure of building up elasticity with reference to national income.

(ii) From the social angle, the tax burden should be progressive. (iii) Since taxation has impact on
production, employment and investment as well as on relative costs and prices it should not be so much
heavy as to militate against national priorities and efficient use of economic resources. (iv) The
procedures for the levy and collection of taxes must be such as to ensure that there is payer, the
minimum of cost, harassment and occasions for litigation to the tax-payer.

Conclusion -Prof. Shirras while analysed the characteristics of a goo tax system as, a tax which brings in
large net revenue without protest from tax. payers and without any political influence can be regarded
as a good tar system.

Q.3. What do you mean by «Tax" and "Fee"? Distinguish between the two clearly.

Ans- -Meaning of Tax--It is to be noted that the Constitution of India no where defines the word "Tax".
Its meaning, therefore, is to be ascertained in the words of various jurists as under-

According to Dalton, "A tax is a compulsory contribution 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 any
legal offence."
According to Bastable, "A tax is a compulsory contribution of wealth of a person or a body of persons for
the service of public power."

According to Lothan C.J., "A tax is a compulsory exaction of money by a public authority for public
purposes enforceable by law and is not a payment for services rendered." In other words, it means that
it is public levy which cannot be weighed in terms of actual services rendered."

According to W. Tausing, "the essence of a tax, as distinguished from other charges by Govt; is the
absence of a direct quid pro quo between the taxpayer and the public authority'

Thus, from the perusal of the above definitions it can be concluded that the taxes are compulsory
payments to Government without expectation of the definite return or benefit to the tax-payers.

Meaning of Fee -The Term "Fee" is defined as under-

According to Prof. Seligman, "Fee is a payment to defray the cost of each recurring service undertaken
by the Government, primarily in the public interest,but conferring a measurable special advantage on
the fee-payer.'

According to J. Mukerjee, "The term fee referred to a charge imposed by some Governmental agency for
special service rendered to individuals."

According to Taylor, "Fees are characterised by more on less free choice on the part of the payer as to
whether or not should he say more or less for direct benefit conferred upon him."

There are two categories of fee viz. fee for licence and fee for service rendered. The former is to cover
the expenses of regulation and the latter to response the service rendered. Quid pro quo of service is
the only criterion.

The money raised by fee must be set apart and appropriated specifically for the performance of the
service for which it has been collected and it must not be merged in the general revenue of the
Government.

Distinction Between Tax and Fee: The distinction between a Tax and

Fee is explained in a tabular form as under-

Tax:
The prohibition that no tax can be levied or collected without the authority of law, applies only in
respect of Taxes.

A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and
is not a payment for services rendered.

Tax is a compulsory levy and is enforced by Law.

The collections are routed to the Consolidated Fund of India.

It is left to the discretion of the Government to use the tax for any public benefit.

There is no element of quid pro quo between the tax payments and the public authority.

Tax may be expropriatory in nature.

The witimate object of tax in a welfare state is to bring about social order.

Taxes change when base changes and the capacity to pay principle is followed.

Generally, taxes are applied to various transactions, often as a percentage, as a means of raising revenue
or in some cases, as a means of incentivising behaviour.

A tax is imposed for public purposes and is not imported by any consideration of services rendered in
return.

Fee:

This prohibition does not apply in respect of a fee.

A fee is a payment for services rendered. i.e., There exist correlation with the services rendered.

Fee is not always compulsory.

The amount collected by way of fees are not merged with the Consolidated Fund of India.

It is set apart only to cover the expenses for which it is collected.

In the case of fee, quid pro quo is an essential element. The fee is charged according to the magnitude of
the benefits received by the citizens.

Fee cannot be expropriatory in nature.

The ultimate object of fee can at the most only be for the regulation of social order.

Fees are uniform and the capacity to pay does not form the basis.

Fee, unlike taxes, are directly linked to the cost of providing a service.

It is not necessary that they should have direct relation to the actual service rendered by the authority
but there should be a reasonable relationship between the fee and the services rendered.
14

It may. however, be noted that some times, even though an imposition is labelled as a fee, it may really
be a tax. It is, therefore, to be examined in each case whether the levy in effect is really a tax or fee. In
this connection, the distinction between the tax and fee was examined in detail by the Supreme Court in
the case of Commissioner, Hindu Religious Endowments, Vs. Sri LakshmindraThirtha Swamiar of Sri
Shirur Mutt. (1954 SCR 1005) that the exaction was a tax and not a fee as it was not dependent upon the
benefit conferred on any particular religious institution but depended merely on the capacity of the
payer and the money levied is not specified for paying the expenses that the Government has to spend
in performing the service. The important feature of the fee is that the amounts collected by way of fees
are not merged with the Consolidated Fund of India and the quid pro quo elements is quite strong. On
the other hand, in the case of a tax, the collection goes to the public revenue or to the Consolidated
Fund of India and the benefit which the tax-payer receives is not measureable in terms of the tax paid by
him.

It is to be noted again that the Supreme Court, in the case of Delhi Cloth & General Mills Co. Ltd., Vs.
Chief Commissioner of Delhi (1970,SCR 348) held that if 60 percent of the amount collected as fees was
actually spent on services rendered, it would be a fee and not a tax. For Example; if an inspection fee is
levied on a cinema house and it turns out to be that there were only two visits or inspections in a year, it
might be held that the fee is not a fee but a tax as the actual levy had no relation to the quality or the
cost of the services provided.

Q. 4. Explain the meaning of Direct and Indirect Tax. Also explain the merits and demerits of both the
taxes with suitable examples.

Ans. Direct and Indirect Tax: Broadly speaking, there are two types of taxes-1. Direct Tax and 2. Indirect
Tax.

Meaning of Direct Tax-Dalton says, " That a direct tax is really paid by a person on whom it is legally
imposed. A tax is said to be a direct tax when impact and the incidence of a tax are on one and the same
person. For Example; income tax, wealth tax and gift tax are a direct tax because their impact and
incidence fall on one the same person.

Meaning of Indirect Tax--According to Dalton, "An indirect tax is imposed on one person, but paid partly
or wholly by another owing to a consequential changes in terms of some contract or bargaining between
them.

In the case of indirect tax impact falls on one person and incidence on another.
For Example; tax on saleable goods is usually an indirect tax because it can be shifted on to the
consumers.

According to Bastable, "Direct taxes are those which are levied on permanent and recurring occasions"
and indirect taxes as "charges on occasional and particular events"

While distinguishing taxes levied immediately on property and income of persons are called direct taxes
whereas those that are paid by the consumers to the State indirectly are called indirect taxes. Thus,
income-tax, wealth-tax and corporate taxes, Gift Tax and Capital Gains Tax which are directly paid to the
state by the individuals may be called direct taxes; and customs and excise duties may be called indirect
taxes.

In conclusion it can be said that the direct taxes involve a direct money burden and in the case of
indirect taxes, the man who pays the tax to the Government is different from the person who bears it
ultimately. The term direct tax generally means a tax paid directly to the Govt. by the persons on whom
it is imposed i.e.. to say the tex-payer has to bear the burden of tax personally; in case of indirect tax the
tax-payer and the taxbearer are not the same person.

Merits of Direct Taxes The following are the merits of direct taxes

Economy It is to be noted that the direct taxes entail less expenses for their collection and as such are
economical. The administrative cost of collecting these taxes is low because the same officers who
assess small income or properties can assess larger incomes and properties. Moreover, the taxpayers
make the payment of these taxes direct to the State and, therefore, every paise that is taken out of the
pocket of the tax-payer is deposited in the State treasury.

Certainty Direct taxes also satisfy the canon of certainty. The taxpayer is certain as to how much he is
expected to pay, and similarly, the State is certain as to how it has to receive income from direct taxes.
Thus, the direct taxes satisfy the canons of certainty, elasticity, productivity and simplicity.

Equity Direct taxes are considered to be just and equitable, because, they are generally based on the
principle of progression. Therefore, they fall more heavily on the rich than on the poor and thus, they
are more equitable.

Reduction in Inequalities Since the direct taxes are progressive hence, the rich people are subjected to
higher rates of taxation. Thus, the taxes help to reduce inequalities in incomes.
Elasticity The taxes also satisfy the canon of elasticity as the government revenue may be increased
simply by raising the rate of taxation. Moreover, the income from direct taxes will also increase with the
increase in income of the people.

Civil Conciousness It is said that direct taxes create civil consciousness among the tax-payers. The tax-
payer may take intelligent and keep interest in the method of public expenditure, and observe whether
the revenue raised is properly utilised or not. In a democratic country this civil consciousness checks the
wastage in the public expenditure.

