LAW OF TAXATION UNIT-I

Taxation is a key element of governance in any country, and in India, it is rooted in Articles 265 to 289 of the Indian Constitution. These articles lay out the powers and duties of the state regarding taxation and set the framework within which tax laws operate. This post will examine these articles, clarify the differences between tax and fee, capital and revenue receipts, and provide insight into income tax, including fundamental concepts and definitions as outlined in the Income Tax Act.

LAW OF TAXATION UNIT-I

• Constitutional basis of power of taxation —Arts. 265 to 289

• Scope of Tax Laws-Tax and Fee-Capital Receipt and Revenue Receipt

• Basic concept of Income Tax — Outlines of Direct Tax and Indirect Tax -- Definition of Income and Agricultural Income under Income Tax Act — Residential Status — Previous Year — Assessment Year — Computation of Income

The Constitutional Framework of Taxation

Understanding Articles 265 to 289

Articles 265 to 289 of the Indian Constitution define the extent and nature of taxation powers granted to the Union and State governments. For instance, Article 265 asserts that "No tax shall be levied or collected except by authority of law." This provision ensures that tax imposition follows established legal guidelines, preventing arbitrary decisions by authorities.

Article 266 addresses how revenue from taxes is shared between the Union and the States. It establishes provisions to ensure fair revenue distribution, vital for effective financial management in India’s federal structure. Articles 267 to 269 specify taxes such as duties on certain goods and those related to income tax. Additionally, Article 270 identifies specific taxes that are levied by the Union but allocated to the States.

Together, these provisions create a robust legislative framework governing tax policy creation, enactment, and enforcement across India.

Constitutional Basis of Power of Taxation — Articles 265 to 289

• Article 265: No tax shall be levied or collected except by the authority of law. This is the foundation of taxation in India — taxes must be backed by a law passed by the legislature.

• Article 266: Talks about the Consolidated Fund of India and how all revenues received by the Government shall go into this fund.

• Articles 268 to 281: These articles divide taxing powers between the Union and the States, such as:

• Article 268: Duties levied by Union but collected by States (e.g., stamp duties).

• Article 269: Taxes levied and collected by Union but assigned to States (e.g., inter-state sale taxes).

• Article 270: Taxes levied and collected by the Union and distributed between Union and States (e.g., Income Tax).

• Article 271: Surcharge on certain duties and taxes.

• Article 276: Taxes on professions, trades, etc., by local bodies.

• Article 280: Finance Commission, which recommends how taxes should be shared.

• Article 289: Exempts the property and income of States from Union taxation unless Parliament provides otherwise.

Scope of Tax Laws

Distinction Between Tax and Fee

Understanding the distinction between 'tax' and 'fee' is essential in tax law. A tax is a mandatory payment imposed by the government on individuals or entities to fund various public expenditures. For example, in the financial year 2021-2022, direct taxes contributed approximately 57% of India's total tax revenue.

Conversely, a fee is a charge for a specific service provided by the government. For instance, a local business may pay a licensing fee to operate legally, or a homeowner might pay a registration fee for a property deed. This payment is directly tied to the service received, showcasing the clear difference from taxes.

Recognizing these distinctions is crucial, as they influence the legal implications surrounding various payments and the responsibilities of taxpayers.

Capital Receipt and Revenue Receipt

Tax laws also make a clear distinction between capital receipts and revenue receipts:

• Capital Receipts: These encompass funds resulting from transactions not impacting the government's revenue balance, such as loans or proceeds from asset sales. For example, in the fiscal year 2020-2021, capital receipts accounted for roughly 12% of the total government's receipts.

  
  

• Revenue Receipts: These are generated from the government’s standard operations, primarily through various taxes. They are used to fund day-to-day activities, such as public welfare programs or infrastructure maintenance. Understanding the difference between these classifications aids in effective budgeting and fiscal planning.

• 
  
  
  

Scope of Tax Laws

• Tax: A compulsory charge imposed by the government without direct benefit (e.g., income tax, GST).

• Fee: A charge for a specific service rendered (e.g., court fees, license fees).

• Capital Receipt: Non-recurring, not earned from regular business (e.g., loan, sale of fixed asset).

• Revenue Receipt: Recurring income from regular operations (e.g., sales, interest, rent).

