NOTES ON

PRINCIPLES OF TAXATION LAW

For

7th Semester BBA LLB(Hons.)

Prepared By on 03/08/2017

AJAY RATNAN
8/5 BBA LLB(Hons.)

GLCK
CONTENTS
Title Page No.
Chapter 1 2
Chapter 2 6
Chapter 3 14
Chapter 4 16
Chapter 5 20
Chapter 6 24
Chapter 7 29
Chapter 8 Removed
Chapter 9 48
Chapter 10 51
Chapter 11 56

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 NOTES ON PRINCIPLES OF TAXATION

CHAPTER 1
Definition and Basic Concepts, Origin and Development of taxation-
historical developments.
Meaning of Taxation
The term Taxation' has been defined in many ways. Commonly heard definition includes: It is
the process by which the sovereign, through its law-making body, races revenues use to defray
expenses of government, it is a means of government in increasing its revenue under the
authority of the law, purposely used to promote welfare and protection of its citizenry, It is the
collection of the share of individual and organizational income by a government under the
authority of the law.
According to Hugh Dalton, "a tax is a compulsory contribution imposed by a public authority,
irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed
as penalty for any legal offence."
'Taxation' is the act of a taxing authority actually levying tax, Taxation as a term applies to all
types of taxes, from income to gift to estate taxes. It is usually referred to as an act; any revenue
collected is usually called taxes.
'Taxation' is the act of laying a tax, or of imposing taxes, as on the subjects of a State, by
government, or by the proper authority; the raising of revenue.
Nature and Scope of Taxation
Taxation is the inherent power of the State to impose and demand contribution upon persons,
properties, or rights for the purpose of generating revenues for public purposes. The power of
taxation upon necessity and is inherent in every government or Sovereignty-
Taxation is an inherent power of sovereignty, essentially a legislative function, enforced for
public purpose, operates only within its territorial jurisdiction, exempts government agencies
from tax (provided such agency performs governmental functions) and is subject to
constitutional and inhered limitations.

Nature of taxation
1. Inherent Power of Sovereignty,
2. Legislative in nature;
3. Public purpose;
4. Territorial in operation,
5. Exemption of the Government;
6. Strongest among the inherent power of the State.
7. Subject of Constitutional and inherent Anonymous
Scope of Taxation
In the absence of limitations provided by the Constitution, the power to tax is essentially
unlimited, plenary, comprehensive, far-reaching, and supreme Taxation compasses every trade
or occupation, every object or industry or possession of property. It levies a burden which, in

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case of failure to discharge, seizure or confiscation of property may be enforced, subject to due
process of law.
Purpose of Taxation
The primary purpose of taxation is to provide funds or property with which the government
discharges its appropriate functions for the protection and general welfare of its citizens
Taxation is for the support of the government in exchange for the general advantages and
protection afforded by the government to the taxpayer and his or her property. The existence
of government is a necessity that cannot continue without financial means to pay its expenses,
therefore, the government has the right to compel all citizens and property within its limits to
share its costs. The State and federal governments both have the power to impose taxes upon
their citizens
The following are some purposes of taxation
1. Financing government spending. —Taxes are justified as they fund government
expenditure and activities that are necessary and beneficial to society.
2. Reduce gap between rich and poor. —Progressive taxation can be used to reduce
inequality in a society.
3. Reduction of consumption of demerit goods. —Taxes can be used an effective tool
to reduce the consumption of demerit goods like alcohol and tobacco. Higher taxes on
these goods reduce the consumption of cigarettes, etc.
4. Control of Inflation. —One of the causes of inflation is too much money chasing too
few goods' Government can take away the extra disposable income of the people
through higher taxes and thus reduce the Aggregate demand in die economy.
5. Balance of Payments. —Tariffs (taxes) are imposed on imports. Government can
correct an unfavourable balance of payment situation by increasing the tariffs. This will
result in imports becoming expensive and will cause a fall in demand for the imported
goods
6. Protecting local industries. —Government uses taxes as a means to protect
local/infant industries may boost the demand for goods and services produced by
domestic industry
Origin and Development of Taxation -Tax History Chronology
ANCIENT PERIOD
There is enough evidence to show that taxes on income in some form or the other were levied
even in primitive and ancient communities. References to taxes in ancient India are found in
„Manusmriti‟ and „Kautilya‟s Arthashastra‟. Manu the ancient sage and law giver stated that
king should levy taxes according to sastras. He advised that taxes should be related to income
and should not be excessive. He laid down that traders and artisans should pay 1/5th of their
profits in gold and silver, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their
produce depending upon their circumstances. The detailed analysis given by Manu on the
subject clearly shows the existence of a well-planned taxation system, even in ancient times.
Kautilya‟s Arthasastra was the first authoritative text on public finance, administration and the
fiscal laws. Collection of income tax was well organized during Mauryan Empire. Schedule of
tax payment, time of payment, manner and quantity were fixed according to Arthasastra. It is

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remarkable that the present day system of taxation is in many ways similar to the system of
taxation given by Kautilya 2300 years ago.

Medieval Era
The system of progressive taxation perhaps owes its origin to Emperor Krishna Devaraya of
Vijaynagar who maintained that taxes should not be levied at flat rates and the amount of tax
levied must depend upon the income of the farmer. Tax administration was further refined by
Sher Shah Sun later by Akbar. Tile Mughal emperors granted land revenue rights to d
Mansabdar in exchange for promises of soldiers in war time. The treaty of 1765 gave Britishers
the right to collect taxes on behalf of the emperor. Well before the dissolution of the Mughal
Empire in 1857, the British system of District Collectors of land revenue was established.

INITIAL PERIOD (1860-1886)

Income tax in its modern form was introduced in India for first time in 1860 by the British
Government to overcome the financial crisis following the events of 1857. Initially
Government introduced it as a temporary measure of raising revenue under the Income Tax
Act 1860 for a period of five years. Different tax rates were prescribed for different heads of
income. In the year 1867, it was transformed as licence tax on trade and profession. In the year
1869, the licence tax was replaced by Income Tax again. The assessments were made on
arbitrary basis leading to inequality, unpopularity and widespread tax evasion. Income Tax was
withdrawn in the year 1874. After the great famine of 1876-78, the Government introduced
local Acts for income tax in different provinces. With several amendments, these Acts
remained in force till 1886. Thus, the period from 1860 to 1886 was a period of experiments in
the context of income tax in India.
PRE-INDEPENDENCE PERIOD (1886-1947) In 1886, a new Income Tax Act was passed
with great improvements than the previous Acts. This Act with several amendments in different
years continued till 1918. In 1918, a new Act was passed repealing all the previous Acts. For
the first time, this Act introduced the concept of aggregating income under different heads for
charging tax. In 1921, the Government constituted „All India Income Tax Committee‟ and on
the basis of recommendation of this committee a new Act (Act XI of 1922) was enacted. This
Act is a landmark in the history of Indian Income Tax system. This Act made income tax a
central subject by shifting the tax administration from the Provincial Governments to the
Central Government. During this period, the Board of Revenue (Central Board of Revenue)
and Income Tax Department with defined administrative structure came into existence.
POST INDEPENDENCE PERIOD
The Income Tax Act 1922 continued to be applicable to independent India. During the early
post-independence period, the Income Tax legislation had become very complicated on
account of innumerable changes. During this period tax evasion was wide spread and tax
collection was very expensive. In 1956, the Government of India referred the Act to a Law
Commission to make the Income Tax Act simpler, logical and revenue oriented. The Law
Commission submitted its report in September 1958 and in the meantime the Govt. also
appointed a Direct Taxes Administration Enquiry Committee to suggest the measures for
minimizing the inconvenience to the assessees and prevention of tax evasion. This committee
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submitted its report in 1959. The recommendations of the Law Commission and the Enquiry
Committee were examined and extensive tax reform programme was undertaken by the
Government of India under the supervision of Prof. Nicholas Kaldor. The Income Tax Bill
1961, prepared on the basis of the Committee‟s recommendations and suggestions from
Chamber of Commerce, was introduced in the Lok Sabha on 24.4.1961. It was passed in
September 1961 by Lok Sabha. The Income Tax Act 1961 came into force on April 1, 1962. It
applies to whole of India including the state of Jammu and Kashmir. It is a comprehensive
piece of legislation having 23 Chapters, 298 Sections, various sub sections and 14 schedules.
Since 1962, it has been subjected to numerous amendments by the Finance Act of each year to
cope with 5 changing scenario of India and its economy. Moreover the Central Board of Direct
Taxes is empowered to amend rules and to clarify instructions as and when it becomes
necessary. Besides this, amendments have also been made by various Amendment Acts e.g.
Taxation Laws Amendment Act 1984, Direct Taxes Amendment Act 1987, Direct Taxes Law
(Amendment) Acts of 1988 and 1989, Direct Taxes Law (Second Amendment) Act 1989 and
at last the Taxation Law (Amendment) Act 1991. As a matter of fact, the Income Tax Act 1961
has been amended drastically. It has therefore become very complicated both for administration
and taxpayers.
RECENT TAX REFORMS
The economic crisis of 1991 led to structural tax reforms in India with main purpose of
correcting the fiscal imbalance. Subsequently, the Tax Reforms Committee headed by Raja
Chelliah (Government of India, 1992) and Task Force on Direct Taxes headed by Vijay Kelkar
(Government of India, 2002) made several proposals for improving Income Tax System. These
recommendations have been implemented by the government in phases from time to time. As
regarding the personal income tax, the maximum marginal rate has been drastically reduced,
tax slabs have been restructured with low tax rates and exemption limit has been raised. In
addition to this, government rationalised various incentive provisions and widened TDS scope.
In case of corporate tax, the government has reduced rates applicable to both domestic and
foreign companies, introduced depreciation on intangible assets and rationalised various 6
incentive provisions. Some new taxes have been introduced such as Minimum Alternative Tax
and Dividend Distribution Tax, Securities Transaction Tax, Fringe Benefit Tax and Banking
Cash Transaction Tax. However, Fringe Benefit Tax and Banking Cash Transaction Tax were
withdrawn by Finance Act, 2009. The Income tax administration was restructured with effect
from August 1, 2001 to facilitate the introduction of computer technology. Further, keeping in
mind the global developments, the department has made considerable efforts for reforming the
tax administration in recent years. Some important measures in this direction are introduction
of mandatory quoting of Permanent Account Number (PAN), e-filing of returns, e-TDS, e-
payment, Tax Information Network (TIN), Annual Information Return (AIR) for high value
transaction, Integrated Taxpayer Profiling System (ITPS), Refund Banker Scheme in certain
cities etc. The main objective of these reforms has been to enhance tax revenue by expanding
the taxpayer base, improving operational efficiency of the tax administration, encouraging
voluntary tax compliance, creating a taxpayer friendly atmosphere and simplifying procedural
rules.

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CHAPTER 2
Canons of Taxation- Adam Smith, Arthasasthra, social aspects of taxation.
CANONS OF TAXATION
Canons of Taxation are the main basic principles (i.e. rules) set to build a 'Good Tax System'.
Canons of Taxation were first originally laid down by economist Adam Smith in his famous
book "The Wealth of Nations".
In this book, Adam smith only gave four canons of taxation. These original four canons are
now known as the "Original or Main Canons of Taxation".
As the time changed, governance expanded and became much more complex than what it was
at the Adam Smith's time. Soon a need was felt by modern economists to expand Smith's
principles of taxation and as a response they put forward some additional modern canons of
taxation.

Adam Smith's Four Main Canons of Taxation

A good tax system is one which is designed on the basis of an appropriate set of principles
(rules). The tax system should strike a balance between the interest of the taxpayer and that of
tax authorities. Adam Smith was the first economist to develop a list of Canons of Taxation.
These canons are still regarded as characteristics or features of a good tax system.
1. CANON OF EQUITY
The principle aims at providing economic and social justice to the people. According to this
principle, every person should pay to the government depending upon his ability to pay. The
rich class people should pay higher taxes to the government, because without the protection of
the government authorities (Police, Defence, etc.) they could not have earned and enjoyed their
income. Adam Smith argued that the taxes should be proportional to income, i.e., citizens
should pay the taxes in proportion to the revenue which they respectively enjoy under the
protection of the state.
2. CANON OF CERTAINTY
According to Adam Smith, the tax which an individual has to pay should be certain, not
arbitrary. The tax payer should know in advance how much tax he has to pay, at what time he
has to pay the tax, and in what form the tax is to be paid to the government. In other words,
every tax should satisfy the canon of certainty. At the same time a good tax system also ensures
that the government is also certain about the amount that will be collected by way of tax.
3. CANON OF CONVENIENCE
The mode and timing of tax payment should be as far as possible, convenient to the tax payers.
For example, land revenue is collected at time of harvest income tax is deducted at source.
Convenient tax system will encourage people to pay tax and will increase tax revenue.
4. CANON OF ECONOMY
This principle states that there should be economy in tax administration. The cost of tax
collection should be lower than the amount of tax collected. It may not serve any purpose, if

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the taxes imposed are widespread but are difficult to administer. Therefore, it would make no
sense to impose certain taxes, if it is difficult to administer.
Canons of Taxation- Bastable
1. CANON OF PRODUCTIVITY
Bastable's first canon of taxation is the canon of productivity. The productivity of a tax
may be observed in two ways. In the first place, a tax should yield a satisfactory amount
for the maintenance of a Government Secondly, the taxes should not obstruct and
discourage production in the short as well as in the long run.
2. CANON OF ELASTICITY
Bastable also laid stress on the principle of elasticity, i.e., the yield of the taxes may be
increased or decreased according to the needs of the Government. Taxes on property
and commodities are not so elastic as income tax.
3. CANON OF DIVERSITY
There should be all types of taxes, direct and indirect, so that every class of citizens
may be called upon to contribute something towards the State Revenue. The burden of
taxation should be widely distributed on the entire economy without causing much
harm to anyone
4. CANON OF SIMPLICITY
It means that a tax should easily be understood by the tax-payer, i.e. its nature, its aim,
time of payment, method and basis of estimation should all easily followed by each tax-
payer Obviously the canon may remove several difficulties of the tax-payer, and,
therefore, it is in the interest of his convenience
5. CANON OF NEUTRALITY
The taxes should be neutral in the sense that they should not have adverse effect on
production or distribution
6. CANON OF EXPEDIENCY
It implies that the possibility of imposing a tax should be taken into account from
different angles, i.e., its reaction upon the tax payers. Sometimes, it is seen that a tax
may be desirable and may have most of the characteristic of a good tax but the
government may not find it expedient to impose it. For example, progressive
agricultural income tax is very much desirable in India, but it has not been imposed so
far in the manner it should have been imposed. Hence, this canon is of vital importance
in democratic countries.
7. CANON OF ECONOMIC STABILIZATION
It may be interpreted, as to promote full employment and if possible stable financial
level. The stabilization of the balance of payments may be subsidiary objective of a
well-organized tax system.
8. CANON OF COORDINATION
In democratic countries taxes are imposed by Federal and Local Governments. It is,
therefore, very much desirable that there must be coordination between the different
taxes that are imposed by different tax authorities.

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INTRODUCTION TO ARTHASHASTRA
 Arthashastra literally means “the science of wealth” or “economics”
 The Arthashastra contains nearly 6000 sutras divided into 15 books, 150 chapters, and
180 sections.
 The 15 books contained in the Arthashastra can be classified in the following manner:
Book 1 on ‘Fundamentals of Management’, Book 2 dealing with ‘Economics’,
Books 3, 4 and 5 on ‘Law’, Books 6, 7 and 8 on Foreign Policies and Books 9 to 14
dealing with ‘war’. Book 15 deals with the methodology and devices used in writing
the Arthashastra.
 Arthashastra is believed to have been written around 4th Century, B.C.
 This vast treatise was written by Vishnugupta who was also known as Chanakya and
Kautilya.
 He was the advisor to Emperor Chandragupta Maurya.
 His works were lost near the end of the Gupta dynasty and not rediscovered until 1905.
One of the first translations of Arthashastra was done by R. Shamasastry in the year
1915.
 Taxation is an important part of governance. Means by which governments finance
their expenditure by imposing charges on citizens and corporate entities.
 The Kautilyan State had a very adept mechanism for taxation. Kautilya knew the
importance of collecting the right amount of taxes at the right time from the right
people.
 According to Kautilya, "Taxation should not be a painful process for the people. There
should be leniency and caution while deciding the tax structure. Ideally, governments
should collect taxes like a honeybee, which sucks just the right amount of honey from
the flower so that both can survive. Taxes should be collected in small and not in large
proportions".
 Kautilya advocated taxation on the basis of the income of the person. The following
taxes were identified by Kautilya:
 Corporate Taxes: These taxes were collected from the guilds of artisans and the
merchants.
 Income Taxes: These taxes were collected by farmers and agriculturists as a part of
their produce.
 Indirect Taxes: These were levied on liquor, slaughter houses, mining, transportation,
etc.
 Land and Property Tax: These included taxes on houses, agricultural or any other
material property.
 Customs Duty: All imported goods had to bear customs duty.

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 Entertainment Taxes: Gambling, entertainment, etc had to part with a specific amount
of taxes.
 Special Taxes: These were levied during special occasions such as wars, famines,
draughts, etc.
Kautilya’s method of taxation involved the element of sacrifice by the taxpayers, direct
benefits to them, redistribution of income and tax incentives.
AMOUNT OF TAXATION
The income structure during the Mauryan Empire was as follows:
• Current Income: It refers to the income which is steady. Normally, 1/6th of the income
had to be paid in the form of taxes.
• Transferred Income: This is the income which has been transferred to an individual.
For instance, the wealth transferred to the son due to the death of his parents comes
under transferred income. 1/4th of this income had to be paid as taxes.
• Miscellaneous Income: This category again had three subdivisions. Which included
recovery of previously written off debts, realisable economies made in investment
against planned budgets any other value added income.
• Every individual had to compulsorily maintain an account book which had to be
presented to the superintendent of commerce while paying the taxes.
• Every transaction had to be recorded on the date of transaction in the account book.
• Not maintaining such a book was considered fraudulent and was punishable.
• Also, the accounting system had to be uniform and as prescribed by the
superintendent of commerce from time to time.
EXEMPTIONS AND WAIVERS
 In case of a widow with children to look after, the transferred income due to the death
of her husband is exempt from taxation.
 In case of faulty rainfall or draught, agricultural produce is exempted from taxation.
 Taxes were exempted for soldiers with exemplary record.
 Taxes were also exempted in case of serious medical illness.
 The family of martyrs in war did not have to pay taxes.
CHANAKYA’S NORMS OF TAXATION
1) It is the duty of citizen to pay tax and that of king to use the collected tax for nation
building.
2) Tax is not to be seen as a compulsory contribution. It is the king’s sacred duty to
protect his citizens with the tax collected. If the king fails in this duty the citizens will
get a right to stop paying taxes and claim refund of already paid taxes.
3) Ability of tax payer must be taken into account.
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4) Limitation of taxing power of a state, Low rates of taxation, maintaining gradual

increase in tax and effective compliance mechanism.
5) There should be effective redistribution of Income.
6) Emphasized fairness and stability of tax structures.
7) Subsidies and tax-incentives should be given to encourage capital formation.
8) Emphasis on Indirect Taxes
9) Import of beneficial foreign goods must be encouraged with tax concession.
10) Special measures to hike taxes should be taken in emergency situations i.e war,
drought, natural disasters. It says that normal methods of taxation may be deviated in
such situations.
11) He favours a surplus budget.
PRACTICAL APPLICATIONS OF TAX LAWS LAID DOWN IN ARTHASHASTRA
1) Tax and toll collection centres should be established at the gates of cities and towns.
2) Efficient officials should be appointed at such points to collect tax from traders after
recording in detail about the whereabouts and transactions of the dealers.
3) Tax evasion, supplying false information, manipulation of stamp duty should be
punished with heavy fines and seizure of property.
4) It lays down a categorical list of unexportable goods.
5) Import of harmful and worthless goods should be prevented.
6) Goods for religious rituals, marriages, social festivities and the like should be
exempted from tax.
7) In addition to normal taxes, traders should also pay road cess as security insurance
against theft, damage or loss of goods in transit.
8) Prostitutes should pay double income tax and an entertainment tax on musical
instruments used by them for entertaining clients.
9) Prescribes a community based tax of 5%-20% advalorem. For certain commodities an
additional surcharge of 5%-9% to be imposed. Prescribed different tax rates for
different kinds of commodities and services.
10) Taxes could be paid in form of Goods.

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Social and Economic Objectives of Taxation

I. PREVENTION OF CONCENTRATION OF WEALTH Article 39(c) of the Constitution
of India says 'that the operation of the economic system does not result in the concentration of
wealth and means of I production to the common detriment.' Prof. Musgrave provided the
following devices to prevent the concentration of wealth:
a) A tax-transfer scheme, combining progressive income taxation of high income
households with a subsidy to low income households.
b) A combination of taxes on goods purchased largely by high income consumers and
subsidies to other goods which are used chiefly by low income consumers.
II. TO SECURE ECONOMIC STABILITY
The tool of taxation may be used to secure economic stability or to remove economic
fluctuations. The economic fluctuations may be due to changes in the overall level of
employment, prices and aggregate demand. The measures are:
• If involuntary unemployment prevails, the level of taxation should be reduced.
• If inflation prevails, the level of taxation should be increased.
• If full employment and price stability prevail, then, there is no need to change the
present level of taxation.
III. TO SECURE ADJUSTMENT IN ALLOCATION OF RESOURCES
All wants cannot be satisfied through the market. Public Sector is used to make provision of
social wants or collective wants, i.e., defence, justice, railways and roads, social and cultural
welfare, etc. As social life became more complex and the civil sense of the people developed,
the State found it necessary and possible to take upon itself some further obligations, such as
those of protection against internal disorders, regulation of trade and commerce, etc. To meet
the expenditure, for these functions, revenue is to be raised through taxes.
IV. TO ACCELERATE ECONOMIC GROWTH
For the purpose of promoting a country's economic development, taxation may be used to
achieve the following objectives:
1. to curtail consumption and, thus, transfer resources from consumption to investment.
2. to increase the incentives to save and invest.
3. to transfer the resources from the hands of the public to the hands of the government in
order to make public investment possible.
4. to modify the pattern of investment into socially desirable manner.
5. to reduce economic inequalities, and to make equitable distribution and wealth in
society.
V. AN INSTRUMENT OF SOCIAL CONTROL
Taxation is a recognised instrument of social control and not merely a source of raising revenue.
In fact, an argument that the taxes can be raised only for the purpose of revenue and not for
any other purpose was raised before the Supreme Court in the case of RMDC (Mysore) P. Ltd.
v. State of Mysore.1 It was submitted before the Court that the real object was the control of
betting and gambling and, therefore, the enactment was a colourable piece of legislation. The

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court held that taxation was in the power of the legislature and that the motives which propelled
it were irrelevant. H.M. Seervai has commented on it by highlighting the well-accepted
principle that tax is a recognised instrument of social control and that any assumption that a tax
cannot be used for purposes other than revenue is ill-founded.
VI. NON-REVENUE OBJECTIVES
The following are the non-revenue objectives:
1. to strengthen anemic enterprises by granting them tax exemptions or other conditions
or incentives for growth;
2. to protect local industries against foreign competition by increasing local import taxes,
3. as a bargaining tool in trade negotiations with other countries;
4. to counter the effects of inflation or depression;
5. to promote science and invention, finance educational activities or maintain and
improve the efficiency of administration;
6. to implement police power and promote general welfare.
Effects of Taxes:
The most important objective of taxation is to raise required revenues to meet expenditures.
Apart from raising revenue, taxes are considered as instruments of control and regulation with
the aim of influencing the pattern of consumption, production and distribution. Taxes thus
affect an economy in various ways, although the effects of taxes may not necessarily be good.
There are same bad effects of taxes too.
Economic effects of taxation can be studied under the following headings:
1. Effects of Taxation on Production:
Taxation can influence production and growth. Such effects on production are analysed under
three heads:
(i) effects on the ability to work, save and invest
(ii) effects on the will to work, save and invest
(iii) effects on the allocation of resources.
Effects on the Ability to Work Save:
Imposition of taxes results in the reduction of disposable income of the taxpayers. This will
reduce their expenditure on necessaries which are required to be consumed for the sake of
improving efficiency. As efficiency suffers ability to work declines. This ultimately adversely
affects savings and investment. However, this happens in the case of poor persons.
Taxation on rich persons has the least effect on the efficiency and ability to work. Not all taxes,
however, have adverse effects on the ability to work. There are some harmful goods, such as
cigarettes, whose consumption has to be reduced to increase ability to work. That is why high
rate of taxes are often imposed on such harmful goods to curb their consumption.
But all taxes adversely affect ability to save. Since rich people save more than the poor,
progressive rate of taxation reduces savings potentiality. This means low level of investment.
Lower rate of investment has a dampening effect on economic growth of a country.

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Thus, on the whole, taxes have the disincentive effect on the ability to work, save and invest.
Effects on the will to Work, Save and Invest:
The effects of taxation on the willingness to work, save and invest are partly the result of money
burden of tax and partly the result of psychological burden of tax.
Taxes which are temporarily imposed to meet any emergency (e.g., Kargil Tax imposed for a
year or so) or taxes imposed on windfall gain (e.g., lottery income) do not produce adverse
effects on the desire to work, save and invest. But if taxes are expected to continue in future, it
will reduce the willingness to work and save of the taxpayers.
Taxpayers have a feeling that every tax is a burden. This psychological state of mind of the
taxpayers has a disincentive effect on the willingness to work. They feel that it is not worth
taking extra responsibility or putting in more hours because so much of their extra income
would be taken away by the government in the form of taxes.
However, if taxpayers are desirous of maintaining their existing standard of living in the midst
of payment of large taxes, they might put in extra efforts to make up for the income lost in tax.
It is suggested that effects of taxes upon the willingness to work, save and invest depends on
the income elasticity of demand. Income elasticity of demand varies from individual to
individual.
If the income demand of an individual taxpayer is inelastic, a cut in income consequent upon
the imposition of taxes will induce him to work more and to save more so that the lost income
is at least partially recovered. On the other hand, the desire to work and save of those people
whose demand for income is elastic will be affected adversely.
Thus, we have conflicting views on the incentives to work. It would seem logical that there
must be a disincentive effect of taxes at some point but it is not clear at what level of taxation
that crucial point would be reached.
Effects on the Allocation of Resources:
By diverting resources to the desired directions, taxation can influence the volume or the size
of production as well as the pattern of production in the economy. It may, in the ultimate
analysis, produce some beneficial effects on production. High taxation on harmful drugs and
commodities will reduce their consumption.
This will discourage production of these commodities and the scarce resources will now be
diverted from their production to the other products which are useful for economic growth.
Similarly, tax concessions on some products are given in a locality which is considered as
backward. Thus, taxation may promote regional balanced development by allocating resources
in the backward regions.
However, not necessarily such beneficial effect will always be reaped. There are some taxes
which may produce some unfavourable effects on production. Taxes imposed on certain useful
products may divert resources from one region to another. Such unhealthy diversion may cause
reduction of consumption and production of these products.
2. Effects of Taxation on Income Distribution:

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Taxation has both favourable and unfavourable effects on the distribution of income and
wealth. Whether taxes reduce or increase income inequality depends on the nature of taxes. A
steeply progressive taxation system tends to reduce income inequality since the burden of such
taxes falls heavily on the richer persons.
But a regressive tax system increases the inequality of income. Further, taxes imposed heavily
on luxuries and nonessential goods tend to have a favourable impact on income distribution.
But taxes imposed on necessary articles may have regressive effect on income distribution.
However, we often find some conflicting role of taxes on output and distribution. A progressive
system of taxation has favourable effect on income distribution but it has disincentive effects
on output.
A high dose of income tax will reduce inequalities but such will produce some unfavourable
effects on the ability to work, save, investment and, finally, output. Both the goals—the
equitable income distribution and larger output—cannot be attained simultaneously.
3. Other Effects of Taxation:
If taxes produce favourable effects on the ability and the desire to work, save and invest, there
will be a favourable effect on the employment situation of a country. Further, if resources
collected via taxes are utilized for development projects, it will increase employment in the
economy. If taxes affect the volume of savings and investment badly then recession and
unemployment problem will be aggravated.
Again, effect of taxes on the price level may be favourable and unfavourable. Sometimes, taxes
are imposed to curb inflation. Again, as an imposition of commodity taxes lead to rising costs
of production, taxes aggravate the problem of inflation.
Thus, taxation creates both favourable and unfavourable effects on various parameters.
Unfavourable effects of taxes can be wiped out by the judicious use of progressive taxation.

CHAPTER 3
Various Forms of Revenue Generation- Tax, Cess, Fee, Toll, Excise,
Duties, Customs
A tax is a compulsory exaction of money by public’s authority for public purposes enforceable
by law and is not payment for services rendered.
CHARACTERISTICS OR ELEMENTS OF TAXES
From the above definitions, the following elements of taxes are visible:
1. Taxes are imposed by the Government on persons and property within its jurisdiction.
2. A tax is a compulsory contribution of the tax-payer.
3. In the payment of a tax, the element of sacrifice is involved.
4. Payment of a tax is the personal obligation of the tax-payer.
5. The aim of taxation is the welfare of the community as a whole
6. A tax is a legal collection
7. An element of force of State is there
8. A tax is not Imposed to realise the cost of benefit
9. Taxes may be assessed on Income or capital, but they are actually paid out of income
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10. A tax may be imposed upon property or occupation or commodities, but they are
actually paid by individuals
11. Tax does not involve quid pro quo between the tax payers and the public authority.
12. The purpose of the tax is raising public revenue
13. Tax by the State is used/received for public purpose or common benefit of all.
14. Tax involves appropriation of private property.
15. Tax is generally payable in money
16. Tax is commonly required to be paid at regular intervals.
17. Tax is proportionate in character, usually based on the ability to pay.
Tax, Custom, Duty, Toll
1. Tax is the most general of these terms and applied to or implied whatever is paid by
the people to the government, according to a certain estimate,
2. Duty is a species of tax more positive and binding than the custom, being a specific
estimate of what is due upon goods, according to their value; hence, it is not only
applied to goods that are imported; but also to many other articles in land,
3. Toll is that species to tax which serves for the repair of roads, at some of places you
need to pay tax in order to use infrastructure (road, bridge etc.) build from your money
given to government as Tax. This tax is called as toll tax. This tax amount is very small
amount but, to be paid for maintenance work and good up keeping.
4. A cess imposed by the central government is a tax on tax, levied by the government for
a specific purpose. Generally, cess is expected to be levied till the time the government
gets enough money for that purpose. For example, a cess for financing primary
education – the education cess (which is imposed on all central government taxes) is to
be spent only for financing primary education (SSA) and not for any other purposes.
5. Fee is a payment for covering the expenses of regulation or to recompensate the service
rendered by the State.

6. Custom Duty is a type of indirect tax charged on goods imported into India. One has to
pay this duty, on goods that are imported from a foreign country into India. This duty is
often payable at the port of entry (like the airport). This duty rate varies based on nature
of items.
7. Octroi is tax applicable on goods entering in to municipality or any other jurisdiction for
use, consumption or sale. In simple terms one can call it as Entry Tax.
8. An excise or excise duty is a type of tax charged on goods produced within the country.
This is opposite to custom duty which is charged on bringing goods from outside of
country. Another name of this tax is CENVAT (Central Value Added Tax).
If you are producer / manufacturer of goods or you hire labor to manufacture goods you
are liable to pay excise duty.
Tax Fee
1) Tax is a compulsory levy and is 1) Fee is not always compulsory.
enforced by law
2) The collections are routed to the 2) The amount collected by way of fees are
Consolidated Fund. not merged with the Consolidated Fund

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3) it is left to the discretion of the 3) It is set apart only to cover the expenses
Government to use the tax for any for which it is collected
public benefit

4) There is no element of quid pro quo 4) In the case of fee quid pro quo is an
between the tax payments and the essential element The fee is charged
public authority according to the magnitude of the benefits
received by the citizens
5) Tax may be expropriatory in nature 5) Fee cannot be discriminatory
6) Tax is levied as a part of common 6) A fee is payment for special benefit or
burden privilege

7) The ultimate object of tax in a 7) The ultimate object of fee can at the most
welfare state is to bring about social only be for the regulation of social order
order.
8) Tax change when base changes and 8) Fees are uniform and the capacity to pay
the capacity to pay principle is does not form the basis.
followed.

CHAPTER 4
Types of Taxes- Direct and Indirect- Merits and Demerits.
Direct taxes
Definition: Direct tax is a type of tax where the incidence and impact of taxation
fall on the same entity.