Thus, direct taxes create Civil conciousness in the mind ofthe tax payers.

When a person has to bear burden of tax, he takes active interest in the affairs of the State.

Demerits of Direct Taxes The following are the demerits of indirect

taxes-

Unpopular- The direct taxes are generally not shifted, and therefore, they are painful to the tax-payer.
Hence, such taxes are unpopular in the nature and are generally opposed by the tax-payers.

Inconvenient_-The Direct taxes are also inconvenient in the nature because tax-payer has to submit the
statement of his total income along with the source of income from which it is derived, which is
generally subject to complications. Moreover, the payment of these taxes in lumpsum is not convenient
to the tax-payer as the Frequent of small amounts of indirect taxes.

Thus, direct tax is very inconvenient because tax payer has to prepare lengthy statements of his income
and expenditure. He has to keep a record of his income up-to-date throughout the year which is very
labourious for him to

do so.

Possibility of Injustice In practice, it is difficult to assess the income of all classes accurately. Hence, the
direct taxes may not fall with equal weight on all classes. Moreover, the rates of direct taxes are
arbitarily fixed by the Government and they may not be on the basis of ability to pay.

Possibility of Evasion A direct tax is said to be a tax on honesty, it is not evaded only when the tax-payer
is honest, otherwise it can be evaded through fraudulent practices. The progressiveness of direct taxes
induces the tax-payer to evade the payment of taxes.
Exemption of Low Income Group - It is to be noted that in case only direct taxation is resorted, the low
income group people cannot be approached by direct taxes, as they are normally exampted from such
taxes on the basis of ability or equality. It is to be noted further that the direct tax is to be paid in lump
sum every year while income which a person earns is received in small amounts. It often becomes
difficult for tax-payers to pay large amount in one instalment only.

Merits of Indirect Taxes--The merits of Indirect taxes are as under-

1. Convenient- Indirect Taxes are imposed at the time of purchase of a commodity or the enjoyment of a
service so that the taxpayer does not feel the burden of the tax as it is hidder in the price of the
commodity bought. They are also convenient because they are paid in small amounts and in intervals
and not in one lump sum. They are more convenient because they are wrapped Principles oftlaxation

in prices of goods.

2. Difficult to Evade Indirect taxes are generally included in the price of commodities purchased. Evasion
of an indirect tax will mean giving up the satisfaction of a given want. In otherwords, it is not possible to
evade indirect tax. The only way to avoid this tax is not to purchase taxed commodities.

3. Elastic- Indirect taxes imposed on commodities with inelastic demand are elastic. It is to be noted that
indirect taxes are also elastic to a certain extent.

A state can increase the revenue within limits of increasing rates of taxes.

4. Equitable- Indirect taxes enable everyone, even the poorest citizens to contribute something towards
the expenses of the State. Since direct taxes leave lower income groups from their scope, indirect taxes
make them share in the financial burden of the State. ant

5. Progressive- Indirect taxes can be made progressive by imposing heavy taxes on luxuries and
exempting articles of common consumption or necesaries.

6. Productive The income from indirect taxes can be made highly productive, by imposing few taxes
each yielding a substantial amount of revenue.
7. Wide Coverage-Through indirect taxes every member of the community can be taxed, so that
everyone may provide something to the government to finance the services of public utilities.

8. Social Welfare- Heavy taxation on the articles which are injurious to the health and efficiency of the
people may restrict their consumption which is in the larger interest of the society itself.

Demerits of Indirect Taxes The following are the demerits of indirect

taxes

Regressive_-The indirect taxes are generally regressive in nature as they fall more heavily upon the poor
than upon the rich persons. In otherwords, a very serious objection levelled against indirect taxation is
that it is regressive in character and as such it is inequitable.

Heavy Administrative Cost- -The administrative cost of collecting such taxes is generally heavy, because
they have to be collected from millions of the individuals in small amounts. Hence, they are
uneconomical.

Reduction in Savings Indirect taxes discourage savings because they are included in price of goods and
people have to spend more on essential commodities and left less to save.

Uncertainty--The income from indirect taxes is said to be uncertain, because the taxing authority cannot
accurately estimate the total revenue from indirect taxes. That is to say, state cannot correctly estimate
as to how much money will it receive from this tax.

5. No-Civil Consciousness- Indirect taxes are collected through middle men like traders and hence they
have no direct impact. In other words, since tax is wrapped up in prices, therefore, it does not create
civil consciousness.

Conclusion: Generally speaking, the burden of indirect taxes tends to fall more heavily on the poorer
sections of the community and that of direct taxes mainly on the richer sections of the community. They
both are not competitive but are complementary of each other. That is why, Gladstone, the great
Victorian Statesman, remarked that the direct and indirect taxes should be viewed as equally attractive
sisters, neither of whom as Chancellor of Exchequer, he had to pay equal addresses. It may, however, be
noted that in recent times, there has been a slight change in utilization of both these types of taxes.
Every State in order to reduce inequality of income, is trying to raise major portion of its income from
direct taxes.
Q. 5. What do you mean by tax planning, tax avoidance and tax evasion?

Explain each with suitable examples. Also state their objectives. Distinguish between tax planning, tax
avoidance and tax evasion.

Or

Explain the evil consequences of tax avoidance? Briefly, explain the causes for tax evasion & avoidance.

Ans. Meaning of Tax Planning -Tax planning may be defined as *an arrangement of a person's business
and/or private affairs in order to minimize tax liability."

In otherwords, tax planning is the art of reducing the tax liability of a person by making use of the
various provisions of the law of taxation. The Government in many cases provides various deductions
and exemptions which can be used by a tax payer to reduce his tax liability.

It is to be noted that the planning of one's incomes and expenses in such a manner so as to avail the
various tax deductions and exemptions is called tax planning. In our Country, lax-payers commonly make
use of S. 80 C of Income Tax Act, 1961 in order to reduce their tax liability. According to S. 80 C, if some
specified investments are made for a specified period, they can avail tax deduction for the same upto a
limit of Rs. 1,00,000. The most common tax saving instruments are the investments in P.P.F. Accounts,
Tax Saving Fixed Deposit, National Savings Certificate, Provident Fund and Mutual Funds etc.

It must, however, be noted that the tax planning is 100%legal and all taxpayers are advised to make use
of the same to reduce their tax burden.

Meaning of Tax Avoidance According to Justice Rangnath Misra, the shortest definition of tax avoidance
is "The art of reduction of tax without breaking Law." Tax Avoidance basically means making use of the
loopholes in the Tax Law to one's own advantage to reduce the tax burden. Although, Tax Avoidance is
100% legal, it is not advisable as the tax-payer has defeated the intention of the Law maker and used
this to his own advantage.

Although, both Tax Planning and Tax Avoidance are legal ways to reduce tax, there is only a thin line of
difference between Tax Planning and Tax Avoidance. In Tax Planning, a taxpayer is doing what the govt.
wants him to do whereas in tax avoidance, a tax-prayer is doing something which the govt. didn't expect
the tax-payer to do so.
The Govt. is trying very hard to remove any loopholes and brings regular amendments in the Budget so
as to ensure that people don't avoid tax by manipulating the law. Since the regular amendments are
being introduced in the Tax Budget by the Govt. hence, it is very difficult for a person to do tax
avoidance.

Meaning of Tax Evasion Tax evasion involves breaking the law, not paying one's taxes where the law
clearly states that they must be paid. Tax evasion is the method by which a person illegally reduces his
tax burden by either deflating their income or inflating their expenses. Both deflating the income and
inflating the expenses have the same impact that the profit gets reduced as a result of which the tax
burden also gets reduced.

It must be noted that In India, people usually evade their taxes by dealing in cash without disclosing the
same in the books of accounts.

To ensure that tax-payers don't evade taxes, the govt. has a vigil eye on almost all transactions and
income tax notices are being issued in case discrepancy is expected in the tax that should have been
paid and the tax that has actually been paid by the tax-payer. Tax Evasion is illegal and heavy penalty is
levied in case the tax evader is caught by Income Tax authorities.

Objectives of Tax Planning, Tax Avoidance and Tax Evasion- It appears from the perusal of the above
noted elements of the tax planning, tax avoidance and tax evasion that the obliectives of all the three
terms is only to reduce the tax liability but the methods adopted by them are different. Methods
adopted in tax planning and avoidance are legal whereas methods adopted in tax evasion are generally
illegal and punishable by the Income Tax Authorities.

