Basic Principles of Taxation Law and Provisions.

This presentation covers the fundamental principles of taxation law, focusing on the provisions within the Indian Constitution (Articles 264-289) that deal with finance, contracts, and property. It outlines the need for government finance, details the Income Tax Act of 1961, and discusses the distribution of revenues between the union and states. The presentation also delves into the structure of income tax, including its determination, exemptions, deductions, and the categorization of income. Additionally, it explores the residential status for tax purposes and distinguishes between capital and revenue receipts and expenditures.

1. Principles of Taxation Law. Introduction: PART XII of the Indian Constitution deals with the Finance, Contracts and Property. Article 264 to Article 289 (Taxation). Need: Finance for the Government: Article 246: Schedule 7 provides the 3 lists of the subjects i.e. Union, State and Concurrent. Union List: Entry 82 gave power to Union Government to levy tax on the income other than agricultural income. State List: Entry 46 give power to state government to levy tax on agricultural income. Through this came the Income Tax Act of 1961.

2. Articles 264-289 Art. 264: Interpretation: “Financial Commission which is constituted in Article 280. Art. 265: Taxes not to be imposed save by authority of law: (no tax shall be levied or collect except authority of law. (Schedule 7 th ) and should not be violative of other constitutional rights. Art 266: Consolidated funds and public accounts of India and of the states. (CF includes all revenues, all loans raise by issue of treasury bills and in repayment of loans all money received by government). (Public account includes all other public money received other than CF.) Art 267: Contingency Fund: CF of India maintained by president and finance secretary and CF of State is maintained by governor and finance secretory. These funds are to be used in emergency situations.

3. Distribution of Revenues b/w Union and States: The Provisions under article 268 to 279 relating to the distribution of taxes between union and state can be suspended by the president’s order at the time of National emergency subject to specific modification s required by order provided in 354 (1). Art 268: Stamp duties levied by the Union but collected and appropriated by the States. It includes stamp duties on bills of exchange, cheques and promissory notes as levied by the Govt of India. It proceeds in any financial year of any such duty leviable within any state shall not form part of the consolidated fund in India and appropriated by the same state except UT in which it was levied. All the decisions regarding levying and appropriation of these duties rest with the central govt as it forms a part of the union list.

4. Art 269: Taxes levied and collect by the Union but assigned to State. Taxes on the sale or purchase of goods and the consignment of goods (exp 269A) shall be levied and collected by the Govt of India but shall be assigned and shall be deemed to have been assigned to the states on or after 1 st April 1996. (not in cf ) Art 270: Taxes levied and distributed between union and the states. All the duties and taxes mentioned in the union list except 268,269 and (A) shall be levied and collected by the govt. of India and distributed between union and states. Art 271: Cess and Surcharge: Basically a double tax i.e. tax on tax. Cess is a sub tax for a specific purpose and the amount goes to CF of India. And supercharge is not levied for specific purpose but on high income groups.

5. Art 274: Prior recommendation of president required to bills affecting taxation in which states are interested. Article 275: Grants in aid: the constitution has provisions for sanctioning grants to the states or other units and goes to CF of India and authority to grant is with the parliament. Union to State and Panchayat. Article 276: this article talks about the taxes that are levied by the state govt, governed by the state government and taxes are also collect by the same. Art 277: Savings: any taxes cesses, feeds or duties which were levied immediately before the commencement of the constitution by any state govt or local body for purpose of state despite being mentioned in union list can continue to be levied and applied for the same purposes until a new law contradicting it has been passed by the parliament.

6. Art 279: this articles deals with the calculation of net proceeds i.e. amount of money received from deducting all cost and expenses associated with the transaction. 279 (A): constitution and composition of GST Council by President. Art 280: Financial Commission of India It is the main agency to resolve the fiscal disputed between state and centre as it relates to finances between centre and state. It is an example of Cooperative federalism and is a quasi judicial body. Composition: 1 Charmain and 4 members appointed and decided by president. Functions: To make recommendations to the president for the distribution or allocation of net proceeds to tax b/w centre and state. To establish principles governing the payment of grants in aid to states from the CF of India. To suggest the necessary measures to increase the CF of State for development of Panchayats in the state on the basis of recommendation made by finance commission. The President of India can also refer any other matter to then in interest of building financial system.

7. Art 281: Recommendations of Financial Commission. The president shall cause every recommendation made by the FC under provisions together with an explanatory memorandum as to the action taken there be laid in each house of parliament. Art 282: Union or State may make any grants for any public purpose. Art 283: receiving and using of the Consolidated Funds of State and Centre. Art 284: any received money by court or officer in connection with affairs to be paid in the public account of India or respective state. Doctrine of Intergovernmental Tax Immunity Art 285 and 289 Art 285: Exemption of Central Property from state taxation is void. But corporations and companies by Government doesn’t get immunity because they are a different entity. Indirect tax is being imposed cuz its not applied through 289 and 285. Art 289: Exemption of State Property or Income from Central Taxation. Parliament can change

8. Art. 286: This article restricts the power of the State to tax 1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the territory of the state. 2) Only parliament can lay down principles to ascertain when a sale/purchase takes place during export or import or outside the state. 3) Taxes on sale/purchase of goods at are of special importance can be restricted by the parliament and the State Govt can levy taxes on these goods of special importance subject to these restrictions. Art. 287: Exemption from taxes on electricity. Art. 288: Exemption from taxation by States in respect of water or electricity in certain cases.

