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A Brief Study on: Tax Laws in India

The system of taxation is the backbone of a nation's economy which keeps revenue consistent, manages growth in the economy, and fuels its industrial activity. India's three-tier federal structure consists of Union Government, the State Governments, and the Local Bodies which are empowered with the responsibility of the different taxes and duties, which are applicable in the country. The local bodies would include local councils and the municipalities.

The government of India is authorized to levy taxes on individuals and organisations according to the Constitution. However, Article 265 of the Indian constitution states that the right to levy/charge taxes hasn't been given to any except the authority of law. The 7th schedule of the constitution has defined the subjects on which Union/State or both can levy taxes. As per the 73rd and 74th amendments of the constitution, limited financial powers have been given to the local governments which are enshrined in Part IX and IX-A of the constitution.

Definition of Tax:
A tax may be defined as a monetary burden rested upon individuals or people with property to help add to the government's revenue. Tax is, therefore, a mandatory contribution and not a voluntary payment or donation which one decides on one's own. It is a payment exacted by the legislative authority. It may be direct tax or indirect tax. Revenue growth which may be a little faster than GDP (Gross Domestic Product) can result from revenue mobilization with an effective tax system and measures.

The government uses this tax to carry out functions such as:
  • Social welfare projects like schools, hospitals, housing projects for the poor, etc.
  • Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
  • Security infrastructure of the country such as military equipment
  • Enforcement of law and order
  • Pensions for the elderly and benefits schemes to the unemployed or the ones below the poverty line.
Types of Tax laws in India:
The two types of taxes in India are Direct and Indirect taxes. One of the biggest and most successful tax reforms in India is the GST(Goods and Services Tax). It assists as a comprehensive indirect tax which helps in eliminating the flowing effect of tax as a whole.
  1. Direct Tax
    It is a tax imposed on corporate units and individual people. It is a type of tax that can't be moved or accepted by anyone else. Direct tax examples are wealth tax, income tax, gift tax, etc. In the Ministry of Finance, the Central Board of Direct Tax (CBDT) is a part of the revenue department. This board has a two-fold role that gives important ideas, significant inputs of planning, and policies to be implemented regarding direct tax in India. The management of direct taxes which is done by the Income Tax department is helped by the Central Board of Direct Taxes in doing so.
  2. Indirect Tax
    Taxes that are indirectly imposed on the public through goods and services are called indirect taxes. The government bodies collect taxes from people who sell goods and services. When a good or product is sold in a state, then a sales tax is levied on it and its rate is decided by the government, this is called Value Added Tax (VAT).

    Formulation of the policy regarding duty, collection of custom excise duty and service tax is dealt with by the Central Board of Excise and Custom (CEBC)

    The Central Board of Excise and Custom was given a new name which was the Central Board of Indirect tax and Custom (CBIC) after GST came into force. Its key role is to help the government in formulating policies related to GST.
  3. Custom Duty
    The customs duty is collected on all goods entering the country to ensure that they are taxed and paid for. It is levied on both export and import of goods and is important in regulating trade as well as being a source of revenue to the government.
  4. Excise Duty
    This is a commodity tax in the true sense as it is levied on the production of goods and not on its sales. It is levied by the Central Government but for alcohol/liquor and narcotics/drugs. Unlike custom duty, this applies only to goods produced in India. It is also called the Central Value Added Tax (CENVAT).
  5. Service Tax
    Here the product taxed is a service. In India, service tax was initially on the services of telephone, share broking, and general insurance. This circle includes far more services since then and now it has been replaced by a consolidated Goods and Service tax.
  6. Value Added Tax
    This tax was introduced because of India's indirect tax structure being weak that created quite a stir. Value Added tax has a self-monitoring means which makes the administration of this tax simple. VAT is applicable in India in All-Union Territories and States except for the Union Territories of Andaman and Nicobar and Lakshadweep.
  7. GST
    After GST came into force, direct and indirect taxes were collected by the three bodies of the government until 1 July 2017. Various indirect taxes which were imposed by the central and state government are incorporated by GST. Both the central and state government collect indirect tax through the intrastate supply of goods and services.