Distinction Between Tax Planning, Tax Avoidance & Tax Evasion -The distinction between the above
noted three terms may be explained as under-

1. Meaning of Tax Planning It may be defined as an arrangement of one's financial affairs to take full
advantage of all eligible tax exemptions, deductions, concessions, rebates, allowances permitted under
the Income-Tax Act, 1961, so that the tax burden is minimised in the hands of the tax-payer without
violating the legal provisions. For Example; tax planning can be done by investing in specified permissible
avenues eligible for deduction O/S. 80 c of Income Tax Act, 1961 or investment in an Special Economic
Zone unit. Itis lawful because legislature intends optimum utilization of these deductions and
exemptions to promote economic activity in the country.
Meaning of Tax Avoidance It is the reducing or negating tax liability in legally permissible manner by
structuring one's affairs. Any such transaction would be valid only if it has commercial substance and is
not a colourable device. In deciding whether a transaction is a genuine or colourable device, it is open
for the tax authorities to go behind the transaction and examine the

"substance" and not merely the "form'

2. The Object of Tax Planning-_The Object of Tax Planning is to reduce tax liability by applying script and
moral of law.

Object of Tax Avoidance-Its object is to reduce the tax liability to the minimum by applying the script of
law only.

Object of Tax Evasion- -The object of tax evasion is to reduce tax liability by applying unfair means by the
assessees.

3. The Benefit of Tax Planning -The benefit of Tax planning generally, arises in long run.

The Benefit of Tax Avoidance It generally, arises in short run.

The Benefit of Tax Evasion- It is to be noted that the benefit of Tax

Evasion generally, do not arise but it causes penalty and prosecution.

4. Treatment of Law in Tax Planning Tax planning uses the maximum of Law in Tax Planning--It uses all
the benefits of the law.

Treatment of Law in Tax Avoidance It uses all the loopholes available in the law.

Treatment of Law in Tax Evasion It overrules the law and is subject to penalty and prosecution
prescribed by Taxation Law.
5. Practice of Tax Planning -It is tax saving.

Practice of Tax Avoidance- It is tax hedging.

Practice of Tax Evasion- It is the concealment of tax.

6. Need of Tax Planning It is desirable.

Need of Tax Avoidance It is avoidable.

Need of Tax Evasion--It is legally objectionable.

The Evil Consequences of Tax Avoidance Justice Chinnapa Reddy in Mc Dowell and Co. Ltd., Vs.
Commercial Tax Officer listed the evil consequences of tax avoidance as follows-

There is substantial loss of much needed public revenue, particularly in a welfare state like ours.

There is the serious disturbance caused to the economy of the country by the piling up of mountains of
black money, directly causing inflation.

There is "the large hidden loss' to the community by some of the best brains in the country being
involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers
and accountants on one side and the tax gatherer and his, perhaps not so skiliful, advisers, on the other
side.

. There is the sense of injustice and inequality which tax avoidance arouses in the breasts of those who
are unwilling or unable to profit by it.

As a matter of fact, it is the ethics of transferring the burden of tax liability to the shoulders of the
guideless, good citizens from those of "the artful dodgers"

Causes for Tax Evasion and Avoidance Tax evasion and avoidance is a global problem. The causes for tax
evasion and avoidance are as follows:
High Rates of Taxation- It is said that if there are the higher rates of tax, the greater will be the
temptation for evasion and avoidance.

Inadequacy of Powers The indequacy of powers vested in the personnel of the department is yet
another cause of tax evasion.

Complexity in Tax Laws- -The complicated provisions of the Direct Taxes Acts, not all of which are easily
intelligible, were also stated to be responsible to some extent.

Absence of Deterrent Punishment_ One important reason for the prevalence of evasion is stated to be
that in actual practice no deterrent punishment like imprisonment is being meted out to tax evaders
when they are caught by Income Tax Authorities.

Lack of Publicity Another reason for widespread evasion is said to be the secret provisions of the Direct
Taxes Acts. At present the department is statutorily prohibited from disclosing any information relating
to a person's return or assessment.

Moral And Psychological Factors Unfortunately, all citizens do not realise their duties to the State and
the necessity of paying the correct amount of taxes and paying them well in time.

Lack of Integrity of Officers It has also been said that lack of integrity in some of the officers of the
department is partly responsible for tax evasion.

Donations to Political Parties People and companies donate to political party in power and try to
influences the tax officials through leaders of political parties concerned.

Suspicious Attitude of Income-Tax Department- It has been said that even when the assessee's returns
are correct in respect of income, wealth etc., and produce evidence in support of them yet the assessing
officers do not always accept them.

Q. 6. What scheme is made for the distribution of revenues between the union and the states under
the relevant provisions of Indian Constitution?

Explain the evaluation of this system in brief.

Ans. Scheme of the Distribution of Revenues Between the Union and the States--Art. 268 of Indian
Constitution provides the scheme of the distribution of revenues between the Union of India and the
States. The States possess exclusive jurisdiction over taxes given in the State List. The Union is entitled to
the proceeds of the taxes in the Union List. The Concurrent List includes no taxes. However, it is to be
noted that while the proceeds of taxes within the State Lists are entirely retained by the States,
proceeds of some of the taxes in the Union List may be allowed, wholly or partially to the States The
following categories of the Union taxes may be wholly or partially assigned to the States-
Duties Levied by the Union but Collected and Appropriated by the States -According to Art. 268, stamps
duties and duties of excise on medicinal and toilet preparations mentioned in the Union List shall be
levied by the Central Government. These duties are collected by the States within which such duties are
leviable. The proceeds of such duties are assigned to the States.

Service Tax Levied by Union and Collected and Appropriated by Union and States Art. 268-A empowers
the Union of India to levy service taxes.

Such taxes shall be collected and appropriated by the Union and the States in accordance with such
principles as may be formulated by Parliament by law.

The 88th Amendment has also amended Art. 270 and substituted the words and figures "Articles 268,
268-A and 269" for the word and figures • Articles 268 and 269'. It has also added a new entry namely
*92-C. Taxes on service' after entry 92-B in the Union List in the Seventh Schedule. It shall come into
force on such date as the Central Government may, by notification in the official Gazette, appoint.

3. Taxes Levied and Collected by the Union and Assigned to the States The Constitution (80th
Amendment) Act, 2000 has amended Art. 269 and substituted new clauses in place of clauses (1) and (2)
of Art. 269. It has also substituted a new Article in place of the existing Art. 270 and has deleted Art. 272
of the Constitution. The amendment has been enacted on the basis of the recommendations of the
Tenth Finance Commission who has recommended that out of the total income obtained from certain
Central taxes and duties 29% shall be given to the States. These amendments shall be deemed to have
come into effect from 1st. April, 1996.

According to the New Clause (1) of Art. 269, taxes on sale or purchase of goods and taxes on the
assignment of goods shall be levied and collected by the Government of India but shall be assigned and
shall be deemed to have been assigned to States on or after the Ist. day of April, 1996 in the manner as
may be prescribed by Parliament by law. The expression "taxes on the sale or purchases of goods" shall
mean taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes
place in the course of interState trade or commerce.

According to the New Clause (2) of Art. 269, the net proceeds in any financial year of any such tax,
except in so far as those proceeds represent proceeds attributable to Union territories, shall not form
part of the Consolidated Fund of India, but shall be assigned to the States within which tax is leviable in
that year, and shall be distributed among those States in accordance with such principles of distribution
as may be prescribed by Parliament by law.

4. Taxes Levied and Collected by the Union But Distributed Between the Union and States- -The
Constitution (80th Amendment) Act, 2000, has substituted a new Article for Art. 270 which shall be
deemed to have been substituted with effect from Ist. of April, 1996. The new Art. 270 provides that "all
taxes and duties referred to in the Union List, except the duties and lares referred to in Art. 271 and any
cess levied for specific purposes under any law made by Parliament shall be levied and collected by the
Government of India and shall be distributed between the Union and the States in the manner provided
in Clause (2)."

Clause (2) provides that such percentage, as may be prescribed, of the net proceeds of any such tax or
duty in any financial year shall form part of the Consolidated Fund of India, but shall be assigned to the
States within which that tax or duty is leviable in that year, and shall be distributed among those States
in such manner and from such time as may be prescribed in the manner provided in Clause (3).

The Constitution (80th Amendment) Act, 2000, abolishes Art. 272 of the Constitution. This amendment
shall be deemed to have come into effect from 1st April, 1996. The effect of the abolition of Art. 272 will
be that the sum whole or part of Union duties of excise including additional duties of excise which are
levied and collected by the Government of India and which has been distributed as grants-in-aid to the
States after 1st April, 1996, but before the commencement of this Act, shall be deemed to have been
distributed in accordance with the provision of Art. 270.