9. Scope of Tax Law: 1. Types of Taxes. 2. Constitutional Provisions. 3. Centre and state relation. 4. Administrative Bodies: Central Board of Direct Tax and Central board of indirect taxes and customs. 5. Tax reforms: GST 6. Judicial Interpretations: ITAT and CESTAT (Customs, Excise and Service tax appellate Tribunal) Tax and Fees: Tax is a compulsory financial charge or levy imposed by a government on individuals, business or other entities whereas fees is a charge levied for a specific server provided to individual.

10. Scope of Tax Law: 1. Types of Taxes. 2. Constitutional Provisions. 3. Centre and state relation. 4. Administrative Bodies: Central Board of Direct Tax and Central board of indirect taxes and customs. 5. Tax reforms: GST 6. Judicial Interpretations: ITAT and CESTAT (Customs, Excise and Service tax appellate Tribunal) Tax and Fees: Tax is a compulsory financial charge or levy imposed by a government on individuals, business or other entities whereas fees is a charge levied for a specific server provided to individual.

11. Revenue Receipt Capital Receipt Recurring Non recurring. Receipts which don’t impact asset- liablity status of government Impact on asset-liability status of government Do not leave any burden government. Taxes Leave burden on government. (borrowings) Shows good financial health Shows bad financial health Increase incomes Increases liability

12. INCOME TAX ACT 1961 Background: Income tax was first introduced in India in 24 th 1860 by the British Ruler Sir James Wilson ( who latter become finance member) in order to meet heavy expenses and losses suffered by the ruler due to India's first freedom movement of 1857. it was first introduced as a temporary revenue measure only for 5 years. Four Categories of Income: Salary and Pension. Interest on securities Income from land and property including agriculture income. Income from business and profession.

13. Then came Income Tax Act 1886: Aim was to make the income tax a permanent and main source of government revenue. Feature: Agriculture income exempted. Profits of company were taxed at flat rate of 10 %. Amended in 1903,1916,1917 in which the super tax was imposed above Rs.50,000. ITA 1922: From Chelmsford reforms made distinction between functions and resources of the state and central government and IT become primary income source. Feature: Tax rates were to be fixed by the finance act to be passed every year. Principle of assessment of previous year’s income during the current year was accepted. From 1939 slab system start.

14. Income Tax Act 1961: 1 st April 1962 and applies to whole India. The ITA 19611 is a comprehensive set of laws that overseas the various tax rules and regulations in the country. It ensures that every year taxes are timely and rightly levied, collected, administered and recovered for Indian Govt. 23 chapters and 298 sections.

15. Concept and Mechanism of Income Tax: Income tax is a direct tax levied on the taxpayer's total income for a specific financial year. The Act outlines a structured process for determining and collecting this tax: Income Determination : The Act categorizes income into various heads (salary, business income, capital gains, etc.) with specific provisions for each. You need to identify the taxable income under the relevant head(s). Heads of Income : These are exhaustive, meaning all taxable income must fall under one of the five heads mentioned in Section 14 of the Act. Exemptions: The Act provides exemptions from tax for specific types of income (e.g., agricultural income, scholarships). Deductions: The Act allows for deductions from gross income for expenses incurred while earning that income. These deductions reduce the taxable income base. Sections 30 to 37 : These sections detail allowable deductions for various expenses incurred in relation to specific heads of income (e.g., travel allowance for salaried individuals, depreciation for business assets). Tax Rates : The Act prescribes tax slabs with varying rates applicable to different income levels. These rates are subject to change through Finance Acts passed annually. Tax Payment: Taxes are paid in advance (Tax Deducted at Source - TDS) or directly to the government after calculating the final tax liability

16. Income (Section 2(24)): While not explicitly defined, income generally refers to any monetary benefit or gain received during the year. Different sections define income under specific heads (salary in Section 15, business profits in Section 28, etc.). Previous Year (Section 3): The financial year preceding the assessment year. For instance, the previous year for the assessment year 2024-25 is the financial year 2 Assessment Year (Section 2(38)): The year in which the income earned in the previous year is assessed for tax purposes. For example, income earned in the financial year 2023-24 is assessed for tax in the assessment year 2024-25.

17. . Distinction between Capital and Revenue Receipts and Expenditure (Remember, these impact taxability): Capital Receipts: These are receipts that result in an increase in the net worth of an asset without reducing its value. They are generally not taxable. Examples: Inheritance, sale of a capital asset (held for more than a specific period). Revenue Receipts: These are receipts that arise from the ordinary course of business or profession and reduce the taxpayer's wealth. They are generally taxable. Examples: Salary, business profits, interest income. Capital Expenditure: Expenditure incurred to acquire or improve a long-term asset. It's usually not deductible as it increases net worth. Examples: Purchase of land, machinery for a business. Revenue Expenditure: Expenditure incurred in earning income. These are generally deductible. Examples: Business expenses like rent, travel costs.

18. Residential Status: 1. Special Category: (Condition must be in India for period of 182 days.) an individual leaving the country in previous year an individual visiting India in the previous year. an individual who is member of crew in a ship. 2. General Category: Basic Conditions: 182 days in previous years and at least 60 days in the pre year and 465 days in previous 4 yrs. Additional Conditions: at least 2 out of 10 previous years and at least 730 days in previous 7 years.

19. Basis of Charge Sec 4: 1. Income tax is an annual tax on income. 2. Tax is charged on every persons ( individual, Hindu undivided family, firm, association, local authority etc ). 3. Income of the previous year is charged to tax in immediately following year at the tax rates applicable for the assessment year. Scope of Total Income: Total Income means income received in India or deemed to receive in India, Income accrue or arise in India or deemed to accrue or arise in India, Income which accrue or arise out side India. IN NRI case: income received in India or deemed to receive in India, Icome accrue or arise in India or deemed to Accrue or Arise in India.

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