GENERAL

PRINCIPLES OF
TAXATION
TAX – DEFINITION and BASIC CONCEPTS

Adam Smith – Tax is a contribution from citizens for

the support of the state
Tax is a compulsory payment levied by the
government on individuals or companies to meet the
expenditure which is required for public welfare.

Black’s law dictionary - “A tax is any contribution

imposed by government upon individuals for the use
and service of the state whether under the name of
toll, tribute, tallage, gabelle, impost, duty, custom,
excise, subsidy, aid, supply or other name”
OECD - A tax is a compulsory unrequited payment to
general government

Dalton - "a tax is a compulsory contribution imposed by

a public authority, irrespective of the exact amount of
service rendered to the taxpayer in return, and not
imposed as penalty for any legal offence.“

Edwin R.A Seligmen – “tax is compulsory contribution

from the person, to the government to defray the
expenses incurred in the common interest of all, without
reference to special benefit conferred; ”
Philip E. Taylor - “tax is a compulsory payment to the
government without expectation of direct benefit in return
to the taxpayer”

Bastable – “Tax is a compulsory contribution of the

wealth of a person or body of persons for the services of
public powers”

Cooley – “The word taxes in its most enlarged sense

embraces all the regular impositions made by the
government upon the person, property, privileges,
occupations and enjoyment of the people for the purpose
of raising public revenue.”
Taussing - “the essence of a tax as distinguished from
other charges by government is the absence of a direct
‘quid-pro-quo’ between the tax payer and the public
authority”.
Under Constitution of India

Art 366 (28) taxation includes the imposition of any tax or

impost, whether general or local or special, and tax shall be
construed accordingly;

Art 366 (29) tax on income includes a tax in the nature of an

excess profits tax;

Art 366 (29 A) tax on the sale or purchase of goods includes

(a) a tax on the transfer, otherwise than in pursuance of a contract,
of property in any goods for cash, deferred payment or other
valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or
in some other form) invoked in the execution of a works contract;
(c) a tax on the delivery of goods on hire purchase or any system
of payment by instalments;
Art 366 (29 A) (d) a tax on the transfer of the right to use any
goods for any purpose (whether or not for a specified period) for
cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association
or body of persons to a member thereof for cash, deferred payment
or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in
any other manner whatsoever, of goods, being food or any other
article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred
payment or other valuable consideration, and such transfer,
delivery or supply of any goods shall be deemed to be a sale of
those goods by the person making the transfer, delivery or supply
and a purchase of those goods by the person to whom such
transfer, delivery or supply is made;
By the Judiciary

Gouse DG & Co. v. State of Kerala

Tax in its widest sense includes all money raised by
taxation , including taxes levied by the union and state
legislature and rates and other charges levied by local
authorities under statutory powers

Matthews v. Chicory marketing board; Commissioner

HR & CE v. Lakshmendra
Tax is a compulsory exaction of money by a public
authority for public services enforceable by law and not
a payment for services rendered
Characteristics of Tax:

1. It is a compulsory contribution. It only means that no one can refuse to pay

a tax, on the general ground that he doesn’t derive any benefit from certain
state services.
2. The fact that tax is a contribution implies the notion of a sacrifice involved
on the part of the contributor.
3. Tax payment is a personal obligation. It is to contribute to the states’ support
that is universal and applies to all. This does not mean that all taxes must be
levied on persons or objects of taxation.
4. A tax is levied according to certain legal requirements.
5. The amount of tax is not fixed with reference to the exact benefit which a
taxpayer receives from the public service. Meaning, there is no element of quid-
pro-quo in the payment of tax.
6. A tax is paid out of the income of the taxpayer.
7. The power of taxation is mainly to be used for collecting revenue to the state,
not for any other ulterior purpose.
Art 265
“ No tax shall be levied or collected except by authority of
law”

Authority of Law

• Statute law
• No tax shall be imposed by executive orders (ordinance),
bye laws, rules and regulations.
- L.Maheshwari prasad v. state of UP ; Gopal narain v.
state of UP
• Within the legislative competence
• Not ultravires
1. Valid law (S. Gopalan v. State of Madras )
2. Not to violate fundamental rights ( Moopil Nair v. State of
Kerala )
3. Not contravene special provisions of the constitution which
imposes limitation on legislative powers. Eg: Art 27, 276,
301, 304 ( M/s Sainik motors v. state of Rajasthan)
4. Based on its Legality ( Shakti kumar v. State of Rajasthan)

Taxes, duties, cess and fees – Mohammadbhai Khudabux

chhipaand v. state of Gujarat 1962

Direct and indirect taxes – Mafatlal industries v. UOI

SC provides for the intention of taxation

Indian Medical Association v. VP Shantha

1. imposed under a statutory power
2. public purposes
3. capacity to pay.

