History and evolution of Indian Taxation Laws (1).pptx

Tax law and Income tax history of India

1. Taxation Laws Dr Shailendra Kumar

2. EVOLUTION OF TAXATION IN INDIA Tax is a compulsory payment to state by its citizens to increase general welfare level of people. Taxation is always an integrated part of every system of governance in India viz. monarchy, republic and modern democratic system. Taxation is found in ancient India as it described by Manusmriti and Arthasastra . Present Indian tax system is based on ancient tax system which was based on the theory of maximum social welfare

3. As Mahabharata (XII 88, 7-8) in Shantiparva reported “the king should gather the tax from the state in the manner as the bees collects honey without hurting the flower.” Kautilya's concept of taxation emphasized on two basic cannon of taxation i.e. equity and justice. The affluent had to pay higher taxes as compared to the poor. The text also explained that taxes should be levied at the proper time, place and form, and realized in a pleasing manner as the calf suckles the udders of the mother

4. Manusmriti , is very basic of current tax administration. A rule was laid down that traders and artisans should pay 1/5th (20%) of their produce in silver and gold, while the agriculturists were to pay 1/6th (~16.5%), 1/8th (~12.5%) and 1/10th (10%) of their produce depending upon their circumstances. Arthasastra mentioned that each tax was specific and there was no scope for arbitrariness. Tax collectors determined the schedule of each payment, and its time, manner and quantity being all pre-determined like modern sophisticated tax system. Taxes were fixed as- 1/6th (16.5%) share of total produce in the form of land revenue. Import and export duties were determined on ad-valorem basis. The import duties on foreign goods were roughly 20% of their value. Similarly, tolls, road cess , ferry charges and other levies were all fixed.

5. Sultanate Period tax on land was major source of revenue for state in sultanate period which called kharaj . It was levied at the rate of 1/5 th share of total produce during the reign of Ala- Ud -Din Khilzi which was further increased to ½ of the produce in the time of Muhammad Tughlak . The sultanate also demanded fawazil , which was any surplus revenue into royal treasury. Instead of this sultans had a khalisa - a certain areas which were under direct control of sultans. One of the different kind of tax known as Zazia was imposed in medieval India which was paid by NonMuslims . Its rate was varied according to tax payer’s income.

6. Mughal Period Taxation in Mughal period was systemized, but there was no universal tax system. Although even at that time the land tax was a central fact of Indian economy. It was ½ of the total produce. The magnitude of the taxes varied with the productivity and minimum cost of peasant subsistence in the different region of the empire. The land tax was known as mal or kharaj which was set as a portion of crop after harvest

7. Taxation System in British India Zamindari system- Lord Cornwallis introduced Zamindari System in 1793 through Permanent Settlement Act that is it is called Permanent Settlement. It was introduced in provinces of Bengal, Bihar, Orissa and Varanasi. Zamindars, who were the owner of the lands, were given the rights to collect the rent from the peasants. The realized amount would be divided into 11 parts. 1/11 of the share belongs to Zamindars and 10/11 of the share belongs to East India Company

8. Ryotwari System This System was introduced by Thomas Munro in 1820 in Madras presidency, Bombay presidency, and parts of Assam and Coorgh provinces of British India. In Ryotwari System the ownership rights were handed over to the peasants. Taxes to government were given by peasants, directly. The tax rates were 1/2th where the lands were dry and 3/5th in irrigated land of total produce

9. Mahalwari system It was introduced in Central Province, North-West Frontier, Agra, Punjab, Gangetic Valley, etc of British India in 1833 during the period of William Bentinck. In this system, the land was divided into Mahals. Each Mahal comprises one or more villages. Ownership rights were vested with the peasants. The village committee was held responsible for collection of the taxes

10. Salt tax . In 1835, special taxes were imposed on Indian salt to facilitate its import. This paid huge dividends for the traders of the British East India Company. The stringent salt taxes imposed by the British were vehemently condemned by the Indian public.

11. The Establishment of Income Tax in Modern India The first Income Tax Act in India was introduced by James Wilson which came into force on 24th July 1860 with the approval of The Governor General. It was a tax selectively imposed on the rich royalty and Britishers. The act lapsed in 1865 and was reintroduced in 1867. Later, Governor General Lord Dufferin introduced a comprehensive Income Tax Act in 1886 with the purpose of collect more revenue to fight AngloRussian war. It was combination of License Tax and Income Tax. Taxes were collected in the same manner as land revenue. The most comprehensive Income Tax Law was the Income Tax Act of 1922. 1919 Chelmsford reforms made a distinction between the functions and resources of the state and the Central Govt. and Income Tax became a primary source of revenue for the central Government.

