Taxation in India

“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”. [1]

Tax is called as the strength of a nation’s economy, if it is taken properly with a correct approach it can keeps revenue consistent, vitalizing industrial activity and control the management of growth of our economy. With a proper tax system and efficient measures, the tax system will likely to give revenue growth faster than GDP. In our country there are three-tier federal structure which is consisting of the Union Government, State Government and the Local Bodies. These 3 bodies are authorized with imposition of the different duties and taxes of our nation. As per the Indian Constitution the government is authorized to levy taxes on individuals and organizations.

Tax is usually the most visible and important component of our India’s revenue system. The main objective of Public Finance is to maximize the development and welfare of the peoples. The development of a nation completely depends upon the mobilization of revenue and its spending. As we know that our country has a federal system and the silent feature of federal government is legislative autonomy and financial independence, even this characteristic has also been enshrined in our constitution. A tax is defined as “pecuniary burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority”. It is an enforced contribution made by the public to the government it is not a kind of any voluntary payment or donation. It is basically of two types direct or indirect tax and which is paid in money.

Direct tax is the one which is applicable directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. This type of tax cannot be shifted by taxpayer to other persons. In case of indirect tax it can shifted to other persons and it is collected by an intermediary such as a retail store. This intermediary files the tax return and forward to the tax to the government. This tax is basically applicable on the goods and services rather than on income or profits which take place in direct tax. In our country, the system of the direct and indirect tax which is known today has been in force from ancient times. Different types of tax and its measures have been referred in Manu Smriti and as well as in Arthasastra.

These tax are applicable on income and wealth of the people but still there is no such evidence which is showing that taxes on income were also levied even in primitive and ancient communities. The word “Tax” has been its origin from “taxation” which basically means an estimate. These taxes were applicable on any sale or purchase of goods and were collected by the authority of government from time to time. The historical background plays an important role of taxes through which present system of taxation is linked. It has its origin same from that of ancient Greece, Germany and Roman and these taxes were some time applicable on the basis of occupation or on the basis of turnover. After that these taxes were also made applicable on the trade between the countries. These taxes were used by the government for public welfare to meet there requirements and country needs.

History and Constitutional aspects of Taxes

According to Deviti DeMarco, “A tax is a share of the income of citizen which the state appropriate in order to procure for itself the means necessary for the production of general public service”. [2]In our country the systematic tax structure had been developed before the maurya period. The basic tax was used to be on land and the crops which were grown at that time. It used to be one third in fertile land. After that the rulers changed and the taxes were also changed from crops and land to other things even it was levied on dancers, musicians etc. The tax name at the period of Sultan Alauddin Khilji was “Jeziya” which a tax applicable only on Hindu to follow their religion. During Mughal period the “Zabi” system was introduced and in it the different rate of taxes were taken on the base of land.

These old tax systems were changed after the East India Company came to our country and they levied the taxes of their form on the presidency towns. Direct taxes were imposed by them on the certain professions but they failed to do so because of poor administration. But in 1859 the taxes were again imposed by the government of India due to financial crises and in these taxes the three percent charge was imposed on all income which are below Rs. 2000 at that time. The very first act which was introduced for regulating the taxes was Income Tax Act, 1860 but this act continued only for five years. Presently the Income Tax Act 1961 governs the income tax which is amended from time to time by the annual finance act. It has the set of rules for its implementation which is known as Income Tax Rules, 1962.

The Indian Constitution has clearly divided and demarcated the financial avenues between the state and central. The Custom Act 1962 generally regulates the duties and taxation but our constitution also provides the provisions relating to taxation under Article 265 to Article 300 which deals with the financial matters. Article 246 lays down that the parliament has the exclusive power to make laws with respect to any matter enumerated in Union List (List 1 of the Schedule 7). In case of Chhotabhai v. UOI [3]it was stated that the law providing for imposition of tax must be a valid law that it should not be prohibited by any provision of the constitution. State has the power to levy taxes on supply of goods or services, but there are certain restrictions on the part of state which has been enumerated under Article 286.