Mathuram agrawal v. State of MP

1. Subject of tax
2. the person liable to tax
3. the rate at which the tax is payable.
Historical Development through the years

Ancient Period - Pre 300 BC

“ It was only for the good of his subjects that he collected taxes
from them just as the sun draws moisture from the Earth to give
it back a thousand-fold” – Kalidasa (Maximum Social Welfare
theory)
“ Taxes to be related to the income and expenditure of the
subject”
 No excessive taxes
 Neither high rate of tax nor exemption for all from taxation

• Manusmriti – the King to collect taxes in such a manner that

the taxpayer does not feel the pinch of paying taxes
 Traders and Artisans – 1/5th of taxes in silver or gold
 Agriculturalists – 1/6th or 1/8th or 1/10th of the produce
•Kautilya’s treatise on statecraft called “Arthasasthra” 322 BC, the
Mauryan empire had remarkable administrative system- economic
governance being the most important part of it.
•Introduced salt tax in india.
•Chandragupta Maurya improvised a common currency system and
created a regiment for collecting revenue from the citizens.
•peasants were freed of taxes and crop collections from regional
rulers, and a common taxation system was formulated.
• Scheduled payment – time, manner and quantity predetermined
• Land revenue (BHAGA) – 1/6th or 1/4th in case of crop raised on
loan, 1/3rd for fertile land ; but agricultural income exempted
• other taxes on cattle and livestock
• EXIM duties on ad valorem basis
• import duties on foreign goods fixed at 20%
• Tolls, Road cess, Ferry charge – fixed
• War, emergency, Famine, Floods – stringent, raise in land tax to
1/4th
• Taxes levied on prostitutes, actor, dancers, musicians, jugglers,
heralds etc.
• Salt tax in India
Bengal
• Hindu – 5%
• Muslim – 2.5%
• British East India Company – Salt Tax Act
on recommendations of Salt Commission 1835
- Only govt can manufacture and distribute salt
- private distribution was made illegal
- In 2016, the Act was abolished

SHIP MONEY
1634 – tax amount equivalent to the value of the ship
Originally introduced by Charles I in 1635 during the financial
deficit of the civil war
1636 – made a permanent concept
1637 – R v. John Hampton
Parliament made the concept of ship money illegal
Medieval period

•Alauddin Khilji,
•imposed a direct Kharaj tax (land tax/ tax on cultivation)
amounting to a maximum of 50 percent of the agricultural
produce (originally paid only by non-muslims). Ushr was paid
by the muslims.
•He further demanded four-fifths of war spoils from his
soldiers.
•In order to maintain the highly structured revenue system
designed by him, Alauddin employed a large number of
people as collectors and accountants. They presented the
budget before him.
•Also imposed Charai (tax on milch cattle) and Ghari (tax on
house)
- these were abolished by Firoze Tughlaq who then levied
Jiziya
•The revenue system of Alauddin Khilji is often regarded to be
the longest sustaining kinds to have been formulated by any
Mughal rulers- seventeenth century,
•The empire had gained the currency of being the largest
economic power in the world, accounting for more than 20
percent of the world’s GDP.
•Akbar adopted the taxation system introduced by Sher Shah Suri
and reformed it further. Accordingly, taxes were based on the area
and productivity of a piece of agricultural land.
•The system was reformed in 1580 and a system called the
dahsala was adopted.
•As per the requirements of the new system, tax revenue was
calculated as one-third of the average produce of the last ten
years.
•The one tax reform that Akbar’s reign is most famed for is that of
abolishing the Jiziya tax on non-Muslims (introduced by Aibak),
which went on to bestow on him the repute of religious tolerance.
• Again levied by Aurangzeb on Hindu subjects in 1679.
Income Tax Act, 1860
1. Income from land and property
2. Income from profession and traders
3. Income from securities
4. Income from salary and pensions

