UNIT-1 – GENERAL

 Concept of Tax- The concept of tax revolves around the principle of contributing to the resources of the government
for the welfare of society. Taxes are mandatory financial charges or levies imposed by a government on individuals or
entities. They serve as a primary source of revenue for the government to finance public expenditures, including
infrastructure development, healthcare, education, defence, and social welfare programs.
Key Features of Tax:
1. Compulsory Payment: Taxes are obligatory and not voluntary. Individuals or entities must comply with the
tax laws.
2. No Direct Benefit: There is no direct link between the tax paid and the benefit received by the payer. Taxes
are pooled for public welfare.
3. Levied by Authority: Only a government or authorized body can impose taxes.
4. Used for Public Purposes: Tax revenues are used to provide public goods and services.

 Different types of taxes-

Direct Taxes:
Levied directly on the income or wealth of individuals or organizations.
Examples: Income Tax, Wealth Tax, Property Tax
Characteristics:
 The burden cannot be shifted to another person.
 Based on the taxpayer's ability to pay.

Indirect Taxes:
Levied on goods and services rather than income or profits.
Examples: Goods and Services Tax (GST), Customs Duty, Excise Duty.
Characteristics:
 The burden can be shifted to the end consumer.
 Collected by intermediaries (e.g., businesses).

 Distinction between tax and fees, tax and Cess

Aspect Tax Fee Cess

A compulsory financial charge A charge levied by the An additional charge on taxes
Definition imposed by the government for government for a specific for a targeted and specific
raising revenue. service provided to the payer. purpose.
To generate revenue for the general
To recover the cost of a specific To fund a particular project or
Purpose public welfare and government
service or benefit provided. scheme, often temporary.
operations.
Imposed as a surcharge on an
Compulsory payment without a Paid in exchange for availing a
Nature existing tax for a specific
direct quid pro quo (benefit). specific service.
purpose.
No direct benefit to the taxpayer;
Direct Direct benefit to the payer in No direct benefit; the funds are
the benefits are general and
Benefit the form of a service or facility. used for the designated purpose.
indirect.
Can be used by the government for
Scope of Limited to the cost of providing Strictly earmarked for the
any expenditure as deemed
Use the specific service. purpose for which it is collected.
necessary.
Levied by the government as an
Levied by the government as per Levied by the government or
Authority additional charge on existing
constitutional provisions. local authorities for a service.
taxes.
Permanent, unless repealed or Linked to the availability or use Temporary, applicable until the
Duration
amended by law. of the service. specific purpose is fulfilled.
Income Tax, Goods and Services Court Fees, Toll Fees, License Swachh Bharat Cess, Health
Examples
Tax (GST). Fees. Cess, Education Cess.

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 Distinction between tax and fees, tax and Cess
1. Tax Evasion
Definition: Tax evasion refers to the illegal and unethical practice of deliberately avoiding the payment of taxes due by
falsifying information, underreporting income, inflating expenses, or concealing transactions.
Characteristics:
 Illegal: It violates tax laws and regulations.
 Unethical: It undermines the fairness of the tax system.
 Consequences: Can lead to penalties, fines, interest, or even imprisonment.
Examples:
 Not reporting income earned in cash.
 Claiming false deductions or exemptions.
 Hiding income in offshore accounts.
2. Tax Planning
Definition: Tax planning is the legitimate arrangement of financial affairs within the framework of tax laws to
minimize tax liability. It involves taking full advantage of all deductions, exemptions, and benefits provided by law.
Characteristics:
 Legal: Fully compliant with tax laws and regulations.
 Ethical: Encouraged as it ensures optimal tax efficiency.
 Consequences: Reduces tax burden while adhering to the law.
Types of Tax Planning:
 Short-Term: Done annually to plan for specific tax-saving investments or deductions.
 Long-Term: Involves structuring income or investments for consistent tax benefits over several years.
Examples:
 Investing in tax-saving instruments like Public Provident Fund (PPF) or National Pension Scheme (NPS).
 Claiming deductions under Section 80C of the Income Tax Act.
 Structuring salary components like House Rent Allowance (HRA) and Leave Travel Allowance (LTA) to
minimize tax.
3. Tax Avoidance
Definition: Tax avoidance refers to the use of legal methods to minimize tax liability. While it is technically within the
bounds of law, it often involves exploiting loopholes or ambiguities in tax laws.
Characteristics:
 Legal but Unethical: Though lawful, it is often frowned upon for undermining the spirit of the law.
 Manipulative: It takes advantage of weaknesses in tax legislation.
 Consequences: Could lead to anti-avoidance rules or additional scrutiny by tax authorities.
Examples:
 Setting up companies in tax havens to benefit from lower tax rates.
 Transferring profits to low-tax jurisdictions using transfer pricing.
 Creating artificial financial structures to claim tax benefits.
Key Differences
Aspect Tax Evasion Tax Planning Tax Avoidance
Legality Illegal Legal Legal but questionable
Ethics Unethical Ethical Often considered unethical
Method Falsifying or concealing Using provisions of the law Exploiting loopholes in the law
data
Consequence Penalties, fines, Savings with no legal issues Scrutiny or future anti-avoidance
s imprisonment measures
Examples Hiding income, false claims Investing in tax-saving Shifting income to tax havens
schemes
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 Retrospective & Prospective Taxation-

