India is the country which offers the well-structured tax system for its citizens. Taxes are an essential and more extensive source of income for the government of the country. For the development of the nation, the government use that money for various purposes and projects. Taxes are only determined by the central and the state government, but there is a vital role of local authorities like municipal corporations. There are two categories of taxes, namely, direct and indirect taxes. The most considerable difference between them is in their implementation. Indirect taxes are levied on goods and services, and on the other hand, the assessee, pay direct taxes. The Income Tax Act,1961 governs the income taxes. This act contains 300 sections with the subsections. Every year after the finance act is passed by the parliament, the income tax act changes accordingly making a few additions and deletions of some provisions.
For good governance, taxes have been the lifeblood. The betterment of nation or development is dependent upon the revenue, which is generated by the medium of taxation. The power to levy taxes is endowed with the centre and the state government. In the Indian constitution, the powers of the centre are well defined. According to the three mentioned lists in the constitution, it is noticed that the Indian constitution does not expressly confer the powers of taxation on local bodies like district boards. These bodies enjoy such powers of taxation only when it is delegated to them by the state government for their needs. The governing and following act is the Income Tax act,1961 in India. According to this act in every assessment year, the income tax shall be charged on the total income of the preceding year at the rate levied by the relevant finance act (from every person).
Constitutional Provisions Related to Taxation
Article 265: No tax, without the authority of law. According to this article, tax can be levied only by the parliament/legislature. For the levy of any tax following conditions must be fulfilled:
- Levy of tax must be within the legislature purview.
- Levy of tax must be only with clear legislative intention.
- There should be no presumption in levy of tax.
- For levy tax, the fiscal statute must be read as a whole.
- Spirit of law alone is not a basis for levy of tax.
- Favourable and strict construction of tax enactments should be available.
In the case of Atlas cycle Industries Limited v. State of Haryana, the Supreme Court held that notification imposing a tax could not be deemed to be expanded to new areas included to the municipalities.
Article 226 to 267 and Article 282 to 284: Consolidated funds, public accounts, contingency funds and custody of funds.
Article 268 to 279: Distribution of tax resources between the Union and the states.
Article 271: Surcharge- Parliament authorities to levy additional tax over state taxation subject.
Article 280 to 281: The financial commission.
Powers of the Union and State in the constitution: Seventh Schedule of the constitution has three types of lists.
- Union list which is defined in Article 246(1): Only the parliament have the exclusive powers to make laws as per list-I.
- State list which is defined in Article 246(3): State government have the exclusive power to make laws as per list-II.
- Concurrent list (List-III): Both union and state government have the concurrent power make laws as per list-III.
Distribution of different types of taxes among these lists is as follows:
- Taxes belonging to the Union only: Corporation tax/ income tax/ railway tax/ air passengers/ newspaper purchase and sale.
- Taxes belonging to the states only: Land revenue/ estate duty/ electrical taxes/ professional tax/ vehicle tax/ entertainment tax.
- Taxes levied by the Union but collected and uses by the state: Medicine and toilet preparations/ Liquor.
- Taxes levied and gathered by the Union but assigned to the state: Land tax/ goods/ train tax/ advertisement tax/ stamp duties/ taxes on inter-state trade and commerce.
- Taxes levied and gathered by the Union but distributed between the Union and the state: All income taxes except the agriculture income.
Provisions Related to Income Tax Act, 1961
The governing act is the Income- tax act,1961, which came into effect in the year 1962. It contains 300 sections and various subsections; out of them, there are some relevant provisions related to our Indian taxation system as mentioned below:
- Section 4 lays down that Income tax authortiy is competent to charge the tax in every assessment year from every person on their total income of the previous year at the rates levied by the relevant finance act.
- Here the word “person” which is mentioned in section 4 is defined under section 2(31) of the act. A person includes an individual, a Hindu, an undivided family, a company or firm, and every artificial juridical person not falling any above categories.
- In section 2 (24) of the act defines the income, according to this act income is taken in the broadest sense. Under section 2(24), income includes- (1) dividend; (2) profits and gains; (3) voluntary contribution received by the trust and various other items. It means there are different types of income for taxation, and income is broad as the actual increase in the amount of wealth.
- Section 5 of the act gives for what constitutes total income concerning the residential status of the person concerned. Here total income is different for the persons who are not ordinarily resident.
- The computation of the income is explained in section 10, receipts, which is mention in the definition of the income are not treated as a part of total income.
- The act divides income into five categories: salaries income from house property, capital gains, profits and gains of businesses or profession, and income from other sources. And for every head, there are different rules for the computation of income.
- Salaries: Salary contains not only the payment is taken in cash as wages from the employer but also the value of profits like a rent-free house.
- Income from house property: Under this head, the annual house-property of which the assessee is the landlord but which is not occupied by him for any trade or profession carried by on his name is chargeable as income from house property.
- This act explained the concerned income tax authorities: The key figure is the assessing officer who issues notices to file the return, determines the income, examines accounts and recovers tax. He does his work by inspectors of income-tax who are subordinated by him. The joint commissioner or additional commissioner supervised the assessing officer. And they are within the jurisdiction of commissioner of income tax (CIT).
- The chief commissioner of income tax supervises the CIT. The top authority is the central board of direct taxes; the function of the board is to regulate the central board revenue act,1963.
- Appeals and Revision: If any assessee is aggrieved by the orders of the assessing officer may appeal to the DCIT or CIT. The member of the income tax department is independent, and the ministry of law and justice appoints them, so for the appeal against the commissioner may be filed by the assessee before the income tax appellate.
- Remedy outside the act: Section 293 of the act said that for any modification or to set aside any assessment made in the act is not file any suit in any civil court.
Limitations of Taxation Laws
- Must not contravene Article 13.
- According to Article 14, there should be equal protection of the law(not to be discriminatory or arbitrary)
- Article 19(1)(g): There should not be unreasonable restrictions upon the right to business.
- Article 27: No tax shall be levied on the proceeds of which are specially appropriated in payment of levies for the promotion or maintenance of any particulars region or religious denominations.
- Article 285: A state legislature or any authority within the state cannot take tax on the property which belongs to the Union.
- Article 289: The Union cannot take the tax on the property and income of the state.
- Article 286: It is the power of the state to levy a tax on sale or purchase of goods.
- Article 287: It is specified in this article that parliament by law provides that a state shall not take the tax on the cases of consumption or sale of electricity.
The structure of the taxation system in India plays a vital role in the development of the country. The government uses the amount of tax for the welfare of the country, so the taxation system of India should be constructed in such a way that all the liable taxpayers should not avoid it. Rather, they must pay it voluntarily. Tax payment helps to reduce the gap between the haves and have-nots. As it helps in mobilizing the surplus income from the haves and reinvesting them for public welfare, these surplus funds reach the have-nots. Both tax avoidance and tax evasion are meant to decrease tax liability, but what makes the change is that the former is sustained in the eyes of law as it does not break any law.
- What is the Income-tax Act, 1961?
- What is the framework of income tax department?
- Who is supposed to pay income tax in India?
- Is non-ordinary resident also pay the income tax?
- In which department, I can appeal against the assessing officer?
- Who has the power to appoint an assessing officer?
- The direct taxes enquiry committee, report
- Sukumar Mitra: income tax, Sarkar, Calcutta, 1970.
- Ahluwalia, M.S, (2001) Economic reforms- A policy agenda for the future. Indian journal of commerce. 54(3):1
- Dr Jyoti Rattan: Taxation laws, eleventh edition, Bharat publication.
 1979 AIR 1149, 1979 SCR(1)1070