1886 Act
1. Income from salary, pensions and gratuity
2. Income from net profits of company
3. Income from interest on securities of GoI
4. Other sources of income

1918 Act – federal structure

1922 Act – nomenclature for the IT Authorities (full of complexities)

1961 Act (repealed 1922 Act)

1. Income from salary
2. Income from House property
3. Income from PGBP
4. Income from Capital gains
5. Income from other sources
Modern India

•The system of preparing an annual budget and laying it before the Legislature
was first introduced in India by James Wilson in February 1869.
•He was the Finance Member of the India Council that advised the Viceroy of
India. Wilson was employed in the India Council after the revolt of 1857 when the
British government realised that they could never govern the country indirectly
through the East India Company.
•Wilson is known to have introduced for the first time, a budgetary system in India
based on the English model.
•He consolidated the threads of finance that had been disrupted by political
revolutions.
•The complexity of developing a finance system for India lay in the country’s
unique diversity. The taxation system, before the coming of Wilson had been
patchy and unregulated.
•The revolt, however, made evident the need for stronger centralised control.
•Thereafter, Wilson introduced the concept of an income tax.
•Wilson aimed at having a balanced budget and a taxation system that did not
interfere with people’s economic behaviours.
The Act of 1892
•conceded to both the Central and Provincial Councils the privilege of
financial criticism or the right to discuss the budget under certain conditions
for the first time.
•Members of the Council however still had no powers to submit or propose
any resolution or to divide the Council in respect of any financial discussion.

After the Morley-Minto Reforms of 1909,

•the Finance Member had to present his estimates to the Central Legislature in
first quarter of every year.
•The Finance Member’s presentation was followed by discussions on Budget
proposals.
•During discussions, the members of the legislature could propose alterations
in tax provisions, loans and grants to local government.
•The Finance Member was able to accept or reject these proposals but he
needed to justify why he accepted some proposals and why rejected others.
•Some items of expenditure such as that of the Army were however treated as
non votable.
History of taxation

Excise is one of the first indirect taxes levied

1870 – Salt tax
1894 – cotton yarn
1917 – motor spirit
1922 – kerosene

Pre independence
1935 GoI Act – to levy tax on sales
1938 – Bombay province tax on tobacco

Post independence
Art 286
Central Sales Tax
Excise levied initially on luxury items, later all commodities
1994 Service tax – based on recommendations of Raja Chelliah
Committee
TAX REFORMS COMMITTEES

I. Taxation Enquiry Commission, 1953-54

- A Tax Reform Committee headed by John Mathai
- The Commission was instituted to make “a comprehensive
enquiry into the system of taxation in this country”
- Progressive tax structure.
- Indirect taxes can be used as a means of progressive taxation,
although in a limited manner.

II. Indian Tax Reforms Committee, 1956 headed by Prof. Kaldor

- He focused primarily on direct taxation .
- He favored the wealth tax, capital gains tax, gift tax and
personal expenditure tax (abolished in 1962)
III. Direct tax reforms Committee, 1971 headed by
W.N.Wanchoo
- He focused on black money
- Kailash Nath Wanchoo headed a committee constituted
by the Central Government in 1971 to estimate the income for
which tax was evaded during the period 1961-62 to 1968-69.
  - The committee adopted Kaldor’s approach after some
modifications and estimated black income at Rs. 700crores and
Rs. 1000crores for the year 1961-62 and 1965-66.

IV. Boothalingam Committee, 1968

- rationalization and simplification of direct taxes in India
- General excise levy of 10% on all products
- Simplification of custom rates
V. Indirect taxation enquiry committee, 1977 headed by Lakshmi
Kant Jha
- Rationalization of duty structure on raw materials and final
products
- primary focus on Union Excise duty
- Introduction of VAT in excise (the tax credit version to be
adopted)