5. Taxes for the Purposes of the Union Art. 271 provides that if Parliament at any time increase any of
the duties or taxes mentioned in Arts. 269 and 270 by imposing a surcharge, the whole proceeds of any
such surcharge shall form part of the Consolidated Fund of India.

6. Grants-in-aid_-The Constitution provides for the following three kinds of grants-in-aid to the States
from the Union resourcese-

(i) Under Art. 273 grants-in-aid will be given to the States of Assam, Bihar, (Odhisa) and West Bengal in
lieu of export duty on the jute products.

The sums of such grants are prescribed by the President with the consultation of the Finance
Commission. These sums shall be given to the States for a period of ten years from the Commencement
of the Constitution.

(ii) Art. 275 empowers Parliament to make such grants, as it may deem essential, to the States which are
in need of financial assistance. The Constitution also provides for special grants given to the States which
undertake schemes of development for the purpose of promoting the welfare of the Scheduled Tribes or
raising the level of administration of we scheduled areas. A special grant to Assam is given for this
purpose.
(iii) Under Art. 282 both the Union and a State make grant for any public purpose even if it relates to a
subject over which it cannot make laws. The Central Government can under this Article make grants to
hospitals or to schools.

7. Taxes for the Purposes of States- -Art. 276 & 277 save the authority of the State to levy taxes, on
subject now forming Part of the Union List, immediately before the commencement of the Constitution.
Thus, taxes which are being levied by those authorities until Parliament by law makes contrary provision.
Art. 276 empowers the States to impose taxes on professions, trades, callings and employment for the
benefit of the State or of a municipality, district board, local boards or other local authorities. But the
provision of Art. 277 does not extend to taxes levied under a law passed after the Constitution came into
force.

In Amraoti Municipality Vs. Ram Chandra, AIR 1964 SC 1166, the Municipality of Amraoti, under a pre-
Constitution law imposed a terminal tax on certain goods. These taxes now can only be levied by the
Parliament. The Municipality thereafter issued a notification imposing taxes on gold and silver which
were not taxable under the pre-Constitution law. The Supreme Court held the notification as
unconstitutional on the ground that Art. 277 could neither permit increases in the rate nor alteration in
the incidence. In S.L. Corn.

(P.) Ltd. Vs. Secy. Board of Revenue, AIR 1904 SC 207, a tax was imposed under a law which was passed
before but brought into force after the commencement of the Constitution. The Court held that Art. 277
could only save the tax if it had actually been levied and collected before the Constitution came into
force.

Evaluation of the Scheme of the Distribution of Revenues Between the Union & the States- The Scheme
of distribution of revenues indicates a clear tendency towards centralisation. The Centre's resources are
many and vast but the States resources are very meagre while the responsibilities of the States are
manifold. The State has to implement all the welfare schemes. Consequently, the States are dependent
upon Centre for funds. These funds are given to the States by the Centre on the recommendation of the
Finance Commission in the form of grants. The States are primarily responsible for the well being of the
citizens.

It is to be noted that the control of Centre over finance appears to be a violation of the principles of
federation which is adopted in the Indian Constitution. But this is to be understood in the context of the
historical background underlying the Indian Constitution, that is, for consolidating and strengthening the
unity of India. It is Central Government which is ultimately responsible for maintaining economic unity
and thereby maintaining the welfare of the country.
It is to be noted that the tendency towards centralisation is seen in the modern times in all the
federations. The problem of Centre-State relations is more serious in the sphere of distribution of
finances. Another problem in this respect is the development of an executive body known as the
Planning Commission. It has been created by the resolution of the Government of India.

It is not a statutory body like the Finance Commission. But the Planning Commission distributes large
parts of Central grants to the states than the Finance Commission. The Central grants recommended by
the Planning Commission is a discretionary grant. In fact, out of the total grants made in a year, only 30
percent is under the purview of the Finance Commission and 70 percent is discretionary grant, given to
the State on the recommendations of the Planning Commission. Since Planning Commission is a political
body hence it is suggested that the Planning Commission should also be made a statutory body.

Q.9. What do you mean by the equality before law? What is the relation between Art. 14 of Indian
Constitution and taxing laws? Can the validity of taxing-laws be examined on the basis of fundamental
right of equality?

Discuss with reference to the leading cases.

Ans. Meaning of Equality Before Law--According to Art. 14 of Indian Constitution, the State shall not
deny to any person equality before the law or the equal protection of laws within the territory of India.
This principle of equality existed in England. But we have modified it in India. It is a part of the rule of
law. The right to equality means that among equals law shall be equal and it shall be equally applied.
The object behind this right is that state shall not discriminate one individual against another.

The concept of equality does not mean absolute equality among human beings which is physically not
possible to achieve. It is a concept implying absence of any special privilege by reason of birth, creed or
the like in favour of any individual, and also the equal subject of all individuals and classes to the
ordinary law of the land. As Dr. Jennings puts it: "Equaility before the law means that among equals the
law should be equal and should be equally administered, that like should be treated alike. The right to
sue and be sued, to prosecute and be prosecuted for the same kind of action should be same for all
citizens of full age and understanding without distinctions of race, religion, wealth, social status or
political influence."

Rule of Law The guarantee of equality before the law is an aspect of Dicey's rule of law in England. It
means that no man is above the law and that every person, whatever be his rank or conditions, is
subject to the jurisdiction of the ordinary courts.
Prof. Dicey gave following three distinct meanings of the Rule of Law-

1. Absence of Arbitrary Power or Supremacy of the Law-"It means the absolute supremacy of law as
opposed to the arbitrary power of the Government. In other words, a man may be punished for a
breach of law, but he can be punished for nothing else."

Equality Before the Law- It means subjection of all classes to the ordinary law of the land administered
by ordinary law courts. This means that no one is above the law with the sole exception of the monarch
who can do no wrong.'

The Constitution is the Result of the Ordinary Law of the Land--It means that the source of the right of
individuals is not the written Constitution but the rules as defined and enforced by the courts.

The first and the second aspects apply to Indian system but the third aspect of the Dicey's rule of law
does not apply to Indian system as the source of rights of individuals is the Constitution of India. The
Constitution is the 36 Supreme Law of the Land and all laws passed by the legislature must be consistent
with the provisions of the Indian Constitution.

Equal Protection of the Laws -The guarantee of equal protection of laws is similar to one embodied in
the 14th Amendment to the American Constitution. This has been interpreted to mean subjection to
equal law, applying to all in the same circumstances. It only means that all persons similarly
circumstanced shall be treated alike both in the privileges conferred and liabilities imposed by the laws.
Equal law should be applied to all in the same situation, and there should be no discrimination between
one person and another. As regards the subject-matter of the legislation their position is the same. Thus,
According to Dr. V.N. Shukla, the rule is that the like should be treated alike and not that unlike should
be treated alike.

The rule of law imposes a duty upon the State to take special measure to prevent and punish brutality
by police methodology. The Rule of Law embodied in Art. 14 is the "basic feature" of the Indian
Constitution and hence it cannot be destroyed even by an amendment of the Constitution under Art.
368 of the Constitution as is held in Indira Nehru Gandhi Vs. Raj Narain,

AIR 1975, SC 2299.

Art. 14 Permits Classification but Prohibits Class Legislation--The equal protection of laws guaranteed by
Art. 14 does not mean that all laws must be general in character and universal in application for, all
persons are not by nature, attainment or circumstances in the same position. The varying needs of
different class of persons often require separate treatment as is held in the case of Chiranjit Lal Vs.
Union of India, AIR 1951 SC 41.

Thus, what Art. 14 forbids is class-legislation but it does not forbid reasonable classification. The
classification, however, must not be "arbitrary, artificial or evasive" but must be based on some real and
substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the
legislation as is held in the case of R.K. Garg Vs. Union of India, AIR 1981

SC 2138.

Art. 14 applies where equals are treated differently without any reasonable basis. But where equals and
unequals are treated differently, Art.

14 does not apply. Class legislation is that which makes an improper discrimination by conferring
paricular privileges upon a class of persons arbitrarily selected from a large number of persons, all of
whom stand in the same relation to the privilege granted that between whom and the persons not so
favoured no reasonable distinction or substantial difference can be found justifying the inclusion of one
and the exclusion of the other from such privilege as was held in Monoponier Co. Vs. City of Los Angeles,
33 Col. App. 675.

Test of Reasonable Classification- -A reasonable classification must fulfil the following two conditions- (i)
The classification must be founded on an intelligible differentia which distinguishes persons or things
that are grouped together from others left out of the group; and

be achieved by the Act.

(il) The differentia must have a rational relation to the object sought to The differentia which is the basis
of the classification and the object of the Act are two distinct things. What is necessary is that there
must be a nexus between the basis of classification and the object of the Act which makes the
classification.