Description: In the case of direct tax, the burden can't be shifted by the taxpayer to
someone else. These are largely taxes on income or wealth. Income tax, corporation
tax, property tax, inheritance tax and gift tax are examples of direct tax.
A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to
the government by the person (juristic or natural) on whom it is imposed. A direct tax is one
that cannot be shifted by the taxpayer to someone else. Atkinson states that’ ’direct taxes may
be adjusted to the individual characteristics of the taxpayer."
The most common form of direct tax is income-tax, which has to be paid by the individuals;
Hindu Undivided Families (HUF), cooperative societies and trusts on the total income they
earn. This can include income from salary, income from house property, business and
professional income, capital gains and income from other sources such as interest. The tax
liability depends on the residential status and gender of the person being taxed. Companies are
also taxed on the income they earn. The onus of declaring income for the purpose of calculating
direct tax liability is on every taxpayer.

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MERITS OF DIRECT TAXES

1. Economy. —The administrative cost of collecting these taxes is low because the same
officers who assess small income or properties can assess larger incomes and properties.
Moreover, the taxpayers make the payment of these taxes direct to the State and,
therefore, every paise that is taken out of the pocket of the taxpayer is deposited in the
State treasury.
2. Certainty. —These taxes also satisfy the canon of certainty. I he tax payer is certain as
to how much he is expected to pay, and similarly, the State is certain as to how it has
to receive income from direct taxes.
3. Equity. —Direct taxes are considered to be just and equitable, because they are
generally based on the principle of progression. Therefore, they fall more heavily on
the rich than on the poor.
4. Reduction in Inequalities. —As the direct taxes are progressive, rich people are
subjected to higher rates of taxation. These taxes help to reduce inequalities in incomes.
5. Elasticity. —The taxes also satisfy the canon of elasticity as the government revenue
may be increased simply by raising the rate of taxation Moreover, the Income from
direct taxes will also increase with the increase ii income of the people
6. Civil Consciousness. -It is said that direct taxes create civil consciousness among the
tax-payers. The tax-payer may take intelligent ml keep interest in the method of public
expenditure, and observe whether flu revenue raised is properly utilised or not. In a
democratic country, this civil consciousness checks the wastage in the public
expenditure.
DEMERITS OF DIRECT TAXES
1. Unpopular. - The direct taxes are generally not shifted, and, therefore, they are painful
to the taxpayer. Hence, such taxes are unpopular in nature ml are generally opposed by
the tax-payers
2. Inconvenience. -These taxes are also inconvenient in nature because tax-payer has to
submit the statement of his total income along with the source of income from which it
is derived, which is generally subject to complications. Moreover, the payment of these
taxes in lump sum is not as convenient to the tax-payer as the frequent payment of small
amounts of indirect taxes.
3. Possibility of Injustice. —In practice, it is difficult to assess the income of all classes
accurately. Hence, the direct taxes may not fall with equal weight on all classes.
Moreover, the rates of direct taxes are arbitrarily fixed by the Government and they
may not be on the basis of ability to pay.
4. Possibility of Evasion. —A direct tax is said to be a tax on honesty, it is not evaded
only when the tax-payer is honest, otherwise it can be evaded through fraudulent
practices. The progressiveness of direct taxes induces the tax-payer to evade the
payment of taxes.
5. Exemption of Low Income Group. —If only direct taxation is resorted, the low-
income group people cannot be approached by direct taxes, as they are normally
exempted from such taxes on the basis of ability or equality.

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Indirect tax
Definition: Indirect tax is a type of tax where the incidence and impact of taxation
does not fall on the same entity.

Description: In the case of indirect tax, the burden of tax can be shifted by the
taxpayer to someone else. Indirect tax has the effect to raising the price of the products
on which they are imposed. Customs duty, central excise, service tax and value added
tax are examples of indirect tax.
An indirect tax is a tax levied by the Government and collected by an intermediary (such as a
retail stores) from the person who bears the ultimate economic burden of the tax (such as the
customer. What this means is that if you are purchasing goods or services from anywhere and
you are the final consumer, then the tax levied on the manufacturer will ultimately get passed
on to the consumer. The reason why these are called indirect taxes is because unlike direct
taxes, the person paying the tax to the government can pass it on to another person. They are
charged first at seller or manufacturer's level, but ultimately get passed on to the consumer.
Atkinson states that "indirect taxes are levied on transactions irrespective of the circumstances
of buyer or seller." An indirect tax is one that can be shifted by the taxpayer to someone else.
An indirect tax may increase the price of a good so that consumers are actually paying the tax
by paying more for the products. Sometimes an indirect tax may be represented separately from
the price of the item or may be shown together with the cost of the product itself For example,
the service tax paid on a food bill is shown separately, but tax paid on fuel is included in the
product price. There are many forms of indirect taxes. Customs duty is a tax levied on items
imported (and exported out of) into a country.
MERITS OF INDIRECT TAXES
1. Convenient. —They are imposed at the time of purchase of a commodity or the
enjoyment of a service so that the taxpayer does not feel the burden of the tax as it is
hidden in the price of the commodity bought They are also convenient because they are
paid in small amounts and in intervals and not in one lump sum
2. Difficult to Evade, —Indirect taxes are generally included in the price of commodities
purchased. Evasion of an indirect tax will mean giving up the satisfaction of a given
want
3. Elastic, —Taxes imposed on commodities with inelastic demand are elastic
4. Equitable, —Indirect taxes enable everyone, even the poorest citizens to contribute
towards the expenses of the State. Since direct taxes leave lower income groups from
their scope, indirect taxes make them share in the financial burden of the State.
5. Can be Progressive. —Indirect taxes can be made progressive by imposing heavy
taxes on luxuries and exempting articles of common consumption.
6. Productive. —The income from indirect taxes can be made highly productive, by
imposing few taxes each yielding a substantial amount of revenue.
7. Wide Coverage. —Through indirect taxes every member of the community can be
taxed, so that everyone may provide something to the government to finance the
services of public utilities.

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8. Social Welfare. —Heavy taxation on articles which are injurious to the health and
efficiency of the people may restrict their consumption.
DEMERITS OF INDIRECT TAXES
1. Regressive. —The indirect taxes are generally regressive in nature as they fall more
heavily upon the poor than upon the rich.
2. Administrative Cost—The administrative cost of collecting such taxes is generally
heavy, because they have to be collected from millions ol individuals in small amounts.
Hence, they are un-economical.
3. Reduction in savings. —Indirect taxes discourage savings because they are included
in price and people have to spend more on essential commodities and left less to save.
4. Uncertainty. —The income from indirect taxes is said to be uncertain, because the
taxing authority cannot accurately estimate the total revenue from indirect taxes.
5. No civil consciousness. —Indirect taxes are collected through middle-men like traders
and hence they have no direct impact.
Differences Between Direct and Indirect Taxes
1. The tax, which is paid by the person on whom it is levied is known as the Direct tax
while the tax, which is paid by the taxpayer indirectly is known as the Indirect tax. The
direct tax is levied on person’s income and wealth whereas the indirect tax is levied on
a person who consumes the goods and services.
2. The burden of the direct tax is transferable while that of indirect tax is non-transferable.
3. the incidence and impact of direct tax falls on the same person, but in the case of indirect
tax, the incidence and impact falls on different [persons.
4. The evasion of tax is possible in case of a direct tax if the proper administration of the
collection is not done, but in the case of indirect tax, the evasion of tax is not possible
since the amount of tax is charged on the goods and services.
5. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family),
Company, Firm, etc. On the other hand, the indirect tax is levied on the consumer of
goods and services.
6. The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.
7. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in
promoting the inflation.
8. Direct tax is collected when the income for the financial year is earned or the assets are
valued at the date of valuation. As against this, the indirect taxes are collected, when
the purchase or sale of goods or services are rendered.
9. Direct tax is imposed on and collected from the assessee. Unlike indirect tax is imposed
on and collected from consumer but deposited to the exchequer by the dealer of goods
or provider of services.

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CHAPTER 5
Methods of Taxation- Proportional, Progressive, Regressive,
Digressive
Taxes may also be divided into three categories called regressive, proportional and progressive.
A regressive tax tends to increase inequality of income as its direct financial impact on the
tax-payer decreases, with the increase in income. Indirect taxes, as levied in India, are
ordinarily regressive in nature.
P.E. Taylor defines : "A schedule of proportional tax rates is one in which the rates of taxation
remains constant as the tax base changes." The amount of tax payable is calculated by
multiplying the tax base with the fixed rate. Thus, in proportional tax system the multiplied
remains constant with the change in multiplicand (income).
P.E. Taylor defines : "A schedule of progressive tax rate is one in which the rate of taxation
increases as the tax base increases". In the case of progressive tax, the multiplier increases as
the multiplicant (income) increases.
Proportional Tax
Proportional tax is a tax imposed so that the tax rate is fixed, with no change as the taxable
base amount increases or decreases. The amount of the tax is in proportion to the amount
subject to taxation. "Proportional” describes a distribution effect on income or expenditure,
referring to the way the rate remains consistent (does not progress from "low to high" or "high
to low" as income or consumption changes), where the marginal tax rate is equal to the average
tax rate. A proportional tax system is also called the 'flat-rate tax'.
It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime.
Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift
the incidence disproportionately to those with a higher or lower economic well-being.
Flat taxes, implemented as well as proposed, usually exempt from taxation household income
below a statutorily determined level that is a function of the type and size of the household. As
a result, such a flat marginal rate is consistent with a progressive average tax rate. A progressive
tax is a tax imposed so that the tax rate increases as the amount subject to taxation increases.
The opposite of a progressive tax is a regressive tax, where the tax rate decreases as the amount
subject to taxation increases.
Examples
A poll tax is a fixed tax for each person. Since each person pays the same amount of money, it
is proportional to the taxed service, neither increasing or decreasing.
Television licences that are implemented in many countries, especially in Europe, are
proportional taxes when they consist of a flat annual payment for the use of a television.
Merits and Demerits of Proportional Tax:
The principle of equality in tax levy can be secured by taxing all taxpayers at a uniform equal
rate. This is known as proportional tax. Whatever the level of income or any other bases of
taxation, the rate of tax remains a single uniform rate under proportional tax.

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Merits
1. A proportional tax is simple, easy to understand and easy to calculate as a uniform rate
is charged.
2. Under proportional tax, the relative economic status of all taxpayers remains unchanged
because all pay tax at a uniform rate regardless of their incomes.
3. Proportional tax does not have any serious or adverse effects on the incentive to work
and save of the taxpayers.
Demerits
1. Proportional tax does not satisfy the canon of equality and justice since the burden of
this tax falls heavily on the poor persons. Both the rich and the poor pay the same rate
of tax. Thus, poor people sacrifice more than the rich though they have lower incomes.
2. Proportional taxation cannot bring social justice. It widens inequality in the distribution
of income and wealth as the burden of this tax is borne mostly by the poor people.
3. It is inelastic and, therefore, less productive. In other words, proportional tax
contributes little to the state exchequer.

PROGRESSIVE TAX
By the turn of the 19th century, the proportional concept had been crumbling to pieces, giving
place to the new; the conservatives of England gave way to the liberal or progressive variant
of 'equal sacrifice' or 'ability to pay' and Lloyd George was the first British Prime Minister to
adopt this new invention.
Prof.AG Pigou in his book 'Economics of Welfare' has developed the new concept in great
depth. After pointing out that poor people in civilized countries are usually given help through
the agency of the State, he thinks that for a variety of reasons income tax is the best means of
doing so. According to him, this tax really,
"Represents what is in effect a transfer of income from relatively rich for the benefit of the
relatively poor persons”
Taxes in which the rate of tax increases are called progressive taxes. Thus, in a progressive
tax, the amount of tax paid will increase at a higher rate than the increase in tax base or income,
for the taxation amount is the product of multiplying the base by the rate and both these increase
in a progressive tax. Thus, a progressive tax extracts an increasing proportion of rising income.
Indian income tax is a typical example of a progressive tax. In India, less tax is levied on people
who earn less and high on people who earn more. On the other hand, such a method discourages
individuals to earn more as there arises a feeling of a loss and hence, it results in low levels of
growth and development because a feeling of unfairness develops. The poor seem to be
rewarded while the rich are punished for working hard and earning more. This might lead to
tax evasion also.
Merits of Progressive Taxes
The merits of progressive taxes are given below:

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1. Principle of Equality Since the rich gets less utility from additional units of money as
compared to the poor, rich must be taxed more than the poor so as to develop equality.
Hence, the biggest advantage of a progressive tax is that the wealthier individuals pay
more of the tax burden.
2. Equal Distribution of Income. It is more just and impartial as it aims to achieve a
reduction in the inequality in earnings of the citizens in an economy.
3. Economical. It is inexpensive to collect progressive taxes, as the cost of collection of
taxes does not increase in the same proportion as the rate of tax increases which make
the progressive tax economical.
4. Elastic. The revenue collection of a government can be augmented by increasing the
tax rate. Its rate can be altered as per the changing needs of the country, thereby
displaying its elasticity.
5. Opportunities of Employment. The marginal propensity to consume increases as the
wealth shifts from the rich to the poor by imposing progressive taxation. Hence, it leads
to more investment and creates opportunities of employment.
6. More Just.These taxes are more just as the burden is shifted from the rich to the poor,
thereby, serving the purpose of morality in taxation.
7. Recession. Progressive taxation helps protect people during a recession because if their
income drops, they fall into a lower tax bracket. This means they will owe less money
to the government.
Demerits of Progressive Taxes
1. Tax Evasion. It encourages high-income earners to hide their wealth from government
taxes.
2. Loss of Revenue. Tax evasion leads to false statements in the tax return form, leading
to loss of revenue.
3. Socialism. As the taxes levied on the rich are redistributed to the poor through
government-aided programs, some see it as socialism.
4. Invasion of Individual Rights. Progressive taxes are an invasion of individual rights
as they are punished for their success.
Regressive Taxes:
A regressive tax is a tax that takes a larger percentage of income from low-income earners than
from high-income earners. It is in opposition with a progressive tax, which takes a larger
percentage from high-income earners. A regressive tax is generally a tax that is applied
uniformly to all situations, regardless of the payer.
A regressive tax affects people with low incomes more severely than people with high incomes.
While it may be fair in some instances to tax everyone at the same rate, it is seen as unjust in
other cases. As such, most income tax systems employ a progressive schedule that taxes high
earners at a higher percentage rate than low earners, while other types of taxes are uniformly
applied. Examples of regressive taxes include sales taxes, user fees and, arguably, property
taxes.
Progressive Tax follows the principle of ‘ability to pay’ because they are levied on the basis of
individual’s income and wealth. Since, ability to pay can be measured, the direct taxes are
imposed at progressive rate whereby richer persons pay higher taxes in comparison to the poor
person. A regressive tax is generally a tax that is applied uniformly and is indirect in nature.
This means that it hits lower-income individuals harder.
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Thus, regressive taxation is unjust and inequitable. It does not comply with the canon of equity.
It tends to accentuate inequalities of income in the community.
Merits of Regressive tax:

1. Convenient: These taxes are paid in the shape of price of commodities. People pay
these taxes when they buy commodities.

2. Increase in investment: The poor section of the economy bears the burden of these taxes.
The aggregate demand increases which encourages the more investment.

3. No Evasion: The poor section of the economy is not in a position to evade these taxes.

Demerits of Regressive Taxes:

1. All Taxes are not regressive: All indirect taxes are not regressive in nature. Many
expensive articles that are taxed being many expensive articles that are taxed being beyond the
means of people in the lower income group.

2. In Justice: The tax burden decreases with increase of income. The incident of tax is greater
on poor than on the rich. Therefore, it is unjust method of taxation.

3. Non-Productive: These taxes are usually implemented or low-priced commodities. These

commodities are consumed by low income consumers. There is a discouragement in the
production of theses commodities.
Digressive Taxes:
A digressive tax is partly progressive since tax rate increases as income increases; and partly
proportional because tax rate remains unchanged even if income increases. Thus, digressive
tax is an admixture of progressive and proportional tax. Under digressive tax, tax payable
increases only at a diminishing rate but up to a certain limit beyond which a flat rate of tax is
charged. In digressive taxation, thus, the tax payable increases only at a diminishing rate.
Diagrammatically, differences in progressive, proportional, regressive and digressive taxation
are shown in Fig. 1.

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The proportional tax rate has a constant slope, graphically, while the progressive tax rate
has a rising positive slope. The steeper the slope of the tax line, the progressive the tax regime.
The regressive tax rate line has a declining negative slope. The steeper the negative slope of
the tax line, the more regressive the taxation. The digressive tax rate line has a rising slope
initially, but it becomes constant after a point.

CHAPTER 6
Tax Avoidance, Evasion, Planning, Management.
Tax Avoidance
The term 'tax avoidance' is taken to refer to arrangements by which a person acting within the
letter of the law, reduces his true tax liability, infringing in the process, both the spirit and
intention of law. Tax avoidance covers a host of behavioural responses to the tax Code that fall
within the letter of the law. A person who switches from whisky to milk consumption because
of tax related price differentials is practicing tax avoidance. Tax avoidance can also be used to
describe the behaviour of a person who buys tax-exempt municipal securities. Such behaviour
should not be regarded as socially harmful. On the contrary, quite often the purpose of tax
legislation is to induce such behaviour. However, when people begin to make extraordinary
use of complicated tax features to minimize their taxes, the tax avoidance can violate the spirit
if not the letter of the law. Sheltering large amount of income by investing in herds of cattle or
apartment houses is certainly not illegal. Yet the availability of specialized tax provisions may
allow people, other than those for whom the provision was intended, to reduce their tax burden
to levels below that which can be justified under reasonable tax criteria. A complicated tax law
is a good hunting ground for the discovery of new tax loopholes. People will always seek new
openings for tax minimization.
In a world of high inflation and high progressive tax rates, it is reasonable to expect that the
more anti-social forms of tax avoidance will be stimulated. Professional people who insist on
being paid in cash, executives who want to take more of their income in kind, people who
collect retirement benefits but who wish to continue to work and arrange to be paid 'under the
table'—all hope to hide portions of their income from the tax collector. Learning how to beat
the tax system certainly takes effort, and the resources used in this pursuit must certainly be
counted as one of the costs of inflation. These activities are all part of the growing underground
economy. People who practice such behaviour do not think of themselves as lawbreakers but
rather simple avoiders of the tax. Unfortunately, these people are not engaging in ordinary
avoidance. Arthur Seldon coined the new term 'tax avoision' which is a type of tax avoidance
that may be illegal.
Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting mistakes
for reducing tax liability and thus avoiding payment of tax which is lawfully payable.
Generally, it is done by twisting or interpreting the provisions of law and avoiding payment of
tax. Tax avoidance takes into account the loopholes of law. Though it has a legal sanction, it
means following the provisions of law in letter but killing the spirit of the law.
Tax Evasion
Tax evasion is an expression used to describe illegal behaviour. A person who did not report
large amount of income could be fined or thrown into jail for evading taxes. An individual who

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attempts to sell tobacco products without having the proper stamps would also be avoiding
taxes.
Evasion denotes down right detracting of revenue through illegal acts, deliberate suppression
or falsification of the facts relating to one’s true tax liability.
Tax evasion is practised in a number of ways. It is a matter of public knowledge that it is sought
to be achieved through benami transactions, under-invoicing of exports and over-invoicing of
imports, inflation of expenditure and suppression of sales, purchase of bogus or fictitious
losses, and/or hawala transactions and variety of such subterfuges.
Tax evasion means avoiding tax by illegal means. Generally, it involves suppression of facts,
falsifying records, fraud or collusion. It is an attempt to evade tax liability with the help of
unfair means. Tax evasion is illegal and would result in punishment by way of penalty, fines
and sometimes prosecution.
Difference Between Tax Avoidance and Tax Evasion

Tax Planning
It is the duty of every citizen to pay legitimate tax but at the same time it is his right not to pay
taxes which are not due.
Tax planning means reducing tax liability by taking advantage of the legitimate concessions
and exemptions provided in the tax law. It involves the process of arranging business operations
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in such a way that reduces tax liability. If more two methods are possible to achieve an
objective, select one which results in lower tax liability.
Examples of Tax Planning in Indirect Taxes • Correct Classification of the goods. • Claiming
permissible deductions like discounts, freight etc from the assessable value. • Determining
correct cost of production of captively consumed goods.
Objectives of Tax Planning
• Claim Deductions under sections 80C to 80U,
• It will reduce your tax liability and you have to pay less tax,
• Minimize the war between Tax Payer and Tax Administrator, Tax payer wants to pay
less tax and Tax Administrator wants to extract most of the tax, by using Tax Planning
this war is minimized as tax payer is using all legal ways to reduce tax liability,
• Makes Investments: - By tax planning, a Tax payer will invest his money in some good
funds which will result in productive returns for tax payer and transfer money to
government for investment too.
• Helps in growth of economy,
• Makes society grow,
• Money saved by you will result in investment which will result in employment
generation.
Tax Management
Tax management is managing the tax affairs which envelops a host of steps such as hiring a
professional to take care of tax compliance, timely payment of tax etc.
Tax management helps an individual or organization to plan their finances and able to pay tax.

Illustration of difference between tax planning, tax avoidance and tax evasion.
The Government has issued Notifications No. 49/2003-CE, 50/2003-CE granting exemption
from excise duty for ten years if industry is set up in the specified area such as Himachal
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Pradesh, Uttarakhand, North East India. The purpose behind these notifications is to encourage
industrialization in these areas.
If a manufacturer sets up manufacturing unit in Himachal Pradesh, it is a tax planning.
However, if he sets up manufacturing facility somewhere else and brings almost ready product
to Himachal Pradesh for carrying out minor operations like, testing, packing, repacking etc and
sells from Himachal Pradesh, it can be said as tax avoidance, because the intention of the
government to encourage industrialization in Himachal Pradesh is defeated. Thus, the
manufacturer follows the letter of the law but defeats the purpose of behind the law. If a
manufacturer manufactures and dispatches the goods from somewhere else and only raises
invoices of sale from Himachal Pradesh to show that goods have been manufactured and sold
from Himachal Pradesh, this is a tax evasion.
McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230 (SC 5 Members Bench)1
In tax planning principle set in McDowell’s case is always referred. The principle set by Hon.
Court that tax planning is permissible but not subterfuges is allocable universally to all the
taxes.
Facts of the case: - McDowell & Co. Ltd (hereinafter referred to as the appellant) was a
licensed manufacturer of Indian Liquor. Buyers of liquor used to obtain passes for release of
liquor after making payment of excise duty directly to excise authorities and present said passes
before appellant whereupon bill of sale was prepared by the appellant showing price of liquor
but excluding excise duty. Sales tax was paid by appellant to sales tax authorities on basis of
turnover but excluding excise duty. The method followed by the appellant resulted in reduction
of sales tax amount on liquor. The issue before Hon. Supreme Court (5 Member Bench) was
whether excise duty which was payable by appellant but had been paid by buyer was actually
a part of turnover of appellant and was, therefore liable to be so included for determining
liability to sales tax. In the instant case appellant followed this method to reduce burden of
sales tax. The liability to pay excise duty is on the manufacturer at the time of removal of the
goods from the factory, though he can recover it from the customer. However, in the instant
case, the duty burden was directly transferred to buyer and the value of the excise duty, which
should have been part of the taxable value for the purpose of sales tax, was not included in the
taxable value. Hon. Supreme Court, on this issue , held that excise duty, which was payable by
appellant but had been paid buyer was actually a part of turnover of appellant and therefore
liable to be included for determining liability of sales tax. 51 On the other issue i.e. whether it
is open to everyone to so arrange his affairs as to reduce burden of taxation to minimum and
such a process does not constitute tax evasion, Hon. Apex Court held that the process will
amount to tax evasion.
Decision :- In the said case of McDowell & Co. Ltd Vs CTO, reported in 1985(3)SCC 230
(SC 5 Members Bench), Hon. Supreme Court, observed that “ Tax planning may be legitimate
if it is within the framework of law , but colorable devices cannot be part of tax planning. It is
wrong to say that it is honourable to avoid payment of tax by dubious methods. It is obligation
of every citizen to pay tax honestly without resorting to subterfuges”. This view was expressed
in majority judgment delivered By Hon. Justice Rangnath Mishra.
However, in the separate judgment, Justice Chinnapa Reddy, expressed that “ In our view, the
proper view to construe a taxing statute , while considering a device to avoid tax , is not to ask
whether a provision should be construed liberally or principally, nor whether the transaction is
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not unreal and not prohibited by the statute , but whether the transaction is a device to avoid
tax and whether the transaction is such that the judicial process may accord approval to it .-
The series of transactions has to be viewed as a whole and then the court should see the real
purpose of the transaction. – It is neither fair nor desirable to expect the legislature to intervene
and take care of every device and scheme to avoid taxation. It is upto the court to take stock
and determine the nature of the new and sophisticated devices to avoid tax and expose for what
they really are and refuse to give judicial benefication”.
Justice Chinnapa Reddy in Mc Dowell and Co. Ltd. v. Commercial Tax Officer} listed the
evil consequences of tax avoidance as follows:
1. First, there is substantial loss of much needed public revenue, particularly in a welfare
State like ours.
2. Next, there is the serious disturbance caused to the economy of the country by the piling
up of mountains of black money, directly causing inflation.
3. Then there is 'the large hidden loss to the community by some of the best brains in the
country being involved in the perpetual war waged between the tax avoider and his
expert team of advisers, lawyers and accountants on the one side and the tax gatherer
and his, perhaps not so skilful, advisers, on the other side.
4. Then again there is the sense of injustice and inequality which tax avoidance arouses in
the breasts of those who are unwilling or unable to profit by it.
5. Last, but not the least, is the ethics of transferring the burden of tax liability to the
shoulders of the guideless, good citizens from those of "the artful dodgers."
Causes for Tax Evasion & Tax Avoidance
Tax evasion and avoidance is a global problem. The causes for tax evasion and avoidance are
as follows:
1. High Rates of Taxation. —The higher the rates of tax, the greater will be the
temptation for evasion and avoidance.
2. Inadequacy of Powers. —The inadequacy of powers vested in the personnel of the
department is yet another cause of tax evasion.
3. Complexity in Tax Laws. —The complicated provisions of the Direct Taxes Acts, not
all of which are easily intelligible, were also stated to be responsible to some extent.
4. Absence of Deterrent Punishment
One important reason for the prevalence of evasion is stated to be that in actual practice,
no deterrent punishment like imprisonment is being meted out to tax evaders when they
are caught.
5. Lack of Publicity. —Another reason for widespread evasion is said to be the secret
provisions of the Direct Taxes Acts. At present, the department is statutorily prohibited
from disclosing any information relating to a person's return or assessment.
6. Moral and Psychological Factors. —Unfortunately, all citizens do not realise their
duties to the State and the necessity of paying the correct amount of taxes and paying
them in time.
7. Lack of Integrity of Officers. —It has also been said that lack of integrity in some of
the officers of the department is partly responsible for tax evasion.
8. Donations to Political Parties. —People and companies donate to political party in
power and try to influence the tax officials through leaders of political parties.

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9. Attitude of Income-tax Department—It has been said that even when the assessee's
returns are correct in respect of income, wealth, etc., and produce evidence in support,
the assessing officers do not always accept them.

RECOMMENDATIONS OF THE DIRECT TAXATION ENQUIRY COMMITTEE

(WANCHOO COMMITTEE) TO FIGHT THE PROBLEM OF (TAX EVASION
1. The committee recommended reduction in the present tax rates as they are very high
and due to this, the tax-payer feels that the tax evasion is profitable and attractive in
spite of the attendant risks.
2. It recommended minimisation of controls and licences in the economy.
3. It recommended regulation of donations to political parties.
4. The practice of being too meticulous in small cases, where no worthwhile revenue is
involved, has done much to damage the image of the department in the public eye.
5. The committee recommended the entertainment expenditure which is incurred
primarily for the furtherance of the taxpayer's business be allowed to be deducted up to
a certain ceiling.
6. The committee recommended the minimum penalty imposable for concealment of
income should be the amount of tax sought to be evaded and the maximum penalty'
imposable should be fixed at twice the said amount.
7. The committee recommended that public consciousness is to be aroused against tax
evasion and tax evaders should be ostracized by the society.
8. The committee also recommended that the department should completely re-orient
itself to a more vigorous prosecution policy in order to install a wholesome respect for
the tax laws in the minds of tax-payers.

CHAPTER 7.
Constitutional Provisions, Federal Polity and Taxation issues, budget,
Finance Act, Money Bill, Limits on Taxing Power.

Constitutional Provisions
In India's federal Constitution the powers of the centre and the constituent units are well
defined. The legislative powers of the Union are enumerated in list I of the seventh schedule
and those of the states in list II, the concurrent powers being found in list III.
Power of Taxation under Constitution of India is as follows:
(a) The Central Government gets tax revenue from Income Tax (except on Agricultural
Income), Excise (except on alcoholic drinks) and Customs.
(b) The State Governments get tax revenue from sales tax, excise from liquor and alcoholic
drinks, tax on agricultural income.
(c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and
house property tax.
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Article 265 provides that no tax shall be levied or collected except by Authority of Law.
The authority for levy of various taxes, as discussed above, has been provided for under
Article 246 and the subject matters enumerated under the three lists set out in the Schedule-
VII to the Constitution.

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Entry No. 6 – Transfer of Property other than agricultural land, registration of deeds amd
documents.
Entry No. 44- 'Stamp duties other than duties on fees collected by means of judicial stamps
but not including rates of stamp duty

Taxation and Fundamental Rights

(Constitutional Remedies Against Illegal Taxation)
Article 13 .
A taxing statute must pass the test of fundamental rights and the charge of discrimination. In
order that the law (imposing tax) to be valid, the tax must be within the legislative competence
(Art. 265) and secondly, the tax must be s subject to the conditions laid down in Art. 13. One
such condition envisaged by. Art. 13(2) is that "The State shall not make any law which takes
any or abridges the rights conferred by this Part and any law made in contravention of this
clause shall, to the extent of the contravention, be void.' Thus, the legislature shall not make
any law which takes away or abridges the equality clause of Art. 14 The State shall not deny
to any person equality before the law or the equal protection of the laws within the territory of
India." The guarantee of equal protection of the laws must be extended to the taxing statutes.
Article 14
Article 14 does not mean that every person should be taxed equally. But it does not mean that
if property of the same character has to be taxed the taxation must be of the same standard, so
that the burden of taxation may fall equally on all persons holding that kind and extent of
property. It is common ground that the tax has no reference to income, either actual or potential,
from the property sought to be taxed. Hence, it may be rightly remarked that the Act obliges
every person who holds land to pay the tax at the flat rate prescribed whether or not he makes
any income out of the property or whether or riot the property is capable of yielding any
income. It is clear, therefore, that inequity is inherent in the very provision of the taxation. It is
one of those cases where lack of classification creates inequality.
What the court has to see is the time and actual effect of the law, as a law appearing to be
discriminatory may not be so in operation. In the case of State of Andhra Pradesh v. Raja
Reddi, land revenue was imposed at a flat rate on land without taking into account the
productivity of the soil. In the case of Moopil Nair, there was no proper procedure laid down
for assessment and collection. The Supreme Court held that Article 14 is violated in both the
cases when a statutory provision finds differences where there are none or makes no difference
where there is one.
A taxation will be struck down as violative of Art. 14 if there is no reasonable basis behind the
classification made by it, or if the same class of property, similarly situated, is subject to
unequal taxation. This requirement does not preclude the classification of property, trades,
profession, and events for taxation subjecting one kind to one rate of taxation and another to a
different rate. Perfect equality in taxation is impossible and unattainable.
In E.I Tobacco Co. v. State of A.P., Sales Tax on virgina tobacco but not on country tobacco
has been held to be valid. In Western Indian Theatre v. Cantonment Board, a higher tax on

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cinema-house containing large seating accommodation and situated in fashionable and busy
localities where the number of visitors are more numerous, than the tax imposed on smaller
cinema-house containing less accommodation and situated in a locality where visitors are poor
and less numerous, was held not to be violative of the equal protection clause of Art. 14. The
classification was based on income of cinema-houses.
In Indian Express Newspaper v. Union of India, it has been held that the classification of
newspapers into small, medium and big newspapers on the basis of their circulation for the
purpose of levying customs duty on newsprint is not violative of Art. 14. The object of
exempting all small newspapers from payment of customs duty while levying full customs duty
on big newspapers is to assist the small and medium newspapers in bringing down their cost
of production. Such papers do not command large advertisement revenue.
Article 19(1) g
A tax, if not levied through a valid law, would be an illegal impost and would constitute an
unreasonable restriction on a citizen's right. Sales tax imposed under an unconstitutional law is
without the authority of law and a threat to trade thus infringing Article 19(l)(g) 'All citizens
shall have the right to practise any profession, or to carry on any occupation, trade or business').
The court, however, would not intervene and strike down a taxing statute merely on the ground
that the taxes would come large scale erosion of the profits. Particularly where a tax is
compensatory, it cannot operate as an un-reasonable restriction on the right to carry on
business. Even where the tax is not compensatory, a taxing statute cannot be struck down as
offending Article 19 (l)(g) unless there is an imminent threat to or immediate burden on the
carrying on of the business or a trade which becomes unreasonable in the circumstances.
Art 27
To maintain the secular character of the Indian Nation, the Constitution, no doubt, guarantees
freedom of religion, to groups of individuals. However, any tax which has gone into the public
fund cannot be utilised for promoting or maintaining any particular religion. Article 27 lays
down that” 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”. A fee can be levied to meet the expenses of
governmental supervision over the administration of religious endowments but the State cannot
levy a tax as there is no such entry in List ll and List III. Only Parliament can levy such a tax
and the States can levy only a fee. Art. 27 will not invalidate the levy of a fee by a State because
the object of such a levy is not to support or preserve any particular religion but to provide a
secular administration to religious institutions.