1986 – MODVAT and attempt to bring Ad Valorem

VI. Choksi Committee, 1977

- Central Tax Court with all India jurisdiction under a
separate statute
- Special Tax Benches composed of Judges with special
knowledge in High court to deal with tax matters
- consolidated income tax, wealth tax and gift tax
VII.Tax Reform Committee 1991-93 headed by Raja Chelliah
• Tax on agricultural income to be included
• Difference in tax rates of domestic and foreign companies
not to exceed 10%
• No wealth tax on productive assets
• Indexation for calculating LTCG to compensate for inflation
- Significant rationalization of tax structure
- Service Tax (1994)
- Reduction in rates; widening tax base
- To make VAT easily administrable, to be levied in 2-3 stages
and adopt at manufacturing level
- reduce import duties
- more exemptions and concessions
- decrease share of trade taxes in total tax revenue

CENVAT replaced MODVAT in 2000

VIII. Rekhi Committee on Indirect tax reforms (1992) headed by
K.L.Rekhi
- A Tribunal for disputes between taxpayers and authorities
- Import consignments to be cleared in 3 days
- Coercive measures not to be used for recovery of duty when a
stay application is filed by the assessee

IX. India’s task force on Direct and Indirect taxes (2002) headed by
Vijay Kelkar
•Basic exemption limit to Rs.1lakh for individuals and Rs.1.5lakhs for
senior citizens and widows
•SD abolished & rate of 20% between Rs.1lakh-4lakh and 30% over
Rs.4lakhs
•Elimination of tax incentives for savings & other income except
handicapped
• Interest subsidy of 2% for housing loans upto Rs.5lakhs
•Abolition of Wealth tax
•No MAT; Corporate tax at 30% for domestic and 35% for foreign
India’s task force on Direct and Indirect taxes (2002) headed by Vijay
Kelkar
(CONT..)
•All excise to be replaced by CENVAT
• 14% CENVAT rate
•Zero percent excise duty on life saving drugs and food, etc
•Uniformity in all states relating to VAT
•Separate legislation for Service tax and to levy them
comprehensively by including few in the negative list
•Services classified based on WTO
•Exemptions for life saving drugs, security items and farm products
•Exemption of tax for small scale units with turnover upto Rs.50lakhs
•Integrated tax credit schemes – CENVAT and service tax
•E-filing facility

2003 – 95th CAA - Art 268A and Entry 92C List I

X. Committee on roadmap for fiscal consolidation (2012)
headed by Vijay Kelkar

•To redesign to encourage compliance of direct tax

•Form GST by combining Central Excise and Service tax
•Negative list of budget 2012 to be reviewed
•PAN-UID mandatory
•Comprehensive cross verification of claims for ITC
•Reduce subsidies on petrol, diesel, kerosene, LPG and urea

2015 – PAN made mandatory for all money transactions

2016 – GST
BUDGET

•Initially, the Railway budget was part of the general budget. On

the basis of recommendations Acworth Committee, the Rail
Budget was separated in 1924. In 2017, the Rail Budget, which
was presented separately for 92 years, got merged with Union
Budget.
•1947 – RK ShanmukhamChetty presented the first Budget of
Independent India (non congress member was a minister in
jawarharhal Nehru’s ministry)
•It was just a review of the economy.
•Rehabilitation of refugees and payment of subsidies for food
grains created a large burden on the first Budget.
•The only tax proposal in the budget was an increase in the
export duty of three per cent on cotton cloth and yarn by an
additional amount of four annas per square yard on cotton cloth
and six annas a pound on cotton yarn.
1950 – The first Budget of the Republic of India was presented by John Mathai

•delivered the most lucid Budget Speech as he took the decision not to read out
all the details telling members that a White Paper with all details was being
circulated. He then gave a mini lecture.
•Budgets don’t deal with issues like foreign relations, yet some sign of India's tilt
towards Russia can be seen in the Budgets of the 1950s. (Foreign aid inflows to
help the new nation were a major source of revenue, and at the start of the
decade these were mostly from the US and UK. But over the decade, aid from
the USSR and its allies, like Czechoslovakia and Romania, become more
important, culminating in the Bhilai Steel Plant project in 1959).
•This budget laid down the roadmap for the creation of the Planning
Commission. The Commission was entrusted with the responsibility of
formulating phased plans for effective and balanced use of resources.
•This budget also reduced the maximum rate of income tax from five annas per
rupee, or 30 per cent, to four annas or 25 per cent. Incomes above Rs 1.21 lakh
attracted a super-tax rate of 8.5 annas per rupee. The maximum rate of personal
taxation was 12.5 annas or about 78 per cent.
•A big change that was made during Deshmukh's tenure was the preparation of
Budget papers in Hindi as well. The first such Budget was the one he presented
in 1955.
1957: The 'Krishnamachari-Kaldor' Budget