• 
  

Basic Concepts of Income Tax

Overview of Income Tax

In India, income tax is governed by the Income Tax Act, 1961, which outlines the rules and regulations regarding income taxation. This Act covers various forms of income and specifies direct payments to the government based on individuals’ or corporations’ financial situations.

Income tax is categorized into two types:

• Direct Tax: This type applies directly to an individual's or entity's income. The tax is progressive, which means that as income rises, the tax rate increases. For example, individuals earning above INR 15 lakh are taxed at rates of up to 30%.

  
  

• Indirect Tax: This tax is levied on goods and services and is ultimately borne by consumers. Examples include the Goods and Services Tax (GST) and customs duties, which collectively contribute over 30% of total tax revenue in India annually.

  
  

Definitions under the Income Tax Act

Basic Concept of Income Tax

Direct Tax vs Indirect Tax

• Direct Tax: Paid directly by individuals to the government (e.g., Income Tax).

• Indirect Tax: Collected by intermediaries (e.g., GST, customs duty).

Definition of Income [Section 2(24) of the Income Tax Act]

Income includes:

• Salary

• Profits and gains of business/profession

• Capital gains

• House property income

• Other sources (like interest, dividends)

Agricultural Income [Section 10(1)]

• Fully exempt from tax.

• Includes rent or revenue from land in India used for agriculture, income from agricultural operations, and sale of agricultural produce.

Definition of Income

According to Section 2(24) of the Income Tax Act, income includes a wide range of earnings, such as profits, dividends, pensions, and even capital gains. This broad definition is vital because it sets the basis for assessing various income streams for taxation.

Agricultural Income

The definition of agricultural income under Section 10(1) states that income from land used for agriculture in India is exempt from income tax. This provision is significant, as it supports the farming community and ensures financial stability for many families engaged in agriculture.

Determining Residential Status

The concept of residential status under the Income Tax Act is fundamental in determining tax liabilities. Criteria laid out classify individuals as either residents or non-residents based on their duration of stay in India over the previous years.

This classification is crucial as it dictates whether a person is taxed on their global income or only on income sourced from India, significantly affecting their overall tax liabilities.

Residential Status [Sections 6 & 7]

Determines taxability of global income:

• Resident and Ordinarily Resident (ROR): Taxed on global income.

• Resident but Not Ordinarily Resident (RNOR): Taxed on Indian income and foreign income from business controlled in India.

• Non-Resident (NR): Taxed only on income earned or received in India.

Previous Year and Assessment Year

The definitions of previous year and assessment year are central to income tax:

• The Previous Year is the financial year preceding the assessment year when income is generated by individuals or entities.

  
  

• The Assessment Year is when taxpayers file their returns based on the income earned during the previous year. Understanding these terms is vital for fulfilling tax obligations.

  
  

Previous Year and Assessment Year

• Previous Year (PY): The financial year in which income is earned (e.g., 2024–25).

• Assessment Year (AY): The year following the PY when the income is assessed (e.g., 2025–26).

Computation of Income

Calculating income is a key element of determining tax liabilities. This involves several steps:

1. Identifying various income sources, such as salaries, business profits, capital gains, and other income, including agricultural revenue.

2. Aggregating the total gross income.

   
   

3. Applying relevant deductions, as outlined in Sections 80C to 80U, for eligible investments and expenses.

   
   

4. Determining the net taxable income, which is then subjected to the applicable tax rates.

   
   

For example, an individual earning INR 10 lakh with eligible deductions of INR 2 lakh would only be taxed on INR 8 lakh.

Computation of Income

• Income is computed under 5 heads:

  1. Salary

  2. House Property

  3. Profits & Gains of Business or Profession

  4. Capital Gains

  5. Income from Other Sources

Deductions (like under Section 80C) and exemptions (like HRA, LTA) are applied, and tax is calculated based on applicable slabs.

Final Thoughts

Understanding the constitutional foundation of taxation in India, particularly Articles 265 to 289, is essential for navigating the complexities of tax obligations. These articles ensure that taxation is conducted legally and fairly, protecting citizens' rights.

Recognizing the differences between taxes and fees, along with capital and revenue receipts, enhances individuals’ and businesses’ abilities to manage their tax responsibilities effectively. Additionally, being familiar with income tax principles, definitions, and computation methods enables better financial planning.

In a diverse country like India, these constitutional provisions regarding taxation continue to evolve. Citizens must stay informed to maximize benefits and contribute positively to national development.