Aspect Retrospective Prospective

Applies only to future events or
Timeframe Applies to past events or transactions.
transactions.
Affects legal or financial Affects decisions and actions taken in
Impact
consequences of past actions. the future.
Provides clarity for future
Certainty Creates uncertainty for past actions.
transactions.
Revising tax laws to affect earlier Introducing new tax rates applicable
Examples
financial years. from next year.

 Federal Base of Taxing Power -Power of Taxation under the Constitution

Constitutional Provisions Related to Taxation
1. Article 265:
o No tax shall be levied or collected except by the authority of law.
o This ensures that taxation is based on legislative authority and prevents arbitrary imposition of taxes.
2. Seventh Schedule:
The division of taxing powers is outlined in the Seventh Schedule, which contains:
o Union List (List I): Taxes that can be levied exclusively by the Union Government.
o State List (List II): Taxes that can be levied exclusively by State Governments.
o Concurrent List (List III): Contains no specific taxation provisions; however, laws related to tax
procedures or administration may be made under this list.
3. Residual Powers (Article 248):
o Parliament has exclusive power to make laws on matters not enumerated in the State List or
Concurrent List, including the power to levy taxes on residual subjects.
4. Articles 268 to 281:
These articles deal with the distribution of tax revenues between the Union and States.

Division of Taxing Powers

1. Union List (Central Government Taxes)
The Union Government has exclusive power to levy taxes on:
 Income Tax (except agricultural income) [Entry 82].
 Customs Duty [Entry 83].
 Corporation Tax [Entry 85].
 Goods and Services Tax (central portion) [Entry 92C].
 Excise Duty (on goods other than alcohol for human consumption) [Entry 84].
 Taxes on the capital value of assets, excluding agricultural land [Entry 86].
 Taxes on foreign trade (Export Duty) [Entry 92A].
 Service Tax (now subsumed under GST) [Entry 92C].
 Taxes on transactions in stock exchanges [Entry 90].

2. State List (State Government Taxes)

The State Governments have the exclusive power to levy taxes on:
 Agricultural Income Tax [Entry 46].
 State Excise Duty (on alcohol for human consumption) [Entry 51].
 Stamp Duty (except on documents in the Union List) [Entry 63].
 Property Tax [Entry 49].
 Land Revenue [Entry 45].
 Taxes on Vehicles [Entry 57].

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  Entertainment Tax [Entry 62] (partially subsumed under GST).
 Taxes on Entry of Goods into a Local Area (Octroi) [Entry 52] (now subsumed under GST).

3. Concurrent List
 No specific taxes are mentioned in this list, but procedural laws (e.g., recovery of taxes, penalties) may fall
under it.

4. Goods and Services Tax (GST)

 Article 246A: Introduced through the 101st Constitutional Amendment, provides concurrent powers to both
Union and State Governments to legislate on GST.
 The GST Council (Article 279A) plays a vital role in ensuring uniformity in tax rates and structures across the
country.
 Integrated GST (IGST) on inter-state supplies is collected by the Union but shared with States.

Distribution of Tax Revenues

The Constitution provides mechanisms for sharing tax revenues between the Union and States to ensure fiscal balance:
1. Taxes Levied by the Union but Collected and Appropriated by the States (Article 268):
o E.g., Stamp duties on certain instruments, Excise duty on medicinal and toilet preparations.
2. Taxes Levied and Collected by the Union but Assigned to States (Article 269):
o E.g., Taxes on the sale of goods in inter-state trade (pre-GST).
3. Taxes Levied and Collected by the Union but Shared with States (Article 270):
o E.g., Income tax and union excise duties (pre-GST), and GST (post-101st amendment).
4. Grants-in-Aid (Article 275):
o The Union provides financial assistance to States based on the recommendations of the Finance
Commission.

Role of Finance Commission (Article 280)

 The Finance Commission recommends how tax revenues should be distributed between the Union and States
and among the States themselves.
 It ensures equitable allocation of resources to address regional disparities.

Key Issues and Challenges

1. Overlap in Taxation Powers: With GST, certain traditional taxes like Entertainment Tax and Entry Tax have
been merged, reducing State autonomy.
2. Vertical Imbalance: Union Government collects a higher share of taxes, creating dependency of States on
central transfers.
3. Horizontal Imbalance: Economic disparities among States lead to uneven tax revenues.