•Invented two new levies, a wealth tax and an expenditure tax, and a
tax on railway passenger fee .
•Put severe restrictions on imports through an import licensing
system; withdrew budgetary allocation for non-core projects, set up
Export Risk Insurance Corp to protect exporters against payment
risks.
•First attempt to distinguish between active income (salaries or
business) and passive income (interest or rent). Raised income tax
rates.
Focussing on measures needed for providing social security
expanded the existing pension scheme, to cover family members of
deceased government servants, by introducing a new Family
Pension Scheme in 1964
1964- 1968: People-sensitive Budget-Morarji Ranchhodji Desai

•Ended the requirement of stamping and assessment by the Excise

Department authorities of goods right at the factory gate and
introduced the system of selfassessment by all big and small
manufacturers, a system still in use.
•Today, except for some goods such as cigarettes and alcoholic
preparations most products are on the self-removal mode for the
levy of excise duty.
•It was done to reduce administrative burden on the Excise
Department and curb discretionary powers with its field officers.
In this particular budget, where both a husband and wife were
income tax payers he withdrew the "spouse allowance" for, as he
said in his budget speech: "it would be improper for any outsider to
decide as to who is dependent on whom… to eliminate this
unintended strain on the relationship of marriage".
1970 – Indira Gandhi was the first woman Finance Minister to present the
Budget

1973 – YB Chavan presented what came to be called the “Black Budget” due to
a budget deficit of Rs 550 crore

•What complicated the situation was the situation of drought coupled with the
war in Bangladesh or East Pakistan.
• also announced the nationalisation of coal mines. The decision, many believe,
had an adverse effect on coal production in the long run. Bundling of coal assets
under a single government-owned entity meant there was no scope for
competition with the market. India has since been an importer of coal.
•In 1974, he brought down the maximum marginal rate of tax by 20 percentage
points from 97.75 per cent to 77 per cent. The move was to set the template for a
key part of direct tax reforms in the year ahead.
•Agreeing to one of the recommendations of a committee on taxation of
agricultural income, Chavan also introduced the clause that requires taxpayers to
factor in their agricultural income to decide the rate at which to pay income tax.
1986 – VP Singh introduced the Modified Value Added Tax
(MODVAT) carrot-stick budget

•This allowed credit/ set-off of duty paid on raw materials against

the duty on final products.
•It was introduced to reduce the cascading effect of taxes on the final
price of goods.
•This was a modest beginning at major indirect tax reform.
•The Budget went on to be a humble inception for the major indirect
tax reform that clearly ensured impressive development in the shift
to the Goods & Services Tax regime.

1987 – Rajiv Gandhi Introduced the Minimum Alternate Tax (MAT)

•It was brought in with the primary objective of bringing into the tax
net highly profitable companies that were legally managing to avoid
paying income tax.
•The idea was inspired from the United States.
1991 – Manmohan Singh opened the economy to encourage foreign investments
•Overhauled the import-export policy, slashed import licensing and went for vigorous
export promotion and optimal import compression to expose Indian industry to
competition from abroad.
•Began rationalisation of duty structures by pruning the peak customs duty from 220 per
cent to 150 per cent.
How this changed India: India is today the second fastest growing economy in the world.
•introduced service tax in the 1994and this was the Budget to tap into the fastest growing
sector of the economy then.

1997 – Called the “Dream Budget” P Chidambaram launched the VDIS Scheme
•Made tax rates moderate for individuals as well as companies. (Maximum marginal
income tax rate for individuals were lowered to 30 per cent from 40 per cent and the
income tax rate for domestic companies to 35 per cent from 40 per cent.)
•Allowed companies to adjust MAT paid in earlier years against tax liability in
subsequent years.
•Launched the Voluntary Disclosure of Income Scheme or VDIS, to bring out black
money.
•Phased out ad hoc treasury bills used for financing the budget deficit.
Chidambaram slashed the surcharge on corporate tax

Why he did it: A little over one per cent of the population had been for income tax so far.
Budget 1997 aimed to widen the tax base.
2000 - The Millennium Budget – Yashwant Sinha

•Phased out of Manmohan Singh's incentive for software exporters. In

Budget 1991, Singh had made income from software exports tax-free for
three years, and then extended the tax holiday to perpetuity in Budget 1995.
•It was done to improve the ratio of taxes to GDP or gross domestic product.