FEDRAL POLITY: DISTRIBUTION OF REVENUE IN THE LIGHT OF THE

CONSTITUTION OF INDIA: TAXATION PROVISIONS
Yet another feature of Indian Federalism could be very well reflected by the manner it lays
down the provisions regarding Distribution of Revenues between the Centre and the States.
Part XII of the Constitution of India deals with the Finance, Property, Contracts and Suits
whereby the second Chapter specifically deals with the Distribution of revenues between both
the governments. The provisions explicitly mention the powers as to who levies the tax, who

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collects it, and who uses it. While certain provisions are specific with respect to the taxation
areas, other is an exception.
Nature of the Provisions
The nature of these provisions is general and financial. This is so because all these provisions
are associated with the levying, collection and appropriation of taxes. By tax, it is meant a
compulsory constraint on the individuals’ income, profits earned, or a contribution added to
the cost in goods and services or any transaction related whereof a certain amount has to be
paid mandatorily.
Hence, it derives its financial character from the purpose for which it has been envisaged
therein. Furthermore, these articles are to be considered as general in nature as there are certain
specific enactments which prevail over these general provisions.
The subject matter of the taxation is to be derived from the Seventh Schedule wherein the
powers have been distributed on the subject matters as per the Union List, State List and the
concurrent List.
Fundamental Principles on basis of which these Articles are envisaged
A federal structure has one of its features as ‘Dual Polity’ which means that there are two
political governments governing the nation; one is at the Centre and the other at the Provincial
level. But ‘Dual Polity’ does not merely concern about the existence of two separate
governments for the purpose of administration, but it also attracts one of the essential needs for
Financial Resources. Both of them need resources to execute their functions. Thus, one must
understand that these provisions are essentially required to maintain the Federal Structure.
Need for the Distribution of powers concerning revenue from tax
The problem of allocating the resources becomes difficult as there is single entity paying tax
and both the governments need the funds. If both the governments were to impose tax as
according to its own discretion, the citizens would have ended up paying tax twice in degree
or in quantity. Also, not all and everything could be legislated by the Parliament alone upon
the matters of tax. Had it been so, there might arise a situation when the Centre would have
reserved all the resources up to itself. Thus, in order to have a just distribution of resources
between the two and to simplify the chaos, the Constitution of India lays down a basis of
distinction between the powers of the Central and the Provincial Governments.
Article 268
Nature
The article provides a mandate on the Government of India as is evident by “…shall be
levied…Government of India…”. Thus, it grants an exclusive power to the Union to levy
stamp-duties and excise duty related to medicinal and toilet preparations.
Subject Matter
The Subject matter of this article concerns the charge on medicinal and toilet purposes which
falls under the sole authority of the Centre to legislate. This is because this article explicitly
mentions as, “…mentioned in the Union list…” To be more precise, Entry 84 of List I, Seventh
Schedule takes note of the power to Union upon this subject. It states that duties of excise
including medicinal and toilet preparations are a part of the inclusive powers of the Central
government.

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Roles of each Government with respect to Collection

While the Union levies the duties, it is the responsibility of the State Governments to collect
wherein such duties are leviable and of the Government of India in case of Union territories.
Appropriation of Funds
Furthermore, the second clause is also a mandatory clause as it requires the proceeds of any
such duty within that state in a financial year necessarily should not to be included in the
consolidated fund of India. Rather, the fund so generated to assigned to that particular state
itself. This is evident by “…shall not…part of …Consolidated Fund of India…shall be
assigned…State”.
Article 268-A
Nature
The article provides a mandate on the Government of India as is evident by “…shall be
levied…Government of India…” Thus it grants an exclusive power to the Union to levy service
tax.
Subject Matter
The subject matter is related to the service tax which falls under the sole authority of the Centre
to legislate. This power is covered under Entry 92-C of List I, Seventh Schedule wherein it is
mentioned as ‘taxes on services’. Service tax basically refers to the constraint on services
provided by the service providers, although the same is ultimately borne by service-users.
Roles of each Government with respect to Collection
Although, the Union imposes service tax, both governments at centre and state have powers
to collect the same. An important keynote is that such collection of taxes is subjected to
principles as laid down by Parliament.
Appropriation of Funds
Similar to the collection, both governments are authorised to appropriate the funds generated
from such tax in a financial year, subjected to the principles and law formulated by Parliament.
Article 269
Nature
The article provides a mandate on the Government of India as is evident by “…shall…levied
and collected…Government of India…” Thus it grants an exclusive power as well as
responsibility on the Union related to taxes on purchase or sale of goods and consignment of
goods.
Subject Matter
The subject matter is related to taxes on purchase or sale save newspapers which are sold and
purchases as a part of inter-state trade or commerce. The taxation provision also extends to
consignment of goods wherein any such consignment is to the person who makes it or any
other as a part of the inter-state trade or commerce. Entries 92-A and 92-B of List I, Seventh
Schedule states such powers of the Union.
Roles of each Government with respect to Collection
Union imposes the tax on purchase, sale or consignment of goods, but the state does not play
any role in the collection mechanism. The collection of tax is also done by the Union itself.

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Appropriation of Funds
Whatever net proceeds have been generated by the way of collection in a financial year has to
be assigned to the State, except those attributable to the Union Territories, in which the tax was
leviable in that year. An important keynote is that such assignment to the states is subjected to
principles as laid down by Parliament. However, the parliament may make laws with regards
tax for the inter-state trade or commerce.
Article 270
Nature
The article grants an exclusive power as well as responsibility on the Union to tax in subject
matters as provided in List I, Seventh Schedule save Article 268, 268-A, 269 and 271.
Subject Matter
The subject matter is related to the tax entries as mentioned in the Union List, i.e., from Entry
82 to 92-C except those four articles as mentioned previously.
Roles of each Government with respect to Collection
Union imposes the tax and duties, but the state does not play any role in the collection
mechanism. The collection of tax is also done by the Union itself.
Appropriation of Funds
Whatever net proceeds have been generated by the way of collection in a financial year have
to be appropriated by both the governments. The percentage of distribution of net proceeds is
applicable to only those states wherein these tax provisions are applicable, and is subjected to
recommendations made by the Finance Commission so set up by the President. However, the
net proceeds do not form a part of the Consolidated Fund of India.

Article 271
Nature
This article is an exception to the preceding two articles, namely, Article 269 and Article 270.
It provides discretion to the Parliament to make laws in matter of surcharge.
Subject Matter
The subject matter of this article concerns surcharge. Surcharge is an additional charge over
the cost of the goods or service.
Roles of each Government with respect to Collection
There is no involvement of the State Governments with respect to surcharges. These are
imposed by the Union at its discretion, i.e., when there arises a requirement for the purposes of
Union.
Appropriation of Funds
The whole proceeds of surcharge are to be appropriated by the Union only. The state neither
possesses a right nor can it demand for such surcharges. An important keynote is that the
surcharges form a part of the consolidated fund of India.
Article 272. Taxes which are levied and collected by the Union and may be distributed
between the Union and the States

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Union duties of excise other than such duties of excise on medicinal and toilet preparations as
are mentioned in the Union List shall be levied and collected by the Government of India, but,
if Parliament by law so provides, there shall be paid out of the Consolidated Fund of India to
the States to which the law imposing the duty extends sums equivalent to the whole or any part
of the net proceeds of that duty, and those sums shall be distributed among those States in
accordance with such principles of distribution as may be formulated by such law
Article 275. Grants from the Union to certain States.
Such sums as Parliament may by law provide shall be charged on the Consolidated Fund of
India in each year as grants-in-aid of the revenues of such States as Parliament may determine
to be in need of assistance, and different sums may be fixed for different States:
Article 276. Taxes on professions, trades, callings and employments
1. Notwithstanding anything in Article 246, no law of the Legislature of a State relating
to taxes for the benefit of the State or of a municipality, district board, local board or
other local authority therein in respect of professions, trades, callings or employments
shall be invalid on the ground that it relates to a tax on income
2. The total amount payable in respect of any one person to the State or to any one
municipality, district board, local board or other local authority in the State byway of
taxes on professions, trades, callings and employments shall not exceed two thousand
five hundred rupees per annum
3. The power of the Legislature of a State to make laws as aforesaid with respect to taxes
on professions, trades, callings and employments shall not be construed as limiting in
any way the power of Parliament to make laws with respect to taxes on income accruing
from or arising out of professions, trades, callings and employments

Holistic Interpretation of Articles

Although it is necessary to understand all of these Articles in their own sense, yet they have to
be read in totality from a holistic point of Interpretation. In India, it is the Judiciary who plays
a role in the interpretation of the statute and other enactments as made by the legislature. In
this section, the researcher tries to bring out the synthesized meaning of all these provisions
from view point of various lenses.
By Hon’ble Supreme Court of India
The Supreme Court of India has rendered two famous judicial precedents under Article 270.
One of them is Devinatha case wherein it has pronounced that although the income tax is to be
levied and collected by the state, yet the States may prescribe for such contribution
distinguished from income tax. Furthermore, the Corporation tax, levied and collected by the
centre is not to be distributed among the states. This is because corporate tax is a super tax on
such profits earned by the Companies and other Corporations.
In yet another case of Kanniyan , this Hon’ble court propounded that the income tax is a part
of the Consolidated Fund of India, and thus, it cannot be distributed among the states and Union
territories and to those which are administered by the Presidential Rule.
In totality, those taxes and duties which are levied and collected by the Government of India
form a part of the consolidated fund of India while those collected by the state do not.

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Scanning articles through lenses of Federalism

Articles 268, 2868-A, 269 and 270 depict the true essence of Cooperative Federalism wherein
both the taxes and duties are appropriated by both the Central and the Provincial Government,
irrespective of who collects it. Thus, both of them are complementary to each other in their
existence with regard to the matters of revenue distribution through taxes.
While on the other hand, Article 271 helps to retain a degree of strong Union even in
Cooperative federal structure. This is also well evident from the levying authority in all the
previously mentioned articles whereby the power rested solely with the Union.
The objective of these provisions is to acquire financial resources by the way of taxation. Such
taxation provisions are laid down by the Centre and collected & appropriated by State, or
Centre, or both. But it is also important to see that such funds or net proceeds are distributed to
only those states where such taxes and duties are applicable. This very well brings out this
aspect, or rather a question, as to what about those states where these provisions do not apply.
Well, may be our constitution makers knew about this query, hence, they also envisaged Article
269 where the net proceeds are assigned to the states as per the proportion so prescribed by the
Parliament.
Consolidated Fund
The consolidated fund is covered under Article 266. Both the governments have their separate
consolidated funds in the name of ‘Consolidated fund of India’ and ‘consolidated fund of that
state’. Under this, all revenues generated by the Union, loans raised and the net proceeds form
a part of it. It is just similar to any personal bank account wherein that natural or artificial
person may be equated with Union of India or that particular state.
However, no money can be appropriated out of the consolidated fund unless the Constitution
provides so.
Contingency Fund
The contingency fund is covered under Article 267. This is not constitutionally born but is
established by law made by the Parliament or the States with respect to the ‘Contingency Fund
of India’ or ‘Contingency Fund of that state’ respectively. Such type of Fund is creating for
meeting any unforeseen expenditure. It is obviously determined by law, but is kept at the
disposal of President or Governor, as the case may be.

Budget
Budget is an Annual financial statement of the estimated receipts and expenditure of the
Government for the financial year. (1st April –31st March). It is presented by the Union
Finance Minister in the parliament. Once passed by both the houses of parliament and approved
by the President of India, the Budget comes into effect from 1st April.
Importance of Budget
The Budget is formulated to optimally allocate the Government’s resources to different sectors
and schemes, so that the broad objectives of the government could be achieved. It presents
government’s proposed revenues and expenditure for the coming financial year. It also
determines how adequately the financial and resource management responsibilities have been

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discharged in the last financial year. Budget is also a means to ensure financial accountability
of the Government to the Parliament. There by maintaining legislative prerogative over
taxation and expenditure.
Preparation of Budget
Budget is prepared by the Budget Division, Department of Economic Affairs, Ministry of
Finance.
a) The budget division issues an annual budget circular to all the Union Government ministries/
departments containing guidelines on how to prepare budget estimates.
b) The Ministries/departments prepare and present their estimates for budget allocation.
c) The ministries also provide the estimates for their revenue receipts in the current financial
year and next financial year to the finance ministry.
d) The finance minister then examines the proposals received from various ministries and
makes necessary changes, if any. The finance minister also consults the prime minister, and
briefs the Union Cabinet, about the budget.
e) The budget division then consolidates all the estimates received and prepares the budget
documents.
Procedure for approval of Union Budget by the Parliament
Budget is approved by the parliament in the following way:
a) First and foremost, President’s recommendation is obtained under Article 117(1) and 117(3)
for introduction and consideration of the Budget in the Lok Sabha.
b) After President’s recommendation, Budget is then laid before the Lok Sabha by the Finance
Minister with the "Budget speech".
c) It is then laid before the Rajya Sabha for discussion, but Rajya Sabha does not have the
power to vote on the demands for grants.
d) The Discussion on Budget in the Lok Sabha is conducted in two stages
(i) General Discussion This includes discussion on the broad aspects of the Budget. No voting
takes place at this stage.
(ii) Detailed Discussion After the general discussion, Parliament is adjourned for a period,
during which the Department Related Standing Committees examine the detailed estimates of
ministries’ expenditure, called Demands for Grants. These committees then prepare the reports
on each ministry’s Demands for Grants and submit them to the Lok Sabha. Then, a detailed
discussion takes place in Parliament on each Ministry’s demands for grants.
e) Following the detailed discussion, voting on demands for grants takes place.
f) After the voting, an Appropriation Bill is introduced and voted on, which authorizes the
government to spend money from the Consolidated Fund of India.

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g) The Finance Bill, which contains provisions for giving effect to financial proposals of
Government, is then introduced immediately in the Lok Sabha. The introduction of this Bill
cannot be opposed. This completes the budgetary process.
Only the Lok Sabha has the power to approve the budget; the Rajya Sabha can only propose
amendments which the Lok Sabha may or may not accept.
The Government receipts categorized in the budget
Government receipts are the income receipts of the government from all the sources in a
particular financial year. These are divided in to two different categories:
a) Revenue receipts: Revenue receipts are those receipts, which neither create liability nor
reduce the assets of the Government. These include revenue received from taxes, cess, interest
payments, dividend on investments etc. They are generally recurring in nature.
b) Capital Receipts: Capital receipts are those which either create liability or reduce the assets
of the Government. These include Government borrowings, disinvestment etc.
The Government expenditure categorized in the budget
Government expenditure is categorized in two ways:
a) Revenue Expenditure: Expenditure that does not lead to creation of any assets or any
reduction in existing liabilities of the government. This includes Salary payments, Pensions,
interest payments, other administrative expenditures etc. These are generally recurring in
nature and deal with day-to-day administrative costs of the government.
b) Capital Expenditure: This refers to the expenditure that leads to creation of assets or
reduction in liabilities of the Government. Examples include infrastructure building, acquiring
assets, repayment of loans etc.
Article 112 of the Constitution of India stipulates that Government should lay before the
Parliament an Annual Financial Statement popularly referred to as ‘Budget’.
Since Parliament is not able to vote the entire budget before the commencement of the new
financial year, the necessity to keep enough finance at the disposal of Government in order to
allow it to run the administration of the country remains. A special provision is, therefore, made
for "Vote on Account" by which Government obtains the Vote of Parliament for a sum
sufficient to incur expenditure on various items for a part of the year. Normally, the Vote on
Account is taken for two months only. But during election year or when it is anticipated that
the main Demands and Appropriation Bill will take longer time than two months, the Vote on
Account may be for a period exceeding two months.
Charged expenditure includes the emoluments of the President and the salaries and allowances
of the Chairman and Deputy Chairman of Rajya Sabha and the Speaker and Deputy Speaker
of Lok Sabha, Judges of Supreme Court, Comptroller and Auditor General of India and certain
other items specified in the Constitution of India under Article 112(3). Discussion in Lok Sabha
on ‘charged’ expenditure is permissible but such expenditure is not voted by the House.
Under provisions of Article 266(1) of the Constitution of India, Public Account is used in
relation to all the fund flows where Government is acting as a banker. Examples include
Provident Funds and Small Savings. This money does not belong to government but is to be

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returned to the depositors. The expenditure from this fund need not be approved by the
Parliament.
The annual accounts of the Government, comprising of Union Government Finance Accounts
and the Appropriation Accounts, are prepared by the Controller General of Accounts. These
documents are presented before the Parliament after their statutory audit by the Comptroller
and Auditor General of India. Preparation and submission of Appropriation Accounts to the
Parliament completes the cycle of budgetary process. Through Appropriation Accounts, the
Parliament is informed about the expenditure incurred against the appropriations made by the
Parliament in the previous financial year. All the expenditures are duly audited and excesses
or savings in the expenditure are explained. The Finance Accounts show the details of receipts
and expenditures for all the three funds (the Consolidated Fund of India, the Contingency Fund
of India and the Public Account) in the form of various statements including liabilities of the
government such as guarantees and loans given to the States, Union Territories and Public
Sector Undertakings.

Budget
Union Budget is prepared by the Department of Economic Affairs of Ministry of Finance.
Earlier the budget was presented in two categories i.e. Railway budget and General budget.
This article will help you understand the step by step process of preparation of the Union
Budget of India. Budget 2017-18 will be presented on 1st February 2017 by the Finance
Minister of India.
From this year onwards, there will be no separate budget for Indian Railway which has been
"merged" with the General Budget. The decision, taken on the recommendation of a NITI
Aayog committee headed by its member Bibek Debroy, reflects the decrease over time in the
relative size of the Rail Budget compared to some of the other components in the General
Budget, such as defence and roads and highways, reducing it to a mere “ritual". According to
Article 112 of the Indian Constitution, the President is responsible for presenting the budget to
the Lok Sabha. The annual financial statement takes into account a period of one financial year.
According to Article 77 (3), the Union Finance Minister has been made responsible by the
President to prepare the budget also called as the annual financial statement and pilot it through
the parliament. Budget embodies the estimated receipts and expenditure of the Government of
India for one financial year. The financial year commences on 1st April each year.

Stages of Budget
In parliament, the budget goes through 5 stages
1. Presentation of budget with Finance Minister’s speech

2. General discussion of the budget. After this, there is an adjournment of houses so that
standing committees scrutinises the demand for grants for a month.

3. Voting on demand for grants in Lok Sabha

4. Passing of appropriation bills

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5. Passing of Finance bills.

Budget Presentation
The budget is presented to the parliament on the date fixed by the President. Generally, it was
presented on the last working day of February, a month before the commencement of the
financial year but this 92 years old practices of presenting budget has been changed now.
During general elections, the budget is presented twice, first to secure a vote on account for 4
months and later completely. Budget speech of finance minister is in two parts, Part A
constitute a general economic condition of the country while part B relates to taxation
proposals.
The general budget is presented in the Lok Sabha by Minister of Finance. At the conclusion of
the speech of the finance minister in Lok Sabha, annual financial statement is laid on the table
of Rajya Sabha.
Discussion of Budget
It is done in two stages. In the first stage, broad outlines of the budget, principle and policies
underlying it are to be discussed in general discussion of the budget which lasts for about 4-5
days. In second stage discussion is held based on reports of concerned Departments/Ministries
standing committees, which is usually done after a month of a general discussion of the budget.
Standing committees submit reports to the house which are persuasive in nature.
Vote on Account
Since the passing of the budget takes almost 2 months, the Government requires the sanction
of an amount to maintain itself for this period. According to Art 116, a special provision called
'Vote on Account' is created by which vote of parliament is obtained by the government for a
sum sufficient generally for 2 months to incur expenditure. During the election year a vote on
an account may exceed from 2-4 months expenditure.
Discussion and Voting on Demand for Grants
After standing committee reports are presented to the house, the house proceeds with a Ministry
wise discussion of committee reports and voting on demand for grants. The time for discussion
and voting on demand for grants is allocated by the speaker in consultation with the leader of
the house.

Guillotine
The guillotine is passing the Demand for Grants without discussion. On the last day of the
period allotted by speaker due to the paucity of time, speaker puts all the outstanding Demands
for grants to vote of the house. It is a device used for want of time.
Powers of both the Houses
Introduction and voting on Demands for Grants is confined only to the Lok Sabha. The Lok
Sabha has the power to assent, refuse to assent and even to reduce the amount of the Demand
for Grant. In Rajya Sabha, there is only general discussion of the budget. The upper house does
not vote on the Demands for Grants.

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Cut Motions
Cut motions are motions for reduction in various demand for grants. Cut motions seek a
reduction of an amount of demands of grants on the following grounds: economy, policy cut
and token cut.
Categories of Cut motions
Economy cut
Economy cut motion demands reduction of a specified amount from the demand for Grant
representing the welfare of the economy.
Policy cut
According to policy cut motion, the demand for a grant is reduced to Re.1 representing the
disapproval of the policy underlying the demand. A member giving such notice should indicate
precise terms, the particulars of the policy which he proposes to discuss. It is open to the
member to advocate alternative policy.
Token cut
Token cut motion is used to voice a grievance. In token cut, the amount of the Demand for
Grant is reduced by Rs.100 in order to express a specific grievance.
Types of Bills
Finance bill
It is introduced in the Lok Sabha immediately after the presentation of the general budget. The
finance bill contains fresh taxation proposals and variations in existing duties. They are
contained in Article 117 of Indian constitution. Finance bill is of two types. Provisions of the
first type relate to the money bill. Provisions of the second type of Finance bill are same as that
of an Ordinary bill.
Money bill
No bill is money bill unless it satisfies the requirements of Article 110. A bill is money bill
only if it contains provisions dealing with all or any of six matters specified in Article 110. A
Financial bill, which receives the certificate of the speaker, is a money bill. The decision of
speaker of House of the people is final and his certificate that a particular bill is money bill is
not liable to be questioned.
Appropriation Bill
An appropriation bill is intended to give authority to the Government of India to incur
expenditure from the consolidated fund of India. After the voting of Demand for grants has
been completed, the government introduces an appropriation bill. Appropriation bill includes
charged expenditure and sums granted by voting on demand for grants. The procedure for
passing the appropriation bill is same as that of the money bills.
Types of Expenditure
Charged expenditure

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It includes expenditure specified in the constitution. There is no voting on charged expenditure.

It includes emoluments of the president and the salaries and allowances of the chairman and
deputy chairman of the Rajya Sabha, speaker and deputy speaker of Lok Sabha, Judges of the
Supreme Court, CAG, and certain other bodies/agencies specified in the constitution.
Non-Charged Expenditure
It is the votable expenditure. It is the sum required to meet other expenditure proposed to be
made from the consolidated fund of India. In other words amount of expenditure incurred
through Demand for Grants.

Types of Grants
The provisions related to supplementary, additional and excess grants are specified in Art.115.
Supplementary Grant
If the amount authorised in the original budget for a particular service for a current financial
year is found to be insufficient, supplementary grant may be made by the Parliament.
Excess grant
It is a grant to retrospectively authorise excess of expenditure committed by an executive. The
public accounts committee recommends such retrospective regularisation on the basis of CAG
report.
Additional Grant
It is the grant made by the parliament for expenditure on new service not contemplated in the
annual financial statement that year.
Token grant
Spending money sanctioned for one head on another head within the same ministry with the
permission of finance ministry is done through a token grant. In the token grant, it seeks a token
sum of Rs.1 from Lok Sabha to spend on a new service.
Exceptional Grant
Through exceptional grant money is sought for service that is not part of the current service of
any financial year.
Indian constitution under Article 112-117 enshrines powers of parliament in the enactment of
the Budget. According to article 112-117, any proposal for expenditure and demand for a grant
can be made only on the recommendation of the President. The parliament has to pass a
financial bill within 75 days of its introduction. After discussion in both the houses on demand
for Grants, Financial bill and appropriation bill and voting of the Lok Sabha Budget is enacted
and expenditure can be incurred from the consolidated fund of India.

MONEY BILL

HOW A BILL BECOMES AN ACT

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A Bill is the draft of a legislative proposal. It has to pass through various stages before
it becomes an Act of Parliament.

First Reading

The legislative process starts with the introduction of a Bill in either House of
Parliament—Lok Sabha or Rajya Sabha. A Bill can be introduced either by a Minister
or by a private member. In the former case it is known as a Government Bill and in the
latter case it is known as a Private Member’s Bill.

It is necessary for a member-in-charge of the Bill to ask for leave to introduce the Bill.
If leave is granted by the House, the Bill is introduced. This stage is known as the
First Reading of the Bill. If the motion for leave to introduce a Bill is opposed, the
Speaker may, in his discretion, allow brief explanatory statement to be made by the
member who opposes the motion and the member-in-charge who moved the
motion. Where a motion for leave to introduce a Bill is opposed on the ground that the
Bill initiates legislation outside the legislative competence of the House, the Speaker
may permit a full discussion thereon. Thereafter, the question is put to the vote of the
House. However, the motion for leave to introduce a Finance Bill or an Appropriation
Bill is forthwith put to the vote of the House.

Publication in Gazette

After a Bill has been introduced, it is published in the Official Gazette. Even before
introduction, a Bill might, with the permission of the Speaker, be published in the
Gazette.

In such cases, leave to introduce the Bill in the House is not asked for and the Bill is
straightaway introduced.

Reference of Bill to Standing Committee

After a Bill has been introduced, Presiding Officer of the concerned House can refer
the Bill to the concerned Standing Committee for examination and make report
thereon.

If a Bill is referred to Standing Committee, the Committee shall consider the general
principles and clauses of the Bill referred to them and make report thereon. The
Committee can also take expert opinion or the public opinion who are interested in

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the measure. After the Bill has thus been considered, the Committee submits its report
to the House. The report of the Committee, being of persuasive value shall be
treated as considered advice given by the Committees.

Second Reading

The Second Reading consists of consideration of the Bill which is in two stages.

First Stage: The first stage consists of general discussion on the Bill as a whole when
the principle underlying the Bill is discussed. At this stage it is open to the House to
refer the Bill to a Select Committee of the House or a Joint Committee of the two
Houses or to circulate it for the purpose of eliciting opinion thereon or to straightaway
take it into consideration.

If a Bill is referred to a Select/Joint Committee, the Committee considers the Bill

clause-by-clause just as the House does. Amendments can be moved to the various
clauses by members of the Committee. The Committee can also take evidence of
associations, public bodies or experts who are interested in the measure. After the Bill
has thus been considered, the Committee submits its report to the House which
considers the Bill again as reported by the Committee. If a Bill is circulated for the
purpose of eliciting public opinion thereon, such opinions are obtained through the
Governments of the States and Union Territories. Opinions so received are laid on the
Table of the House and the next motion in regard to the Bill must be for its reference
to a Select/Joint Committee. It is not ordinarily permissible at this stage to move the
motion for consideration of the Bill.

Second Stage: The second stage of the Second Reading consists of clause-by-clause
consideration of the Bill as introduced or as reported by Select/Joint Committee.

Discussion takes place on each clause of the Bill and amendments to clauses can be
moved at this stage. Amendments to a clause have been moved but not withdrawn
are put to the vote of the House before the relevant clause is disposed of by the House.
The amendments become part of the Bill if they are accepted by a majority of members
present and voting. After the clauses, the Schedules if any, clause 1, the
Enacting Formula and the Long Title of the Bill have been adopted by the House, the
Second Reading is deemed to be over.

Third Reading

Thereafter, the member-in-charge can move that the Bill be passed. This stage is
known as the Third Reading of the Bill. At this stage the debate is confined to
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arguments either in support or rejection of the Bill without referring to the details thereof
further than that are absolutely necessary. Only formal, verbal or consequential
amendments are allowed to be moved at this stage. In passing an ordinary Bill, a
simple majority of members present and voting is necessary. But in the case of a Bill
to amend the Constitution, a majority of the total membership of the House and a
majority of not less than two-thirds of the members present and voting is required in
each House of Parliament.

Bill in the other House

After the Bill is passed by one House, it is sent to the other House for concurrence
with a message to that effect, and there also it goes through the stages described
above except the introduction stage.

Money Bills

Bills which exclusively contain provisions for imposition and abolition of taxes, for
appropriation of moneys out of the Consolidated Fund, etc., are certified as Money
Bills. Money Bills can be introduced only in Lok Sabha. Rajya Sabha
cannot make amendments in a Money Bill passed by Lok Sabha and transmitted to it.
It can, however, recommend amendments in a Money Bill, but must return all Money
Bills to Lok Sabha within fourteen days from the date of their receipt. It is open to Lok
Sabha to accept or reject any or all of the recommendations of Rajya Sabha with
regard to a Money Bill. If Lok Sabha accepts any of the recommendations of Rajya
Sabha, the Money Bill is deemed to have been passed by both Houses with
amendments recommended by Rajya Sabha and accepted by Lok Sabha and if Lok
Sabha does not accept any of the recommendations of Rajya Sabha, Money Bill is
deemed to have been passed by both Houses in the form in which it was passed by
Lok Sabha without any of the amendments recommended by Rajya Sabha. If a Money
Bill passed by Lok Sabha and transmitted to Rajya Sabha for its recommendations is
not returned to Lok Sabha within the said period of fourteen days, it is deemed to have
been passed by both Houses at the expiration of the said period in the form in which
it was passed by Lok Sabha.

DISTINCTION BETWEEN MONEY BILL, FINANCE BILL AND BILLS

INVOLVING EXPENDITURE
1. A Money Bill is a Bill which contains only matters mentioned in Art110(1)
A Financial Bill, apart from dealing with one or more of the matter* mentioned in Art.
110(1) deals with other matters also. Thus, ’Finance Bill" is a Money Bill to which
provisions of general legislation are also added apart from one or more matters of Art.
110(1). All Money Bills are Financial Bills but all Financial Bills are not Money Bills
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2. In two matters, the Money Bills and the Financial Bills do not differ: (1)A Financial
Bill, like the Money Bill, can only originate in the Lok Sabha, (2) Like Money Bill, the
Financial Bill also cannot be introduced without the recommendation of the President.
[(Art. 117(1)].

3. Financial and other Bills involving expenditure differ from a Mona Bill in so far as the
former can be amended or rejected by the Rajya Sabha like any Ordinary Bill. The
Rajya Sabha cannot amend or reject a Money Bill and if there is a deadlock between
the Houses, it can be resolved by the joint session of the Houses. Thus, the Rajya Sabha
has some control over Financial and other I Bills involving expenditure.
4. As regards the procedure for its passage, a Financial Bill is as good as I an ordinary bill
except that a Financial Bill cannot be introduced without the President's
recommendation and it can only be introduced in the Lok Sabha Thus, a Financial Bill
is passed according to the ordinary procedure provided I for passing of an Ordinary
Bill.

5. As far as Presidential assent is concerned in case of Money Bill, the President may
either give his assent or refuse his assent. In case of a Financial Bill, he may, however,
in addition, refer it back to the House with a measure for reconsideration (Art. 111).
CONSTITUTIONAL LIMITATIONS UPON THE TAXING POWER
Apart from Art 265 and the limitations imposed by the division of the taxing power between
the Union and the State Legislature by the relevant entries in the Legislative list, the taxing
power of either Legislature is particularly subject to the following limitation imposed by
particular provision of our constitution.
(i) It must not contravene Art 13.
(ii) It must not deny equal protection of the laws (Art 14).
(iii) It must not constitute an unreasonable restriction upon the rights of business [Art
19(l)(g)].
(iv) No tax shall be levied the proceeds of which are specifically appropriated in
payment of expenses for the promotion or maintenance of any particular religion or
religious denomination. (Art 27).
(v) A State legislature or any authority within the State cannot tax the property of the
Union (Art 285).
(vi) The Union cannot tax the property and income of a State (Art 289).
(vii) The power of a State to levy tax on sale or purchase of goods is subject to Art 286.
(viii) Save in so far as Parliament may by Law otherwise provide a State shall not tax the
consumption or sale of electricity in the case specified in Art 287.
(ix) Imposition of tax should not impede the free flow of trade. Commerce and
intercourse (Art 301).
(x) Levy of tax must not offend Art 304 (a).