Scope of tax law in India
Taxability of income in India depends on a person's residential status.

For tax purposes, the residential status of an individual is classified as:
  • Ordinarily Resident
  • Not Ordinarily Resident
  • Non-Resident

Taxability of Ordinary Resident (OR)
Ordinary Residents are chargeable to tax in India in respect of their worldwide income. This includes even foreign income even if it is not received or brought into India. There is no escape from taxability in India even if the remittance of income is restricted by the foreign country.

Non-residents are chargeable to tax in India on the following "Indian source incomes":
  • Income received1 in India, whether earned in India or elsewhere;
  • Income deemed to be received in India, whether earned in India or elsewhere;
  • Income which accrues or arises2 in India, whether received in India or elsewhere;
  • Income which is deemed to accrue or arise in India, whether received in India or elsewhere.
Taxability of Non-Resident (NR
  1. Income is said to be received when it first reaches the person.
  2. Income is said to accrue or arise when the right to receive the income becomes vested in the person and such income must be due to the person.
NR can, however, claim the beneficial provisions of the Indian Income tax law or the applicable Double Taxation Avoidance Agreement, in order to avoid possible double taxation.

Taxability of Resident Not Ordinarily Resident (NOR)
The NOR status is unique to India. No other country has such an intermediate residential status. The NOR residential status is mainly intended as a relief from taxability during the transitory period from NR

Not Ordinarily Residents are chargeable to tax in India on the following incomes:
  • Indian source income;
  • Income which accrues or arises outside India from business controlled / profession set up in
As compared to an NR, NOR is additionally chargeable to tax in India in respect of their income accruing outside India from a business controlled from India or from a profession set up in India. The expression 'business controlled in India' means that the 'head and brain' of the business - the controlling power - should be situated in India and should direct the business activities from India.

Thus, foreign passive incomes like interest, dividend, royalty etc. would not be taxable in India for a person who is NOR. Even share of profit of a partnership firm or any other business income would not be taxable in India, if the business in respect of which such income arises is not controlled from India.

If business is controlled from India, then the income is taxable in India. In other words, all foreign sourced income of a NOR is normally not taxable in India unless it is derived from a business controlled in or a profession set up in India.

Tax resources distribution between union and state:
The importance of such a distribution is very clear, as with the distribution only, Government will come to conclusion as how has been distributed to each states and how much it should be kept in consolidated fund of India to meet future needs. So, it's very important to see that equal distribution is made of revenues with respect to their contribution.

Distribution of revenues thus, leads to clarity and leaves no scope for any confusion. With the help of distribution, we meet justice. Also, the relationship between center and state grows and the Government doesn't go only unitary but equal participation of State is also there in colleting taxes. So, distribution of revenue leads to a better form of Government as the provisions with regard to distribution can be changed according to needs and circumstances if any conflicts between the distributions arise.

There are few Articles in the Indian Constitution which specifically focuses on distribution of revenues.

Article 269: Taxes levied and collected by the Union but assigned to the States:
Sub-clause (1) of Article 269
Article 269(1) includes all the taxes on the "sale or purchase of goods" and "taxes on the consignment of goods" except those included in Article 269 A. These taxes are assigned to States as provided by the law but are collected and levied by the Government of India.

  1. The expression "taxes on the sale or purchase of goods" does not imply on all kinds of trade but essentially refers to the taxes that are levied on inter-state sale or purchase of all kinds of goods except newspapers.
  2. The expression "taxes on the consignment of goods" refers to tax duty levied on the consignment of goods when happening in the course of Inter-state trade. It includes both the cases even when the consignment is to the person making it or to any other person.

It may include:
  1. Succession Duty
  2. Central Sales Tax
  3. Estate Duty etc

Sub-clause (2) of Article 269
Article 269(2) lays down that the revenue obtained from such tax is distributed between states (except in case of Union territories where it goes to the central government), It does not form the part of the consolidated fund of India. The manner of the distribution is to be prescribed by the Parliament.