2001 – Yashwant Sinha changed the timing of the Budget speech to 11:00
am
•In Budget 2001-02, Sinha introduced Transfer Pricing Regulations,. The
regulation played a big role in the prevention of erosion of the tax base in
India.
•The budget presented by Yashwant Sinha became popular as Roll-Back
Budget as he, later, rolled-back several of his proposals from service tax to
hike in LPG prices under pressure from the opposition.
•With the introduction of Cenvat Credit Rules in 2004, cross credit between
service tax and excise was allowed for the first time, reducing effective tax
costs and boosting industry.
•The budget for the financial year 2010-11 aimed to revive the agriculture
sector but mentioned no incentives for organic fertilizers and sustainable
farming
•2012: The target for agricultural credit was raised from Rs 100,000 crore to
Rs 575,000 crore in 2012-13. Second, through various fiscal initiatives like
amending the Fiscal Responsibility and Budget Management Act of 2003
(FRBM Act), the budget gave the private sector the message that reforms were
on track, at least those concerning government's direct market impacting
activities like borrowing.
•2013: The budget increased allocation for agriculture and watershed
development.The finance minister announced a “Nirbhaya” fund of Rs 1,000
crore in memory of the December 16, 2012 rape-and-murder victim. An all-
women bank was also announced.For the youth, Rs 1,000-crore was allocated
for skill development while for the poor there was the promise of rolling out
the Direct Benefit Transfer Scheme across the country.
•2015: The only big green initiative of this budget is the increase of cess on
coal from Rs 100 per tonne to Rs 200 per tonne.
•2017: Under Jaitley, the Goods and Services Tax was also introduced. GST
replaced several taxes like central excise duty, services tax, additional customs
duty, surcharges, state-level value added tax and Octroi. Even other levies
which were applicable on inter-state transportation of goods were also done
away with.
Tax vs Fee
TAX
Compulsory contribution
No Quid Pro Quo
No tax shall be levied except
by authority of law
Tax entries in the various Lists
of Schedule VII
Common benefit of all
Benefit is not directly
proportional to the amount
paid
Objective is to raise revenue
 Commissioner, HR&CE v.
Lakshmendra
FEE
Voluntary contribution
Quid pro quo
Fee levied in respect of non-
tax entry also
Specific entries
-Entry 96 (List I)
-Entry 66 (List II)
-Entry 47(List III)
Specific benefit
Benefit in return is directly
proportional to the amount
paid
Specifically for the
performance of that service for
which it is imposed
Tax vs Fee
TAX FEE
Merged in the general revenue Not part of general revenue
of the state (Consolidated
fund)
Ability to pay principle Not considered

•Secretary, Govt of Madras v. Zenith lamp & co.

•Southern Pharmaceuticals & Chemicals v. St of Kerala
- It is not essential for fee to be credited to a separate fund
but can be apportioned to the consolidated fund also.

BUT, for a levy to be fee, there must be separate apportionment

and direct return necessarily, as stated in,
•Mahant Sri Jagannath Ramanuj Das v. St of Orissa (1954)
- Contribution to the HR&CE as an increase of Rs. 250 for the
rendering of the same service is a fee

• Commissioner, HR&CE v. Lakshmendra

- when the amount collected was not earmarked for defraying
the expenses in performing the services, the levy is in the nature of
tax and not a fee, and is unconstitutional

• HR&CE v Swaminath.L.T
- Fee must be levied incidental to the legislation with respect to
any entity