 Immunity of State agencies/Instrumentalities

Key Constitutional Provisions
1. Article 285: Exemption of Union Property from State Taxation
o Clause (1): The property of the Union (Central Government) is exempt from all taxes imposed by a
State or any authority within a State.
o Clause (2): Parliament may authorize the State to levy taxes on Union property if deemed necessary.
Implication:
o State Governments cannot impose taxes (such as property tax) on Union-owned properties or assets
unless explicitly permitted by Parliament.
o Examples: Railways, defense properties, central government offices, etc., are immune from state-
imposed property taxes.
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 2. Article 289: Exemption of State Property and Income from Union Taxation
o Clause (1): The property and income of a State shall be exempt from Union taxation.
o Clause (2): However, this exemption does not apply to any trade or business carried on by or on
behalf of the State, or any operations connected therewith.
o Clause (3): Parliament may pass laws defining the scope of this immunity.
Implication:
o Union cannot impose taxes (like income tax) on revenues earned by the State from its sovereign
functions.
o If a State engages in trade or commercial activities, the income from such activities is taxable.

Judicial Interpretations
1. State of West Bengal v. Union of India (1963):
o The Supreme Court held that Union property is immune from State taxation under Article 285.
2. New Delhi Municipal Corporation v. State of Punjab (1997):
o The immunity under Article 289(1) does not extend to taxes imposed on trade or business carried out
by a State.
3. Bombay Municipal Corporation v. State of Bombay (1951):
o It was clarified that the exemption under Article 285(1) is absolute unless Parliament expressly
authorizes State taxation.
4. Hindustan Aeronautics Ltd. v. Commercial Tax Officer (1972):
o A government-owned corporation or company conducting business operations is not immune from
taxation unless expressly covered under the immunity provisions.

Scope of Immunity
1. Union Property (Article 285):
 Absolute immunity unless Parliament authorizes taxation.
 Includes immovable and movable assets directly owned by the Union.
2. State Property and Income (Article 289):
 Sovereign functions of the State are exempt from Union taxation.
 Trade and business activities conducted by the State are taxable.
 State instrumentalities (e.g., State corporations) are typically subject to taxation for commercial activities.
3. Instrumentalities of State/Union:
 Entities like Public Sector Undertakings (PSUs), State Development Corporations, or Boards engaged in
commercial activities are generally not immune from taxation.

Exceptions and Clarifications

1. Sovereign Functions vs. Commercial Activities:
o Sovereign functions (e.g., police, judiciary, public administration) are exempt.
o Commercial activities (e.g., State-run transport corporations, power companies) are taxable.
2. Indirect Taxation:
o Immunities under Articles 285 and 289 are generally limited to direct taxes.
o For example, GST or excise duties may be imposed on goods and services provided by State or Union
instrumentalities.
3. Applicability of GST:
o Transactions involving goods or services between Union and State instrumentalities or agencies are
subject to GST unless explicitly exempted.

Rationale for Immunity

1. Federal Autonomy: Prevents financial encroachment by one level of government on the autonomy of another.
2. Efficient Functioning: Ensures that government functions are not hindered by financial liabilities arising from
taxes.
3. Clarity in Scope: Encourages distinction between sovereign and commercial functions.

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 Contemporary Issues
1. Taxation of State PSUs:
o State Public Sector Undertakings engaged in profit-making activities are taxable, often leading to
disputes about the distinction between sovereign and commercial functions.
2. GST on Government Activities:
o While certain government activities are exempt from GST, ambiguity remains regarding services
provided by State instrumentalities like transport or electricity boards.

 Fundamental Rights and the power of Taxation

Key Fundamental Rights and Their Relationship with Taxation

1. Article 14: Right to Equality
o Principle: Taxes must be non-discriminatory and adhere to the principle of equality before the law.
o Implications:
 Tax laws should not arbitrarily discriminate between individuals or groups.
 Classification for taxation purposes (e.g., different tax rates for different income slabs) must
have a reasonable nexus with the objective of the legislation.
Judicial Precedents:
o Kunnathat Thathunni Moopil Nair v. State of Kerala (1961): The Supreme Court struck down a land
tax law that imposed a flat rate of tax without considering the landowner's capacity to pay, deeming it
violative of Article 14.

2. Article 19(1)(g): Right to Practice Any Profession, Trade, or Business

o Principle: Excessive or arbitrary taxation that hampers a citizen's ability to conduct trade, business, or
profession can violate Article 19(1)(g).
o Implications:
 Taxes must not be confiscatory or oppressive.
 Reasonable restrictions may be imposed, but these must be justified under Article 19(6).
Judicial Precedents:
o State of Madras v. Gannon Dunkerley & Co. (1958): The Supreme Court held that a sales tax law
should not impose unreasonable restrictions on trade and commerce.