Relation Between Art. 14 of Indian Constitution & Taxing Laws It is to be noted that the power of the
State to classify for the purposes of taxation is of wide range and flexibility. The State has wide power in
selecting persons or objects it will tax and a statute is not open to attack on the ground that it taxes
some persons and objects and not others. But it does not mean that a taxation law can claim immunity
from the equality clause in Art. 14 of the Constitution. It has to pass like any other law the equality test
laid down in Art. 14. But it must be remembered that the State has in view of the intrinsic complexity of
fiscal adjustment of diverse elements, a considerable wide discretion in the matter of classification for
taxing purposes. The legislature has sufficient freedom to select and classify persons, districts, goods,
properties, income and object which it would tax, and which it would not tax. So long as the
classification made within the wide and flexible range by a taxing statute does not transgress the
fundamental principles underlying the doctrine of equality, it is not objectionable on the ground of
discrimination merely because it taxes or exempts from tax some income or objects and not' others. Nor
the mere fact that a tax falls more heavily on some in the category, is by itself a ground to render the
law invalid. It is only when within the range of its selection the law operates unequally and cannot be
justified on the basis of a valid classification that there would be violation of Art. 14 as was held in I.T.
Officer, Shillong Vs. NTR Rambat AIR 1976 SC 670.

A taxation will be struck down as violative of Art. 14 if there is no reasonable basis behind the
classification made by it, or if the same class of property, similarly situated, is subject to unequal
taxation. This requirement does not preclude the classification of property, trades, profession and
events for taxation subjecting one kind to one rate of taxation, and another to a different rate. Perfect
equality in taxation is impossible and unattainable as is held in Spences Hotel Pvt. Ltd. Vs. State of W.B.
1991, 2 SCC 154.

In E.J. Tobacco Co. Vs. State of A.P., AIR 1962 SC 1773 a sales tax on virginia tobacoo but not on country
tobacco has been held to be valid.

In Western India Theatre Vs. Cantonment Board, AIR 1959 SC 582, a higher tax on cinema-house
containing large seating accommodation and situated in fashionable and busy Iccalities where the
number of visitors are more numerous, than the tax imposed on smaller cinema-house containing less
accommodation and situated in a locality where visitors are poor and less numerous, was held not to be
violative of the equal protection clause of Art.

14. The classification was based on income of cinema-houses.

In VenkateshwaraTheatre Vs. State of Andhra Pradesh, AIR 1993 SC

1947, the validity of A.P. Entertainment Tax Act, 1939 as amended by the Act of 1984 was challenged on
the ground that it was violative of Art. 14. As a result of amendment introduced by the Act of 1984, the
system for levy of tax on the basis of number of persons actually admitted to each show was. dispensed
with and tax was levied on the basis of the percentage of the gross collection capacity per show and
different percentage was prescribed depneding on the type of the theatre and the nature of the local
area where it was situated. The theatres were classified into different classes and different rate of tax
prescribed for them, namely, air-conditioned, air-cooled, ordinary permanent and semi-permanent and
touring and temporary theatres have been further classified on the basis of the type of the local area in
which they are situate. The Court held the classification was not violative of Art. 14 as it was based on
intelligible differentia and there was relation between the differentia and the object sought to be
achieved by the Act.

In Indian Express Newspapers Vs. Union of India (1985) 1 SCC 641 it has been held that the classification
of newspapers into small, medium and big newspapers on the basis of their circulation for the purpose
of levying customs duty on newsprint is not violative of Art. 14. The object of exempting all small
newspapers is to assist the small and medium newspapers in bringing down their cost of production.
Such papers do not command large advertisement revenue. Their area of circulation is limited and
majority of them are in Indian languages catering to rural sector.

In R.K. Garg Vs. Union of India, AIR 1981 SC 138, popularly known as the Bearer Bond's Case, the
constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 and
the Act which replaced it was challenged on rational basis and was violative of Art. 14. S.3 of the Act
granted certain immunities to a person who had invested his unaccountable money in the Special Bearer
Bonds. They were not required to disclose the nature and source of acquisition of the Special Bearer
Bonds. It prohibited the commencement of any enquiry or investigation against such a person. The
Court by 4: 1 majority upheld the validity of the Ordinance and the Act on the ground that the
classification made by the Act between persons having black money and persons not having black
money was based on intelligible differentia having rational relation with the object of the Act.

In State of Maharashtra Vs. Madukar Balkrishna Badiya (1988) 4 SCC

290, the validity of the Bombay Motor Vehicles Tax Act, 1958, as amended by the Maharashtra Acts of
1987 and 1988, was challenged as violative of Art.
14. The Act provided for levy of one time tax at 15 times the annual rate on all motor cycles and tricycles
used or kept for use in the State. But provided that in case of motor cycles used or kept for use by a
company or other commercial organisation the rate of tax was three times higher than that rate. It also
provided for refund thereof if the vehicle was removed of outside the State or their registration was
cancelled due to scraping of the vehicle. The Court held that the Act was not violative of Art. 14.

In Kerala Hotel and Restaurant Association Vs. State of Kerala (1990)

2 SCC 502, the constitutional validity of provisions of the States of Kerala and Tamil Nadu which imposed
sales tax in two States on cooked food sold to the affluent in the luxury hotels while exempted from
sales tax the modest eating houses. It was held that classification made between the two type of hotels
for the purpose of imposing tax was neither discretionary nor arbitrary and

'was based on intelligible differentia and had a rational nexus with the object sought to be achieved by
the Acts. The tax was imposed on the basis of their annual income. The object was to raise revenue by
taxing sale of costlier food in luxury hotel to affluents who could afford costly food.

In Secretary to Government of Madras Vs. P.R. Sriramuly, (1996) 1

SCC 345, the respondent had challenged the validity of the Madras Court Fees and Suits Valuation Act,
1955 under which court fee levied on certain appeals was ad volerem at the rate of 7½ percent the
wholly arbitrary, unreasonable and unjustified bearing no relationship to the cost of administration of
justice and that in fact was not a levy of 'fee' but really a levy of "tax". He contended that the court fee
must be related to the cost of administration of justice and cannot be used as a means of taxation for
the purpose of raising revenue to the government for its general administration.

The Supreme Court held that the levy of court fee on an ad volerem, flat rate of 7½ percent without any
upper limit was valid being in the nature of a fee and not a tax, having the quid pro quo (Correlation
with the service rendered) and is not a colourable exercise of legislative power.

Can the Validity of Taxing Laws be Examined on the Basis of Fundamental Right of Equality?-Yes, the
validity of taxing laws can be examined on the basis of fundamental right of equality. A tax statute can
be held to violate Art. 14. if intends to impose on the same class of property similarly situated an
incidence of taxation which leads to clear inequality. In K.T. Moopil Nair Vs. State of Kerala AIR 1961, a
land tax at a flat rate of Rs.
2 per acre was held as violative ofArt. 14 as it made no reference to income, either actual or potential,
from the land taxed. Where objects, persons or transactions essentialy dissimilar are treated by the
imposition of a tax which is uniformally applied, discrimination may result for refusal to make arsionai
classification.

Similarly, in State of Kerala Vs. Haji K. Kutty Naha, AIR 1969 SC 318, a tax on buildings on the "floorage"
basis on a sliding scale without taking into consideration the purpose for which the building was used,
the town and locality in which the building was situated, the nature of structure, the economic rent
obtained from the building, or other related circumstances, was held invalid U/Art. 14 as no attempt was
made to provide for any rational classificaton in imposing the tax in question.

Likewise, in Ashirwad Films Vs. Union of India (2007) 6 SCC 624, different rates on Telgu & Non-telgu
films in the State of A.P. were invalidated by CourtU/Art. 14 of Indian Constitution.

Conclusion- It appears from the perusal of the above mentioned cases that the validity of taxing-laws
can be examined on the basis of the fundamental right of equality U/Art. 14 of Indian Constitution in
proper cases.

Q.7. What is the main object of Art. 301 of the Indian Constitution?

Does this Article authorise Parliament and the States for the imposition of Regulatory and
Compensatory taxes? Ifso, to what extent? Explain fully. Or

"Trade, Commerce and Intercourse through out the territory of India shall be free." Comment with
reference to the relevant judicial decisions.

Ans. The Main Object of Art. 301 of Indian Constitution It is to be noted that the framers of the Indian
Constitution were fully conscious of the importance of maintaining the economic unity of the Union of
India. Free movement and exchange of goods throughout the territory of India was esential for the
economic unity of the country which alone could maintain the progress of the Country.