•D.C. Mills v. Chief Commissioner

- Amount payable by a factory owner for the purpose of
inspection is a Fee.
CANONS OF TAXATION
Adam smith – Wealth of Nation book - 1776
Canon of equality or ability to pay
Adam Smith observes “the subjects of every state ought to contribute towards the
support of the government as nearly as possible, in proportion to their respective abilities
that is in proportion to the revenue which they enjoy under the protection of the state”.
Canon of certainty
“The tax which each individual is bound to pay ought to be certain and not arbitrary. The
time of payment, the manner of payment, the quantity to be paid ought all to be clear and
plain to the contributors and to every other person”.
Canon of convenience
“every tax ought to be levied at the time or on the manner in which it is most likely to be
convenient for the contributor to pay it.”
Canon of economy.
Smith says that “every tax ought to be contrived as both to take out and to keep out of
pockets of the people as little as possible over and above what it brings to the public
treasury of the state”.
•Canon of Productivity
it is better to have fewer taxes with large revenues, rather than
more taxes with lesser amounts of revenue. More taxes tend to
create chaos and confusion among the taxpayers.
•Canon of Elasticity
Elasticity is closely connected with fiscal adequacy. This canon
implies that yield from taxation should grow along with increase in
population and development of economy. The taxes are to be easily
adjusted and to be increased or decreased, according to the demand
of the revenue. Elasticity demands that there should be in the
system, a capacity to respond quickly to the changes in the demand
for revenue
•Canon of Simplicity
The system of taxation should be made as simple as possible
since the common taxpayers are illiterate. The entire process
should be simple, non-technical and straightforward so as to avoid
tax evasion
•Canon of Diversity
Being heavily dependent on a single tax source can be
detrimental for the economy. As such, it is better to collect
taxes from multiple sources, diversifying the sources of
taxation
•Canon of Expediency
Taxes should not be covered in controversy. Taxpayers
should have no doubt about its desirability.
•Canon of Co-ordination
In a federal system of government, taxes are imposed by the
cen­tral, state and local governments. Hence there must be a
well stitched co-ordination between the taxes imposed by
different taxing authorities.
•Canon of Neutrality
The tax system should not distort the working of the market
mecha­nism. Taxes should not produce any adverse effect in the
economy. This canon means that taxes should be able to avoid
undesirable effect upon the economic system of the country.
•Canon of Flexibility
Flexibility ensures that whenever the government requires
additional revenue, it can be generated without much hassle.
Flexibility means that there should be no rigidity in the tax
system, so that it can be quickly adjusted to new conditions.
Under a flexible system, a new tax can be imposed or an old tax
can be withdrawn to adjust to the changed situation.
Mohammadbhai Khudabux chhipaand v. state of Gujarat

- Agricultural Produce markets – Market Committee’s levy

of fees
- Taxes, duties, cess and fees – differentiated
Tax planning
• Mcdowell case
“ Tax planning can be legitimate if it is done within the
framework of law”
• Duke of Westminister case
• W.T.Ramsay v. IRC
• Fernance v. Dalson
• UOI v. Azadi Bachao Andolan

Tax Evasion
1. Illegal as it is from suppression of facts/ non-disclosure
2. Criminal charges incurred

Tax Avoidance
3. Legal as it identifies loopholes in the law to avoid paying
taxes
4. No charges
Interpretation of Taxing statutes

• why? – to find the intention of the legislature

• what? – the rule of interpretation will come to play only if there
is a doubt with regard to the express language used (Pandian
Chemicals v. CIT)
• when? – required only when the words are ambivalent (Kesavji
Ravji & Co. V. CIT)

1. Literal rule – A penal provision must be construed strictly

(ACIT v. Vellaiyappa Textiles Ltd.)

2. Golden rule (Vidharba Irrigation Ltd. V. ACIT)

3. Harmonious construction –
a. Intention of the legislature
b. Object and purpose of enactment to be read
4. Mischief rule – Hayden’s rule

5. Strict construction (for a taxing statute) –

“In determining tax liability, one must have regard to the
strict letter of law. If the revenue satisfies a court that a case
falls strictly within the provisions of law, then the subject can be
taxed. If, on the other hand, the case is not covered within the
four corners of the provisions of the taxing statute, no tax can be
imposed by influence or by trying to probe into the intentions of
the legislature and by considering what was the substance of the
matter” (A.V.Fernandez v St. of Kerala)

6. Beneficial construction (for the benefit of the assessee) – CIT

v. Hindustan Bulk carriers
Hanraj &Co. v State of J&K
“ The subject is not to be taxed without clear words for the
purpose of raising revenue and every Act of the Parliament must
be read according to the natural construction of its words”

Lakshmi Bai v. CIT

“It is a well settled principle that taxation statute in particular
has to be strictly construed and there is no equity in taxing
provision”