12. In India ,this tax was introduced for the first time in 1860,by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. Thereafter ,several amendments were made in it from time to time. In 1886,a separate Income tax act was passed. This act remained in force up to, with various amendments from time to time. In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 has been brought into force with 1 April 1962

13. What is Tax? Compulsory monetary contribution to the states revenue, assessed and imposed by a Government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc of individuals and organizations. Tax is imposition of financial charge or other levy upon a taxpayer by a state or other the functional equivalent of the state

14. Definitions Selingman : ‘Tax means a compulsorily collected donation from public which is used for the benefit of all. Tax does not cater to individual needs’ Taylor : ‘Tax means a compulsory donation by public without any direct benefit for such donation’. Dr. Dalton : ‘Tax is mandatory liability and it does not resemble any reciprocal or proportionate benefit’

15. Income tax Annual charge levied on both earned income (wages, salaries, commission) and unearned income (dividends, interest, rents). In addition to financing a government's operations, progressive income taxation is designed to distribute wealth more evenly in a population and to serve as automatic fiscal stabilizer to cushion the effects of economic cycles.

16. . Its two basic types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of incorporated firms. However, presence of tax loopholes (whose number increases in direct proportion to the complexity of tax code) may allow some wealthy persons to escape higher taxes without violating the letter of the tax laws

17. Jagannath Ramanuj Das v/s State of Orissa AIR 1954 Supreme Court held “a tax is un- doubtly in nature of a compulsory exaction of money by public authority for public purpose” Income: Income is money that an individual or business receives in exchange for providing a good or service or through investing capital

18. Types of taxes Direct Tax : A direct tax is really a tax which is paid by a person on whom it is legally imposed and the burden of which cannot be shifted to any other person is called a direct tax. For example - Income Tax, Wealth Tax, etc. Direct tax is paid by an individual directly to the government. A taxpayer cannot transfer this liability to another entity or person. The Central Board of Direct Taxes (CBDT), which is governed by the Department of Revenue, administers direct taxes in India. CBDT also contributes to the planning stages concerning the implementation of direct taxes.

19. Indirect Tax : The taxes in which the burden is passed on to a third party are called Indirect Taxes. For example - Service Tax, VAT, Excise duty, Custom duty, etc. An individual pays indirect tax to the government but through an intermediary. This intermediary then passes it on to the government. The Central Board of Indirect Taxes and Customs (CBIC) is responsible for administering indirect taxes in India. The Department of Revenue governs the CBIC as well.

20. Progressive, regressive and proportional taxes Taxes differ according to their impact on different income groups. Some taxes will redistribute from better-off groups to less well-off and these are called progressive taxes. However, others will have the opposite effect and these are called regressive taxes Progressive tax - a tax that takes a greater proportion of a person's income as their income rises. Regressive tax - a tax that takes a smaller proportion of a person's income as their income rises. Proportional tax - a tax where the percentage of income paid in taxation always stays the same

21. Distinction between tax and fee, tax and cess , Tax is the compulsory pecuniary payment made by the citizens to the state without any quid pro quo. The amount collected by the state is used for providing common amenities to the society at large and also used to meet its administrative expenses. Eg.Income tax, Sales tax,Property tax etc Cess is also a tax levied by the government from its subjects to meet specified expenses or for specific purposes. Eg. Education cess , petroleum cess , cess on Income tax etc Fees means the charge or rate levied by the government from people who use such services provided by the government. Eg. Toll on roads and bridges, registration fee, court fee etc

22. Hindu Religious Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, AIR 1963 SC 966 , the distinction between a tax and a charge was first addressed. The Supreme Court ruled that a tax constitutes a fee in this case when, firstly, the money obtained through the levy is related to the costs incurred by the government in providing the service. Therefore, a quid pro quo component is required . Second, the money raised must be explicitly designated for the costs the government incurs in providing the services and not combined with the Consolidated Fund

23. Mahant Sri Jagannath Ramanuj Das v. State of Orissa, AIR 1954 SC 400 where it was held that the fee must be the consideration for certain services which the individuals received , and it must not be merged in the general revenue of the State to be spent for general public purposes