3. Article 265: No Tax Without Authority of Law

o Principle: A tax cannot be imposed or collected unless there is a specific legal provision authorizing it.
o Implications:
 Ensures that the legislature alone has the power to levy taxes, protecting against arbitrary
taxation by the executive.
 Taxpayers are entitled to challenge unauthorized taxes as unconstitutional.

4. Article 301: Freedom of Trade, Commerce, and Intercourse

o Principle: Taxation should not create barriers to the free flow of trade and commerce across the
country.
o Implications:
 Interstate trade must remain free from discriminatory or excessive taxation.
 Parliament may impose restrictions under Article 302 for public interest, but these must not
violate other constitutional provisions.
Judicial Precedents:

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 o Atiabari Tea Co. Ltd. v. State of Assam (1961): The Supreme Court invalidated a tax on the transport
of goods that effectively restricted interstate trade, holding it violative of Article 301.

5. Article 21: Right to Life and Personal Liberty

o Principle: Arbitrary taxation that leads to deprivation of livelihood or property can be challenged as
violating Article 21.
o Implications:
 Taxes must be reasonable and not lead to excessive deprivation of property or resources
essential for a dignified life.

6. Article 27: Freedom from Taxation for Promotion of Religion

o Principle: No person can be compelled to pay any taxes specifically for the promotion or maintenance
of any particular religion or religious denomination.
o Implications:
 Taxes for general welfare that incidentally benefit religious institutions are permissible.
 Specific levies for religious purposes are unconstitutional.
Judicial Precedents:
o Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar (1954): A
fee charged for regulation of religious institutions was held valid as it was not for promotion of
religion.

Judicial Safeguards Against Excessive Taxation

1. Proportionality: Tax laws must balance public interest and individual rights.
2. Reasonableness: The quantum of taxation must align with the taxpayer's capacity to pay.
3. Right to Judicial Review: Taxpayers can challenge tax laws or orders that violate fundamental rights.

 Scope of Taxing powers of Parliament. Delegation of taxing power to State Legislatures and Local bodies
Scope of Taxing Powers of Parliament
Parliament has wide powers to levy taxes under the Union List (Seventh Schedule):
1. Taxes Levied by Parliament:
o Income Tax (other than agricultural income) [Entry 82].

o Corporation Tax [Entry 85].

o Customs Duty [Entry 83].

o Excise Duty (excluding alcohol for human consumption) [Entry 84].

o GST on inter-state transactions (IGST) [Entry 92C].

o Taxes on capital value of assets (excluding agricultural land) [Entry 86].

2. Residual Powers of Taxation (Article 248):

o Parliament can legislate on matters not enumerated in the State or Concurrent List, including new
forms of taxes.
3. Restrictions on Parliament's Power:

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 o Article 303 prevents discriminatory taxation between states unless necessary to address scarcity of
goods.

Delegation of Taxing Power

Delegation of taxing power refers to authorizing subordinate bodies (such as State Legislatures or local bodies) to levy
taxes under specific guidelines.
1. Delegation to State Legislatures:
o Parliament may delegate certain taxing powers to States under specific laws.

o Example: Article 268 allows taxes like stamp duties and excise on medicinal preparations to be levied
by the Centre but collected and retained by States.
2. Delegation to Local Bodies:
o States delegate certain taxing powers to municipal corporations, panchayats, and other local
authorities under their jurisdiction.
o Common taxes levied by local bodies include:

 Property Tax.
 Professional Tax.
 Entertainment Tax (partially subsumed under GST).
3. Judicial Oversight:
o Delegated taxation powers must adhere to constitutional principles.

o Excessive or vague delegation is subject to judicial scrutiny.

Key Judicial Decisions

1. Atiabari Tea Co. Ltd. v. State of Assam (1961):
o Held that taxes or restrictions on the free flow of goods across states violate Article 301 unless
justified under Articles 302 or 304.
2. Automobile Transport Ltd. v. State of Rajasthan (1962):
o The Supreme Court clarified that regulatory measures like toll taxes, which facilitate trade and
commerce, do not violate Article 301.
3. Jindal Stainless Ltd. v. State of Haryana (2016):
o Reiterated the principle that Article 304(b) permits states to impose reasonable restrictions on trade
and commerce in the public interest.
Challenges in Inter-State Taxation
1. Disputes Between States:
o States often challenge taxation policies perceived as discriminatory or impacting inter-state
commerce.
2. GST Implementation Issues:
o Ensuring equitable distribution of GST revenue among States and resolving disputes over inter-state
transactions remain complex.
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3. Judicial Balancing:
o Courts play a crucial role in balancing the federal structure and ensuring that both Union and State
taxing powers align with constitutional mandates.

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