Finance Act

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Finance Act is an annual Act passed regularly by the parliament every year. It fixes the tax
rates, tax exemptions and tax- deductions for each year. Amendments to taxation laws are also
made through the Finance Act. If in any particular year, the Financial Act is not passed by 1 st
April, then the tax rates for that year shall be charged according to the tax rates prevalent in the
previous year or at the rates proposed in the new unpassed Finance Bill, whichever is more
favourable to the assesse. Finance Act is also accompanied by the Annual Budget.

CHAPTER 9
Tax Reforms In India, Overview Of Suggestions Of Various Tax Reforms
Committees In India.
TAXATION ENQUIRY COMMISSION REPORT 1954
This was the first attempt to Reform the tax system in India post-independence. It was headed
by John Mathai former Finance Minister of the Union.
Main Recommendations
• Tax Holiday and incentives to new industrial undertakings, in order to trigger
industrialisation and capital formation in crucial areas.
• Development rebate to be allowed
• Widening and deepening of tax structure at centre and state levels to reduce inequalities
KALDOR COMMITTEE REPORT, 1957
Headed by Nicholas Kaldor of Cambridge University who was invited by Indian government
to India in order to study the existing tax system in India and suggest reforms. Kaldor made an
in-depth study and arrived at the conclusion that the then existing tax system in India was
inequitable unscientific and inefficient. Crores of money where been evaded under Income
Tax. Therefore he suggested the introduction of Wealth Tax to supplement the Income Tax
Act.So that revenue which was being evaded under Income Tax law could be harnessed through
wealth tax law. This is due to a logic that even though it may be easy for a person to conceal
his income it would be relatively more difficult to conceal his wealth. Even though Kaldor had
recommended only individuals and HUF as assessees for the purpose of wealth tax; the
government also included companies under the purview of wealth tax Act.
WANCHOO COMMITTEE REPORT 1971
Also known as Direct Taxes Enquiry Committee headed by Justice Wanchoo of Supreme
Court. Main focus of this committee was on tax evasion and black money. Reasons for large-
scale tax evasion where held to be:
• High tax rates
• High controls and licences
• Inadequate information system
Wanchoo committee disapproved Voluntary Disclosure Scheme as a measure to curb tax
evasion, and favoured more severe measures like search and seizure.

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Settlement Commission system was introduced as per recommendations of Wanchoo

committee. Under Settlement Commission system an assessee who's tax cases are pending
before tax authorities can withdraw these cases and settle them for once and all before the
settlement Commission. However, he should fulfil certain conditions like payment of
additional tax, true and full disclosure of liabilities etc. Settlement Commission will give him
conditional immunity from penalty and prosecution. Wanchoo Committee also recommended
reduction in tax rates and simplification and rationalization of tax system.
JHA COMMITTEE REPORT 1991
Also known as Indirect Taxation Enquiry Committee headed by L K Jha, former governor of
RBI. The committee recommended the following features of an ideal tax system
• Elasticity with reference to National Income. As National Income rises, revenues
should go up proportionately
• From a social angle, tax burden should be made progressive. It should effect more
heavily on the rich than on the poor.
• Indirect taxes have impact on production, employment, investment costs and prices.
Hence, should not be so heavy so as to adversely affect efficient use of economic
resources.
• Procedures for levy and collection of tax should involve minimum cost and harassment
of tax so as to minimise litigation
• In order to avoid cascading effect of indirect taxes, excise duty should be lowered and
VAT introduced.
RAJA CHELLIAH COMMITTEES REPORT, 1991
Raja Chelliah is also known as the father of India's tax reforms. Chairman of TRC [Taxation
Reforms Committee]. The following where the main recommendations of Raja Chelliah
Committee:
• Introduction of VAT. This would lead to efficiency, equal competition and fairness in
the tax system.
• More Reliance on indirect taxes. As the majority of Indians have low incomes and high
consumption.
• Conduct tax-payer education programs, workshops, distribute pamphlets etc.
• Give refunds in time.
• Conduct periodic inspection to detect tax evasion.
• Introduce scientific audit system.
• Identify unregistered potential tax payers.
• Prevent misuse of input tax credit by dealers.
The following recommendations of Raja Chelliah Committee were implemented:
• Drastic reduction in Customs and Excise duty.
• Lowering of Corporation tax. Differentiating between closely held and widely held
companies for tax purpose was abolished. Dividend stocks reduced to 10 percentage by
2001 to 2002. By 2003 to 2004 there was a reversal in the starting system from the
hands of shareholders to the companies.
• By 1997-98 maximum rates of income tax was fixed at 30 %
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• Wealth tax on shares security etc were abolished

• Tax reforms since 1991 were initiated as a part of structural reforms process following
the economic crisis in 1991
KELKAR COMMITTEE REPORT, 2012
Headed by Vijay Kelkar also known as Report On Fiscal Consolidation or Task Force. Also
suggested some tax reforms.
1. To bring tax GDP ratio to a higher level of 11.9 %
2. To implement GST which would increase output, export and tax revenues. Central
Excise and service tax to be merged in GST.
3. National portal for taxpayers to file application for rectification and appeals.
4. Amendment of the relevant laws to ensure mandatory quoting of Pan [Permanent
Account Number] and UID [Unique Identification Number] in all economic
transactions, like bank accounts, fixed deposit, salary payments, immovable property
transactions etc.
5. Subsidy on diesel is main cause of India's fiscal deterioration. Recommended increase
in price of diesel, kerosene and LPG.
6. Tax system should be made simple so as to promote voluntary compliance.
7. Abolished dividend distribution tax and MAT [Minimum Alternate Tax].
8. Abolish exemptions given without appreciating the logic and objectives.
9. Give power to Central Government to impose tax on Agricultural Income. States should
pass resolution under article 252 of the Constitution for this purpose.
10. Two rates of taxes for customs and excise duties.
11. Exemptions from CENVAT to be given only for life saving drugs, security items.
12. Exempt public utility services from service tax etc.
13. Institution of simple, transparent tax system and widening tax base.

PARTHASARATHY SHOME COMMITTEE REPORT, 2012

Set up by Dr. Manmohan Singh. Headed by Parthasarathy Shome. Laid down GAAR [General
Anti Avoidance Rules]
Main recommendations of Shome Panel.
• Retrospectively in tax laws only in rarest of rare cases; to correct anomalies in tax
statutes, clarify technical/procedural defects and prevent tax-abuse under scheme of
tax-planning.
• Intensive training to tax officers in international taxation.
• Abolish tax on capital gains.
• Increase in STT [Securities Transactions Tax].
• Selection of CBDT and CBEC heads should be based on specialisation and policy
experience and not just seniority. Lack of cooperation between CBDT and CBEC
should be solved. Artificial separation between CBDT [Central Board of Direct taxes]
and CBEC [Central Board of indirect taxes] should be done away with and an integrated
authority of CBDIT [Central Board of Direct and Indirect Taxes] should be established.
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• Improve elasticity of tax system.

• Regular adjustment of tax-rates according to inflation-rates.
• Removal of unreasonable exemptions.
Shome panel focused mainly on preventing tax avoidance rather than
generation of tax revenue
TARC REPORT TAXATION ADMINISTRATION REFORMS COMMITTEE
REPORT, 2014
Main recommendations
• For consumer focus 10 percentage of tax administration budget should be spent on tax
payer services.
• Pre-filled tax returns with options should be introduced.
• Post of revenue secretary to be abolished. This function should be assigned to CBDT
and CBEC. There should be a governing Council to oversee them. This Council should
suggest tax policy and legislation.
• Human resource development- IRS Officers should specialise in particular areas of
taxation.
• Central Vigilance Commission should have an IRS officer as a member.
• Scheme of Pre-dispute consultation should be introduced.
• PAN {Permanent Account number} should be further developed into CBIN [Common
business identification number] which can be referred to by both CBDT and CBIT.
Other relevant tax committees
o Tyagi Committee 1958 also known as Direct Taxes Administration Enquiry
Committee
o Sir Srinivasa Vardhachiar Commission, 1947 one of the main forces behind
enactment of Income Tax Act, 1961.
o Boothalingam Committee 1961 also known as Committee for Rationalization and
Simplification of Tax Structure.
o K.N Raj Committee 1972 suggested to bring Agricultural Income Tax under Income
Tax net for calculation purpose.

CHAPTER 10
Recent Trends in Taxation
1. Introduction of GST
Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that
will be levied on every value addition.
Full form of GST is Goods and Services Tax. GST is defined in article 366 (12 A) to mean
“any tax on supply of goods and service or both except taxes on supply of the alcoholic liquor,
human consumption” It is a single indirect tax for the whole nation, one which will make India
a unified common market. It is a single tax on the supply of goods and services, right from the
manufacturer to the consumer. The GST Bill was introduced in Lok Saba in 2009 by erstwhile
UPA government but they failed to get it passed. The NDA government introduced a ‘slightly

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modified’ version of the GST Bill in the Parliament and both the Houses passed it. Through
GST, the government aims to create a single comprehensive tax structure that will subsume all
the other smaller indirect taxes on consumption like service tax, etc. Touted to be a major game
changer, in the words of Union Finance Minister Arun Jaitley ‘it will lead to the financial
integration of India’.
Currently, tax rates differ from state to state. GST will ensure a comprehensive tax base with
minimum exemptions, will help industry, which will be able to reap benefits of common
procedures and claim credit for taxes paid. GST, as per government estimates, will boost India's
GDP by around 2 per cent.
Why GST needed
GST will break the complicated structure of separate central and state taxes which often overlap
with each other to create a uniform taxation system which will be applicable across the country.
Taxes will be implemented more effectively since a network of indirect taxes like excise duty,
service tax, central sales tax, value added tax (VAT) and octroi will be replaced by one single
tax. The state will still have a say in taxation, as the number of taxes will be reduced to three
with Central GST, State GST and Integrated GST for inter-state dealings.
GST rates
The GST Council, headed by Jaitley and of which all states Finance Ministers are members,
has approved four main tax slabs -- 5 per cent, 12 per cent, 18 per cent and 28 per cent that
aims to lower tax incidence on essential items and to keep the highest rate for luxury and
demerits goods. The lowest rate of 5 per cent will be on items of mass consumption which are
used particularly by common people. The second and third category of standard rates of 12 and
18 per cent will accommodate most of the goods and services. The fourth slab of 28 per cent is
levied mainly on white goods such as refrigerators, washing machines etc.
GST Impact
On salaried employees, self-employed professionals
GST is applicable mainly for businesses and hence won’t directly affect the salaried class and
self-employed professionals such as doctors, lawyers etc. However, it will impact their
expenses due to the change in rates of goods and services they avail. Other than that, they will
continue to pay their income tax like before. The medical sector has been exempted from GST.
On businesses
The GST is all set to change the way businesses have operated until now. The elimination of
multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions
will improve the ease of doing business and reduce avoidable litigation. It also untangles a
complex web of taxes that businesses have been subjected to under the existing system.
However, these advantages are only going to be visible in the long run. At the moment,
businesses are clearly unsure about what the immediate impact will be. Other than the
unpredictability over the increase in the headline tax rate on many items being offset by the
extra tax credits on raw materials and services, as claimed by the government, adopting to a
whole new online system is a task in itself.
The taxes GST will subsume

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Industries and commercial enterprises were paying various taxes at various stages of a product
or service, such as manufacture, transport, wholesale, logistics and retail. The administration
of these taxes were often tangled in paperwork, resulting in slow inter-state movement of
products and increased costs for consumers. GST new replaces at least 17 existing indirect
taxes being levied by the Centre and states.
This includes Central Excise Duty, Duties of Excise (medicinal and toilet preparations),
Additional Duties of Excise (goods of special importance), Additional Duties of Excise
(textiles and textile products), Additional Duties of Customs (commonly known as CVD),
Special Additional Duty of Customs (SAD), Service Tax, Cesses and surcharges in so far as
they relate to supply of goods or services, State taxes that the GST will subsume (all Central
taxes); State VAT, Central Sales Tax, Purchase Tax, Luxury Tax, Entry Tax (all forms),
Entertainment Tax (not levied by local bodies), Taxes on advertisements, Taxes on lotteries,
betting and gambling, State cesses and surcharges (all state taxes).
All these taxes have been replaced by Central GST, State GST and Integrated GST (on every
inter-state supply of goods and services). After its implementation, consumers will not be
subjected to the burden of double taxation. The final consumer will bear only the GST charged
by the last dealer in the supply chain, with set-off benefits at all the previous stages.

GST Benefits:
Elimination of Multiple Taxes
The biggest benefit of GST is an elimination of multiple indirect taxes. All taxes that currently
exist will not be in picture. This means current taxes like excise, octroi, sales tax, CENVAT,
Service tax, turnover tax etc will not be applicable and all that will fall under common tax
called as GST.
Saving more Money
For a common man, GST applicability means the elimination of double charging in the system.
This will reduce the price of goods and services & help common man for saving more money.
It is expected that price of FMCG products, small cars, cinema tickets, electrical wires etc is
expected to reduce.
Ease of business
GST will bring one country one tax concept. This will prevent unhealthy competition among
states. It will be beneficial to do interstate business.
Easy Tax Filing and Documentation
For a businessman, GST will be a boon. No multiple taxes means compliance and
documentation will be easy. Return filing, tax payment, and refund process will easy and hassle
free.
Cascading Effect reduction
GST will be applicable at all stages from manufacturing to consumption. GST will provide tax
credit benefit at every stage in chain. Today at every stage margin is added and tax is paid on

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whole amount, in GST you will have tax credit benefit and tax will be paid on margin amount
only. It will reduce cascading effect of tax thereby reducing cost of product.
More Employment
As GST will reduce cost of product it is expected that demand of product will increase and to
meet the demand, supply has to go up. The requirement of more supply will be addressed by
only increasing employment.
Increase in GDP
As demand will grow naturally production will grow and hence it will increase gross domestic
product. It is estimated that GDP will grow by 1-2% due to GST.
Reduction in Tax Evasion
GST is a single tax which will include various taxes, making the system efficient with very
little chances of corruption and Tax Evasion.
More Competitive Product
As GST will address cascading effect of tax, inter-state tax, high logistics cost it will make
manufacturing more competitive. This will bring advantage to businessman and consumer.
Increase in Revenue
GST will replace all 17 indirect taxes with single tax. Increase in product demand will
ultimately increase tax revenue for state and central government.
Goods and service tax is a boon for the Indian economy and the common man. It is a welcome
step taken by the government.

Exemptions under GST:

Under GST, the government has fixed GST rates on 1,211 goods and 500 services in the range
of five to 28 per cent. Certain items such as alcohol, petrol, diesel and natural gas will be
exempt under the GST. In addition to these, the GST Council has also classified certain items
under the 0 per cent tax rate, implying that GST will not be levied on them. This list includes
items of daily use such as wheat, rice, milk, eggs, fresh vegetables, meat, fish, sindoor, bindi,
stamps, judicial papers, printed books, newspapers, bangles, handloom, bones and horn cores,
bone grist, bone meal, kajal, children's' picture, drawing or colouring books, human hair.

2. Wealth Tax in India Abolished

Wealth Tax in India was introduced in India in the year 1957 and is levied on Individuals,
HUFs and Companies if the Net Wealth of such person exceeds Rs. 30 Lakhs on the Valuation
Date i.e. last date of the previous year. For the purpose of computation of taxable net wealth,
only a few specified assets are taken into account.
Arun Jaitley while announcing Budget 2015 announced that the levy of Wealth Tax has now
been completely removed from Financial Year 2015-16 onwards. The loss of revenue due to
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the abolishment of Wealth Tax would be compensated by the levy of additional surcharge on
high income earning assessees.
The levy of surcharge is easy to collect & monitor and also does not result into any compliance
burden on the taxpayer as well as the administration department. The information pertaining to
assets which is currently required to be furnished in the Wealth Tax Return would now be
required to be mentioned in the Income Tax Return. The new Income tax return forms would
accordingly be amended so as to capture the details of assets.
Reason for Abolishment of Wealth Tax
The Wealth Tax Act which was introduced in 1957 was thoroughly revised in 1993 on
recommendations of the Chelliah Committee. The Chelliah Committee had recommended
abolition of Wealth Tax in respect of all items of wealth other than those which can be regarded
as unproductive forms of wealth or other items whose possession could legitimately be
discouraged in Social Interest.
The actual collection from the levy of wealth tax during the Financial Year 2011-12 was 788.67
Crores and during the Financial Year 2012-13 was Rs. 844.12 Crore only. The no. of Wealth
Tax assesses was around 1.15 Lakhs in 2011-12.
Although only a nominal amount of revenue is collected from the levy of wealth tax; this levy
creates a significant amount of compliance burden on the taxpayers as well as administrative
burden on the department. This is because the taxpayers are required to value the assets as per
the provisions of the Wealth Tax Rules for computation of net wealth and for Certain Assets
like Jewellery, they are required to obtain valuation report from the Registered Valuer.
Moreover, the assets which are specified for the levy of Wealth Tax, being unproductive like
Jewellery, Luxury Cars etc are difficult to be tracked and this gives an opportunity to the
assesses to under report/ under value the assets which are liable to wealth tax.
Due to this, the collection of wealth tax over the years has not shown any significant
improvement and has only resulted in disproportionate compliance burden on the taxpayers
and administrative burden on the department.
Due to the above-mentioned reasons, the levy of Wealth Tax in India has been abolished and
removed. The loss of revenue to the govt, due to removal of the levy of Wealth Tax would be
compensated by the additional surcharge levied on high income earning assessees.

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CHAPTER 11
INTERPRETATION OF TAXING STATUTES.

Interpretation means the art of finding out the true meaning of the words in a statute[law]. A
taxing statute is a law which compulsorily imposes a tax, fee, cess or duty. A taxing statute
consists of 3 main parts:
1. Charging Section- A section which declares the tax-liability of a person.
2. Assessment Sections- contains the methods of compiling/calculating the tax payable.
3. Recovery Sections- Contains provisions for recovery of tax from a person who does not
pay tax voluntarily.
Generally, Strict Rule of interpretation is to be followed in case of taxing statutes. It covers the
following principles:
1. There is no presumption or equity as to tax. If a person comes clearly within the scope
of the charging section of a taxing statute, he must be taxed no matter how great is
hardship maybe

2. A person can be taxed only if the words of the taxing statutes clearly, expressly and
unambiguously imposes tax liability upon him. Before taxing a person, it must be
shown that he falls within the ambit of the charging section by clear words used in that
section. There is no implied power to tax. The power to tax must be express and clear.
[Russell v. Scott(1948) 2 ALL ERI]
In Commissioner of Wealth Tax v. Ellison Bridge Gymkhana.
While integrating a taxing statute, if an ambiguity occurs; that is, if the words of the
taxing statute are open to double meanings; one in favour of the taxpayer and one
against him, then that meaning which is favourable to the taxpayer must be adopted.
In CIT v. Jalgaon Electric Supply Co.
It was held that there is nothing wrong or unjust, if the taxpayer escapes from the law
due to inability of the Legislature to express itself clearly.
3. Charging section and computation sections must be read together. If the computation
sections cannot be applied to a person's case; it can be safely interpreted that the
charging section also does not apply to him. [CIT v. Srinivasa Setty]

4. An interpretation which supports double taxation should be avoided as far as possible.

But if the double taxation is legally maintainable(if it is imposed by competent
authorities through a clear law and does not violate fundamental rights) then it can be
upheld.

5. If there is a Casus Omisus (a point missed or not provided for by the legislature) in a
taxing statute, then the courts should not try to fill in such gaps as it feels like. [J.
Srinivasa Rao v. Government of AP]

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6. Logic or reason is of not much use in the interpretation of taxing statutes. For eg. In
Azamjha v. Expenditure Tax Officer the issue was the interpretation of the word
"dependent". According to words in the Act "dependent" means the assessees' spouse,
minor child or any person wholly or mainly dependent on the assessees. The court held
that the words “wholly or mainly dependant on the assessee” is not applicable to spouse
and minor child. Hence, spouse and minor child can be treated as dependents even if
they have separate incomes are not actually dependent on the assessee.

In Forage & Co Ltd. v. Municipal Corporation of Bombay the schedule of the Act laid
down a list of items taxable under the head of “Materials used for road construction and
repair”. Zinc Oxide was one of the items mentioned in the list. The assessee contented
that zinc oxide was not a material used for road construction or repair. But the court
held that where the words of the Act are clear and express; then it should be followed
strictly. Hence zinc oxide is taxable under the head of “Materials used for road
construction and repair’ even though it is not actually used for that purpose.

7. While classifying taxable goods under the taxing statute, specific headings should be
given more preference then general headings. For eg. In Alpine Industries v. CCE the
question was, under which heading is lip-balm taxable. Court held that it would not
come under the general heading of “Medicament” but under the specific head of
“preparation for skin care”.
If there is a change in the meaning of a taxable good as a result of which it comes under
a different classification head, then the burden of proof is on the tax department to prove
it. For example, in Mauri Yeast India private limited v. State of UP. The tax department
accepted the classification of the assessees’ goods under a particular entry for over 20
years. Later, the department tried to tax it under a different entry. Court held that it is
up to the department to prove that the meaning of the goods has changed in order to
classify it under a different entry.
8. If there are penalty/punishment provisions in a taxing statute, the court should follow
the doctrine of mens rea while interpreting such provisions. [Gujarat Travancore
Agency v. CIT.]

9. While intepreting the classification of a good that is, while deciding whether a particular
good is taxable or not, it's common parlance meaning should be adopted unless the Act
gives a special meaning to that good.

Eg. [Motipur Zamindary v. State of Bihar]

The issue was whether sugarcane was a ‘green-vegetable’ for the purpose of tax
exemption under the Bihar Sales Tax Act. The court held that though sugarcane is a
‘green-vegetable’ botanically yet it cannot be treated as a green vegetable in its popular
meaning. Hence, it is taxable.
10. While interpreting tax-exemption provisions, the object of the tax-exemption should be
considered. If the object of the tax exemption is public good or social welfare then
liberal interpretation which favours the exemption should be followed. Eg. Tax
exemptions for non-profit making educational institutions. [Oxford University press
v. CIT]. If the tax-exemption does not involve much public welfare objects or other

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beneficent objects; then it should be interpreted strictly. That is, if two views are
possible; the one which is against the assesse should be followed. Otherwise it may lead
to increase the burden on society.

11. And interpretation which is likely to lead to large-scale tax-evasion and tax-avoidance
should be avoided. [CCE v. Acer India Ltd. ]

12. Even though equity and tax are strangers, when two views are possible; the view which
is equitable should be adopted and the view which results in injustice should be avoided.
In CIT v. J.H Gottayadgiri -Under the Income Tax Act, the income from business of a
wife or minor child of the assesse is treated as the income of the assesse himself the
court held that in such a situation the business losses of the assessees’ wife or minor
child can be treated as the loss of assessees and can be deducted by the assesse.

SOME TERMS FROM PREVIOUS QUESTION PAPERS (2016,

2015)
What is Consumption Tax?
Consumption tax refers to the tax we pay for using goods and services. It is deducted on the
money spent on consumption. It is a kind of indirect tax like sales tax or value added tax.
Consumption tax is also known as cash-flow tax, expenditure tax or even consumed income
tax.
Consumption tax can be rather regressive in nature, like other sales taxes. Using methods of
exemptions, deductions, graduated rates, tax rebates etc will make this kind of tax less
regressive in nature. The tax exemptions and deductions accumulated will in turn reduce the
taxpayer’s burden; and also will be a form of saving when it comes to your taxes. This is a tax
for the expenses made by you, while income tax is a tax you pay on the income earned by you.
Consumption Tax Features:
• Consumption Tax is a western concept, and will be gradually moving it’s way towards
the east. Some of the main features of consumption tax are:
• Everyone who pays consumption tax will get certain exemptions and deductions, so
that the people with lower consumption power do not have to pay these taxes.
• Any individual who is liable to pay consumption tax will not receive any deductions
since they have the ability to save, and these savings are already subject to deduction.
• The consumption tax payee will get tax exemption on all incomes placed in investments
made, since it taxes only consumptions made or amount spent, not saved.
Regulatory And Compensatory Tax:
Tax is a compulsory Contribution and is the sovereign attribute of the State. It is a branch of
Public Finance of every Economy. Taxation is collection of revenue and Public expenditure
is the application of the revenue so collected. Tax is necessary for the Functioning of Every
Economy of the World, without it all the duties and the obligations of the state will be undone
and power unused.

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To smoothen the movement of interstate trade and commerce, the state has to provide many
facilities by way of roads etc.. The concept of regulatory and compensatory taxation has been
evolved with a view to reconcile the freedom of trade and commerce guaranteed by Art. 301
with the need to tax such trade at least to the extent of making it pay for the facilities
provided to it by the state, e.g., a road net-work. If a charge is imposed not for the purpose of
obtaining a proper contribution to the maintenance and upkeep of the road, but for the
purpose of adversely affecting trade or commerce, then it would amount to, a restriction on
the freedom of trade, commerce and intercourse.

The concept of regulatory and compensatory taxation has been applied by the Indian courts to
the state taxation under entries 56 and 57 of List II.

Atiabari Tea Co. V. State of Assam:

Facts: A tax levied by the State of Assam on the carriage of tea by road or inland waterways
was held bad for "the transport or movement of goods is taxed solely on the basis that the goods
are thus carried or transported, and thus "directly affects the freedom of trade as contemplated
by Art. 301."
The Supreme Court took the view that the freedom guaranteed by Art. 301 would become
illusory if the movement, transport, or the carrying of goods were allowed to be impeded,
obstructed or hampered by the taxation without satisfying the requirements of Art. 302 to 304.
The court did not take into consideration the quantum .of tax burden, which by no means was
excessive. Simply because the tax was levied on 'movement' of goods, from one place to
another, it was held to offend Art. 301.

The view propounded in Atiabari was bound to have great adverse effect upon the financial
autonomy of the states. It would have rendered their taxing power under entries 56 and 57, List
II.
Accordingly, the matter came to be re-considered by the Supreme Court in Automobile
Transport v/s Rajasthan:
Facts: The State of Rajasthan had levied a tax on motor vehicles ( Rs. 60 on a motor car and
Rs. 2000 on a goods vehicle per year) used within the state in any public place or kept for use
in the state. The validity of the tax was challenged. Taking the view that freedom of trade and
commerce under Art. 301 should not unduly cripple state autonomy, and that it should be
consistent with an orderly society, the Supreme Court now ruled that regulatory measures and
compensatory taxes for the use of trading facilities were not hit by Art. 301 as these did not
hamper, but rather facilitated, trade, commerce and intercourse.
Issue: A working test to decide whether a tax is compensatory or not would be to enquire
whether the trades people are having the use of certain facilities for the better conduct of their
business and paying not patently much more than what is required for providing the facilities?
A tax does not cease to be compensatory because the precise or specific amount collected is
not actually used in providing facilities.

The concept of compensatory tax evolved in this case was something new as in Atiabari, the
court had dismissed the argument that the money realized through the tax would be used to
improve roads and waterways rather curtly by saying that there were other ways, apart from
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the tax in question, to realize the money, and that if the said object was intended to be achieved
by levying a tax on the carriage of goods, the same could be done only by satisfying Art. 304(b).

Decision: The court ruled that Art.301 did not hit the tax, as it was a compensatory tax having
been levied for use of the roads provided for and maintained by the state. Thus, to this extent,
the majority view in Atiabari was now overruled by Automobile.

Since then the concept of regulatory and compensatory taxes has become established in India
with reference to entries 56 and 57, List II, and the concept has been applied in several cases,
and progressively the courts have liberalized the concept so as to permit state taxation at a
higher level.

The Direct Taxes Code (DTC)

Background on the Direct Taxes code
The Direct Taxes Code (DTC) is an attempt by the Government of India (GOI) to simplify
the direct tax laws in India. DTC will revise, consolidate and simplify the structure of direct
tax laws in India into a single legislation. The DTC, when implemented will replace the
Income-tax Act, 1961 (ITA), and other direct tax legislations like the Wealth Tax Act, 1957.
The Regime so far: 2009 - 2014
The first draft bill of DTC was released by GOI for public comments along with a discussion
paper on 12 August 2009 (DTC 2009) and based on the feedback from various stakeholders, a
Revised Discussion Paper (RDP) was released in 2010. DTC 2010 was introduced in the Indian
Parliament in August 2010 and a Standing Committee on Finance (SCF) was specifically
formed for the purpose which, after having a broad-based consultation with various
stakeholders, submitted its report to the Indian Parliament on 9 March 2012.
Recent action: As a follow-up on this initiative and as stated by the Finance Minister (FM) in
his Interim Budget Speech in February 2014, after taking into account the recommendations of
the SCF, a “revised” version of DTC (DTC 2013) has been released on 31 March 2014.
The DTC 2013 proposes to introduce:
• General Anti Avoidance Rules (GAAR),
• Taxation of Controlled Foreign Companies (CFC),
• Place of Effective Management (POEM) rule as a test to determine residency and tax
indirect transfer of Indian assets.
• Also contains expanded source rules for taxation of royalty, fees for technical services
(FTS) and interest.
Further certain novel provisions are also included such as additional tax levy on certain persons
having high net worth such as dividend tax levy on dividend income earned by resident
shareholders in excess of INR10 million. It also proposes a tax rate of 35% for
individuals/HUFs where the total income exceeds INR100 million.
The DTC 2013 is presently a draft version which can be implemented only after it is presented
before the Indian Parliament where. The fate of the DTC 2013 continues to be is uncertain.

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Nevertheless, DTC 2013 provides an opportunity to assess the impact of the proposals on
current structures and business models.
The Central Board of Direct Taxes
The Central Board of Direct Taxes (CBDT) is a part of Department of Revenue in the Ministry
of Finance. The CBDT provides inputs for policy and planning of direct taxes in India, and is
also responsible for administration of direct tax laws through the IT Department. The CBDT is
a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials
of the Board in their ex officio capacity also function as a division of the Ministry dealing with
matters relating to levy and collection of direct taxes. The CBDT is headed by Chairman and
also comprises six members, all of whom are ex officio Special Secretary to the Government
of India.
The Chairman and members of the CBDT are selected from the Indian Revenue Service (IRS),
whose members constitute the top management of the IT Department. The Chairman and every
member of CBDT are responsible for exercising supervisory control over definite areas of field
offices of IT Department, known as Zones. Various functions and responsibilities of the CBDT
are distributed amongst Chairman and six members, with only fundamental issues reserved for
collective decision by the CBDT. The areas for collective decision by the CBDT include policy
regarding discharge of statutory functions of the CBDT and of the Union Government under
the various direct tax laws. They also include general policy relating to:
• Set up and structure of Income Tax Department;
• Methods and procedures of work of the CBDT;
• Measures for disposal of assessments, collection of taxes, prevention and detection of
tax evasion and tax avoidance;
• Recruitment, training and all other matters relating to service conditions and career
prospects of all personnel of the Income-tax Department;
• Laying down of targets and fixing of priorities for disposal of assessments and
collection of taxes and other related matters;
• Write off of tax demand exceeding Rs.25 lakhs in each case;

Finance Commission
THE CONSTITUTION OF INDIA has laid down elaborate and detailed provisions for the
division of financial resources between the Union and the states. the scheme of division of
resources makes a clear bifurcation of taxes to be levied by the Union and the states.
Consequently, there is no overlapping tax jurisdiction as is common in most of the older
federations. The above scheme of distribution has tended to give the Union more flexible
sources of revenue and, as a result, created a gap between the needs and resources of the states.
It is an important problem of federal finance to bridge this gap between functions and resources.
In India, the Constitution has attempted a three-fold scheme to bridge this gap. Firstly, the
states are entitled to a share in federal taxes, namely, taxes on income (other than corporation
tax) and Union excise duties on some commodities. Secondly, the states are assigned the entire
proceeds of certain taxes levied by the Union, namely, estate duty, the tax on railway fares and

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additional excise duties levied in lieu of sales tax. Finally, the Constitution provides a system
of grants-in-aid of revenues.
Having made provisions for federal assistance to the states, both as grants-in-aid and as a share
of specified taxes, the Constitution visualised the necessity for a machinery independent of
Union Government to determine the measure of assistance that should be afforded and also the
principles on which this assistance should be made available. This machinery was created in
the form of Finance Commission to be appointed by the President every five years so that
such periodical adjustments can be made in the union-state financial relationship as are needed
in the light of the emerging situation.
The Finance Commission is a unique experiment in the Indian federal system. It has been
envisaged by the framers of the Indian Constitution as "a quasi-arbitral body whose funtion is
to do justice between the centre and the states". It is an authority without parallel in other
federations. The only other body which, bears some resemblance to it is the Commonwealth
Grants Commission of Australia. However, there are significant differences between the two
institutions as regards their status and the scope of their competence. The Indian Finance
Commission is created by the Constitution and it is not a standing body. It sits only once in
five years.
Article 280 of the Constitution which provides for the constitution of the Finance Commission
authorized Parliament to determine the qualifications required for appointment as members of
the commission, manner in which they should be selected and to prescribe the powers of the
commission for the performance of their functions.
Article 280 (3) of the Constitution lays down the functions of the Finance Commission. The
commission is required to make recommendations to the President as to (a) the distribution
between the Union and the states of the net proceeds of taxes which are to be or may be divided
between them and the allocation between the states of the respective shares of such proceeds,
(b) the principles which should govern the grants-in-aid of the revenues of the states out of the
Consolidated Fund of India, and (c) any other matter referred to the commission by the
President in the interests of sound finance. Under the Constitution, the decisions on the
commission's recommendations with respect to income tax is taken by the President and with
respect to other taxes, grants-in-aid, etc., by Parliament.