24. Cess is a form of tax charged/levied over and above the base tax liability of a taxpayer. A cess is usually imposed additionally when the state or the central government looks to raise funds for specific purposes. Different from the usual taxes and duties like excise and personal income tax, a cess is imposed as an additional tax besides the existing tax (tax on tax). The government imposes cess charges on taxes like income tax, GST, excise duty, etc., which constitutes the basic difference between cess and tax. For example, the Swachh Bharat cess is levied by the government for cleanliness activities that it is undertaking across India. Cess is to be discontinued once the objective is met. If a person’s income comes under the non-taxable slab of the Income Tax taxation slab, they are not required to pay the cess amount

25. health and education cess in the 2018 Union Budget. It is levied on your income tax to meet the educational and health needs of people belonging to the BPL (below poverty line) category. The Union Government takes initiatives to improve educational infrastructure and quality through digitalization, appoints qualified teachers, develops school buildings. Government used to levy a 3% education cess on income tax. However, from FY 2018-2019, a 4% of cess is levied for improvement of health and education services.

26. construction workers’ welfare cess is implemented under sections 3(1) and 3(3) of the Building and Other Construction Workers’ Welfare (BOCWW) Cess Act, 1996. As per the provisions, employers need to pay 1% of the construction cost to the Government . Cess on Crude Oil, Natural gas and crude oil produced from domestic oil blocks are subjected to ad valorem cess . The Central Government imposes a 20% cess on crude oil and natural gas for the development oil industry.

27. differences between tax and cess Government collects taxes to fund multiple employment schemes and welfare programs. However, cess is charged against a particular improvement or development program and the amount collected from cess is strictly to be used for that purpose. If the amount goes unspent for a particular year, it is carried forward to the next financial year. There are certain taxes that the Central Government needs to share with the state government. However, in the case of a cess charge, this rule is not applicable. Government can easily introduce and abolish cess charges, but general taxes need IT law amendments for initiation.

28. Income Tax (concept) Income tax is tax on income. Income tax is a central subject according to the Constitution of India. Income tax is a very important direct tax. It is an important and most significant source of revenue of the Government. The government needs money to maintain law and order in the country; safeguard the security of the country from foreign powers and promote the welfare of the people. It is the foremost duty of the government to bring out such welfare and development programmes which will bridge the gap between the rich and the poor. For this purpose, mobilization of funds from various sources is required

29. Objectives of Income Tax To reduce inequalities in the distribution of income and wealth. To bring out equity between classes of tax payers. To accelerate the economic growth and development of country. To make available of funds for economic development. To encourage investment in new capital goods. To channelize investment into those sectors which contribute the most economic growth

30. Neutrality: In many ways the market system works well. Adam Smith’s invisible hand provides the consuming public with a steady flow of goods and services. As a starting point, there­fore, a tax system should be designed to be neutral. That is, it should disturb market forces as little as possible.

31. Non-Neutrality: There is, however, an important modification that must be made to the neutrality principle. In some cases it may be desirable to disturb the private market. The government might tax polluting activities so that firms will do less polluting.

32. Equality: Taxes represent both sacrifice and com­pulsion. Therefore, it is important that taxes be both fair and give the appearance of being fair.

33. Efficiency: Compliance costs to business and administration costs for governments should be minimized as far as possible. Certainty and simplicity: Tax rules should be clear and simple to understand, so that taxpayers know where they stand. A simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements. As a result, businesses are more likely to make optimal decisions and respond to intended policy choices. Complexity also favours aggressive tax planning, which may trigger deadweight losses for the economy.

34. Flexibility: Taxation systems should be flexible and dynamic enough to ensure they keep pace with technological and commercial developments Effectiveness and fairness : Taxation should produce the right amount of tax at the right time, while avoiding both double taxation and unintentional non-taxation. In addition, the potential for evasion and avoidance should be minimised .

35. T wo prin­ciples for judging fairness The Benefit Principle: This principle recognizes that the purpose of taxation is to pay for government services. Therefore, those who gain the most from government services should pay the most. If the govern­ment follows the benefit principle of taxation it must estimate how much various indivi­duals and groups benefit and set taxes accor­dingly The Benefit Principle simply holds that different individuals should be taxed in proportion to the benefit they receive from government programmes . Just as people pay money in proportion to their consumption of private bread, a person’s taxes’ should be related to his (or her) use of collective goods like public roads or parks. Those who receive numerous benefits should pay more than those who receive few. However, this principle is difficult to apply in practice and it is normally observed that those who receive the maximum benefit from public expenditure pay very little — if any — tax. So another principle of taxation has been developed.