Sub-clause (3) of Article 269
Article 269(3) further explains that the parliament has the power to define the scope of what constitutes the sale, purchase or consignment of goods in the course of inter-State trade or commerce.

Article 269 (A) - Positions in GST Regime
With the latest 101st Amendment a new article 269 A was inserted which brought some considerable changes.

Sub-clause (1) of Article 269
Article 269A (1) basically involves the following aspects:
  1. Levying and collection of goods and services tax (GST).
  2. It applies in the case of inter-State trade or commerce.
  3. The tax collected shall be appropriated between the States and the Union.
  4. The Parliament has the power to lay down the law regarding the sharing of taxes collected under this article as per the recommendations of the Goods and Services Tax (GST) Council.

The Parliament, in Section 17 of the Integrated Goods and Services Tax Act, 2017 in the exercise of its powers provided in Article 269A(1) of the Constitution has provided the manner in which integrated tax collected by the Union under the IGST Act can be apportioned in between the Union and the States.

Import of goods is a tax on supply
Article 269A(1) is followed by an explanation that in the context of India, all the imports of goods and services in the course of inter-State trade, shall be deemed to be considered as the part of the supply of goods and services.

Article 270- Taxes levied and distributed between the Union and the States:
Article 270 of the Indian Constitution basically deals with the subject of how the taxes are levied and distributed between the Union and the states.

Clause (1) of Article 270
It lays down the procedure of the appropriation for certain taxes i.e. all the taxes except those mentioned under Article 268, 269 and 269A and any surcharge on taxes and duties mentioned in Article 271 or, any cess levied for a specific purpose, other than these the provision holds true for every other tax.
  1. These taxes are levied and collected by the Union.
  2. The tax shall be distributed between the States and the Central Government.
  3. It may include taxes such as:
    • Excise Duty on Non-GST products
    • Income Tax
    • Basic Customs Duty etc.
  4. The manner for this distribution is provided under Article 270(2).

But before proceeding with understanding the manner of distribution as provided under Article 270(2), Let us first study what changes the 101st Amendment brought to this Article and what are its implications.

Clause (2) of Article 270
This clause lays down that the central tax obtained by the government as mentioned in clause (1) shall be distributed between the states as per the time and manner provided under clause (3) and such share will not form the part of the consolidated fund of India.

Clause (3) of Article 270
According to Article 270(3), all central taxes formed in one central pool shall be distributed in the manner prescribed by the President of India as per the recommendations of the Finance Commission. For the operational period of 2015-2020, the share of the states in the net proceeds of the Union tax revenue was 42%.

Article 271 � Surcharge on certain duties and taxes for purposes of the Union:
Article 271 has the following key elements:
  1. Parliament has the power to increase any duty or tax anytime by levying a surcharge except in the case of GST mentioned under Article 246A.
  2. All the proceeds obtained from the surcharges will be part of the consolidated fund of India.
  3. All the amount from such an increase in tax shall be retained by the parliament and it is not shared amongst the states.
  4. The Article has its basis to Section 137 and Section 136(1) of the Government of India Act, 1935.
  5. Further, no authority has the power to prevent the Parliament from imposing a surcharge.

Article 273 - Grants in lieu of export duty on jute and jute products:
According to Article 273, the Government of India before independence provided the provision regarding the sharing of net proceeds of the jute export duty with the jute growing provinces. But under the constitution, the states are not entitled to obtain any apportion of such duty.

The Provision specifies that for a period of 10 years from the commencement of the Constitution, the jute growing states of West Bengal, Bihar, Orissa and Assam will receive grants-in-aid from the Union from the share of the jute export duty. But as this provision was applicable only up to 10 years after the commencement of the constitution, so now this Article does not hold any relevance.