Powers of the Finance Commission:

• The Finance Commission is considered a quasi-judicial body because it has
powers of the civil court according to the Court of Civil Procedure.
• The Commission can summon and enforce the attendence of any witness
• It can ask any person to share information or produce a document, which it
deems relevant for carrying out its work.
• The Commission can ask for any public record or document from any court or
office in the country.

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Notes LAW OF Taxation

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LAW OF TAXATION
UNIT I
GENERAL
CONCEPT OF TAX - NATURE AND CHARACTERISTICS OF DIFFERENT TYPES
OF TAXES - DIRECT AND INDIRECT TAXES - DISTINCTION BETWEEN TAX,
FEES & CESS - TAX EVASION, TAX PLANNING & TAX AVOIDANCE -
RETROSPECTIVE TAXATION - FEDERAL BASE OF TAXING POWER - POWER
OF TAXATION UNDER THE CONSTITUTION, IMMUNITY OF STATE
AGENCIES/INSTRUMENTALITIES - FUNDAMENTAL RIGHTS AND THE
POWER OF TAXATION - COMMERCE CLAUSE, INTER STATE COMMERCE
AND TAXATION, SCOPE OF TAXING POWERS OF PARLIAMENT,
DELEGATION OF TAXING POWER TO STATE LEGISLATURES AND LOCAL
BODIES.

A1. INTRODUCTION
Before one can embark on a study of the law of income-tax, it is absolutely
vital to understand some of the expressions found under the Income-tax Act,
1961. The purpose of this Chapter is to enable the students to comprehend
basic expressions. Therefore, all such basic terms are explained and suitable
illustrations are provided to define their meaning and scope.
1. OBJECTIVES
 After going through this lesson you should be able to understand:
 Importance and History of Income Tax in India
 Meaning of Person and Assessee
 Definitions of various Terms used in Income Tax
 What is regarded as ‘Income’ under the Income-tax Act
 What is ‘Gross Total Income’
 Concept of Assessment Year and Previous Year
 How to charge tax on income
 Income-tax rates

2. Importance , History, Present Act

IMPORATANCE
The Taxation Structure of the country can play a very important role in the
working of our economy. Some time back the emphasis was on higher rates of

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Tax and more incentives. But recently, the emphasis has shifted to Decrease in
rates of taxes and withdrawal of incentives. While designing the Taxation
structure it has to be seen that it is in conformity with our economic and social
objectives. It should not impair the incentives to personal savings and
investment flow and on the other hand it should not result into decrease in
revenue for the State.

In our present day economy structure Income Tax plays a vital role as a source
of Revenue and a measure of removal economic disparity. Our Taxation
structure provides for Two types of Taxes --- DIRECT and INDIRECT ; Income Tax
, Wealth Tax and Gift Tax are Direct Taxes whereas Sales Tax and Excise Duties
are Indirect Taxes.

HISTORY
The Income Tax was introduced in India for the first time in 1860 by British
rulers following the mutiny of 1857. The period between 1860 and 1886 was a
period of experiments in the context of Income Tax. This period ended in 1886
when first Income Tax Act came into existence. The pattern laid down in it for
levying of Tax continues to operate even to-day though in some changed form.
In 1918, another Act- Income Tax Act, 1918 was passed but it was short lived
and was replaced by Income Tax Act, 1922 and it remained in existence and
operation till 31st. March, 1961.

PRESENT ACT
On the recommendation of Law Commission & Direct Taxes Enquiry Committee
and in consultation with Law Ministry a Bill was framed. This Bill was referred
to a select committee and finally passed in Sept. 1961. This Act came into
force from 1st.April 1962 in whole of the country. Income Tax Act, 1961 is a
comprehensive Act and consists of 298 Sections. Sub-Sections running into
thousands Schedules, Rules, Sub-Rules, etc. and is supported by other Acts and
Rules. This Act has been amended by several amending Acts since 1961. The
Annual Finance Bills presented to Parliament along with Budget make far-
reaching amendments in this Act every year.

3. MEANING OF “TAX MANAGEMENT”

“… A Business who stays aloof of tax matters cannot remain competitive. Tax
laws are an economic reality in the Business world. A Tax Dollar is just as real
one derived from other source.”
Tax Management is now an integral part of business management. It involves
not only due compliance of law in timely and regular manner, but also
arranging the affairs in such a manner that it reduces the tax liability burden.
Specifics are :

 Filling of Return
 Maintenance of Accounts
 Getting the Accounts Audited.
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 Complying with the notices of Income Tax Department.

 Payment of Advance Tax
 Timely deduction of Tax at Source and its payment.

4. PERSON [ Section 2(31) ]

The word “Person” is a very wide term and embraces in itself the following :

 Individual : It refers to a natural human being whether Male or Female , Minor

or Major.
 Hindu Undivided Family (HUF) : It is a relationship created due to operation of
Hindu Law. The Manager of HUF is called “ Karta” and its member are called
‘Coparceners’.
 Company : It is an artificial person registered under Indian Companies Act 1956 or
any other Law.
 Firm : It is an entity which comes into existence as a result of partnership agreement.
The Income Tax accepts only these entities as Firms which are accessed as Firms
under Section 184 of the Act.
 Association of Persons (AOP) or Body of Individuals (BOI) : Co-operative societies,
MARKFED, NAFED, etc are the example of such persons. When persons combine
together to carry on a joint enterprise and they do not constitute partnership under the
ambit of law, they are assessable as an Association of Persons. An A.O.P. can have
firms, companies, associations and individuals as its members. A Body of Individual (
B.O.I.) cannot have non-individuals as its members. Only natural human being can
be members of a Body of Individuals.
 Local Authority : Municipality, Panchayat, Cantonment Board, Port Trust etc. are
called Local Authority.
 Artificial Judicial Person : Statutory Corporations like Life Insurance Corporation, a
University etc. are called Artificial Judicial Persons.

These are seven categories of person chargeable to tax under the Act. The aforesaid
definition is inclusive and not exhaustive . Therefore, any person, not falling in the above-
mentioned seven categories, may still fall in the four corners of the term “Person” and
accordingly may be liable to tax under Sec.4.
Example:
Determine the status of the following :

1. Delhi University
2. Microsoft Ltd.
3. Delhi Municipal Corporation
4. Swayam Education Pvt. Ltd.
5. Axsis Bank Limited.
6. ABC Group Housing Co-operative Society.
7. DC & Co., firm of Mr. Dust and Mr. Clean
8. A joint family of Mr.Dirty, Mrs. Dirty and their sons Mr. Dust and Mr. Clean

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9. X and Y who are legal heirs of Z ( Z died in 1995 and X and Y carry on his business
without entering into partnership).

Solutions :

1. Artificial Judicial Person

2. a Company
3. a local authority
4. a company
5. a company
6. an association of person
7. a firm ;
8. a Hindu Undivided Family
9. an association of persons.

5. Assessee [ Section 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable under this
Act and includes the following:

(i) Every person in respect of(ii) A person who is (iii) Every person who is
whom any proceeding under deemed to be an deemed to be an
the Income-tax Act has been assessee under any assessee in default under
taken: provisions of this Act any provisions of this Act.
i.e. a person who is A person is said to be an
a. for the assessment of treated as an assessee in default if he
his income or the assessee. This would fails to comply with the
income of any other include the legal duties imposed upon him
person in respect of representative of a under the Income-tax Act.
which he is assessable; deceased person or For example: a person,
or the legal guardian of paying interest to another
b. to determine the loss minor if minor is person, is responsible for
sustained by him or by taxable separately. deducting tax at source
such other person; or on this amount and to
c. to determine the deposit the tax with the
amount of refund due to Government. If he fails in
him or to such other either of these duties i.e.,
person. if he does not deduct the
tax, or deducts the tax
but does not deposit it
with the Government, he
shall be deemed to be an
assessee in default.

1. Every assessee is a 'person', but every person need not be an 'assessee'.

For example, X, an individual has earned total income of Rs. 2,40,000 in
the previous year. He is a person but not an assessee because his total
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income is less than the maximum exemption limit of Rs. 2,50,000 and no
tax or any other sum is due from him.
2. A person may not have his own assessable income but may still be an
assessee. For example, an assessee, who has earned an income of Rs.
1,45,000 in a previous year, fails to deduct the tax at source on salary
paid by him, which he was required to do under the Act, shall be deemed
to be an assessee in default. Although, he is not assessable in respect of
his own income, as it is below the maximum exemption limit, but shall
still be an assessee for not deducting the tax at source, which he was
obliged to do.
Example :
 Income of Mr. You ( age : 30 years) is Rs. 1,45,000 for the assessment
year 2018-19. he does not file his return of income because his income is
not more than the amount of exempted slab. Income-Tax Department
does not take any action against him. He is not an “assessee” because no
tax or any other sum is due from him.
 Income of Mr. Me ( age: 35 years) is Rs.1,60,000 for the assessment year
2018-19. He does not file his return of income. Since he is supposed to
file his return of income ( income being more than exempted slab of
Rs.1,50,000) . he is an “Assessee”.
 Income of Mr. S ( age : 50 years) is Rs. 70,000 for the assessment year
2018-19. He files his return of income ( even if his taxable income is less
than Rs.1,50,000 ). Assessment order is passed by the Assessing Office
without any adjustment. Mr.S is an “ Assessee”.
 Income of Mr. Ram ( age : 25 years) is less than Rs.1,50,000 for the
assessment year 2009-10. He files his return of income to claim Refund of
Tax deducted by XYZ Ltd. on interest paid to him. B is an “Assessee”.
 Income of MR. Clean ( age : 30 years) is less than Rs.1,50,000 for the
assessment year 1018-19. He does not file his return of income. During
2018-19 , he has paid salary of Rs.2,40,000 to an employee. Though he is
supposed to deduct TDS (Tax deducted at Source ), yet due to ignorance
of law, no tax deducted by him. In this case, Mr. Clean is an “assessee” as
he has failed to deduct tax at source. This rule is applicable even if his
own taxable income is below Rs.1,50,000.

6. Meaning Of “INCOME” [ Section 2(24) ]

The Definition given u/s 2 (24) is inclusive and not exhaustive. According to
English dictionary, the term “Income” means periodical monetary return
coming in regularly from definite sources like one’s business, Land, Work,
Investments etc.”.
It’s nowhere mentioned that “Income” refers to only monetary return. It
includes value of Benefits and Perquisites.
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The term “Income” includes not only what is received by using the property but
also the amount saved by using it himself. Any thing which is convertible into
income can be regarded as source of accrual of income.
“ Income includes “ :

 Profit and Gains : For instance, Profit generated by a businessman is

taxable as “Income”.
 Dividend : For instance, “Dividend” declared/paid by a company to a
shareholders is taxable as “ income” in the hands of shareholders .
 Voluntary contribution received by a Trust : In the hands of a Trust,
income includes voluntary contributions received by it. This rule is
applicable in the following cases..
o Such contribution is received by a trust created wholly or partly for
charitable or religious purpose ; or
o Such contribution is received by a scientific research association ; or
o Such contribution is received by any fund or institution established
for charitable purposes ; or
o Such contribution is received by any university or other educational
institutions or hospital.

Example :
ABC Trust is created for public charitable purposes. On Dec, 15, 2008 it receives
a sum of Rs.2 Lakh as voluntary contribution from a business house . Rs. 2 Lakh
would be included in the income of the Trust.

 The value of any Perquisites or Profit in lieu of Salary taxable in the hand
of employee.

Example:
Mr. You is employed by XYZ Ltd. Apart from Salary , he has been provided a
Rent-Free House by the employer . the value of perquisites is respect of the
Rent-Free House is taxable as “Income” in the hands of Mr. You..

 Any Special Allowance or Benefit : All type of special allowance are

given/allow to the assessee to meet the expenses exclusively, wholly and
necessarily for the duties he performed for the office or employment is
treated as “Income”.

Example:
Mr. You is employed by XYZ Ltd. He gets Rs.5,000 per month as conveyance
allowance other than Salary .Rs. 5,000 per month is treated as “ Income”.

 Value of any Benefit or Amenity, whether convertible into money or not.

 Any Capital Gain taxable u/s 45 is treated as “Income”

Example:
Mr. You owns a House Property. On its transfer, he generates a Capital Profit of
Rs.1,20,000. it is treated as “Income” even if it is Capital Profit.
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 Any winning from Lotteries (it included winning from prizes awarded) ,
Winning from Crossword Puzzles, winning from Races including Horse
Race, winning from Card Games and other similar Games, winning from
gambling or betting.

Example:
Mr. You wins a sum of Rs. 50,000 from gambling. Rs.50,000 is treated as “
Income” of Mr. You.

 Any sum received by the assessee on account of his employer’s

contributions to any Provident Fund, Superannuation Fund or any other
Fund for the welfare of such employees in the business.
 Amount exceeding Rs.50,000 by way of Gift.

FEATURES OF “INCOME’
The following features of income can help a person to understand the concept
of income.
1. Definite Source : Income has been compared with a fruit of a tree or a
crop from the field. Fruit comes from a tree and crop from fields. Thus the
source of income is definite in both cases. The existence of a source for
income is somewhat essential to bring a receipt under the charge of tax.
2. Income must come from Outside : No one can earn income from himself.
There can be no income from transaction between head office and branch
office. Contributions made by members for the mutual benefit and found
surplus cannot be termed as income of such group.
3. Tainted Income : Income earned legally or illegally remains income and it
will be taxed according to the provisions of the Act. Assessment of illegal
income of a person does not grant him immunity from the applicability of
the provisions of other Act. Any expenditure incurred to earn such illegal
income is allowed to be deducted out of such income only.
4. Temporary or Permanent : Whether the income is permanent or
temporary, it is immaterial from the tax point of view.
5. Voluntary Receipt : The receipts which do not arise from the exercise of a
profession or business or do not amount to remuneration and are made
for reasons purely of personal nature are not included in the scope of total
income.
6. Dispute regarding the Title : In case a person is receiving some income
but his title to such receipts is disputed, it will not free him from tax
liability. The receipt of such income has to pay tax.
7. Income in Money or Money’s worth : The income may be in Cash or in
kind. It is taxable in both cases.

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TAX TREATMENT OF “INCOME’

For the purposes of treatment of income for tax purposes it can be divided into
3 categories :
A. Taxable Income : These incomes form part of total income and are fully
taxable. These are treated u/s 14 to 69 of the Act. These are Salaries, Rent,
Business Profits, Professional Gain, Capital Gain, Interest, Dividend, Winning
from Lotteries, Races etc.
B. Exempted Incomes : These incomes do not from part of total income
either fully or partially . hence, No Tax is payable on such incomes. These
incomes are given u/s 10(1) to 10(32) of the Act.
C. Rebateable ( Tax Free) Incomes : These incomes form part of total
income and are fully taxable. Tax is calculated on total income out of which a
Rebate of Tax at average Rate is allowed . The Rebateable incomes given u/s 86
of the Act are :
 Share of income received by a member of an association of persons
provided the total income of such AOP is assessed to tax at the rates
applicable to an individual.
 Share of income received by a partner of a firm assessed as an
association of persons (PFAOP) provided the total income of such PFAOP is
assessed to tax at the rates applicable to an individual.

7. GROSS TOTAL INCOME (GTI) & TOTAL INCOME

U/s 14 the term “Gross Total Income” [ GTI ] means aggregate of incomes
computed under the following Five heads :

 Income under the head “Salaries”

 Income under the head “ House Property”
 Income under the head “Profit and Gains of Business or Profession”.
 Income under the head “Capital Gain”.
 Income under the head “ Other Sources”.

After aggregating income under various heads, losses are adjusted and the
resultant figure is called “ Gross Total Income” [ GTI ]
From Gross Total Income , Deductions u/s 80 are allowed. The resultant figure is
called “Total Income “ on which Rates of Taxes are applied

8 ASSESSMENT YEAR [ Section 2 (9) ]

“ Assessment Year” means the period of 12 months commencing on the 1st
day of April every year.
In India, the Govt. maintains its accounts for a period of 12 months i.e. 1st April
to 31st March every year. As such it is known as Financial Year. The Income Tax
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department has also selected same year for its Assessment procedure.

The Assessment Year is the Financial Year of the Govt. of India during which
income a person relating to the relevant previous year is assessed to tax.
Every person who is liable to pay tax under this Act, files Return of Income by
prescribed dates. These Returns are processed by the Income Tax
Department Officials and Officers. This processing is called Assessment. Under
this Income Returned by the assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is
issued. The year in which whole of this process is under taken is called
Assessment Year.

At present the Assessment Year 2008-2009 ( 1-4-2018 to 31-3-2019) is going

on.

Example-
Assessment year 2018-19 which will commence on April 1, 2018, will end on
March 31, 2019.

Income of Previous Year of an assessee is taxed during the next following

Assessment Year at the rates prescribed by the relevant Finance Act

9. PREVIOUS YEAR [ Section 3 ]

As the word ‘Previous’ means ‘coming before’ , hence it can be simply said that
the Previous Year is the Financial Year preceding the Assessment Year e.g. for
Assessment Year 2008-2009 the Previous Year should be the Financial Year
ending 31st March 2008.

 Previous Year in case of a continuing Business :

It is the Financial Year preceding the Assessment Year. As such for the
assessment year 2008-2009, the Previous Year for continuing business is 2007-
2008 i.e. 1-4-2007 to 31-3-2008.

 Previous Year in case of newly set up Business :

The Previous Year in case of newly started business shall be the period
between commencement of business and 31st March next following . e.g. in
case of a newly started business commencing its operations on Diwali 2007,
the Previous Year in relation to Assessment Year 2008-2009. shall be the period
between Diwali 2007 to 31 March 2008.

 Previous Year in case of newly created source of income :

In such case the Previous Year shall be the period between the day on which

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such source comes existence and 31st March next following.

Sl. Secti
Income Previous Year
No. on

1. Financial Year in which found to be

Cash Credit [68]
entered.

2. Financial Year preceding the Assessment

Unexplained Investment [69]
Year

3. Unexplained Bullion, Financial Year in which found in the

[69A]
Cash, Jewelley possession of the assessee.

4. Partly explained Financial Year in which Investment was

[69B]
Investment made.

5. Financial Year in which expenditure was

Unexplained Expenditure [69C]
incurred.

6. Payment of Hundi, Financial Year in which such payment was

[69D]
Money in Cash made.

10. When Income Of Previous Year Is Not Taxable In The Immediately Following
Assessment Year .

The rule that the income of the previous year is taxable as the income of the immediately
following assessment year has certain exceptions. These are:

1. Income of non-residents from shipping business [ Section 172] ;

In case a Non-Resident Shipping Company, which has no representative in India, earns
income by carrying passengers, livestock, mail or goods loaded from any Indian Port, such
Ship will have to pay Tax on such Income, otherwise the Ship will not be allowed to leave
the Port till the tax on such income has been paid or alternative arrangements to pay tax are
made. Such income will be assessed to paid tax at current year’s rates.

2. Income of persons leaving India either permanently or for a long period of time [ Section
174] ;
In case I.T.O. has the reasons to believe that an individual will leave India with having no
intention of retuning to India during the current assessment year, the total income of such
individual will be taxable in the current assessment year for the period between the expiry of
last previous year and till the date of his departure.

3. Income of a person trying to transfer his assets with a view to avoiding payment of tax.
[ Section 175]

4. Income of a discontinued business [ Section 176]

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In these cases, income will be taxed in the same year it is earned.

These exceptions have been incorporated in order to ensure smooth collection of income tax
from the aforesaid taxpayers who may not be traceable if tax assessment procedure is
postponed till the commencement of the normal assessment

On the basis of the aforesaid discussion, it can be said that a financial year plays a double
role—it is a Previous Year as well as an Assessment Year.

11. What Are Different Heads Of Income According To Income Tax Act. ?

There are 5 different Income heads. The Income under each head will be charged to Income
Tax. Thus the tax will be computed on the basis of total income.

1. Salaries including Allowances, value of Perquisites, Profits in lieu of salary and

Pensions.
2. Income from House Property whether residential, commercial or let out.
3. Profits & Gains of Business / Profession.
4. Capital Gains - Short & Long Term.
5. Income from other Sources including Bank Interest, Interest on Securities, Lotteries,
Cross word Puzzles, Races, Games, Gift received on or after 1-9-2004 in excess of
Rs. 50,000 in cash etc. from unrelated persons.

12. Who All Have To Pay Income-Tax ?

a. Individual including Non-resident, Hindu Undivided Families (HUF), Bodies of

Individuals (BOI), Association of Persons (AOP) & Artificial Juridical Persons ( such
as Deities of Temples) having taxable income exceeding Rs. 1.5 lakh (Rs. 1,80,000
for Resident Women assesses below 65 Years and Rs. 2,25,000 for Resident Senior
Citizens.)
b. Societies & Charitable / Religious Trusts having taxable income exceeding Rs.1.5
lakh.
c. All Partnership Firms irrespective of their Income.
d. Co-Op. Societies irrespective of their Income.
e. All Companies irrespective of Income.
f. Local Authorities like, Panchayats, Municipal Corporation etc.

13. How Income-Tax Will Be Charged By The Income Tax Department ?

Income Tax is charged on 5 different heads. Aggregate of taxable income under each head of
income is known as Gross Total Income and so
Taxable Income = Gross Total Income - Allowance Deductions.

Deduction of Expenditure :
In computing income under various heads, deduction is allowed towards expenditure
incurred in relation to earning the income. However, no deduction shall be allowed in
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respect of expenditure incurred in relation to incomes exempt from tax.

Computation of Gross Total Income :

It is the aggregate of incomes under various heads of income calculated after set-off of
unabsorbed depreciation/loss, carried forward from earlier years.

Set-off and Carry Forward :

Set-off means adjustment of certain losses against the income under other sources / heads.
Carry forward implies carrying forward of certain losses for set-off in subsequent years.

Total / Taxable Income :

Total / Taxable Income is computed after deducting permissible deductions under section
80A to 80U, from the Gross Total Income.

Where the Gross Total Income of the Assesses includes Short-Term Capital Gains from
transfer of equity shares / units of an equity oriented mutual fund subject to Securities
Transaction Tax or any Long-Term Capital Gains, then no deduction shall be allowed
against such Capital Gains.
On this Taxable Income, Income Tax will be calculated as per the applicable rates.

14. What Is Agricultural Income ?

Sec.10(1) exempts Agricultural Income from Income-Tax. Bu virtue of Sec.2(1)a

the expression “Agricultural Income” means :

 Any Rent or Revenue derived from Land which is situated in India and is
used for agricultural purposes. [Sec. 2(1A)(a)]
 Any income derived from such land :
o Use for Agricultural purposes ; or
o Used for agricultural operations means- irrigating and harvesting ,
sowing, weeding, digging, cutting etc. It involves employment of
some human skill, labour and energy to get some income from
land. ; or

According to Sec. 2(1)(a) , if the following 3 conditions are satisfied, income

derived from Land can be termed as “Agricultural Income”.

Condition-1 : Income derived from Land

It is essential that for any income to be termed as agricultural Land must be
effective and immediate source of Income and not indirect and secondary.

As a result, interest on arrears of land revenue, dividend paid by a company out

of its profits which included agricultural income also and salary paid to a
manager for managing agricultural farms are not agricultural incomes because
in all these cases land is not the effective and immediate source of income.

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Condition-2 : Land is used for Agricultural Purposes

To term any income as agricultural income, it is necessary that income must be
the result of agricultural operations performed on agricultural land. Agriculture
means performance of some basic operations— irrigating and harvesting ,
sowing, weeding, digging, cutting etc. it involves employment of some human
skill, labour and energy to get some income form land.

Condition-3 : Land is situated in India

To qualify the exemption u/s 10(1) of the Act, it is necessary that agricultural
income must be derived from land situated in India. In case income is derived
from agricultural land situated outside India or is from any non-agricultural
land, it will not be exempted u/s 10(1). It is taxable income under the head
“Income from other Sources”.

What is the Tax Treatment of Income which is partially Agricultural and

partially from Business [ Rules 7, 7A, 7B and 8]

For disintegrating a composite business income which is partly agriculture and

partly non-agricultural, the following rules are applicable –

Type of Income Business Income Agricultural Income

 Tea Business 40% 60%

 Coffee Business 40% 60%

 Rubber Business 40% 65%

Example :
Mr. X owns a Flour Mill and some agricultural Land. During the year 2018-2019
he has shown profit of Rs.25 lacs from the Business of Flour Mill. On scrutiny of
accounts it was found that he has used 5,000 quintals of wheat produced in his
own Farms and cost of this wheat has not been debited to P & L account. The
market price of the wheat during the season was Rs.400 per quintal.. Find out
his Agricultural and Business income.

[ Hints : Agricultural income Rs.20,00,000 and Business income Rs. 5,00,000 ]

Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as
Central Board of Direct Taxes (CBDT) constituted under the Central Board of Revenue
Act, 1963.

The major tax enactment in India is the Income Tax Act, 1961 passed by the
Parliament, which imposes a tax on the income of persons.

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This Act imposes a tax on income under the following five heads:
I. Income from salaries
II. Income from business and profession
III. Income in the form of capital gains
IV. Income from house property
V. Income from other sources

In Terms of the Income Tax Act, 1961, a person includes

I. Individual
II. Company
III. Firm
IV. Association of Persons (AOP)
V. Hindu Undivided Family (HUF)
VI. Body of Individuals (BOI)
VII. Local authority
VIII. Artificial Judicial person not falling in any of the preceding categories

NATURE AND CHARACTERISTICS OF DIFFERENT TYPES

OF TAXES
Tax meaning & different types of Taxes in India
Government levy taxes on citizens for creating an influx of income that are utilized for supplementing projects for
country's development, welfare, and boosting the economy so as to raise the standard of living. By the
Constitution of India, the government can levy tax and allocate the same to central and state governments. The
Parliament and State Legislature has to agree on the taxes levied so as to pass into the mainstream of
application.

For FY 2017-18, the slab rate for income tax up to Rs. 5 lakh has has been brought down to 5% from 10%. The
tax rate for companies with per annual turnover of up to Rs 50 crore has been brought down to 25% from 30%.

Income Tax Slab for Individual Tax Payers & HUF (Less Than 60 Years Old
Both Men and Women)

Income Slab Tax Rate

Income up to Rs 2,50,000* No tax

Income from Rs 2,50,000 – Rs 5,00,000 5%

Income from Rs 5,00,000 – 10,00,000 20%

Income more than Rs 10,00,000 30%

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Income Slab Tax Rate

Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.

Cess: 3% on total of income tax + surcharge.

*Income tax exemption limit for FY 2017-18 is up to Rs. 2,50,000 for individual & HUF other than those
covered in Part(II) or (III)

Income Tax Slab for Senior Citizens (60 Years Old Or More but Less than 80
Years Old Both Men & Women)

Income Slab Tax Rate

Income up to Rs 3,00,000* No tax

Income from Rs 3,00,000 – Rs 5,00,000 5%

Income from Rs 5,00,000 – 10,00,000 20%

Income more than Rs 10,00,000 30%

Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh upto Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.

Cess: 3% on total of income tax + surcharge.

*Income tax exemption limit for FY 2017-1 is up to Rs. 3,00,000 other than those covered in Part(I) or (III)

Income Tax Slab for Senior Citizens(80 Years Old Or More Both Men &
Women)

Income Slab Tax Rate

Income up to Rs 2,50,000* No tax

Income up to Rs 5,00,000* 5%

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Income Slab Tax Rate

Income from Rs 5,00,000 – 10,00,000 20%

Income more than Rs 10,00,000 30%

Surcharge: 15% of income tax, where total income exceeds Rs.1 crore.

Cess: 3% on total of income tax + surcharge.

*Income tax exemption limit for FY 2017-18 is up to Rs. 5,00,000 other than those covered in Part(I) or (II)

What are the Benefits of Taxes?

 The government can work on important infrastructures and developmental plans for the nation from the
income generated through taxes.
 These also encourage citizens to create sufficient investments and savings and use several financial
investments to reduce the taxable income and thus lessening the tax amount to be paid.
 Paying taxes includes that you must file for tax returns. On doing so it gets easier to apply for home loan
or credits and easing your financial journey.

What are the Penalties for Not Paying Taxes?

Different types of taxes carry unique penalties if not paid out. These penalties can be monetary fines to
imprisonment according to the crime's severity. In few cases, you may have to pay the owed tax with a lump sum
as fine that is determined by the government officials. Thus, it is recommended that everyone must pay the taxes
in time and be aware of the taxes you are liable to pay.

There are Some Important Types of Taxes:

Direct and indirect taxes are different in a way these are implemented. You may have to directly pay some taxes
such as corporate tax, income tax etc., while some are indirectly paid such as service tax, sales tax, value added
tax etc. There are few other taxes that the Central Government has brought into effect and levied on both
indirect and direct taxes such as Krishi Kalyan Cess tax, Swachh Bharat Cess tax, infrastructure cess tax etc.

Here's a list of taxes people in India pay

1. Direct Tax

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Taxes which are paid directly by individuals and organisations to the

government of India come under Direct Tax. Taxes which are paid under Direct
Tax include, Personal Income Tax, Capital Gains Tax, Securities Transaction Tax,
Perquisite Tax, Corporate Income Tax, Marginal Tax, Rate Tax on Agricultural.

2. Indirect Tax
Service Tax which is incurred indirectly by the government of India are provided
by firms and servicing companies in lieu of monetary benefit. The Central
Government via the Finance Act, 1994 governs the taxability of services
provided by an individual or a company under Section 66B. Service tax is
charged at the rate of 15% currently. The taxability arises once the value of
services exceeds Rs. 10 lakhs during the financial year.

3. Goods and Services Tax

Goods and Services Tax (GST) is an indirect tax (or consumption tax) levied in
India on the supply of goods and services. It is levied at every step in the
production process.
The tax is divided into five slabs -- 0 per cent, 5 per cent, 12 per cent, 18 per
cent, and 28 per cent.
Although GST is collected by the central government, taxes on petroleum
products, alcoholic drinks, electricity are separately collected by the state
government.
Taxes imposed by Central Government
1. Income tax
Besides agricultural income, Income Tax is mainly collected by the central
government. It is imposed on individuals or entities (taxpayers) that varies with
respective income or profits (taxable income).
2. Custom Duty
Collected by Central Board of Excise and Customs (CBEC) under the
Department of Revenue, the Ministry of Finance, Government of India, Custom
Duty is levied on goods imported in India as well as exported from India.
The Constitutional provisions have given to Union the right to legislate and
collect duties on imports and exports.
3. Excise Duty
Central Excise duty is an indirect tax levied on those goods which are
manufactured in India and are meant for home consumption. The taxable event
is 'manufacture' and the liability of central excise duty arises as soon as the
goods are manufactured. It is a tax on manufacturing, which is paid by a
manufacturer, who passes its incidence on to the customers.
The term "excisable goods" means the goods which are specified in the First
Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 , as
being subject to a duty of excise and includes salt.
In India, Excise Duty is applied to these goods namely,
 Petroleum crude
 High-speed diesel
 Motor spirit (commonly known as petrol)

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 Natural gas
 Aviation turbine fuel
 Tobacco and tobacco products.
4. Corporation Tax
Company whether Indian or foreign is liable to taxation, under the Income Tax
Act,1961. Corporation tax is a tax which is levied on the incomes of registered
companies and corporations.
Companies in India, whether public or private are governed by the Companies
Act, 1956. The registrar of companies and the company law board administers
the provisions of the Act.
The government divides it between two sub-categories:
Domestic company [Section 2(22A)]
An Indian company (i.e. a company formed and registered under the
Companies Act,1956) or any other company which, in respect of its income
liable to tax, under the Income Tax Act, would have to pay the tax.
A domestic company may be a public company or a private company.
Foreign company [Section 2(23A)]
A company whose control and management are situated wholly outside India,
and which has not made the prescribed arrangements for declaration and
payment of dividends within India.
State Tax
1. Electricity Duty
Although the taxes are collected by the central government, Electricity Tax may
vary from state to state.
2. Value Added Tax (VAT)
One of the important components of tax reforms initiated since liberalization is
the introduction of Value Added Tax (VAT). The VAT is a multi-point destination-
based system of taxation, with tax being levied on value addition at each stage
of the transaction in the production/ distribution chain.
The VAT is basically a State subject, derived from Entry 54 of the State List, for
which the States are sovereign in taking decisions. The State Governments,
through Taxation Departments, are carrying out the responsibility of levying
and collecting the VAT in the respective States. While the Central Government
is playing the role of a facilitator for the successful implementation of VAT. The
Ministry of Finance is the main agency for levying and implementing VAT, both
at the Centre and the State level.
The Department of Revenue, under the Ministry of Finance, exercises control in
respect of matters relating to all the direct and indirect taxes, through two
statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the
Central Board of Customs and Central Excise (CBEC).
The term 'value addition' implies the increase in the value of goods and
services at each stage of production or transfer of goods and services. The VAT
is a tax on the final consumption of goods or services and is ultimately borne by
the consumer.