36. The Ability-to-pay Principle The principle that states that individuals should pay taxes according to their ability to pay. If the government sets taxes according to this benefit principle it does not redistribute income. But if it sets taxes according to ability to pay, the rich should pay more than the poor. The ability-to-pay principle simply states that the amount of taxes people pay should relate to their income or wealth. The higher the wealth or income, the higher the taxes. Usually tax systems organized along the ability-to-pay principle are also redistributive, meaning that they raise funds from higher-income people to increase the incomes’ and consumption of poorer groups. An individual who earns Rs. 50,000 per month is able to pay more taxes than an individual who earns Rs. 2,500 per month If the government levies a progressive tax on income and wealth and, at the same time, provides assistance to poor people, it would substantially redistribute income from the rich to the poor

37. C anons of taxation Canon of Ability: The State is necessary for all—rich and poor. Without the State, nobody’s life or property is safe. So everyone is required to pay taxes to meet the expenses of the State. But a person who earns Rs. 50,000 a year has not the same taxable capacity as the person who earns Rs. 10,000 a year. The canon of ability states that a person should be made to pay taxes according to his ability to pay. If everyone pays according to his ability, there is equality of sacrifice. So this rule of Adam Smith is also known as the canon of equity

38. Canon of Certainty: The principle of certainty requires that the tax which every individual has to pay should be certain and not arbitrary. “The time of payment, the amount to be paid ought all to be clear and plain to the contributor and to every other person.”

39. Canon of Convenience : The time and manner of tax payments should be made as convenient to tax-payers as possible. The Pay- As-You-Earn (PAYE) method of collecting personal taxation under which an employer deducts tax on behalf of employees and pays it to the Finance Department is a good example of this quality. For this reason, the salaried persons are taxed at the source, that is at the source of income. Some taxes are collected by installments so as to make it convenient for the tax-payer to make the payment in small amounts. On the other hand, self-employed people and companies have to put aside money reserves to pay the tax when they are assessed

40. Canon of Economy : According to Smith again — “every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the State.” A tax whose collection involves high expenditure should be avoided. Taxes should be levied in such a way as to minimize the cost of collection in terms of resources collected. In modern times two other canons of taxation are also recognized as beneficial

41. Canon of Elasticity: A tax should be sufficiently elastic in yield. The amount of tax ought to be so contrived that it can be varied according to the needs of the government. For instance, the rate of income tax is variable. In modern times, all taxes and their rates can be varied. The rate of income tax is liable to be changed according to the changes in the level of income of the people. The land revenue is, however, fixed for a period. It is not liable to be changed as is possible in the case of income tax. In case of crop failure, the government can, of course, grant remission.

42. Canon of Productivity : All taxes should be productive. It is better not to impose a tax whose yield is negligible. The canon of pro­ductivity implies that taxes should be imposed in such a manner as not to hamper production or to decrease the volume of resources collected. In other words, the levy of a tax should not only increase the income of the State, it must not also destroy the incentives of the people to undertake productive enterprises.

43. Legislative framework of taxation in India under the Indian Constitution India has a three-tier federal structure, comprising the Union Government, the State Governments and the Local Government. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. Power to levy and collect taxes whether, direct or indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order is not in conformity with the Constitution, it is called ultra vires the Constitution and is illegal and void.

44. Article 245 in Constitution of India 245. Extent of laws made by Parliament and by the Legislatures of States (1)Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State. (2)No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. 265. Taxes not to be imposed save by authority of law.—No tax shall be levied or collected except by authority of law

45. 265. No tax shall be levied or collected except by authority of law. Distribution of Revenues between the Union and the States 268. (1) Such stamp duties and such duties of excise on medicinal and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected. (a) in the case where such duties are leviable within any [Union territory], by the Government of India, and (b) in other cases, by the States within which such duties are respectively leviable.

46. 270. (1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268 and 269, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2)

47. Freedom as to payment of taxes for promotion of any particular religion. Fundamental right. Article 27. No person shall be compelled to pay any taxes, the proceeds of which are specifically appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination.