Prior to the integration of India and the new Constitution there were in existence a large number of
Indian States which in the exercise of their sovereign powers, had created customs barriers between
themselves and the rest of India, thus hindering at several points which constituted the boundaries of
those Indian States, the free flow of commerce. Thus, the main object of Art 301 was obviously to
breakdown the border barriers between the States and to create one unit with a view to encouraging
the free-flow of stream of trade and commerce throughout the territory of India as was held by
Supreme Court in Atiabari Tea Co. Ltd. Vs. State of Assam, AIR 1961 SC 252.

Art. 301 declares that trade, commerce and intercourse throughout the territory of India shall be free.
Art. 301 is modelled on S. 92 of the Australian Constitution which says that ........ "trade and commerce
and intercourse among the States whether by means of internal carriage or ocean navigation, shall be
absolutely free. In its historical context this section was intended to abolish State custom barriers. But as
a result of judicial decisions, it applies to both the Commonwealth as well as the States. This was
recognised in the decision of James Vs. Commonwealth of Australia. (1936), A.C. 578 in which a
Commonwealth statute requiring a licence for inter-State shipments of dried fruits was declared
unconstitutional by Privy Council But the freedom in India is wider than that in Australia U/S. 92. While
S. 92 refers to Inter-State-trade only. Art. 301 includes both the freedom of Inter-State and intra-State,
i.e. within the territory of State trade and commerce. That it imposes a restriction on the legislative
power of both Parliament and the State Legislature. The presence of words "absolutely free" in
Australian Constitution presented many difficulties in that country. Trade and commerce could not be
regulated by the Centre. The restriction was to be spelled out by the Court.

Restrictions on Art. 301. The restrictions are contained in Art. 302 to'

305. This is necessary because no freedom is 'absolute and even in Australia the freedom is not
'absolute' but 'regulated' and 'relative'. Art. 301 applies not only to inter-State trade but also intra-State
trade, commerce and intercourse. Thus, Art. 301 will be violated where restrictions are imposed at the
frontier of a State on any stage prior or subsequent. The freedom guaranteed by Art. 301 is freedom
from all restrictions, except those which are provided for U/Arts. 302 to 305. These provisions clearly
show that the guarantee U/Art. 301 cannot be taken away by an executive action, as was held in District
Collector, Hyderabad Vs. Ibrahim and Co. AIR 1970S.C. 1255.

Again, it was held in Automobile Transport Vs. State of Rajasthan AIR

1962 SC 1406 that the restrictions from which the freedom is guaranteed should be such restrictions as
directly and immediately restrict the frec-flow of movement of trade and not incidental or indirect
restriction.
According to Art. 301, the word trade means 'buying or selling of goods while the term 'commerce'
includes all forms of transportations such as by land, air or water. The term 'intercourse means
movement of goods from one place to another place. Thus, the words 'trade, commerce and intercourse
cover all kinds of activities which are likely to come under the nature of

commerce.

It may, however, be noted that Art. 19(1) (g) also guarantees to citizens the right to practise any
profession or carry on any trade, business, etc. But while Art. 19(1) (g) confers a fundamental right on
citizens to carry on trade, business etc. Art. 301 confers only a statutory right. The right under Art.

19(1) (g) can only be claimed by citizens, but the right under Art. 301 can be claimed by any person
whether a citizen or foreigner.

The word 'free in Art. 301 does not mean freedom from laws or regulations. There is a clear distinction
between laws interfering with freedom to carry out the activities constituting trade and law imposing
rules of proper conduct or other restraints for the due and orderly manner of carrying out the activities.
The distinction is known as regulations. The word 'regulation' has no fixed connotation. Its meaning
differs according to the nature of the thing to which it is applied.

Does Art. 301 Authorise Parliament and States for the Imposition of Regulatory & Compensatory Taxes?
Yes, Art. 301 can authorise Parliament and the states for the imposition of Regulatory and
Compensatory taxes to some extent. It was held in G.K. Krishna Vs. State of T.N. AIR 1975 SCC 83 that a
purely regulatory and compensatory law cannot be regarded as violative ofthe freedom of trade and
commerce. Such laws are intended merely to regulate trade and commerce, they tend, to facilitate, and
not restrict or restrain freedom of trade. Thus, such measures as traffic regulations, licensing of vehicles,
charging for the maintenance of roads, marketing and health regulations, price control, economic and
social planning, prescribing minimum wages are purely regulatory measures. Similarly, a law which
levies a tax or toll for the use of a road or bridge is not a barrier or burden on a trade but in reality helps
the free-flow of trade by enabling the provision of a more convenient and less expensive route. Such
compensatory taxes are no hindrance to any such freedom of trade so long as they are within
reasonable limits; if the amount of such taxes are unduly high it certainly would hamper trade. In this
connection the Court has pointed out that the distinction between "freedom" in Art. 301 and
'restriction' in Art. 302 and 304 must be kept in mind, and that which, in reality facilitates trade cannot
be a restriction while that which actually hampers trade will be a restriction as is held in Automobile,
Case, AIR 1962, S.C. 1406.
Again, in Atiabari Tea Co. Vs. State of Assam, AIR 1951 SC 232, the validity of the Assam Taxation (on
Goods Carried by Roads or Inland Waterways) Act of 1954 was challenged on the ground that it violated
Art. 301 and was not saved by Art. 304 (b). The petitioner carried on the business of growing tea and
exporting it to Calcutta via. Assam. While passing through Assam the tea was liable to tax under the said
Act. The Supreme Court held that the impugned law and undoubtedly levied a tax directly and
immediately on movements of goods and therefore, came within the purview of Art. 301.

The Act was, therefore, held void. The Court said that taxes may and do amount to restrictions if they
directly and immediately restrict trade. In this case, the tax undoubtedly affected the free-flow of trade.
Imposition of a duty or tax to every would not amount per se to an infringement of Art. 301. Only such
taxes or restrictions which directly or immediately restrict the free-flow of trade, commerce and
intercourse would fall within the purview of Art. 301. A tax may in certain cases, directly or immediately,
restrict or hamper the fow of the trade, but every imposition of tax does not do so. Every case must be
judged on its own facts and in its own setting of times and circumstances as is held in State of Kerala Vs.
Mother Provincial, AIR 1970 SC 2079.

It is to be noted further that such taxes could only be validly levied if the requirements of Art. 304 (b)
are satisfied, i.e., the previous sanction of the President before the State enacts such a law. This is a
safeguard to ensure that the economic unity of the country is not disrupted by the State Legislature.

In the present case, the requirements of Art. 304 (b) had not been complied with. The Court said that
the freedom guaranteed by Art. 301 would become illusory if the movement, transport or the carrying
of goods was allowed to be impeded, obstructed or hampered by taxation without satisfying the
requirements of Art. 302 to 304.

In State of Mysore Vs. Sanjeeviah, AIR 1967 SC 1189, the Government made a rule under the Mysore
Forest Act, 1900, banning movement of forest produce between sunset and sunrise. The Supreme Court
held the rule void as it was not a 'regulatory' but 'restrictive' measure which infringed the right
guaranteed under Art. 301.

In Automobile Transport Ltd. Vs. State of Rajasthan, AIR 1962 SC 1906 the appellant challenged the
validity of the Rajasthan Motor Vehicles Taxation Act, 1951, inter alia, as violating Art. 301. The State
Government imposed a tax on all motor vehicles used and kept within the State of Rajasthan. The Court
held the tax valid as they were only regulatory measures imposing compensatory laxes-for facilitating
trade, commerce and intercourse. The direct and immediate effect test- laid down in Atiabari's Case was
affirmed by the Court with a clarification that regulatory measures imposing compensatory tax do not
come within the purview of the restrictions contemplated in Art. 301, and therefore, such measures
need not comply with the requirement of provisions of Art. 304 (b). The effect of the majority decision in
this case is that a compensatory tax is not a restriction upon the movement parts of trade and
commerce.

In G. K. Krishna Vs. State of Tamil Nadu, AIR 1975 SC 583, the petitioner challenged the validity of a
Government Notification under the Madras Motor Vehicles Taxation Act, 1931, enhancing motor
vehicles tax on minibuses from Rs. 30 per seat per quarter to Rs. 100 per seat per quarter on the ground
inter alia that the tax imposes restriction on the freedom guaranteed by Art. 301.

He claimed that the tax was neither compensatory nor regulatory in character, and therefore, it was a
restriction on the freedom of the trade, commerce in character and as the Notification was not a law
passed with the previous sanction of the President, it would not be saved by Art. 301 (b). On behalf of
the Government it was claimed that this measure was taken with a view to avoid unhealthy competition
between minibuses and regular stage-carriage buses and to put down the misuse of minibuses. The
Supreme Court held that the tax on contract carriages imposed by the Government Notification was
compensatory in nature and was not, therefore, violative to the freedom guaranteed in Art. 301.