Article 274- Prior recommendation of President required to Bills affecting taxation in which States are interested:
As per this article, any bill or amendment on the following listed subject matters cannot be moved or introduced in either house of the Parliament before a prior sanction from the President which include bills/amendments dealing with:
  1. The imposition or varying of any tax within which the States are interested; or
  2. It modifies or changes the meaning of the expression "Agricultural Income" as laid down in the Indian Income-Tax Act; or
  3. It lays down, modifies or amends any principle by which money is distributed to the States; or
  4. It levies a surcharge on the state taxes for the purpose of the Union.
The clause(2) under Article 274 provides the definition of the term " tax or duty in which states are interested" which can split into two-parts:
  1. Any tax or duty the whole or part of the net proceeds of which are assigned to any State; or
  2. Net proceeds of any tax or duty that are actually part of the consolidated fund of India but for the time being, assigned to the States.

Article 275: Statutory grants:
These grants are given by the Parliament to the specific states who are in need of assistance.
  1. Under this, different amounts of grants are fixed for different states.
  2. The amount is given out of the consolidated fund of India.
  3. There are two provisos to clause (1) dealing with the granting of aid to the states for any developmental scheme approved by the government of India for the welfare of scheduled areas and scheduled tribes, with a special focus to Assam.
According to clause (2) of Article 275, any order made by the Parliament regarding the grants-in-aid as provided under clause (1) shall need a prior recommendation of the Finance Commission.

Further, it also lays down that the Finance Commission has the power to make recommendations other than those which are mentioned in provisos to clause (1).

Article 276- Taxes on professions, trades, callings and employments:
Article 276 empowers a state or other local authority to impose taxes on professions and trades. But the total amount payable under any such tax shall not exceed two thousand and five hundred rupees per annum. Earlier this limit was up to two fifty rupees only and was raised after the recommendations of the Sarkaria Committee in 1988.

Article 277 - Saving of Pre-Constitutional laws:
According to Article 277, if any taxes, duties, cesses or fees which were lawfully levied by the Government of any state, municipality, or local bodies before the commencement of the Constitution shall be continued even after the commencement. It will not be affected by the fact that the same subject is now a part of the Union list. Though however, it will be continued only till the Parliament does not make any law to the contrary.

Article 279- Calculation of net proceeds:
Article 279 basically defines the net proceeds of a tax. As per clause (1) of this article, all the earnings from the taxes excluding the cost of the collection will constitute the net proceeds of India.

Further, it provides that the net proceeds of a tax or duty, in whole or in part or of any area will be certified by the Comptroller and the Auditor General of India and the decision of the CAG shall be final subject to conditions mentioned under clause (2) of the Article.

Article 279 A- GST Council:
Article 279A empowers the president of India to constitute a Council named Goods and Services Tax Council (GST Council) within 60 days after the commencement of the 101st Constitution Amendment Act, 2016.

Article 280-Finance Commission:
Article 280 of the Indian Constitution is a very important article as it deals with the Finance Commission of India. It lays down the composition, power and functions of the finance commission. The idea of the finance committee has been borrowed from the Common-wealth Commission of Australia.

As per Article 280, the President has the power to set up a Finance Commission after a period of every five years. The Finance Commission will assist the President by making recommendations to him regarding the distribution of net proceeds of taxes to be divided between the centre and the states.

Article 281-Recommendations of the Finance Commission:
Article 281 defines the process of how the recommendations of the Finance committee will be introduced in parliament. As per this article, the President of India shall cause to lay down all the recommendations made by the Finance Commission under the provisions of this Constitution along with an explanatory memorandum before each House of the Parliament.

India is a large country with people from various communities, wealth levels, and income levels. Taxation cannot be the same for everyone. This is one of the reasons why India's tax system has been so difficult for so long.

The procedure has grown smoother since the establishment of the GST, which is an all-inclusive indirect tax that has helped eliminate the cascading effect that existed previously.

To summarise, the Parliament's rights are unrestricted, and the Indian Constitution grants the Parliament broad powers that are neither rigorous nor consistent. As a result, there exist provisions that can amend the rules of law based on future demands.

Written By:
  1. Varun Sharma (BBA LLB 7th semester) - Geeta Institute of Law
  2. Shubham Tyagi (BBA LLB 7th semester) - Geeta Institute of Law

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