48. Every person , whose taxable income for the previous financial year exceeds the minimum taxable limit , is liable to pay income tax to the Central Government during the current financial year on the income of the previous financial year at the rates in force during the current financial year

49. under section 2 (24) "income" includes ( i ) profits and gains; (ii) dividend; (iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17; ( salary) perquisite, profits (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;

50. (v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59; (s28, profits or gain out of business or profession , trade, profession association,(S41 loss expenditure or trading liability (vi) any capital gains chargeable under section 45 (vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule

51. Previous year Sec. [3. “Previous year” defined.—For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment year: Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. ( 1999) The Financial Year in which the income is earned is known as the previous year. Any financial year begins from 1st of April and ends on subsequent 31st March. The financial year beginning on 1st of April 2003 and ending on 31st March 2004 is the previous year for the assessment year 2004-2005.

52. Assessment Year Sec 2 (9) “assessment year” means the period of twelve months commencing on the 1st day of April every year; Assessment year means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act.

53. Residential Status (42) “resident” means a person who is resident in India within the meaning of section 6; (30) “non-resident” means a person who is not a “resident” [, and for the purposes of sections 92, 93 9 and 168, includes a person who is not ordinarily resident within the meaning of clause (6) of section 6;

54. Sec. 6. Residence in India (1) An individual is said to be resident in India in any previous year, if he (a) is in India in that year for a period or periods amounting in all to one hundred and eighty two days or more; (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year. Ref: https://www.icai.org/post/13752

55. Income Tax Law has classified the residential status into three categories Categories which classified the residential status of an individual Resident (ROR) Resident but Not Ordinarily Resident (RNOR) Non Resident (NR)

56. 1. Resident (ROR) If he/she stay in India for a period of 182 days or more in a financial year , or He/ She is in India for a period of 60 days or more in a financial year and If he/she stays in India for a period of 365 days or more during the 4 years immediately preceding the previous year . Section 6(6) of Income Tax Act, 1961 there are following two conditions when an individual will be treated as the “Resident and Ordinarily Resident ” (ROR in India As per Section 6(6) of Income Tax Act, 1961 there are following two conditions when an individual will be treated as the “Resident and Ordinarily Resident” (ROR in India. If He/ She stays in India for a period of 730 days or more during the 7 years of preceding previous year. If He/ She stays in India for at least 2 out of 10 previous financial years which is preceding the previous years. If the individual doesn’t satisfy either of the condition, then he is not eligible as Resident and Ordinarily Resident (ROR) and will be known as not ordinarily resident

57. 2 Resident but Not Ordinarily Resident (RNOR) An individual will be treated as RNOR In a financial year if an individual stays in India for a period of 182 days or more ; Or He/ she stays in India for a period of 60 days in a financial year and 365 days or more during the 4 previous financial years Resident but Not Ordinarily Resident (RNOR) should satisfy one of the basic condition  If He/ She stays in India for a period of 730 days or more during the 7 preceding financial year or; If He/ She was a resident of India for at least 2 out of 10 in the previous financial year.

58. 3. Non – Resident (NR) Individual will be qualified for Non Resident (NR) if He/ She satisfies the following conditions In a financial year if an Individual stay in India for less than 181 days and In a financial year If an Individual stay in India for not more than 60 days If an Individual stay in India which exceed 60 days in a financial year but doesn’t exceed the 365 days or more during the 4 previous financial years

59. Basis of Charge Sec 4 Section 4 of the Income Tax Act, 1961 is an essential provision that lays down the foundation for the taxation of income in India. This section defines the scope of taxable income under the Income Tax Act and is critical in determining the liability of taxpayers. Section 4 of the Income Tax Act, 1961 provides for the charge of income tax on the total income of a taxpayer. The section lays down the scope of taxable income, which includes all income from whatever source derived, subject to certain exemptions and deductions. This means that all sources of income, including salary, business income, capital gains, and other sources of income, are subject to taxation under this section

60. Scope of Total Income Sec.5

61. The word “Income” has a very broad and inclusive meaning. In case of a salaried person, all that is received from an employer in cash, kind or as a facility is considered as income. For a businessman, his net profits will constitute income. Income may also flow from investments in the form of Interest, Dividend, and Commission etc. Infect the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into five different heads, such as: Income from Salary Income from House property Income from Business or Profession Income from capital gains Income from other sources Therefore to levy income tax, one must have the understanding of the various concepts related to the charge of tax like previous year, assessment year, Income, total income, person etc. which is discussed in detail in the following secti

62. Sales Tax