In State of Bihar Vs. Harihar Prasad Debuka, (1989) 2 SCC 192, the respondent challenged the Bihar
Government Notification requiring a person transporting goods through the State of Bihar on goods
carrier or vessel to carry permits in the prescribed forms violative of Arts. 301 and 304 of the
Constitution. The respondent purchased 165 bags of mustard from the State of Rajasthan and was
transporting the same to Jamshedpur in the State of Bihar by a truck, the Court held that the
Notification was a regulatory measure and hence Constitutional. It did not impede or restrict inter-State
trade and hence was not violative of Arts. 301 and 304 of the Constitution.

In Video Electronics Pvt. Ltd. Vs. State of Punjab, AIR 1990 S.C. 820, it was held that the Notification
issued by the State of U.P. under Sales Tax Act, 1948 and the Central Sales Act, 1956, exempting new
units of manufactures in respect of various goods for different periods ranging from 3 to 7 years from
payment of sales tax was not violative of Art. 301. The petitioners had contended that the
manufacturers of local goods were entitled to the exemption while the manufacturers of other States
selling the same goods in the State of

U.P. were liable to pay sales tax, and therefore, imposition of sales-tax was discriminatory and violative
of Art. 301. The exemption based on natural and business factors, that is, to provide incentive to
manufacturers of local goods.

The challenge on the basis of Art. 304 was also negatived. Art. 304 is an exception to Art. 301. The need
for taking resort to exception will arise only if the impugned tax is hit by Arts. 301 and 303.
In State ofTamil Nadu Vs. Sanjeeth Trading CO., AIR 1993 SC 237, the validity of Clause 3 of Tamil Nadu
(Movement Control) Order, 1982 was challenged as violative of Art. 301. By Notification timber was
declared to be an essential article and a total ban was imposed on its movement from the State of Tamil
Nadu to any place outside. It was held that it was a regulatory measure for ensuring the availability of
timber to a common man at a reasonable price, authorised U/Art. 301 and 304 (b).

Restrictions on Trade and Commerce It is to be noted that Art. 301 is subject to the restrictions imposed
under Arts. 302 to 305 which are as under-

1. Parliament's Power to Regulate Trade and Commerce in the Public Interest- Art. 302 authorizes
Parliament to impose such restrictions on the freedom of trade, commerce or intercourse between one
State and another or within any part of the territory of India as may be required in the public interest.

The question as to whether a restriction imposed by Parliament by law is in the public interest or not is a
justifiable issue. In that case, Parliament is given the sole power to decide what restrictions can be
imposed in the public interest as authorized by Art. 302. It has been held that restrictions imposed on
the movement of grain under the Defence of India Rules are in the interest of general public Vide Suraj
Mal Roopchand & Co. Vs. State of Rajasthan, AIR 1967, Raj. 104.

It may, however, be noted that the power of Parliament U/Art. 302 is limited by Art. 303(1) which
provides that Parliament shall not have power to make any law giving any preference to any one State
over another by virtue of any Entry relating to trade and commerce in any one of the List in the Seventh
Schedule. But under Clause (2) of this Art., the Parliament may, however, discriminate among States if it
is declared by a law that it is necessary to do so for the purpose of dealing with a situation arising from
scarcity of goods in any part of the territory of India. The question as to whether there is a scarcit) of
goods in any part of India is for the Parliament to decide.

2. State's Power to Regulate Trade and Commerce-Art. 304 (a)

empowers the State to impose any tax on goods imported from other State if similar goods in the State
are subject to similar tax so as not to discriminate between goods so imported and goods manufactured
or produced in the State.
In State of Madhya Pradesh Vs. Bhailal Bhai, AIR 1964 SC 1006, a State by law imposed sales tax on
imported tobacco but locally produced tobacoo was not subject to such sales tax. The Court invalidated
the tax as discriminatory.

Clause (2) of this Article authorized the State to impose such reasonable restrictions on the freedom of
trade, commerce and intercourse as may be required in the public interest. But no Bill or Amendment
for this purpose can

President.

be introduced in the Legislature of State without the previous sanction of the

3. Saving of Existing Laws and Laws Providing for State Monopolies-Art. 305 saves existing laws and laws
providing for State monopolies in so far as the President may by order otherwise direct. In Saghir
Ahmand Vs. State of U.P., AIR 1961 S.C. 728, the Supreme Court raised the question as to whether an
Act providing for State monopoly in a particular trade or business conflicts with the freedom of trade
and commerce, guaranteed by Art. 301, but left the question undecided. Art. 19 was amended by the
Constitution (First Amendment) Act, 1951 in order to take out such State Monopolies out of the purview
of Art. 19 (1) (g). But no corresponding provision was added to Art.

305. It appears from the judgement of the Supreme Court that inspite of such an amendment a law
introducing such State Monopoly might have to be justified before the Courts as being 'in the public
interest under Art. 301 or as amounting to a 'reasonable' under Art. 306 (b) of the Constitution.

It may, however, be noted that the Constitution 4th Amendment now makes existing laws and future
laws providing for State monopoly in trade immune from attack on the ground of infringement of Arts.
301 and 303.

4. Appointment of Authority for Carrying out the Purposes of Arts 301 to 304-Art. 307 empowers
Parliament to appoint such authority as it considers appropriate for carrying out purposes of Arts. 301,
302, 303 and

304. It can confer on such authorities such powers and duties as it thinks proper for the above
mentioned purposes.
Q. 30. What do you mean by Black Money and Corruption? State the factors leading to generation of
Black Money and corruption. What are the various scams which are responsible for generating the
Black Money and Corruption in India. What are theCauses of creating Black Money? What are the
remedies to minimise or eradicate Black Money and Corruption?

Ans.Meaning and Definition of Black Money- - It is not possible to give a universal and uniform definition
of Black Money. Different writers have their own conception of the subject-matter. As a matter of fact.
several terms with similar connotations have been in vogue, including Unaccounted Income'.

"Black Income*Dirty Money'*Black Wealth?, Underground Wealth', Black Economy', 'Parallel Economy',
'Shadow Economy', and 'Underground' or Unofficial Economy. All these terms usually refer to any
income on which the taxes imposed by government or public authorities have not been paid. Such
wealth may consist of income generated from legitimate activities have not been paid. Such wealth may
consist of income generated from legitimate activities or activities which are illegitimate per se, like
smuggling, illicit trade in banned substances, counterfeit currency, arms trafficking, terrorism, and
corruption.

According to some writers Black Money may be defined as under

According to Dr. Jayant S. Bhoyar, Black Money" may be defined as assets or resorces that have neither
been reported to the public authorities at the time of their generation nor disclosed at any point of time
during its possession"

According to the National Institution of Public Finance and Policy

(NIPFP), "Black Money" may be defined as the aggregates of incomes which are taxable but not reported
to the tax authorities."

3. According to Art. 161 of Indian Constitution, "If a Govt. servant while performing his public duty
receives gifts and honour more than, what is payable to him as legitimate salary, such action is called
corruption and black money is created from such act."

Thus, it appears from the perusal of the above definitions of Black Money that in addition to wealth
earned through illegal means, the term black money would also include legal income that is concealed
from public authorities

(i) To evade payment of taxes (income tax, excise duty, sales tax, stamp duty, etc);
(ii) To evade payment of other statutory contributions;

(iii) To evade compliance with the provisions of industrial laws such as the Industrial Dispute Act, 1947,
Minimum Wages Act, 1948, Payment of Bonus Act, 1936, Factories Act, 1948, and Contract Labour
(Regulation and Abolition) Act 1970, and/ or

(iv) To evade compliance with other laws and administrative procedures.

Factors Leading to Generation of Black Money- The factors leading to generation of black money are as
follows-

1. Illegal Activities -Black Money may include proceeds from a range of activities including racketeering,
trafficking in counterfeit and contraband goods, smuggling, production and trade of narcotics, forgery,
illegal mining, illegal felling of forests, illicit liquor trade, robbery, kidnapping, human Trafficking, sexual
exploitation and prostrution, cheating and inancial fraud, embezzlement, drug money, bank frauds, and
illegal trade in arms. Some of these offences are included in the schedule of the Prevention of Money
Laundering Act,2002.