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It is a multi-stage tax with the provision to allow 'Input tax credit (ITC)' on tax at
an earlier stage, which can be appropriated against the VAT liability on the
subsequent sale.
This input tax credit in relation to any period means setting off the amount of
input tax by a registered dealer against the amount of his output tax. It is given
for all manufacturers and traders for the purchase of inputs/supplies meant for
sale, irrespective of when these will be utilised/ sold.
The VAT liability of the dealer/ manufacturer is calculated by deducting input
tax credit from tax collected on sales during the payment period (say, a
month).
3. Sales Tax
It is the tax which is paid to the government for the sales of products and
services. Sales tax is of different types depending upon the sale of product from
manufacturer to wholesaler or retailer to the customer.
4. Entertainment Tax
In India, a tax is imposed on things related to entertainment such as for movie
tickets, festivals, commercial shows, amusement parks etc. and the revenue
goes to the state government.
5. Toll Road Tax
Also called as turnpike or tollway, toll tax is a fee paid by the passerby. The toll
is collected to recover the cost of road construction, maintenance etc.

1. DIRECT TAX
The Central Board of Direct Taxes is one of the bodies that takes care of direct taxes and helps on with its
support, duties, governing etc. Some of these are mentioned below:

Income Tax Act

Following the IT Act of 1961, the government rules the income tax in India. It comes from the sources such as
owning of property or house, business, salaries, gains from investment etc.

Expenditure Tax Act

The expenditure tax was introduced in 1987 and concerns the expenses you incur when availing services at a
restaurant or hotel. It does not apply on Jammu and Kashmir but rest of the India.

Securities Transaction Tax

When you trade in stock market or securities, you gain some substantial amount of money which becomes a
source of income, and is levied with securities transaction tax. The same is added to the share price, so when
you sell or buy shares, you pay this tax every time.

Capital Gains Tax

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The capitals gains tax is implied on sizeable earning from sale of property or investments. There are two types:
short term capital gains and long term capital gains. The interest earned on investment is taxed.

Interest Tax Act

This tax came into effect in 1974. It states the amount payable on interest earned from specific situations. There
was an amendment, which eliminated requirement of interest tax on interests earned later to March 2000.

Perquisite Tax

The privileges that employers bestow on employees are taxed as well. These come under the perquisite tax. The
perks can extend to compensations such as housing, cars, phone and fuel bills etc. If these facilities are used for
official purpose, then the costs incurred may be exempted from such taxes.

Corporate Tax

This tax is paid by firms for the revenue these earn. There are specific tax slabs in this section and the payment
of tax is according to these slabs. Types are: minimum alternative tax, fringe benefit tax, and dividend
distribution tax.

Wealth Tax Act

As per the budget 2015, the Wealth Tax stands abolished, but it was enacted in 1951. It was meant to pose
taxation as per the net wealth of the company, individual or a Hindu Unified Family.

Gift Tax Act

Since 1958, the Gift Tax came into being, which taxed people on receiving gifts worth a value and shelling an
amount up to 30% of the gift's expense. However, this tax was done away with in 1998. Now if someone other
than the exempted entities gives gift to you, exceeding INR 50,000 then this gift amount will be taxed.

2. INDIRECT TAX
Some of the taxes are levied on the facilities and services you enjoy and these come to be taxed by the
government. Here are few of the important indirect taxes.

Value Added Tax

VAT is a commercial tax but not levied on commodities with zero rates such as essential drugs and food items or
those that come under exports. However, value added tax comes in play for supply chain where it is paid by
dealers, distributors and manufacturers.

Sales Tax

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This tax was levied on sale of product and came under both central and state legislation. The limitation of the
sale tax is that it can be taken once for particular product. Thus if the product is resold, this tax won't apply.

Service Tax

The service tax as the name implies is a tax added on services provided in India. The last ratio percentage for it
was 14 and it is not applied on goods but firms that offer services. Such amount is reflected in the bill to
customers

Goods and Services Tax (GST)

The most talked about tax is the Good and Services Tax, which has superimposed several of the indirect taxes,
which now stands defunct. GST is consumption based tax and applies on value added services, goods at
several stages of consumption in supply chain. Merchants can pay the GST rate applicable and claim it through
the tax credit system.

Excise Duty

This tax is imposed on things manufactured in India and called as Central Value Added Tax or CENVAT. It is
collected from the manufacturer of goods by the government. No excisable goods that bear any payable duty are
allowed to move without the payment of duty to the destination where these are manufactured or produced.

Custom Duty and Octroi

On making a purchase that has to be imported in India from another country, you may have to pay custom duty
and Octroi tax. The Octroi is for ensuring that goods from across the borders and coming into the country are
taxed properly.

3. OTHER TAXES
The other taxes are referred to as cess and are levied by the government with intention of generating funds for
specific purposes as decided by the Finance Minister.

Swachh Bharat Cess

Starting from November 2015, the Swachh Bharat Cess is applicable on taxable services of India and is
accounted at 0.5% over and above service tax of 14%. This cess is not implemented on services which are
completely exempt from service tax or services covered under negative services list. This is collected by the
Consolidate Fund of India and utilize in promoting and funding government campaigns related to Swachh Bharat
efforts.

Krishi Kalyan Cess

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Applicable since June 2016, the Krishi Kalyan Cess is levied on all services of India in order to extend welfare to
farmers and improve the agricultural facilities of the nation. The rate for this tax is 0.5% and charged over and
above the Swachh Bharat Cess and service tax.

Professional Tax

Employment or professional tax is a tax levied by the state governments. As per the norms, individuals practising
a profession such as lawyer, doctor, company secretary, chartered accounted or earning etc must pay this tax.
Not every state levy professional tax, whose rate also differs as per the state government's discretion.

Property Tax

Real estate tax or property tax is levied by the local municipal bodies of all cities. These are levied to make funds
for maintaining basic civic services. The owners of commercial and residential properties are subject to the
Municipal tax.

Entertainment Tax

The entertainment tax is levied by the government on television series, amusement, feature films and
recreational parlours. Such tax is taken into account as the business entity's total collection of earnings from film
festival earnings, commercial shows and audience participation.

Stamp Duty, Registration Fee, Transfer Tax

The mentioned taxes supplement property tax and are incurred at specific such as charges of stamp duty,
property registration or transfer of ownership to another person or entity.

Infrastructure Cess

The infrastructure cess came into effect on 1st June 2016. A cess of 1% is eligible on motor vehicles driven on
LPG/CNG/Petrol. The vehicles accounted for such cess must be 4 meters or less in length and 1200cc or lower
engine capacity. 2.5% tax has to be paid for diesel motor vehicles that do not exceed the mentioned length and
contain engines with capacities lower than 1500cc. 4% cess is applicable on vehicle's overall cost for big SUVs
and sedans.

Education Cess/Surcharge

The Education Cess helps to cover the cost by government for sponsoring educational programs. The tax is
collected independently and applicable on all Indian corporations, citizens and other people residing in the
country. Currently, the cess amount is 2% of individual's income.

Entry Tax

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Under entry tax, select states in India such as Madhya Pradesh, Assam, Gujarat, Uttarakhand, and Delhi
account for tax payable on items that enter this state via e-commerce establishments.

Road Tax and Toll Tax

This form of tax is paid for the infrastructure developed by the government for roads and bridges. The amount of
such tax is rather negligible and utilized for maintenance of particular roadway projects.

DISTINCTION BETWEEN
TAX, FEES & CESS
Tax is the amount payable by each person for doing an activity and paid by the
purchaser/earning income (receiver) and paid by him/her and goes to government.

Income tax is charged for earning income above a threshold limit and paid to central
government.

GST is charged when goods/services are sold and recovered from a person purchasing
goods/services and paid to central government for allocation amongst central and state
government.

Amount of taxes are shared between center and state in proportion to predecided
allocation amongst them.

Fee is charged for giving a license, certificate, permission and is charged from a person
desirous of taking License, certificate and/or permission and retained by the department
giving such permission. Ther is no share of center and/or state from the fee collected.

Cess is charged generally by Central government for any specific purpose and payable to
central government only. There is no share of state in Cess collected.

Tax is the compulssory 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

A cess imposed by the central government is a tax on tax, levied by the government for
a specific purpose.

Generally, cess is expected to be levied till the time the government gets enough
money for the earmarked purpose and not for any other purposes.In simple
words, a cess tax is an earmarked tax.

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 If the purpose for which the cess is created is fulfilled, it should be eliminated.
Article 270 of the Constitution describes a cess.

Cess may be levied by the union or state governments.

Cess are named after the identified purpose; the purpose itself must be certain and
for public good.

At present, the main cess are: education cess, road cess or (fuel cess), infrastructure cess,
clean energy cess, krishi kalyan cess and swachh bharat cess.

On the other hand, ‘Surcharge’ is an additional charge or tax levied on an existing

tax imposed for the purposes of the Union.

Unlike a cess, which is meant to raise revenue for a temporary need, surcharge is
usually permanent in nature.

In case no tax is due for a financial year, then no surcharge is levied.

A surcharge is dealt with under Article 271 of the Constitution.

Surcharges, in India, are used to make the taxation system more ‘progressive’.

 They are used to ensure that the rich contribute more to the tax kitty than the
poor.
An example of surcharge is one where individuals earning more than ₹1,00,00,000
annually are required to pay an extra sum amounting to 15% on their income tax.

Following are the difference between the usual taxes, surcharge and cess.

The usual taxes go to the consolidated fund of India and can be spent for any purposes.

 Surcharge also go to the consolidated fund of India and can be spent for any
purposes.
 Cess go to Consolidated Fund of India but can be spent only for the specific
purposes for which they have been created.
The proceeds collected from a surcharge and a cess levied by the union need not be
shared with the State governments and are thus at the exclusive disposal of the union
government.

The use of usual taxes, cess and surcharges requires appropriation bill to be passed
in the Parliament.

Hence, it can be seen that the Constitution makes a distinction between a cess and a
surcharge and the two cannot be used interchangeably.

TAX EVASION, TAX PLANNING & TAX AVOIDANCE

 Tax evasion and Tax Avoidance can leave your finances jeopardize for a long time
 Tax planning is an umbrella term which not only covers the various aspects of tax-
filling but focuses deeper on the need of reducing one’s tax liability

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Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through fraudulent
techniques like deliberate under-statement of taxable income or inflating expenses. It is an
unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing
fewer profits in order to avoid tax burden. It involves illegal practices such as making false
statements, hiding relevant documents, not maintaining complete records of the transactions,
concealment of income, overstatement of tax credit or presenting personal expenses as
business expenses. Tax evasion is a crime for which the assesse could be punished under the
law.

Tax Planning: Tax planning is process of analyzing one’s financial situation in the most
efficient manner. Through tax planning one can reduce one’s tax liability. It involves
planning one’s income in a legal manner to avail various exemptions and deductions. Under
Section 80C, one can avail tax deduction if specific investments are made for a specific
period up to a limit of Rs 1, 50,000. The most popular ways of saving tax are investing in
PPF accounts, National Saving Certificate, Fixed Deposit, Mutual Funds and Provident
Funds. Tax planning involves applying various advantageous provisions which are legal and
entitles the assesse to avail the benefit of deductions, credits, concessions, rebates and
exemptions. Or we can say that Tax planning is an art in which there is a logical planning of
one’s financial affairs in such a manner that benefits the assesse with all the eligible
provisions of the taxation law. Tax planning is an honest approach of applying the provisions
which comes within the framework of taxation law.

Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax liability. In
other words, it is an act of using tax regime in a single territory for one’s personal benefits to
decrease one’s tax burden. Although Tax avoidance is a legal method, it is not advisable as it
could be used for one’s own advantage to reduce the amount of tax that is payable. Tax
avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by
finding new ways to avoid the payment of taxes that are within the limits of the law. Tax
avoidance can be done by adjusting the accounts in such a manner that there will be no
violation of tax rules. Tax avoidance is lawful but in some cases it could come in the
category of crime.

Features and differences between Tax evasion, Tax avoidance and Tax Planning:

1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal

2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and
objectionable.

3. Motive: Tax planning is the method of saving tax .However tax avoidance is dodging of
tax. Tax evasion is an act of concealing tax.

4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to
penalty or imprisonment.

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5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script
of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax
planning is done to reduce the liability of tax by applying the provision and moral of law.

6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax evasion is not
permissible.

 Tax liability of an individual can be reduced through 3 different methods- Tax

Planning, Tax avoidance and Tax evasion. All the methods are different and
interchangeable.
 Tax planning and Tax avoidance are the legal ways to reduce tax liabilities but Tax
avoidance is not advisable as it manipulates the law for one’s own benefit. Whereas
tax planning is an ideal method.

Tax Planning , Tax Avoidance and Tax

Evasion
Meaning of Tax Planning

INTRODUCTION

The main goal of every taxpayer is to minimize his Tax Liability. To achieve this
objective taxpayer may resort to following Three Methods :

o Tax Planning
o Tax Avoidance
o Tax Evasion

It is well said that “Taxpayer is not expected to arrange his affairs in a such
manner to pay maximum tax “ . So, the assessee shall arrange the affairs in a
manner to reduce tax. But the question what method he opts for ? Tax
Planning, Tax Avoidance, Tax Evasion !
Let us see its meaning and their difference.

MEANINNG OF TAX PLANNING

Tax Planning involves planning in order to avail all exemptions, deductions and
rebates provided in Act. The Income Tax law itself provides for various methods
for Tax Planning, Generally it is provided under exemptions u/s 10, deductions
u/s 80C to 80U and rebates and relief’s. Some of the provisions are enumerated
below :

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 Investment in securities provided u/s 10(15) . Interest on such securities is

fully exempt from tax.
 Exemptions u/s 10A, 10B, and 10BA
 Residential Status of the person
 Choice of accounting system
 Choice of organization.

For availing benefits, one should resort to bonafide means by complying with
the provisions of law in letter and in spirit.
Where a person buys a machinery instead of hiring it, he is availing the benefit
of depreciation. If is his exclusive right either to buy or lease it . In the same
manner to choice the form of organization, capital structure, buy or make
products are the assesse’s exclusive right. One may look for various tax
incentives in the above said transactions provided in this Act, for reduction of
tax liability. All this transaction involves tax planning.

Why Every Person Needs Tax Planning ?

Tax Planning is resorted to maximize the cash inflow and minimize the cash
outflow. Since Tax is kind of cast, the reduction of cost shall increase the
profitability. Every prudence person, to maximize the Return, shall increase the
profits by resorting to a tool known as a Tax Planning.

How is Tool of Tax Planning Exercised ?

Tax Planning should be done by keeping in mine following factors :
 The Planning should be done before the accrual of income. Any planning
done after the accrual income is known as Application of Income an it
may lead to a conclusion of that there is a fraud.
 Tax Planning should be resorted at the source of income.
 The Choice of an organization, i.e. Taxable Entity. Business may be done
through a Proprietorship concern or Firm or through a Company.
 The choice of location of business , undertaking, or division also play a
very important role.
 Residential Status of a person. Therefore, a person should arranged his
stay in India such a way that he is treated as NR in India.
 Choice to Buy or Lease the Assets. Where the assets are bought,
depreciation is allowed and when asset is leased, lease rental is allowed
as deduction.
 Capital Structure decision also plays a major role. Mixture of debt and
equity fund should be balanced, to maximize the return on capital and
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minimize the tax liability. Interest on debt is allowed as deduction

whereas dividend on equity fund is not allowed as deduction

Methods Of Tax Planning

Various methods of Tax Planning may be classified as follows :

1. Short Term Tax Planning : Short range Tax Planning means the
planning thought of and executed at the end of the income year to reduce
taxable income in a legal way.
Example : Suppose , at the end of the income year, an assessee finds his taxes
have been too high in comparison with last year and he intends to reduce it.
Now, he may do that, to a great extent by making proper arrangements to get
the maximum tax rebate u/s 88. Such plan does not involve any long term
commitment, yet it results in substantial savings in tax.
2. Long Term Tax Planning : Long range tax planning means a plan
chaled out at the beginning or the income year to be followed around the year.
This type of planning does not help immediately as in the case of short range
planning but is likely to help in the long run ;
e.g. If an assessee transferred shares held by him to his minor son or
spouse, though the income from such transferred shares will be clubbed with
his income u/s 64, yet is the income is invested by the son or spouse, then the
income from such investment will be treaded as income of the son or spouse.
Moreover, if the company issue any bonus shards for the shares transferred ,
that will also be treated as income in the hands of the son or spouse.
3. Permissive Tax Planning : Permissive Tax Planning means
making plans which are permissible under different provisions of the law, such
as planning of earning income covered by Sec.10, specially by Sec. 10(1) ,
Planning of taking advantage of different incentives and deductions, planning
for availing different tax concessions etc.
4. Purposive Tax Planning : It means making plans with specific
purpose to ensure the availability of maximum benefits to the assessee
through correct selection of investment, making suitable programme for
replacement of assets, varying the residential status and diversifying business
activities and income etc.

Tax Avoidance
It is an act of dodging tax without breaking the Law. It means when a taxpayer
arranges his financial activities in such a manner that although it is within the
four corner of tax law but takes advantages of loopholes which exists in the Tax
Law for reduction of tax a liability. In other words though he has complied the
letter of law but not the sprit behind the law.

Following transactions are held as Tax Avoidance which are :

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1. Where tax law is complied with by using colorable devices which means
that use o dubious method or a method which is unfair for reduction of
tax liability.
2. Where the fact of the case is presented in a false manner.
3. Where the sprit behind the law is avoided.
4. There is a malafide intention.

It means that method adopted for reducing tax liability should be within the
framework of law. If it is not within the framework of law, it amounts to tax
avoidance and not Tax planning.

Tax Evasion
Any illegal method which leads to reduction of tax liability is known as Tax
Evasion. The Tax Evasion is resorted to by applying following dishonest means :

1. Concealing the Income

2. Claiming excessive expenditure
3. Falsification of accounts.
4. Willful violence of Rules

E.g. Claiming depreciation where no asset exist in the Business or claiming

depreciation on the assets which is used for residential purposes. It Is basically
a fraudulent method of reduction in tax liability.

The Difference Between ‘Tax Planning’ And ‘Tax

Management’
THE DIFFERENCE BETWEEN ‘TAX PLANNING’ AND ‘TAX MANAGEMENT’ .

Tax Planning Tax Management

The objective of Tax Management is to

(i) The Objective of Tax Planning is
comply with the provisions of Income Tax
to minimize the tax liability
Law and its allied rules.

Tax Management deals with filing of Return

(ii) Tax Planning also includes Tax
in time, getting the accounts audited,
Management
deducting tax at source etc.

(iii) Tax Planning relates to future. Tax Management relates to Past ,. Present,
Future.
Past – Assessment Proceedings, Appeals,
Revisions etc.

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Present – Filing of Return, payment of

advance tax etc.
Future – To take corrective action

(iv) Tax Planning helps inTax Management helps in avoiding

minimizing Tax Liability in Short- payment of interest, penalty, prosecution
Term and in Long Term. etc.

Tax Management is essential for every

(v) Tax Planning is optional.
assessee.

The Difference Between ‘Tax Avoidance’ And ‘Tax

Evasion'
THE DIFFERENCE BETWEEN ‘TAX AVOIDACNE’ AND ‘TAX EVASION’

TAX AVOIDANCE TAX EVASION

(i) Where the payment of tax is

avoided though by complying withWhere the payment of tax is avoided
the provisions of law but defeating through illegal means or fraud is termed as
the intension of the law is known as tax evasion.
tax Avoidance.

(ii) Tax Avoidance is undertaken by

Tax evasion is undertaken by employing
taking advantage of loop holes in
unfair means
law

(iii) Tax Avoidance is done through

Tax Evasion is an unlawful way of paying
not malafied intention but
tax and defaulter may punished.
complying the provision of law.

(iv) Tax Avoidance looks like a tax

Tax evasion is blatant fraud and is done
planning and is done before the tax
after the tax liability has arisen.
liability arises.

RETROSPECTIVE TAXATION
One of the most controversial economic issues in the last five years was the tax dispute
between Vodafone and the tax department.

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The case originated after the revenue’s (tax department) notice to Vodafone that the company
has to pay a capital gains tax of nearly Rs 11000 crores from its purchase of Hutchison Essar
Telecom Company from Hutch.

The entire dispute centered on the question that whether an indirect transfer of property
located in India can be taxed under the relevant section 9(1)(i) of the Income-tax Act. The
section instructs imposition of capital gains tax when the capital assets are transferred
directly from one company to another.

Indirect transfer means when the shares of a company is transferred, the underlying asset is
also transferred to the buyer.

At the final stage of the dispute, the Supreme Court verdict that tax department doesn’t have
the right to tax the deal. This is because the relevant income tax Act (Section 9 (i) (i)) doesn’t
instruct tax authorities when capital asset (machinery building etc) lying in India is
transferred indirectly by transferring the shares by foreign companies abroad. Both Vodafone
and Hutch were foreign companies and they made deal in another foreign company which
held 67% of shares of Hutchison Essar India Limited. Hence Vodafone need not pay tax for
the said deal.

Retrospective taxation under the Income Tax Act

After the setback in the Vodafone case, government has amended Section 9 (i) (i)). The new
amendment clarified that when a share transaction take place between two nonresident
entities that results indirect transfer of assets lying in India, such an income will be taxed in
India.

But the most important point about the 2012 amendment of the income tax act was that it
was amended with effect from 1962. This means the amendment has retrospective effect.

A retrospective tax law is one that takes effect from a date before it is passed. Here, the law
imposing tax on indirect transfer of assets in India was enacted in 2012, but the tax will be
applicable to all transaction that took place from 1962 onwards (Income tax rule was passed
in 1962).

The controversy was that whether it is fair to impose a tax with retrospective effect. A
company’s business decisions are based upon the tax situation that exists today. It is very
difficult to organize its activities today based on a future law that will be made applicable
from today.

An ideal tax system should be predictable certain and stable. Hence retrospective
implemetation is a bad move.

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Later, the government has asked Sri Parthasarathi Shome to make recommendations about
the retrospective implementation.

Recommendations of the Shome Committee

The Shome Panel had recommended that any taxation involving indirect transfer of assets
located in India should be prospective and not retrospective.

The Committee concluded that retrospective application of tax law should occur in
exceptional or rarest of rare cases, and with particular objectives. Moreover, retrospective
application of a tax law should occur only after exhaustive and transparent consultations with
stakeholders who would be affected.

The controversy surfaced again recently when the tax department issued notice to Vodafone.
Vodafone is not ready to pay taxes after the SC verdict. The company has indicated that it
will approach Netherlands government (its registered office) for invoking the India-
Netherlands Bilateral Investment Protection Agreement.

In the next budget, it is expected that the government may discontinue retrospective clause of
the amendment.
Before every financial year begins, Ministry of Finance presents its finance budget which covers
aspects such as how the previous year has gone and what are the proposals/plans for the next
financial year in terms of revenue allocation to various sectors, changes relating to tax law
provisions (both direct and indirect tax) etc. Such tax law changes generally termed as
‘amendments’ are proposed keeping in mind on-going developments, welfare of taxpayers,
loopholes which could not be plugged in earlier and also representations received by various
stakeholders. For eg: extension of profit linked deduction to few more years, introduction of new
exemption, introduction of new tax levy such as equalisation levy etc. Once these proposals are
accepted by both houses of parliament and receives the assent of Hon’ble President, it becomes
an enacted law.
These amendments can be of two kinds based on the specified date of its application;
a) Prospective amendment and
b) Retrospective amendment.
While prospective amendments are comparatively easy to handle and accepted atleast based on
its nature of application, retrospective amendments create lot of confusion and complexity and are
not easily acceptable. Therefore, date of application of law plays a major role to determine its
impact on taxpayers and be prepared and plan their next move. Hence, in this article we have
discussed retrospective amendment and covered the following topics:

1. Prospective amendment in brief

Dictionary meaning of the word ‘prospective’ is something that is ‘likely to happen in future’ or
‘likely to be or become something specified in the future’. Therefore, prospective amendment
would mean any changes to law that takes effect in the future either from date of enactment of
new law or any specified future date. For eg: Introduction of new Section 80TTB by Finance Act

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2018 which provides for higher deduction to senior citizens w.r.t interest income and it is made
applicable from financial year 2018-19.

2. Retrospective amendment
Dictionary meaning of the word ‘retrospective’ is ‘looking back over the past’, ‘relating to or thinking
about the past’, ‘looking backwards’ etc. In a similar fashion, with respect to law or statute, it
simply means ‘taking effect from a date in the past’.
Therefore, if there is an amendment to the law and it is applicable from a specified date in the past
but not future, it is termed as a retrospective amendment. For example, Extension of exemption
under Section 10(23C) to an income received by any person on behalf of the Chief Minister’s
Relief Fund, was made retrospectively from 1 April 1998 by Finance Act 2017.

3. Retrospective tax
Retrospective tax is nothing but a combination of two words “retrospective” and “tax” where
“retrospective” means taking effect from a date in the past and “tax” refers to a new or additional
levy of tax on a specified transaction. Hence, retrospective tax means creating an additional
charge or levy of tax by way of an amendment from specified date in the past. For eg:
Levy of tax on indirect transfers by Finance Act 2012 retrospectively from 1961; Introduction of
Section 14A for disallowance of expenditure related to exempt income in the year 2001 with
retrospective effect from April 1962.

While retrospective amendment may or may not have an additional tax levy or charge,
retrospective tax will have an additional tax levy.

4. Reasons for retrospective amendment / tax

Many a times retrospective amendments are carried out to undo some of the decisions of judicial
bodies which went against legislative intent or for removing certain anomalies in law. Sometimes it
may be simply to benefit taxpayers in genuine cases and do away with undue hardship or
difficulties faced by taxpayers.
For eg: When Supreme Court of India held in its ruling pronounced prior to 2001 that in case of
composite business and indivisible business, principle of apportionment is not applicable and
expenditure incurred in earning exempt income cannot be apportioned and disallowed due to
indivisibility. Post the ruling, Section 14A was introduced in the year 2001 which disallows
expenditure incurred by taxpayer in relation to exempt income irrespective of composite nature of
business. Government also came up with Rules providing the mechanism to determine the
amount to be apportioned and disallowed. While tax department claimed this amendment to be to
clarify the intention of the legislature with respect to expenses relating to earning of exempt
income, it is also due to Supreme Court’s ruling as mentioned above.

5. Major retrospective amendments/tax in Indian

income tax
Till date one of the major and most controversial retrospective amendment carried out was
bringing indirect transfer under tax bracket by Finance Act 2012.

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Supreme Court in the case of Vodafone held that Section 9 does not authorize tax authorities to
tax capital gains derived from indirect transfer of shares of Indian company while the main
transaction was between two foreign companies to acquire a foreign company which had majority
shares in Indian company. It may be noted that quantum of transaction and tax foregone by tax
department due to this Supreme Court ruling was huge.
Therefore, Government of India (Ministry of Finance) amended Section 9 of Income-tax Act, 1961
vide Finance Act 2012 and provided that shares or interest in any foreign company/entity shall be
deemed to be situated in India if such shares or interest derives its substantial value from assets
located in India. Any capital gain from transfer of such shares or interest in foreign company
deriving its substantial value from assets located in India was brought under tax levy. Government
did not stop at this amendment of new levy but made it effective retrospective from 1962. This
would mean Vodafone case where entire transactions were already carried out and ruling was also
pronounced by Supreme Court could be brought to tax with this retrospective amendment.

6. Validity of retrospective
amendment/retrospective tax
As already mentioned retrospective tax is not so easily welcomed by taxpayers as it creates an
additional levy on the transaction which is already concluded when the provisions of law were
different. Taxpayer would have planned his finance and tax based on the law as it existed at that
time and disturbing the same by way of unjust and unwarranted retrospective amendments is
unreasonable. However, retrospective amendment / retrospective tax by itself does not become
unreasonable or invalid. Validity/reasonableness of retrospective amendment/tax depends on facts
and circumstance of each case and need to be analysed on the merits of amendment in light of
facts and circumstance under which such amendment is made.
To sum up, any retrospective amendment which benefits taxpayers is welcome and non-beneficial
retrospective amendment / retrospective tax which is only clarificatory in nature is acceptable.
However, any unreasonable and unexpected new tax levy on a transaction which is closed in light
of the then existing law would be unfair and cause disruption and validity need to be analysed.

FEDERAL BASE OF TAXING POWER

India has a federal form of government, and hence a federal finance system. The essence of
federal form of government is that the Centre and the State Governments should be
independent of each other in their respective, constitutionally demarcated spheres of Action.
Once the fundamentals of the government are spelt out, it becomes equally important that
each of the government should be provided with sources of raising adequate revenues to
discharge the functions entrusted to it. For the successful operation of the federal form of
government financial independence and adequacy for the backbone.

Taxes in India are levied by the Central Government and the state governments. Some minor
taxes are also levied by the local authorities such as the Municipality.

The authority to levy a tax is derived from the Constitution of India which allocates the
power to levy various taxes between the Central and the State. An important restriction on
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this power is Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law". Therefore, each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State Legislature.
FISCAL FEDERALISM IN INDIA

The federal character of public finance in India has its origin as far as the seventies of the last
century. Although at that time the country had a unitary form of government, some division
of functions and financial powers between the Center and the state was found
administratively desirable.

[i] Ever since then the arrangements have been revised and improved from time to time.
Fiscal federalism entails the division of responsibilities in respect of taxation and public
expenditure among the different layers of the government, namely the Center, the states and
the local bodies. Fiscal federalism helps governmental organization to realize cost efficiency
by economies of scale in providing public services, which correspond most closely to the
preference of the people.

[ii] From the point of view of economy, it creates a unified common market, which promotes
greater economic activity.

[iii] The Seventh Schedule (Article 246) delineates ‘the subject matter of laws made by the
Parliament and by the Legislatures of the states’ and indicates the Union List (List I), states
List (List II) and the Concurrent List (List III).

[iv] List I invests the union with all functions of national importance such as defence,
external affairs, communications, constitution, organization of the Supreme Court and the
high courts, elections etc, List II invests the states with a number of important functions
touching on the life and welfare of the people such as public order, police, local government,
public health, agriculture, land etc. List III is a concurrent List, which includes
administration of justice, economic and social planning, trade and commerce, etc.

According to Article 246, Seventh Schedule, Parliament has exclusive powers to make laws
regarding matters enumerated in List I, notwithstanding the provisions of the other clauses of
this Article. On the other hand, the Legislature of any state has exclusive power to make laws
for the state regarding any of the matters enumerated in List II, subject to other clauses.

[v] With regard to List III, both the Parliament and a State Legislature can make laws but the
law listed in I or III, vests with the Union. Thus, the Union has supremacy over a wide range
of the legislative field.

Accordingly there are both mandatory and enabling provisions in the Constitution for
facilitating a wide-ranging transfer of resources, arranged in a systematic manner, through:

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1) Levy of duties by the Center but collected and retained by the States;

2) Taxes and duties levied and collected by the Center but assigned in whole to the states;

3) Mandatory sharing of the proceeds of income tax;

4) Permissible participation in the proceeds of the Union excise duties;

5) Statutory grants –in-aid of the revenues of states;

6) Grants for any public purpose; and

7) Grants of loans for any public purpose.

POWER OF TAXATION UNDER INDIAN

CONSTITUTION
Taxes in India are levied by the Central Government and the state governments. Some minor
taxes are also levied by the local authorities such as the Municipality.

The authority to levy a tax is derived from the Constitution of India which allocates the
power to levy various taxes between the Central and the State. An important restriction on
this power is Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law". Therefore, each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State Legislature.

Constitutionally established scheme of taxation

Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament of
India and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists:

 List - I entailing the areas on which only the parliament is competent to make laws,
 List - II entailing the areas on which only the state legislature can make laws, and
 List - III listing the areas on which both the Parliament and the State Legislature can make laws upon
concurrently.
Separate heads of taxation are no head of taxation in the Concurrent List (Union and the States have no
concurrent power of taxation). The list of thirteen Union heads of taxation and the list of nineteen State heads
are given below:

Central government of India

SL.
Taxes as per Union List
No.