Article 286 clearly prohibits the state to impose tax on the supply of goods or services or both which take place outside the state. Also it prohibits the state to impose the tax in course of import of goods and services or export of goods and services out of the territory of India. In case of State of Orrisa v. MMTC [4]it was also stated by the Supreme Court that the sale become complete only after reaching the destination and article 287 of the Indian Constitution prohibits the state from imposing tax on consumption or sale of electricity supplied to government utilized for public work. The tax power of state has been clearly stated in our constitution with their jurisdiction in List II under Seventh Schedule.

Kinds of taxes and Penalties for not paying taxes

As we know tax are basically of 2 types of taxes Direct tax and Indirect tax. These kinds of taxes were of following kinds. So, the types of Direct taxes are Personal Income Tax, Corporate Income Tax, Property Tax, Inheritance Tax (Estate Tax), Gift Tax, Expenditure Tax and the types of Indirect taxes are as follows Customs Duty, Central Excise Duty, Service Tax, Sales Tax, Securities Transaction Tax. So these are the different types of taxes which are applicable on the people by the government and as discussed above government is empowered to levy taxes on the people. As the time has also changed today everything is done on these online platforms and e- commerce has become the main platform today. The government has passed the Finance Act 2020, which included a change in taxes which are levied on these online platforms.

These charge of taxes on online platform was introduced in 2016 which were 6% and was limited to the online advertisements. But as per the latest amendment, a tax will be charged 2 per cent on the gross payment “received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated”. Although, these taxes which were imposed on these online platforms were not a part of budget which is passed by the Finance Minister Nirmala Sitharaman’s in 2020. This amendment made by the government with the intent to long stand and deliberately help the nation in this COVID 19 pandemic. Even in other nations this system of digital charging of tax helped them in increasing the revenue. Basically, the taxation policy is followed as per the principle stated in International Taxation Principles.

The International taxation Principle was first formulated in 1920s but as the world has shifted towards the modernization these principles were outdated today. In respect to change these principles 135 countries including our nation agreed to define the new principles regarding tax. However countries like France, Spain and the United Kingdom have introduced unilateral measures to levy taxes on taxing global tech giants. So, in respect to this our government has also introduced system to levy the taxes on these digital platforms. These taxes were also applicable on digital players of other nations situated in our country.

There are number of types of taxes if these taxes are not payed to the government then are several penalties applicable on that person and organization. Penalties such as imprisonment can be invoked due to ignorance or laziness, as well as willful actions leading to evasion of tax and in some of the case there is both penalty and imprisonment. If there is late payment of tax then the assessing officer has the power to impose penalties as per her discretion, even for filling of tax return same the discretion of assessing officer will be applicable and section 139 of the Income tax applicable in it. In case of not producing books of account section 132 of the act will be applicable and it is punishable with imprisonment which may extend to 2 years and shall also be liable to fine in accordance with section 275B.

There are also many other tax provisions under which a person may have to pay penalties and these are also applicable on digital taxation also and both fine and imprisonment is applicable. Also, there could be other problems due to which tax return and other obligations are not filled on time. But everything is stated under the Act completely. But there are certain digital platforms which are not paying tax and it is found that apps like Zoom, Tinder, and Tumblr these firms are not paying taxes. These companies are required to pay service tax at 18% even there are many such platforms which are not paying taxes properly. They all will liable for penalties and punishments.


Tax is one of the most important revenue of the government which is utilized for the welfare of nation and it has also progressed in its system. It is continuous system to improve the revenue productivity and the nation. As we have discussed that today business has highly been shifted to e-commerce platforms, so the government has also shifted their taxes policy on these platforms. But many of the digital platforms like Zoom, Tinder they are not paying their taxes either in direct or indirect form and they even are having their business from so long. So these digital platforms are likely to pay the taxes as government has made applicable on them.



[1] Kalidas in Raghuvansh eulogizing KING DALIP from History of Direct Taxation on Income Tax India

[2] Deviti DeMarco, Italian Economist

[3] 1962 AIR 1006, 1962 SCR Supl. (2) 1

[4] 1994 Supp(3) SCC 109

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