2. Failure to Disclose Permissible Economic Activities The significan amount of black money is generated
through legally permissible economic activities, which are not accounted for and disclosed or reported
to the public authorities as per the law or regulations, thereby converting such income into black
money. The failure to report or disclose such activities or income may be with the objective of evading
taxes or avoiding the cost of compliance related to such reporting or disclosure. It may also be the result
of non-compliance

with some other law. For Example; a factory owner may under-report production on account of theft of
electricity which in turn leads to evasion of

3. Manipulation of Accounts- Black Money is generated by manipulation of accounts. There can be two
different modi operandi involved in generation of black money. The first is the crude approach of not
declaring or reporting the whole of the income or the activities leading to it, This is the likely approach in
all cases of criminal, illegal, and impermissible activities. The sophistications in such an approach mostly
get introduced subsequently for the purpose of laundering the money so generated with the objective
of making it accountable and converting it into legitimate reported wealth that can be openly possessed
and used.

4. Misrepresentation of Financial Statement-The best way of classifying and understanding the various
ways and means adopted by taxpayers for the generation of black money would be the financial
statement approach, elaborating different means by which the accounts prepared for reporting and
presenting before the authorities are manipulated to misrepresent and underdisclose income, thereby
generating unaccounted, undeclared, and unreported income that amounts to black money.

5. Mis-or-Non-Reporting of Transactions--Any transaction entered into by the tax-payer must be

reported in books of account which are summarised at the end of the year in the form of financial
statements. The financial statements basically comprise statement of income and expenditure which is
called by different names such as Profit and Loss Account' or ' Income and Expenditure Account and
statement of assets and liabilities which is called

"Balance Sheet' or 'Statement of Affairs'. Tax evasion involves misreporting or non-reporting of the
transactions in the books of account.

6. Out of Book Transactions-This is one of the simplest and most widely adopted methods of tax evasion
and generation of black money Transactions that may result in taxation of receipts or income are not
entered in the books of account by the tax-payer. The tax-payer either does not maintain books of
account or maintains two sets or records partial receipts only. This mode is generally prevalent amount
the small grocery shops, unskilled or semiskilled service providers, etc.

7. Parallel Books of Accounts- This is a practice usually adopted by those who are obliged under the law
or due to business needs to maintain books ofaccount. In order to evade reporting activities or the
income generated from them, they may resort to maintaining two sets of books of account-one for their
own consumption with the objective of managing their business and the other one for the regulatory
and tax authorities such as the Income Tax Department, Sales Tax Department, and Excise and Customs
Department. The second set of books of account, which is maintained for the purpose of satisfying the
legal and regulatory obligations of reporting to different authorities, may be manipulated by omitting
receipts or falsely inflating expenses, for the purpose of evading taxes or other regulatory requirements.

8. Manipulation of Books of Account- When books of accounts are required to be maintained by tax-
payers under different laws, like the Companies Act, 1956, the Banking Regulation Act, and the Income
Tax Act, it may become difficult for these tax-payers to indulge in out of books transaction or to
maintain parallel books of accounts. Such parties may resort to manipulation of the books of accounts to
evade taxes.

9. Manipulation of Sales/Receipts- A tax-payer is required to pay taxes on profit or income which is the
difference between sale proceeds or receipts and expenditure. Thus, manipulation of sales or receipts is
the easiest method of tax evasion. Other innovative means may include diversion of sales to associated
enterprises, which may become more important if such enterprises are located in different tax
jurisdictions and thereby may also give rise to issues related to international taxation and transfer
pricing.

10. Manipulation of Expenses- Since the income on which taxes are* payable is arrived at after
deducting the expenses of the business from the receipts, manipulation of expenses is a commonly
adopted method of tax evasion. The expenses may be manipulated under different heads and result in
under-reporting of income. It may involve inflation of expenses, sometimes by obtaining bogus or
inflated invoices from the so called 'bill masters', who make bogus vouchers and charge nominal
commission for this facility.

11. Land and Real Estate Transactions- Due to rising prices of real estate, the tax incidence applicable on
real estate transactions in the form of stamp duty and capital gains tax can create incentives for tax
evasion through under-reporting of transaction price. This can lead to both generation and

Main Causes of Creating Black Money- The following are the main causes of creating black money- -

Corruption in Govt. & Administration--After the independence most of the political leaders are actually
drenched in corruption activities due to selfish motto and therefore, there is no fear in the minds of the
administrators and result of which the officers in the administration do the work of the people and get
bribes a large scale from them and the share of such bribes is also given to the political party in power.
In this way, the illegal money is collected at a large scale. This is a black money and it affects the
economic system adversely.

War Affairs Situation- It is to be noted that when there is war affairs situation there is artificial shortages
and hoarding commodities and prices are hiked to a lot due to which it become very difficult to live for
the common people. In order to avoid this situations Government has started rationing system and
quota distribution system, so also the rates of commodities are fixed. But the merchants did not
distribute these commodities among the poor people and instead of that; they sold there commodities
in the market at the higher rates and get profit.
95

Extravagant Control on Producers It is to be noted that after independence the development of our
country began with proper planning but, at the same time Government imposed lot of conditions on the
industries and due to which there was heavy loss to the producers and in order to avoid this loss, the
producers adopted the way of black money marketing and started to get large profits from this black
marketing. This extravagant contiol of Government helped to create black money.

Devaluation of Property In our country, daily selling and purchasing are honestly done, then tax is
required to be paid on a large scale. In order to avoid this tax, the cost of the commodities is shown less
during the selling and buying business. And taxes are avoided. Black money is created due to avoiding of
taxes.

Peoples Tendency Towards Physical Happiness- Day to day, the tendency of the people of our country is
being tend towards physical happiness and enjoyment. They desire and expect to get the things for
happiness and enjoyment but they are not ready to do hard work for that.

Expenditure increases, but to meet the increased expenditure, the income short falling. For this
purpose, the people adopt illegal methods to mitigate the increases expenditure and thus the black
money is born.

6. Increasing Party Funds in Politics It may be noted that whether it may be National party or State level
party. they give crores of Rupees as party funds in order to win their party candidate and under the plea
of this fund there are number of illegal works done on a large scale, from which black money is created.
Similarly. increased public expenses inflation, incorrect information of agriculture production, gambling,
speculation, smuggling and such other businesses also help to create black money.

Remedies to Minimise or Eradicate the Black Money and Corruption from the Society In order to
eradicate the Corruption and Black money following remedies may be proposed

To Cancel the Currency Notes of 500 & 1000- The Government should cancel immediately the currency
notes of 500 and 1000 and create hard and fast rules. If the currency notes of 500 and 1000 are
cancelled, it will automatically control over such people who have utilized these notes for self interest
and the economic condition of the country will be benefited and stabilized. Similarly, hard laws should
be passed for giving punishment to those who have accumulated wealth by such illegal method, so that
the black money and corruption will be reduced.

Declaration of Purchaging ofGold & Property be Made Compulsory-It must be made compulsory to
inform that after purchasing of gold and immovable property and while transfering suchsroporey
whether income tar in tai or otherwise. So also, if some property is in foreign countries when ssiph
property is declared or not. The person concerned should ascertain st suchrs and give the correct
information. This provision should be made compulsory.
3. Declaration of Foreign Income be Made Compulsory- The Government should make it compulsory to
declare his income earned in forcies countries and be liable to be taxed.

4. Declare Self plan- The Government should make it compulsory to declare self plan to declare black
money. Which converts black money into whice money when Government declared this plan during
1951-1965

Government had received Rs. 50 crores of tax.

5. Revision of Tax Procedure is Needed- It is necessary to revise tax procedure and where there are
loopholes from laws should be blocked.

Similarlv, changes should be done as suggested by Taxation Inquiry Commission, 1953.

6.Specific Fixed Deposit Plan of 1981 be Introduced It is to be noted that the specific fixed deposit plan
of 198 1 should again be started, and black money should be brought under the production purposes.
This is the motto of this plan. Rs 964 crores was received by way of taxes and therefore, Government
should again start this plan.

7. The Govt. Should Expand Banking Business The Government should expand and propagate the
banking business and all transactions should be made through bank only. Goverment should try to
impress this on the minds of the people and ensure that no black money is created.

8. To Establish a National Level Plan to Give Training of Moral Values In order to protect the social and
moral values of the people and all should help for all round development of the country. Government
should prepare a National Level Plan to give training of moral values to the people.

9. Income Tax Raid be Made Compulsory- There should be raid through the income tax department on
all those who are from high income group and who are doubtful tax evaders and tax with fine should be
recovered after calculating their property and they should be sever ly punished.
10. Information of Double Tax Plan be Communicatelfo the People-The information of double tax plan
contract should be given to the people and the black money which is in the foreign countries should try
to bring back and the countries with whom contract has been made by exchanging the information
should try for stoppage of black money.