82 Income tax:Taxes on income other than agricultural income.

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83 Custom Duty: Duties of customs including export duties

Excise Duty: Duties of excise on the following goods manufactured or produced in India namely
84 (a)Petroleum crude (b)high speed diesel (c)motor spirit (commonly known as petrol) (d)natural
gas (e) aviation turbine fuel and (f)Tobacco and tobacco products

85 Corporation Tax

Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on
86
capital of companies

87 Estate duty in respect of property other than agricultural land

88 Duties in respect of succession to property other than agricultural land

89 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight.

90 Taxes other than stamp duties on transactions in stock exchanges and futures markets

Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in
92A
the course of inter-State trade or commerce

92B Taxes on the consignment of goods in the course of inter-State trade or commerce

97 All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution

State governments

SL.
Taxes as per State List
No.

Land revenue, including the assessment and collection of revenue, the maintenance of land records,
45
survey for revenue purposes and records of rights, and alienation of revenues etc.

46 Taxes on agricultural income

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47 Duties in respect of succession to agricultural land.

48 Estate Duty in respect of agricultural land

49 Taxes on lands and buildings.

50 Taxes on mineral rights.

Duties of excise for following goods manufactured or produced within the State (i) alcoholic liquors for
51
human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics.

53 Electricity Duty:Taxes on the consumption or sale of electricity[17]

Taxes on sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol),Natural
54 gas aviation turbine fuel and alcohol liquor for human consumption but not including sale in the course of
inter state or commerce or sale in the source of international trade or commerce such goods.

56 Taxes on goods and passengers carried by roads or on inland waterways.

57 Taxes on vehicles suitable for use on roads.

58 Taxes on animals and boats.

59 Tolls.

60 Taxes on profession, trades, callings and employments.

61 Capitation taxes.

Taxes on entertainment and amusements to be extent levied and collected by a panchayat or Municipality
62
or a regional council or a district council.

63 Stamp duty

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IMMUNITY OF STATE
AGENCIES/INSTRUMENTALITIES
According to Tax Law, the Doctrine of Immunity of Instrumentalities means, the State and
Central (Federal) Governments have immunity from paying taxes imposed by the other.
Article 289(2) of the Constitution of India relaxes the Doctrine saying that the Union can tax
a State by passing a bill in the Parliament.

The Concept of State and Article 12 of the Constitution of India

The law dictionary defines “state” as :-
A body politic, or society of men united together for the purpose of promoting their mutual safety and
advantage, by the joint efforts of their combined strength. Individuals need constitutional protection
from the acts of the state itself. Fundamental rights protection is available against the state only as
ordinary laws are sufficient enough to protect infringement of rights by individuals. With great powers
comes a greater risk of abuse and in order to safeguard rights and freedom of individuals so that men
in power do not trample upon them. However, in order to delve deeper into the concept it is firstly
imperative to explore the definition of “state”.

Article 12 defines state in the following manner:

In this part unless the context otherwise requires, “the State” includes
1. The Government and Parliament of India
2. The Government and Legislature of each of States
3. Local Authorities or
4. Other Authorities
Within the territory of India or under the control of Government of India.

Concept of sovereign immunity.

India has adopted a restricted concept of sovereign immunity. Pursuant to the Code of Civil
Procedure of India, foreign states and their organs and instrumentalities can be sued with the
prior written consent of the Indian government. However, such consent may not be required
where the matter is governed by a special law (for, eg, the Carriage by Air Act 1972,
Consumer Protection Act 1986) or where the legal proceedings are not in the nature of a suit,
such as an industrial dispute under the Industrial Disputes Act 1947. In its 2011 judgment in
Ethiopian Airlines v Ganesh Narain Saboo (Ethiopian Airlines), the Supreme Court of India
reiterated the consistent view in India that the doctrine of sovereign immunity in India was
not absolute, and that foreign states do not have immunity from judicial proceedings in cases
involving their commercial and trading activities and contractual obligations undertaken by
them in India.
Legal basis
What is the legal basis for the doctrine of sovereign immunity in your state?
The legislative recognition of the doctrine of sovereign immunity in India can be found in
the following provisions and statutes:

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 section 86 of the Code of Civil Procedure 1908 (CPC), which provides that no suit
may be instituted against foreign states in India, except with the prior written consent
of the government; and
 the Diplomatic Relations (Vienna Convention) Act 1972, which incorporates certain
specified immunities available to diplomatic missions and their members in India
pursuant to the Vienna Convention on Diplomatic Relations, 1961. A few articles of
the Convention, including articles 29, 30, 31, 32, 37, 38 and 39, have been given the
force of law in India by extending the scope of sovereign immunity to diplomatic
agents, their family, members of staff and servants.
It is noteworthy that in Mirza Ali Akbar Kasani v United Arab Republic & Anr, a five-judge
bench of the Supreme Court held that section 86(1) CPC modifies the international doctrine
of sovereign immunity to a certain extent, and when a suit is instituted against a foreign state
with the consent of the government, it is not open for a foreign state to rely upon the doctrine
of sovereign immunity under international law.
Jurisdictional immunity
Domestic law
Describe domestic law governing the scope of jurisdictional immunity.
The domestic law governing jurisdictional immunity of foreign states is prescribed in section
86(1) of the CPC. Section 86(1) provides that ‘no foreign state may be sued in any court
otherwise competent to try the suit except with the consent of the central government
[government] certified in writing by a Secretary to that Government’; implying thereby that
there is immunity in the favour of foreign states from the jurisdiction of Indian courts, which
survives unless the government consents to a suit against a foreign state. However, the
proviso to section 86(1) exempts suits by tenants of immovable properties held by foreign
states from the requirement of obtaining the government’s prior consent.
Further, section 86(2) provides that the government shall not consent to a suit against a
foreign state unless certain conditions exist. Per section 86(2), the government may only
consent to a suit against a foreign state where the foreign state:

 has instituted a suit in a court against the person desiring to sue the foreign state;
 by itself or another, trades within the local limits of the jurisdiction of the court;
 is in possession of immovable property situated within those limits and is to be sued
with reference to such property or for money charged thereon; or
 has expressly or impliedly waived the privilege accorded to it.

Exemption of Central Property from State Taxation

The property of Centre is exempted from all taxes imposed by a state or any authority within
a state like municipalities, district boards, panchayats and so on. But, the Parliament is
empowered to remove this ban. The word ‘property’ includes lands, buildings, chattels,
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shares, debts, everything that has a money value, and every kind of property movable or
immovable and tangible or intangible. Further, the property may be used for sovereign (like
armed forces) or commercial purposes. The corporations or the companies created by the
Central government are not immune from state taxation or local taxation. The reason is that a
corporation or a company is a separate legal entity.

Exemption of State Property or Income from Central Taxation

The property and income of a state is exempted from Central taxation. Such income may be
derived from sovereign functions or commercial functions. But the Centre can tax the
commercial operations of a state if Parliament so provides. However, the Parliament can
declare any particular trade or business as incidental to the ordinary functions of the
government and it would then not be taxable. We note here that the property and income of
local authorities situated within a state are not exempted from the Central taxation. Similarly,
the property or income of corporations and companies owned by a state can be taxed by the
Centre. The Supreme Court, in an advisory opinion24 (1963), held that the immunity granted
to a state in respect of Central taxation does not extend to the duties of customs or duties of
excise. In other words, the Centre can impose customs duty on goods imported or exported
by a state, or an excise duty on goods produced or manufactured by a state.

FUNDAMENTAL RIGHTS AND THE POWER OF

TAXATION IN INDIA
Taxation is the legal capacity of the sovereignty or one of its governmental agents to exact or
impose a charge upon persons or their property for the support of government and for the
payment for any other public purposes which it may constitutionally carry out. The power of
taxation differs from the power of eminent domain, for under taxation the government is
required to make and enforce contribution of money or property by the citizen as his share of
the burden of support of the government. Property taken under eminent domain is much
beyond the owner’s share of the burden of government. Eminent domain takes nit a share of
the public burden, but more than a share.

A government cannot exist without raising and spending money. Parliament controls public
finance which includes granting of money to the administration for expenses on public
services, imposition of taxes and authorization of loans. This is a very important function of
Parliament. Through this means Parliament exercise control over the executive because
whenever Parliament discusses financial matters, government’s broad policies are invariably
brought into focus. The Indian Constitution devises an elaborate machinery for securing
parliamentary control over finances which is based on the following four principles.
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The first principle regulates the constitutional relation between the Government and
Parliament in matters of finance. The executive cannot raise money by taxation, borrowing
or otherwise, or spend money, without the authority of Parliament. The second principle
regulates the relation between the two Houses of Parliament in financial matters. The powers
of raising money by tax or loan and authorizing expenditure belongs exclusively to the
popular House, viz., Lok Sabha. Rajya Sabha merely assents to it. It cannot revise, alter or
initiate a grant. In financial matters, Rajya Sabha does not have co-ordinate authority with
Lok-Sabha and Rajya Sabha plays only a subsidiary role in this respect. The third principle
imposes a restriction on the power of Parliament to authorize expenditure. Parliament cannot
vote money for any purpose whatsoever except on demand by ministers. The fourth principle
imposes a similar restriction on the power of Parliament to impose taxation. Parliament
cannot impose any tax except upon the recommendation of the Executive.

Constitutional Podium of Taxing Power

The entries in the legislative lists are divided into two groups- one relating to the power to
tax and the other relating to the power of general legislation relating to specified subjects.
Taxation is considered as a distinct matter for purposes of legislative competence. Hence, the
power to tax cannot be deducted from a general legislative Entry as an ancillary power. Thus,
the power to legislate on inter-state trade and commerce under Entry 42 of List I does not
include a power to impose tax on sales in the course of such trade and commerce.

There is no Entry as to tax, in the Concurrent List; it only contains an Entry relating to levy
fees in respect of matters specified in List III other than court-fees.
In order to determine whether a tax was within the legislative competence of the legislature
which imposed it, it is necessary to determine the nature of the tax, whether it is a tax on
income, property, business or the like so that the Entry under which the legislative power has
been assumed could be ascertained.

The primary guide for this is what is known as the ‘charging section. The identification of
the subject-matter of a tax is only to be found in the charging section, the section which
creates the liability to pay the tax as distinguished from the mode of assessment or
machinery by which it is assessed.

Generally speaking, all taxation is imposed on persons, but the nature and amount of liability
is determined either by individual units, as in the case of a poll-tax, or in respect of the tax
payers’ interest in property or in respect of transactions of activities of the tax payers.

Constitutional Limitations Upon The Taxing Power ( FUNDAMENTAL

RIGHTS)

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Apart from the limitation by the division of the taxing power between the Union and State
Legislature by the relevant Entries in the legislative Lists, the taxing power of either
Legislature is particularly subject to the following limitations imposed by particular
provisions of our Constitution:
(1) It must not contravene Art.13.
(2) It must not deny equal protection of the laws, must not be discriminatory or arbitrary .
(Art.14)
(3) It must not constitute an unreasonable restriction upon the right to business.(19(1)(g))
(4) No tax shall be levied the proceeds of which are specially appropriated in payment of
expenses for the promotion or maintenance of any particular religion or religious
denomination (Art.27).
(5) A State Legislature or any authority within the State cannot tax the property of the Union.
(Art.285)
(6) The Union cannot tax the property and income of a State (Art.289).
(7) The power of a State to levy tax on sale or purchase of goods is subject to Art.286.
(8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax the
consumption or sale of electricity in the cases specified in Art.287

INTERSTATE COMMERCE AND TAXATION IN INDIA

The Central Sales Tax (CST) is a levy of tax on sales, which are effected in the course of
inter-State trade or commerce. According to the Constitution of India, no State can levy sales
tax on any sales or purchase of goods that takes place in the course of interstate trade or
commerce. Only parliament can levy tax on such transaction. The Central Sales Tax Act was
enacted in 1956 to formulate principles for determining when a sale or purchase of goods
takes place in the course of interstate trade or commerce. The Act also provides for the levy
and collection of taxes on sale of goods in the course of interstate trade and commerce and to
declare certain goods to be of special importance in the interstate commerce or trade.

The central sales tax is an indirect tax on consumers. Though CST is a central levy, however
it is administered by the concerned State in which the sale originates. The seller or a dealer
of goods in a State has to collect State Sales Tax on the sale of goods within the State as well
as central Sales Tax on sales that takes place in the course interstate trade or commerce.

The objects of the Central Sales Tax Act, 1956 are given in the preamble of the Act which
says that it is an Act to formulate principles for determining when a sale or purchase of
goods takes place in the course of inter-state trade or commerce or outside the a State or in
the course of import into or export from India, to provide for the levy, collection and

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distribution of taxes on sales of goods in the course of inter-State trade or commerce and to
declare certain goods to be of special importance in inter-State trade or commerce and
specify the restrictions and conditions to which State laws imposing taxes on the sale or
purchase of such goods of special importance shall be subject.

Content of Article 301

The scope and content of Article 301 depends on the interpretations of three expressions
used therein, viz., 'trade, commerce and intercourse', 'free' and 'throughout the territory of
India'.

Trade, commerce and intercourse

The framers of the Indian constitution, instead of leaving the idea of 'intercourse' to be
implied by the process of judicial pronouncements, expressly incorporated the same in
Article 301. The words trade and commerce have been broadly interpreted. In most of the
cases, the accent has been on the movement aspect. For example, in the Atiabari Tea Co. v.
State of Assam case, the court emphasized : "whatever else it (Art.301) may or may not
include, it certainly includes movement of trade which is of the very essence of all trade and
is its integral part," and, further, that "primarily it is the movement part of the trade" which
Article 301 has in its mind, that "the movement or the transport of the trade must be free,"
and that "it is the free movement or the transport of goods from one part of the country to the
other that is intended to be saved."

Again, in State of Madras v. Nataraja Mudaliar, the court stated that "all restrictions which
directly and immediately affect the movement of trade are declared by Article 301 to be
ineffective." Nevertheless cases are not wanting where movement has not been involved but
other aspects of trade and commerce have been involved. The view now appears to be fairly
settled that the sweep of the concept 'trade, commerce and intercourse' is very wide and that
the word trade alone, even in its narrow sense, would include all activities in relation to
buying and selling, or the interchange or exchange of commodities and that movement from
place to place is the very soul of such trading activities.

In Koteswar v. K.R.B. & Co, a restriction on forward contracts was held to be violative of
Article 301.The supreme court held that a power conferred on the state government to make
an order providing for regulating or prohibiting any class of commercial or financial
transactions relating to any essential Article, clearly permits restrictions on freedom of trade
and commerce and, therefore, its validity has to be assessed with reference to Article 304(b).

In District Collector, Hyderabad v. Ibrahim, the Supreme Court has invalidated under
Article 301 an attempt by a state to create by an administrative order a monopoly to deal in

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sugar in favour of cooperative societies. The order was issued while the proclamation of
emergency was operative and so Article 19 (1)(g) could not be invoked. The court therefore
took recourse to Article 301.

In Fatehchand Himmatlal v. State of Maharashtra, the Supreme Court considered the

question that whether the Maharashtra debt relief act, 1976, was constitutionally valid vis-à-
vis Article 301. This depended on the further question that whether money-lending to poor
villagers which was sought to be prohibited by the Act could be regarded as trade, commerce
and intercourse. The court answered in the negative although it recognised that the money-
lending amongst the commercial community is integral to trade and therefore is trade.
Free
The word 'free' in Article 301 cannot mean an absolute freedom or that each and every
restriction on trade and commerce is invalid. The Supreme Court has held in Atiabari that
freedom of trade and commerce guaranteed by Article 301 is freedom from such restrictions
as directly and immediately restrict or impede the free flow or movement of trade. Therefore
Article 301 would not be attracted if a law creates an indirect or inconsequential impediment
on trade, commerce and intercourse which may be regarded as remote. The word 'free' in
Article 301 does not mean freedom from regulation. As has been observed by the supreme
court: "there is a clear distinction between laws interfering with freedom to carry out the
activities constituting trade and laws imposing on those engaged therein rules of proper
conduct or other restraints directed to the due and orderly manner of carrying out the
activities." Regulation of hours, equipment, weight, size of load, lights, traffic laws are some
examples of regulatory laws which are not hit by Article 301.

Regulations like rules of traffic facilitate freedom of trade and commerce whereas
restrictions impede that freedom. In State of Mysore v. Sanjeeviah , A rule banning
movement of forest produce within the state between 10 p.m; and sunrise was held to be void
under Art. 301 as it was not 'regulatory' but 'restrictive. Tax laws are not excluded from the
scope of Art. 301. A tax which directly and immediately restricts trade would fall within the
purview of Art. 301. From the trend of the case-law it appears that there is a greater readiness
on the part of the courts to characterize an impediment on movement of commerce as 'direct'
and so hold it bad under Art. 301, than the one not on movement which is usually held to be
indirect or remote and so valid, e.g., octroi, sales tax, purchase tax, etc. But sales tax
discriminating between goods of one state from those of another may affect free flow of
trade and so offend Art. 301. A tax levied by Parliament on interstate sale would have
offended Art. 301 as such a tax, in its essence, encumbers movement of trade or commerce
because by its very definition an interstate sale is one which occasions movement of goods
from one state to another. Nevertheless, it was held valid because of Art. 302.

Throughout the territory of India

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The view is definitely held now that Article 301 applies not only to interstate but also to
intrastate trade and commerce, i.e. trade within the state. Therefore, it means freedom of
trade commerce and intercourse is there within the state and/or outside the state and/or any
part within the territory of India.
International tourist corporation v. State of Haryana
Facts: The state of Haryana levied a tax on transporters plying motor vehicles between Delhi
and Jammu & Kashmir. They use national highway, pass through Haryana without picking
up or setting down any passenger in the state. The responsibility for constructing and
maintaining of national highways rests on the Centre. It was therefore argued by the
transporters that the tax could hardly be regarded as compensatory, but the court rejected the
contention.

The Supreme Court said that what is necessary to uphold such a tax is the existence of a
specific, 'identifiable' object behind the levy and a 'sufficient nexus' between the 'subject and
the object of the levy.' The court further said that a state incurs considerable expenditure for
maintenance of roads and providing facilities for transport of goods and passengers. Even in
connection with national highways, a state incurs considerable expenditure not directly by
constructing or maintaining them but by facilitating the transport of goods and passengers
along with them in various ways such as lighting, traffic control, amenities for passengers,
halting places for buses and trucks. That part of a national highway which lies within
municipal limits is to be developed and maintained by the state. There is thus sufficient
nexus between the tax and the passengers and goods carried on the national highways to
justify the imposition of the said tax.

Decision: the tax was held to be valid.

Direct and immediate restrictions

The restrictions which will attract Article 301 must be those which directly and immediately
restrict or impede the free flow or movement of trade. Only those taxes which directly and
immediately restrict trade would fall within the purview of Article 301. the rational and
workable test to apply would be: does the impugned restrictions operate directly or
immediately on trade or its movement? what is prohibited is a tax whose direct effect is to
hinder the movement of trade.
Restriction on freedom of trade, commerce and intercourse throughout the territory of India
cannot be justified unless they fall within Article 304.

Necessity of reasonable restrictions

Now a question arises as to the necessity of such reasonable restrictions. To answer this, the
constitutional framers were conscious of free trade, commerce and intercourse throughout
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the territory of India is necessary. At the same time, such freedom may require to be curtailed
or curbed in public interest and the parliament and the state legislatures have been given
powers under Articles 302, 303, 304.

The object of part XIII is not to make inter-state trade, commerce and intercourse absolutely
free. Reasonable restrictions in public interest are permissible. Regulatory or compensatory
measures cannot be regarded as violative of the freedom unless they are shown to be
colorable measures to restrict the free flow of trade, commerce and intercourse. Therefore
Article 304 allows imposition of such reasonable restrictions on the freedom of trade as are
in public interest.

Conclusion
To conclude this research paper, I would like to say that part XIII is the most badly drafted
part of the constitution of India. The constitution framers had just borrowed this part from
the Australian constitution, (section 92) perhaps, without taking into consideration its further
implications and consequences in a country like India.

¢ Firstly, the freedom enshrined under the part XIII, is subject exception upon exception and
thereby limiting the scope of the said freedom.
¢ Secondly, the constitution framers could not have provided the words like "subject to the
other provisions to this part". If this part is interpreted literally or the literal rule of common
law is applied then it can be said that this part is to be read only with the other provisions of
this part only and not the other provisions of the constitution. but practically it is not so, as
supreme court, in many cases, as referred in this paper, has taken the help or read along with
other provisions of the constitution as well.
¢ Thirdly, these badly drafted provisions can only be cured by the amendment to the
constitution. Therefore, it needs amendment.
¢ Fourthly, it is not a self-contained code. May be the constitution has specifically provided
that it will subject only to the part XIII, but it has to be read in a harmonious way. Therefore,
it is to be read with the other provisions of the constitution.

SCOPE OF TAXING POWERS OF PARLIAMENT,

DELEGATION OF TAXING POWER TO STATE AND
LOCAL BODIES
Indian constitution has divided the taxing powers as well as the spending powers (and
responsibilities) between the Union and the state governments. The subjects on which
Union or State or both can levy taxes are defined in the 7th schedule of the constitution.
Further, limited financial powers have been given to the local governments also as per
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73rd and 74th amendments of the constitution and enshrined in Part IX and IX-A of the
constitution.

Since the taxing abilities of the states are not necessarily commensurate with their
spending responsibilities, some of the centre’s revenues need to be assigned to the
state governments. On what basis this assignment should be made and on what
guidelines the government should act – the Constitution provides for the formation of
a Finance Commission (FC) by President of India, every five years, or any such earlier
period which the President deems necessary via Article 280. Based on the report of the
Finance Commission, the central taxes are devolved to the state governments.

Separation of Powers
The Union government is responsible for issues that usually concern the country as a
whole, for example national defence, foreign policy, railways, national highways,
shipping, airways, post and telegraphs, foreign trade and banking. The state
governments are responsible for other items including, law and order, agriculture,
fisheries, water supply and irrigation, and public health.

Some items for which responsibility vests in both the Centre and the states include
forests, economic and social planning, education, trade unions and industrial disputes,
price control and electricity. Then, there is devolution of some powers to local
governments at the city, town and village levels.

The taxing powers of the central government encompass taxes on income (except
agricultural income), excise on goods produced (other than alcohol), customs duties,
and inter-state sale of goods. The state governments are vested with the power to tax
agricultural income, land and buildings, sale of goods (other than inter-state), and
excise on alcohol. Local authorities such as Panchayat and Municipality also have
power to levy some minor taxes.
The authority to levy a tax is comes from the Constitution which allocates the power to
levy various taxes between the Centre and the State. An important restriction on this
power is Article 265 of the Constitution which states that “No tax shall be levied or
collected except by the authority of law.” This means that no tax can be levied if it is not
backed by a legislation passed by either Parliament or the State Legislature.

Sources of Revenue for Union Government

The sources of Revenue of the Union Government are as follows:

 Income (except tax on agricultural income), Corporation Tax & Service Tax
 Currency, Coinage, legal tender, Foreign Exchange
 Custom duties (except export duties)
 Excise on tobacco and other goods.

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 Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the
constitution but Estate duty was abolished in India in 1985 by Rajiv Gandhi
Government)
 Fees related to any matter in Union list except Court Fee
 Foreign Loans
 Lotteries by Union as well as State Governments.
 Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting, other
forms of communication
 Property of the Union
 Public Debt of the Union
 Railways
 Stamp duty on negotiable instruments such as Bills of Exchange, Cheques, Promissory
notes etc.
 Reserve Bank of India
 Capital gains taxes, Taxes on capital value of assets except farm land
 Taxes other than stamp duties on transactions in stock exchanges and future markets
 Taxes on the sale and purchase of newspapers and advertisements published therein.
 Terminal Taxes on Goods and passengers, carried by Railways and sea or air.

Sources of revenue for State Governments

The following are sources of revenue for State Governments.

 Taxes and duties related to agricultural lands

 Capitation Taxes
 Excise on liquors, opium etc.
 Fees on matters related to state list except court fee
 Land Revenue, Land and buildings related taxes
 Rates of Stamp duties in respect of documents other than those specified in the Union
List
 Taxes on mineral rights subject to limitations imposed by the parliament related to
mineral development
 Taxes on the consumption or sale of electricity
 Sales tax on goods (other than newspapers) for consumption and use within state.
 Taxes on advertisements except newspaper ads.
 Taxes on goods and passengers carried by road or on inland waterways
 Taxes on vehicles, animals and boats, professions, trades, callings, employments,
luxuries, including the taxes on entertainments, amusements, betting and gambling.
 Toll Taxes.

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Certain Taxes levied as Concurrent Powers

Please note that the Union and the State Governments have the concurrent powers to fix the
principles on which taxes on motor vehicles shall be levied and to impose stamp duties on
non-judicial stamps. The property of the Union is exempted from State Taxation; and the
property of the states is exempted from the Union Taxation. But the parliament of India can
pass legislation for taxation by Union Government of any business activities / trade of the
state which are not the ordinary functions of the state.
Residuary Power of Taxation
Union Government has exclusive powers to impose taxes which are not specifically
mentioned in the state or concurrent lists. Some taxes imposed using these powers include
Gift tax, wealth tax and expenditure tax.

State’s power Regarding Sales Tax

The sales tax on consumer goods such as toothpastes, soaps, daily use items, electronic items
etc. are imposed, collected and appropriated by state governments. However, newspapers and
newspaper ads are exception to this. Further, there are four restrictions to this power of the
state. These include:

 A state cannot impose sales tax if a good is produced there but is sold outside the state.
 A state cannot impose sales tax if the sale and purchase is taking place for items due
for export.
 A state cannot impose tax on interstate trade and commerce of goods
 State cannot impose a tax on a good that has been declared of special importance by
parliament.

Other facts about levying and appropriation of Taxes

 Sales tax is imposed, levied, collected, appropriated by states as mentioned above
 Income tax, Corporation Tax, Service tax are levied and collected by Centre but are
appropriated by both states and centres as per distribution formula recommended by
Finance Commission. This formula is NOT binding upon the parliament.
 However states have no share in surcharges, cesses on these taxes.
 Stamp duties on negotiable instruments and excise duties on medicinal and toilet
preparations that have use of alcohol and narcotics are levied by Centre. But these
taxes don’t make a part of consolidated fund of India. They are assigned to respective
states only, which appropriate these taxes.
 Sales tax in case of Inter-state trade of goods (except newspapers) is levied and
collected by the centre but such proceeds are assigned to states. (This is known as
Central Sales Tax)
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Constitutional Limitation Upon Taxing Power:

Apart from the limitation by the division of the taxing power between the Union and State
Legislature by the relevant Entries in the legislative Lists, the taxing power of either
Legislature is particularly subject to the following limitations imposed by particular
provisions of our Constitution:
(1) It must not contravene Art.13.
(2) It must not deny equal protection of the laws, must not be discriminatory or arbitrary .
(Art.14)
(3) It must not constitute an unreasonable restriction upon the right to business.(19(1)(g))

(4) No tax shall be levied the proceeds of which are specially appropriated in payment of
expenses for the promotion or maintenance of any particular religion or religious
denomination (Art.27).
(5) A State Legislature or any authority within the State cannot tax the property of the Union.
(Art.285)
(6) The Union cannot tax the property and income of a State (Art.289).
(7) The power of a State to levy tax on sale or purchase of goods is subject to Art.286.
(8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax the
consumption or sale of electricity in the cases specified in Art.287

Delegation of Taxation Power:

The doctrine of excessive delegation is applied by the courts to adjudge the validity of the
provision delegating the power. Therefore, too board power ought not to be vested in the
executive matters of taxation; the parent act ought to contain policy in the light of which the
executive is to exercise the power delegated to it. The courts uphold delegation of power to
decide “ matters of details” concerning the working of the tax law in question. The
expression “matters of details”, in truth, is really an euphemism to cover the delegation of
significant powers to the executive in the tax area.
With regard to delegation in taxing legislation, the following principles may be treated
as well settled:
The power to impose a tax is essentially a legislative function, under article 265 of the
constitution no tax can be levied or collected except by the authority of law, and here law
means law enacted by the legislature and not made by the executive. Therefore, the
legislature cannot delegate the essential legislative function of imposition of tax to an
executive authority.Subject to the above limitation, a power can be conferred on the
government to exempt a particular commodity from the levy of tax. A power may also be
delegated to bring certain commodity under the levy of tax.The power to fix the rate of tax is
a legislative function, but if the legislative policy has been laid down, the said power can be
delegated to the executive.It is open to the legislature or executive to fix different rate of tax
for different commodities.Commodities belonging to the same category should not, however,
be subjected to different and discriminatory rates in the absence of any rational basis.Needs
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of the taxing body is not a test for determining whether guidance was furnished by the
legislature in exercising power to tax. The circumstance that the affairs of the taxing body
(panchayat, municipality, corporation, etc.,) are administered by the elected representatives
responsible to the people is wholly irrelevant and immaterial in determining whether the
delegation is excessive or otherwise.A taxing statute should be strictly construed. If a
provision is ambiguous, the interpretations that favour the assesse should be accepted.A
distinction, however, should always be made between charging provisions and machinery
provisions should be construed liberally so as to make charging provisions effective and
workable.General principles of delegated legislation apply to taxing statutes also.
Rates of Taxation:

The power to decide what to tax as well as whom to tax was delegated, there are other
varieties of delegation. The executive or the delegate may be empowered to fix the rates of
taxation. Under the central excise and salt act 1944, the government can by notification
increase upto 50% the excise duty levied by the parliament on commodity. Such a
notification is required to be laid before the parliament. Similarly, under the sea customs act,
the executive can vary the rates of taxation provided under the act by exempting certain
goods partially from duty. In such delegation valid? In devi das vs Punjab, the supreme court
upheld a provision which authorised the executive to levy sales tax at a rate between 1
percent and 2 percent. In the same act, however, where power was given to the government
to levy sales tax at such rates `as it deems fit’, the delegation was held to be invalid. In delhi
municipality vs BCS & W Millsthe court upheld a provision, which delegated power to levy
electricity tax, without setting any limits, to the corporation. The court while distinguishing
this case from devi das pointed out that:

(i) The delegation was to a local body which was popularly elected and whose decisions
were taken after public debate;
(ii) The upper limit to the total levy was provided by the needs of the body which had to be
deduced from the nature of its functions;
(iii) The body was subject to government control.

Similar grant of power to a municipal corporation was upheld in corporation of Calcutta vs

liberty cinema, the court is generally more willing to uphold delegation of fiscal power in
favour of elected bodies such as panchayats or municipalities. In darshanlal mehra vs India,
the supreme court observed that the rate of tax to be levied and the persons or the class of
persons liable to pay the same was to be determined by inviting objections which were
finally considered and decided by the state government. The tax was to be levied in
accordance with the statutory rules framed by the state government and those rules were
required to be laid before each house of the state legislature. These, in the opinion of the
court, constituted sufficient guidance and safeguards for valid delegation of legislative
power.
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In nagappa vs IO mines cess commissioner &anor,the supreme courtheld that s 2 of the iron
mines labour welfare act 1958, which authorised the government to levy and collect excise
duty not exceeding 50% tone on iron ore by a notification in the official gazette, was valid.
The proceeds of the levy were to be used fot the welfare of labour and the maxima had been
laid down.

Role of Judiciary In Taxing Power:

In Gwalior rayon silk manufacturing co ltd vs assistant commissioner of sales tax, S8 (2)(b) of the
central sales tax act which authorised levy of sales tax on sale of goods in the course of inter state
trade and commerce at the rate of 10 percent or at the rate applicable to the sale or purchase of
goods inside the appropriate state, whichever is higher was challenged. The impugned section was
upheld by all the judges, though they differed on the extent of permissible delegation. Khanna j
rejected the argument that since the legislature could repeal the act it had retained enough
control over subordinate legislation and therefore it was not necessary to lay down legislative
policy or guidelines for the delegate. Mathew j, in his dissenting judgment, upheld the argument,
which he again pursued in a majority opinion in n k papiah vs excise commissioner.

Banarasi Das v. State of Madhya Pradesh. In this case the Supreme Court was confronted
with the question as to whether Section 6(2) of Berar Sales Tax Act, 1947 which empowered the
State government to amend the schedule of the Act providing either for exemption from sales tax
or to bring in other goods within the purview of sales tax, was suffering from the vice of excessive
delegation. The Supreme Court speaking through Justice VenkataramaAiyer held that the
impugned provision was not an impermissible delegation of legislative power. The Supreme Court
relied on Raj Narain’s Case and held that the executive can determine details relating to the
working of taxation laws, such as the selection of persons on whom the tax is to be laid and the
rates at which it is to be charged. In the instant case the Court also referred to Powell v. Apollo
Candle Co. Ltd. and Syed Mohammed and Co. v. Madras and Hampton Junior and Co. v.
US and went on to hold that the power conferred by Section 6(2) was not unconstitutional.
Actually, the judicial comprehension of the judgment in Banarasi Das case came to light only
after the subsequent judgments like in the case of Corp. of Calcutta v. Liberty Cinema, wherein the
court held there was no distinction in principle between delegating a power to fix rates of taxes to
be charged on different classes of goods and a power to fix rates simpliciter. Thus, in the instant
case the majority upheld the validity of Section 548(2) of the Calcutta Municipal Act, 1951 was not
void notwithstanding that no guideline was issued

Conclusion
The article was an attempt to address the issue of delegated legislation in tax laws. The very
concept of delegation is opposing to the idea of rigid separation of powers. A strict adherence to
the age old doctrine of separation of powers might do more harm than good. The legislature
cannot be logically expected to enact on the plethora of situations dealing with different classes of
people. In appropriate cases, there could be delegated legislation in tax laws as well but then the
legislature cannot wipe out itself. Thus, the direct and immediate effect of delegation should not
be to confer uncontrolled power on the executive which might endanger the interests of the
subjects. In fact controlling the powers of the executive is the very purpose of the legislative.
According to Wade, administrative law is the law relating to the control of powers of the executive
authorities. Justice Markandey Katju writes in one of his articles that there was a need to create a
body of legal principles to control and to check misuse of these new powers conferred on the State
authorities in this new situation in the public interest. But then it will be a mistake to think that
administrative law is hostile to efficient government. Wade also pointed out that, “intensive
administration will be more tolerable to the citizen, and the Government’s path will be smoother,
where the law can enforce high standards of legality, reasonableness and fairness.” As per the

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comparative study of the delegation of tax laws in India, United States and England, one
phenomenon which is common in the three systems is that despite the recognition that there
could be a delegation of tax laws by the legislature yet it cannot confer an arbitrary power on the
executive. It is submitted that the model is most developed in the United States where the Courts
look for several checks on the power conferred on the executive. The author will conclude with this
quote by Sir John Donaldson, M.R., in R. v. Lancashire CC, ex p Huddleston on the development of
administrative law: “…administrative law has created a new relationship between the courts and
those who derive their authority from the public law, one of partnership based on a common.

Suggestion
(i) It is clear that there is a need for the legislature to delegate some tasks to its executive. The
existence of this need in the case of tax laws is even clearer. What is not so clear, however, is how
far this need translates into legally valid actions. The jurisprudence on this point has expanded
and today, we see that the Supreme Court upholds a majority of tax legislations that confer
powers on the executive.

(ii) It might even be said that this attitude displays a sort of special treatment to tax laws. Unlike in
other spheres where the law operates, the Supreme Court seems to be mindful of the fact that
taxation imposes a heavy burden on the State; one that cannot be managed without deep
cooperation between the organs of government. Such cooperation sometime involves extensive
support by the executive.

(iii) To encourage and facilitate this necessary cooperation, the Supreme Court has taken a lenient
view on delegation of legislative functions to the executive. The result has been an ever-increasing
occupation of power by the executive. The only concern that remains unaddressed so far is
whether such extensive delegation will at some time lead to an over powerful executive. Only time
and further case law will give us the answer to this question.

UNIT II
DIRECT TAX REGIME
THE INCOME TAX ACT 1961
BASIS OF TAXATION OF INCOME -BASIC CONCEPTS, PERSON, RESIDENTIAL
STATUS AND INCIDENCE OF TAX, INCOME FROM SALARIES - INCOME
FROM HOUSE PROPERTY - INCOME FROM BUSINESS OR PROFESSION AND
VOCATION - CAPITAL GAINS, INCOME FROM OTHER SOURCES - DEEMED
ASSESSEE, SET OFF AND CARRY FORWARD LOSS, INCOMES EXEMPT FROM
TAX, PERMISSIBLE DEDUCTIONS AND CHAPTER VIA DEDUCTIONS,

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ASSESSMENT, KINDS OF ASSESSMENT, INCOME TAX AUTHORITIES-

APPOINTMENTS-POWERS & FUNCTIONS, PROVISIONS RELATING TO
COLLECTION AND RECOVERY OF TAX-FILING OF RETURNS, ELECTRONIC
FILING, I.T PORTAL WORKING AND REFUND OF TAX, APPEAL AND
REVISION PROVISIONS, OFFENCES AND PENALTIES.

Income Tax
Most of us are familiar with the term ‘income tax’. Come end of financial year, and we all dread a stipulated
deduction from our salary in the name of income tax. But seldom are we aware of the meaning of income tax
and its compositions. So let’s read all about income tax in detail and understand how it affects business
professionals like us.

What is Income Tax?

Income tax is a percentage of an individual person’s or Business’ income that is paid to the government to run
the nation smoothly, fund infrastructural development, pay salaries of those employed by the state or central
governments, etc. All such taxes are levied based on the passing of a law. Income tax is defined as the law that
governs the provisions for our income tax.

Income tax is an exclusive and direct means of taxation like capital gains tax, securities transaction tax, etc.
There are many other indirect taxes that we pay such as Goods and Services Tax (GST), sales tax, VAT, Octroi
and service tax.

A large part of revenue for the Government of India comes from the income tax you pay every month or upon
every contractual earning. Ministry of Finance handles these revenue functions and it has delegated the
responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes
(CBDT).

Who pays Income Tax and why is it needed?

Income tax is applicable to be paid by individuals, corporates, businesses, and all other establishments that
generate income. The collection, recovery, and administration of income tax in India is regulated by Income Tax
Act, 1961. The government deploys this tax amount for a number of reasons ranging from building the
infrastructure to paying the state and central government employees their salaries. Income tax helps the
government generate a steady source of income which is eventually used for the development of the nation.
Even though income tax is paid every month from the monthly earnings, it is calculated on an annual basis. The
amount of income tax an individual has to pay depends on a number of factors.

Income Tax in Detail

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Income tax is paid by every individual person, Hindu Undivided Family, Association of Persons, Body of
Individuals, companies, corporate firms, local authorities and any other artificial juridical persons that generate
income on a regular basis.

Taxes are calculated on the annual income of a person, and an annual cycle of a year in the eyes of the Income
Tax law. This is applicable from the 1st of April and ends on the 31st of March of the next calendar year. The law
has recognised these years as “Previous Year” and “Assessment Year”.

The year in which income is earned is called previous year and the one in which it is charged to tax is called
assessment year.

Taxes are collected by the government in three ways:

1. Voluntary payment by taxpayers to designated banks, like advance tax and self-assessment tax.
2. TDS or Taxes Deducted at Source are the ones which is deducted from your monthly income, before you
receive it.
3. TCS or Taxes Collected.

Taxable Heads of Income

Income from different sources is taxed differently. These are known as heads of income and are as detailed
below:

 Income from Salaries: Any form of income that is received from an employer by an employee is taxed
under this heading. Employers have to withhold tax mandatorily under Section 192, in case the income
of their employees falls under a taxable bracket. It is also the employer’s responsibility to also provide
a Form 16, which contains details of tax deductions and net paid income.
 Income from House Property: The income, in this case, is taxable if the assesse is the owner of a
property which has been given out on rent. The property here, is not supposed to be used for business
or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means
you and your family live there, and do not have to pay taxes on this. (Read on to know more about
calculating income from house property). Income from house property is calculated as follows:
o Gross Annual Value (GAV) = x
o Less: Municipal Taxes Paid = (y)
o Net Annual Value = x-y
o Less: Deductions under Section 24 = z
o Income from House Property = (x-y) – z
 Profits and Gains Of Business or Profession: These are the types of taxes that are applicable for
income from business or professional services rendered. The provisions for computing the tax on this
type of income is according to Sections 30 to 43D.
 Income from Capital Gains: These taxes are applicable on income that arises when capital assets are
transferred. Capital assets are defined as a property of any value that is held by the assesse such as
buildings, land, equity shares, bonds, debentures, jewellery, art, assets, etc.

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 Income from other sources: Any other source of income that cannot be classified under the above
heads of income falls under this heading. There are some specific and pre-determined incomes which
fall under this heading, such as:
o Income by way of dividends.
o Winnings from horse races / lotteries.
o Employee’s share contributed towards staff welfare schemes or any fund set up under the ESIC
Act that is received by the employer from the employees.
o Interest on securities like debentures, government securities and bonds.
o Interest on compensation.
o Gifts.
o Rental income other than house property.
o Family pension received after the death of the pensioner.
o Income that is earned on interest, other than by way of securities.

Taxable Heads of Income

Income from different sources is taxed differently. These are known as heads of income and are as detailed
below:

 Income from Salaries: Any form of income that is received from an employer by an employee is taxed
under this heading. Employers have to withhold tax mandatorily under Section 192, in case the income
of their employees falls under a taxable bracket. It is also the employer’s responsibility to also provide
a Form 16, which contains details of tax deductions and net paid income.
 Income from House Property: The income, in this case, is taxable if the assesse is the owner of a
property which has been given out on rent. The property here, is not supposed to be used for business
or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means
you and your family live there, and do not have to pay taxes on this. (Read on to know more about
calculating income from house property). Income from house property is calculated as follows:
o Gross Annual Value (GAV) = x
o Less: Municipal Taxes Paid = (y)
o Net Annual Value = x-y
o Less: Deductions under Section 24 = z
o Income from House Property = (x-y) – z
 Profits and Gains Of Business or Profession: These are the types of taxes that are applicable for
income from business or professional services rendered. The provisions for computing the tax on this
type of income is according to Sections 30 to 43D.
 Income from Capital Gains: These taxes are applicable on income that arises when capital assets are
transferred. Capital assets are defined as a property of any value that is held by the assesse such as
buildings, land, equity shares, bonds, debentures, jewellery, art, assets, etc.
 Income from other sources: Any other source of income that cannot be classified under the above
heads of income falls under this heading. There are some specific and pre-determined incomes which
fall under this heading, such as:

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o Income by way of dividends.

o Winnings from horse races / lotteries.
o Employee’s share contributed towards staff welfare schemes or any fund set up under the ESIC
Act that is received by the employer from the employees.
o Interest on securities like debentures, government securities and bonds.
o Interest on compensation.
o Gifts.
o Rental income other than house property.
o Family pension received after the death of the pensioner.
o Income that is earned on interest, other than by way of securities.

What is Tax Incidence?

Definition: Tax incidence is the distribution of the overall tax burden between sellers
and buyers in an economy. In other words, it analyzes who is paying more of the overall
taxes in the economy, the buyer or the seller.
What Does Tax Incidence Mean?
What is the definition of tax incidence? The overall tax burden in an economy
typically shifts between the buyers and sellers depending on the price elasticity
of demand and supply. If demand is more elastic than the economic supply, the tax
burden will fall on the producer. Likewise if the elasticity of supply is greater than
demand, more of the tax burden will fall on the buyers.
Let’s look at an example.

Example
When taxes are imposed on goods or services with relatively inelastic demand like
medicine or medical care, suppliers are able to raise the price of the good or service by
the tax amount because of the lack of significant change to quantity demanded when
prices change. Thus, they are able to avoid paying any of the tax because it is passed
on to the buyer.
In most cases, demand is not this inelastic and the entire tax burden cannot be passed
on to consumers. Usually the elasticity is somewhere between elastic and inelastic.
This means that the producer could potentially pass some of the expense on in the
form of higher prices but not all of it. The remaining tax burden would be the producer’s
responsibility.

Take pencils for example. A $0.25 tax on pencils could result in a $0.10 increase in
price by producers. The producers would be responsible for the remaining $0.15 tax.

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These tax burdens have far reaching effects, even for changes under a dollar. Cut
backs made by producers can make their suppliers feel the impact through reduced
use and purchase of required inputs.

The group that is least affect by price will bear the largest amount of the tax
responsibility. To calculate the incidence of tax formula, you can use the pass-through
method.

Price Elasticity of Supply (.5) / (Price Elasticity of Supply (.5) – Price Elasticity of
Demand (-.04)) = 0.5 / [0.5 – (-.0.4)] = 0.5/0.9 = 56% is the amount paid by the buyer.

100% – 56% = 44% is the amount of tax incidence paid by the seller.

Summary Definition
Define Tax Incidence: Incidence of tax means the shift of economic tax burden from
buyer to sellers and vice versa due to changes in the elasticity of demand and supply.

Tax incidence on a taxpayer in India depends upon his residential status.

Tax incidence on a taxpayer in India depends upon his residential status. Whether an income
earned by an individual, in or outside India, is taxable in India depends on the residential status of
the individual rather than on his citizenship. People are often under the wrong impression that
taking up foreign citizenship helps obtain tax benefits. However, the Income Tax Act, 1961 (Act)
does not provide tax benefits on the basis of a person’s citizenship.
Taxing jurisdiction
There are three different principles adopted internationally to identify the tax jurisdiction of the
income of an individual. These principles—citizenship principles, source principle and residence
principle are adopted by different countries as per their choice. In the US, income is taxed based
on citizenship and source based principles, whereas India follows the residence based and source
based taxation system. Under citizenship based taxation, income is taxed on the basis of
citizenship of the taxpayer, whereas under residence based taxation system, income is taxed on
the basis of residential status of the taxpayer.
Under the Income Tax Act, the residential status of an individual is determined on the basis of
period of stay of taxpayers in India. Basis the longevity of the period of stay, residential status is
further classified into further three categories (Residents and Ordinarily Resident (ROR),
Residents but not Ordinarily Residents (RNOR) cumulatively referred as resident; and Non
Residents (NR), depending upon which the income is charged to tax in India.

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According to the categorisation of residential status, the Act specifies the scope of income to be
taxable in the hands of RORs, NORs and NRs. It provides that RORs shall be required to pay tax
on their worldwide income whereas RNORs are required to pay tax only on Indian income, plus
any income accruing outside India from a business controlled in or profession set up in India.
However, non-residents are taxed only on income that has its source in India. Entire process of
evaluation of residential status under the Act nowhere requires any emphasis on the citizenship of
an individual.
Another aspect that needs to be kept in mind is that the Double Taxation Avoidance Agreements
(DTAA) also incorporates the concept of residential status. In order to qualify as a resident under a
DTAA entered into by India, an expat should enjoy residential status either in the overseas country
or in India under the domestic laws. There also citizenship has no role to play.
Citizenship has limited relevance as far as Indian taxation is concerned. A person taking up foreign
citizenship, but continuing to stay in India, does not really get any tax benefit. Only if a person
physically stays abroad that he gets the benefit of becoming an NR or an RNOR, who is liable to
pay tax only on Indian income. However, certain HNWIs exploits loopholes in the aforesaid
provisions by shifting their residence to foreign jurisdiction to qualify as non-resident Indians and
liable to tax only on the income accruing or arising in India.

Residential Status for Income Tax –

Individuals & Residents
It is important for Income Tax Department to determine the residential status of a tax
paying individual or company. It becomes particularly relevant during the tax filing
season. In fact, this is one of the factors based on which a person’s taxability is
decided. Let us explore the residential status and taxability in detail.

1. Meaning and importance of residential status

The taxability of an individual in India depends upon his residential status in India for any particular
financial year. The term residential status has been coined under the income tax laws of India and
must not be confused with an individual’s citizenship in India. An individual may be a citizen of
India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end
up being a resident of India for income tax purposes for a particular year.
Also to note that the residential status of different types of persons viz an individual, a firm, a
company etc is determined differently. In this article, we have discussed about how the residential
status of an individual taxpayer can be determined for any particular financial year

2. How to determine residential status?

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For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let
us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in
the relevant financial year
In the event an individual leaves India for employment during an FY, he will qualify as a resident of
India only if he stays in India for 182 days or more. This otherwise means, condition (b) above of
60 days would not apply to him

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident
ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following
conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an
RNOR.

Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the
year.

3. Taxability
Resident: A resident will be charged to tax in India on his global income i.e. income earned in
India as well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need
not pay any tax in India on their foreign income.
Also note that in a case of double taxation of income where the same income is getting taxed in
India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that
India would have entered into with the other country in order to eliminate the possibility of paying
taxes twice.

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TAXABLE INCOME FROM SALARY

Understanding the head of Income from salary, its components, features, the charging section, computation of salary
income, allowances and perquisites.

Indian tax system is divided into mainly two parts, direct tax and indirect tax. Income Tax Act 1961 applies the direct
tax laws relating to salary earned. It is a broad concept which includes every kind of payment made by an employer to
employee, i.e., monetary as well as non-monetary facilities.

Components of Salary: Salary u/s 17(1) of Income Tax Act comprises of the following:
1. Compensation,
2. Pension or annuity
3. Gratuity
4. Commission, fees, benefits or profits in addition to salary,
5. Advance salary
6. Leave salary,
7. Taxable portion of transfer to recognised provident fund, and
8. The contribution made in pension scheme u/s 80CCD by the Central Government or
the employer to the account of the employee in the previous year.

Features of Income from Salary

1. It is most important that an employer-employee relationship exists between the people
involved to charge any payment under the head salary.
2. The employment can be full-time or part-time. Salary earned from multiple employers
can be clubbed together.
3. Once the employee accrues the salary, the liability to pay tax can’t be exempted by any
means.
4. The surrendered salary of the employees is exempt from the tax.
5. In the case of tax-free salary, the pay income along with the tax will be a part of the
revenue from the pay of the employee.

Charging Section of Salary

Section 15 of the Income Tax Act states that salary can be taxed on due or receipt basis, whichever is earlier.

Computation of Income from Salary:

Particulars Amount

Basic Wage 25000

Allowances received 3400

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Particulars Amount

Perquisites 5000

Profits in lieu of Salary 2500

Benefits for retirement 1500

Gross Salary 37400

Less: Deductions

u/s 16(ii) Entertainment Allowance* Nil

u/s 16(iii) Professional Tax** (2500)

Income under the Head Salary 34900

Note:

*Entertainment Allowance: This is only allowed for Government Employees.

**Professional Tax: Directly reduce if paid by the employee. In case employer pays it, then it is first added to salary
and then deducted.

Allowances: The income from salary includes various benefits that are received by the employee. The allowances that
are exempt to a certain level include House Rent Allowance (HRA), Leave Travel Allowance, etc.

Perquisites: The employees enjoy many perks in addition to the salary received which forms a part of the computation
of income from salary. The employees also enjoy exemption concerning these perquisites.

TAXABLE INCOME FROM PROPERTY

Owning a house one day – everybody dreams of this, saves towards this and hopes
to achieve this one day. However, owning a house property is not without
responsibilities. Paying house property taxes annually is one of them. If you want to
learn how to save tax on home loan interest, this guide is for you. It also talks about
how to report home ownership in your income tax return.

1. Basics of House Property

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A house property could be your home, an office, a shop, a building or some land
attached to the building like a parking lot. The Income Tax Act does not differentiate
between a commercial and residential property. All types of properties are taxed
under the head ‘income from house property’ in the income tax return. An owner for
the purpose of income tax is its legal owner, someone who can exercise the rights of
the owner in his own right and not on someone else’s behalf.

When a property is used for the purpose of business or profession or for carrying out
freelancing work – it is taxed under the ‘income from business and profession’ head.
Expenses on its repair and maintenance are allowed as business expenditure.
a. Self-Occupied House Property
A self-occupied house property is used for one’s own residential purposes. This may be occupied
by the taxpayer’s family – parents and/or spouse and children. A vacant house property is
considered as self-occupied for the purpose of Income Tax.
Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only
one is considered and treated as a self-occupied property and the remaining are assumed to be
let out. The choice of which property to choose as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been
extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and
remaining house as let out for Income tax purposes.
b. Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house
property for income tax purposes
c. Inherited Property
An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a
self occupied one or a let out one based on its usage as discussed above.

2. Steps to Calculate Income From House

Property
Here is how you compute your income from a house property:

a. Determine Gross Annual Value (GAV) of the property: The gross annual value
of a self-occupied house is zero. For a let out property, it is the rent collected for a
house on rent.

b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from
GAV of property.

c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual Value –
Property Tax
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d. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a

deduction from the NAV under Section 24 of the Income Tax Act. No other expenses
such as painting and repairs can be claimed as tax relief beyond the 30% cap under
this section.

e. Reduce home loan interest: Deduction under Section 24 is also available for
interest paid during the year on housing loan availed.

f. Determine Income from house property: The resulting value is your income
from house property. This is taxed at the slab rate applicable to you.

g. Loss from house property: When you own a self occupied house, since its GAV
is Nil, claiming the deduction on home loan interest will result in a loss from house
property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the
property. The rental value must be higher than or equal to the reasonable rent of the
property determined by the municipality.

3. Tax Deduction on Home Loans

a. Tax Deduction on Home Loan Interest: Section 24
Homeowners can claim a deduction of up to Rs 2 lakh on their home loan interest, if
the owner or his family resides in the house property. The same treatment applies
when the house is vacant. If you have rented out the property, the entire home loan
interest is allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if

both the following conditions stand satisfied:
a. The loan is taken on or after 1 April 1999
b. The purchase or construction is not completed within 5 years from the end of the FY in which
loan was availed
When is the deduction limited to Rs 30,000?

As already mentioned, if the construction of the property is not completed within 5

years, the deduction on home loan interest shall be limited to Rs. 30,000. The period
of 5 years is calculated from the end of the financial year in which loan was taken.
So, if the loan was taken on 30th April 2015, the construction of the property should
be completed by 31st March 2021. (For years prior to FY 2016-17, the period
prescribed was 3 years which got increased to 5 years in Budget 2016).

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Note: Interest deduction can only be claimed, starting in the financial year in which
the construction of the property is completed.

How do I claim a tax deduction on a loan taken before the construction of the
property is complete?

Deduction on home loan interest cannot be claimed when the house is under
construction. It can be claimed only after the construction is finished. The period
from borrowing money until construction of the house is completed is called pre-
construction period.

Interest paid during this time can be claimed as a tax deduction in five equal
instalments starting from the year in which the construction of the property is
completed. Understand pre-construction interest better with this example.

b. Tax Deduction on Principal Repayment

The deduction to claim principal repayment is available for up to Rs. 1,50,000 within
the overall limit of Section 80C.Check the principal repayment amount with your
lender or look at your loan installment details.

Conditions to claim this deduction-

 The home loan must be for purchase or construction of a new house property.
 The property must not be sold in five years from the time you took possession.
Doing so will add back the deduction to your income again in the year you sell.

Stamp duty and registration charges Stamp duty and registration charges and
other expenses related directly to the transfer are also allowed as a deduction under
Section 80C, subject to a maximum deduction amount of Rs 1.5 lakh. Claim these
expenses in the same year you make the payment on them.

c. Tax Deduction for First-Time Homeowners: Section

80EE
Section 80EE recently added to the Income Tax Act provides the homeowners, with
only one house property on the date of sanction of loan, a tax benefit of up to Rs
50,000.

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c. Tax Deduction for First-Time Homeowners: Section

80EEA
A new section 80EEA is added to extend the tax benefits of interest deduction for
housing loan taken for affordable housing during the period 1 April 2019 to 31 March
2020. The individual taxpayer should not be entitled to deduction under section
80EE.

These benefits are not available for an under construction property.

Do you own more than one house?

If you own more than one house, you need to file the ITR-2 form.

Read our guide to ITR-2 form here.

4. Claiming Deduction on Home Loan

 The amount of deduction you can claim depends on the ownership share you
have on the property.
 The home loan must also be in your name. A co-borrower can claim these
deductions too.
 The home loan deduction can only be claimed from the financial year in which
the construction is completed.
 Submit your home loan interest certificate to your employer for him to adjust
tax deductions at source accordingly. This document contains information on
your ownership share, borrower details and EMI payments split into interest
and principal.
 Otherwise, you may have to calculate the taxes on your own and claim the
refund, if any, at the time of tax filing. It’s also possible that you may have to
deposit the dues on your own if there is a tax payable.
 If you are self-employed or a freelancer, you don’t have to submit these
documents anywhere, not even to the IT Department. You will need them to
calculate your advance tax liability for every quarter. You must keep them
safely to answer queries that may arise from the IT Department and for your
own records.

5. Tax Benefits on Home Loans for Joint

Owners
The joint owners, who are also co-borrowers of a self-occupied house property, can
claim a deduction on interest on the home loan up to Rs 2 lakh each. And deduction
on principal repayments, including a deduction for stamp duty and registration
charges under Section 80C within the overall limit of Rs.1.5 lakh for each of the joint
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owners. These deductions are allowed to be claimed in the same ratio as that of the
ownership share in the property.

You may have taken the loan jointly, but unless you are an owner in the property –
you are not entitled to the tax benefits. There have been situations where the
property is owned by a parent and the parent and child together take up a loan
which is paid off only by the child. In such a case the child, who is not a co-owner is
devoid of the tax benefits on the home loan.

Therefore, to claim the tax benefits on the property:

1. You must be a co-owner in the property
2. You must be a co-borrower for the loan
Each co-owner can claim a deduction of maximum Rs 1.5 lakh towards repayment
of principal under section 80C. This is within the overall limit of Rs 1.5 lakh of
Section 80C. Therefore, you can avail a larger tax benefit against the interest paid
on home loan when the property is jointly owned and your interest outgo exceeds
Rs 2 lakh per year.

It’s important to note that the tax benefit of both the deduction on home loan interest
and principal repayment under section 80C can only be claimed once the
construction of the property is complete.

6. HRA and Deduction on Home Loan

Scenario 1:

You live in a rented accommodation since your house is too small for your
needs

Raghav lives in a rented house in Noida since his own office, son’s school and his
wife’s office are in Noida, He has his own house on the outskirts of Delhi which is
quite small and also lying vacant. He is paying interest on the loan on his own
house.

Raghav can claim:

 HRA for rent he pays for the house in Noida,and

 Deduction on interest up to Rs 2,00,000 on the home loan

Scenario 2:

You live in a rented house; your own house is also let out
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Neha recently bought a flat in Indore, though she lives and works in Bangalore. She
has no plans of returning to Indore in the next five years so she gives that flat on
rent. She lives on rent in Bangalore.

Neha can claim:

 HRA for the rent she pays for the house in Bangalore and
 Claim the entire interest she pays during the year on the home loan

7. Case Study
Aditya earns rental income from his house in Vizag.See how his GAV and NAV are
computed and how much he has to pay as taxes here.

8. Significant Budget Amendment in

2017 – Impact explained with an
example
Till FY 2016-17, loss under the head house property could be set off against other
heads of income without any limit. However, form FY 2017-18, such set off of losses
has been restricted to Rs 2 lakhs. This amendment would not really affect taxpayers
having a self-occupied house property. This move will have an impact on taxpayers
who have let-out/ rented their properties. Though there is no bar on the amount of
home loan interest that can be claimed as a deduction under Section 24 for a rented
house property, the losses which could arise on account of such interest payment
can be set off only to the extent of Rs 2 lakhs.

Here is an example to help you comprehend the impact of the amendment:

Particulars AY 2017- AY 2018-

18 19

Salary income 10,00,000 10,00,000

Income from other sources (Interest income) 4,00,000 4,00,000

Income from house property (*) (4,40,000) (2,00,000)

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Gross Total Income 9,60,000 12,00,000

Deductions 2,00,000 2,00,000

Taxable income 7,60,000 10,00,000

Tax on the above 77,000 1,12,500

Additional tax outgo excluding cess in AY 2018-19 on 35,500

account of the amendment

Workings for Income from House Property

Particulars AY 2017- AY 2018-19
18

Property A

Annual Value Nil Nil

(-) Interest on housing loan 2,00,000 2,00,000

restricted to

Loss from House (2,00,000) (2,00,000)

Property(A)

Property B

Net income from House 60,000 60,000

Property after all
deductions (B)

Property C

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Annual Value 5,00,000 5,00,000

Less : Standard Deduction 1,50,000 1,50,000

Less : Interest on loan 6,50,000 6,50,000

Loss from House Property (3,00,000) (3,00,000)

(C)

Total income from house (4,40,000) Restricted to (2,00,000). Balance loss of

property (A+B+C) Rs 2.4 lakhs can be carried forward for
the next 8 AYs

INCOME UNDER BUSINESS/PROFESSION & VOCATION

It referred to any economic activity carried for earning profits. Economic activity refers to any trade,
Commerce, Manufacturing Activity, Trading Activity or any other concern in nature of all.
It is not compulsory for continuation of similar transaction or a series of transaction or carried the
business permanently.
Profession: It refer that a person provides services against their skill & knowledge like that of CA,
Doctor, Engineer, etc. In Profession a person can earn their livelihood through their intellectual or
manual skills.
Basis of Charge of Income Under Business/Profession:
There are some of the income which are taxable under the head “Profit & gains of Business or
Profession”
1. The profit & gains earned by the assesses from the business/profession carried at any
time during the previous year.
2. If any person had receive/due any compensation or payment managing the whole or
substantially the whole of the affairs of an Indian Company, in connection with the
termination of his management or the modification of the terms & conditions relating
thereto;
3. Income derived from performing specific services for its member by trade, profession
or any other similar association.
4. Any perquisite or benefit arising from business or profession, whether convertible into
money or not.

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5. Any Interest income,Commission,Salary or bonus due or received by any partner from

that Company.
6. Any amount received under a Key man Insurance Policy including the amount
allocated by way of bonus on such policy.
7. Income received from any speculative transaction.
8. Any profit received from the transfer of Duty Entitlement Pass book scheme.
9. Any Profit Received on the transfer of the Duty Free Replenishment Certificate.
10.Any profit received on sale of a license granted under the Imports (Control) Order,
1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947)
11.Any amount received or receivable,in cash or in kind under such agreements:
If a person not carrying out any activity in relation to any business.
Or
If a person is not sharing any Know-how,patent, copyright, trade-mark, licence, franchise or any
other business or commercial right of similar nature
Method of Accounting
Under Sec.145, income under Business & Profession shall be computed in accordance with the
method of accounting regularly followed by the assesses. The two recognized methods are Cash
system and Mercantile system of accounting.
Cash System: In this system,all expenses & income are booked when they receive.
Mercantile System of Accounting : All Income & expenses are booked on accrual basis.
Speculative Business: Speculative business is one which carries speculative transaction. It is
consider to be a separate business.
Speculative Transaction: These are those transaction which in which their is a contract for
sale/purchase of shares,stock.
Computation of Income:
Deductions not Admissible:
1. Losses due to illegal trade practices.
2. Expenses not related to the business.
3. Expenses related to Capital Assets
4. Loss on sale of shares.
5. Future Anticipated Losses
6. Advance paid for commencement of new business which is not established
Computation of Business Profits:
Business Profit should be calculated through profit & Loss Account.In Profit & Loss Account there
are some expenses which are partly allowed or disallowed under Income Tax Act. On the Credit
side of Profit & Loss A/c there are some Income which are tax free or not taxable under the head
Business/Profession.
Balance as per P & L A/c (+) Profit

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(-) Loss Amount

Add Expenses claimed but not allowed under the Act
1. All Provisions & Reserves (Provision for Bad Debt/Depreciation/Income)
2. All Taxes (Except Income Tax, Wealth Tax etc.) except sales Tax,Excise
3. Duty,& Local Taxes of premises used for business.
4. All Charities & Donations
5. All personal Expenses
6. Any type of Fine / Penalty
7. Speculative Losses
8. All Capital Losses
9. Any Difference in Profit & Loss Account
10. Previous year Expenses
11. Rent paid to self
12. All expenses related to other head of Income
13. Payments made to the partner (in terms of salary,commission or any other way.)
14. All capital expenses except scientific research
15. Loss by theft
16. Expenses on Illegal Business
17. Rent for Residential portion
18. Interest on Income tax, TDS etc
Total of these Items is added to the profit or adjusted from loss
While calculating the Profit/Loss of Professional all receipt are recorded as their Income &
irrespective of that all the expenses paid in providing the services,office expenses are deducted
from the Income.
The Supreme Court in Chennai Properties & Investments Ltd vs. CIT 2015 (5) TMI 46 (SC) has
observed that merely an entry in the object clause showing a particular object would not be the
determinative factor to arrive at an conclusion whether the income is to be treated as income from
business and such a question would depend upon the circumstances of each case, viz., whether
a particular business is letting or not.
Following are some of professions as per Rule 6F of the I.T. Rules, 1962:

1. Architectural
2. Accountancy
3. Authorised representative
4. Engineering
5. Film Artist
6. Interior Decoration
7. Legal
8. Medical
9. Technical Consultancy.

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“Film artist” means any person engaged in his professional capacity in the production of a
cinematograph film whether produced by him or by any other person, as—
(i) an actor,
(ii) a cameraman;
(iii) a director, including an assistant director;
(iv) a music director, including an assistant music director;
(v) an art director, including an assistant art director;
(vi) a dance director, including an assistant dance director;
(vii) an editor;
(viii) a singer;
(ix) a lyricist;
(x) a story writer;
(xi) a screen-play writer;
(xii) a dialogue writer; and
(xiii) a dress designer.
It was observed by the Madras High Court in reference to section 2(13) in the case of Dr. P.
Vadamalayan vs. CIT (supra) that the definition of ‘business’, being an inclusive definition and not
being exhaustive, is indicative of extension and expansion and not restriction.
The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of
the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider
import than the word ‘profession”. The words “business” and “vocation” are not synonymous, Upon
a proper construction of the words “business” and “vocation” in the context of the Indian Income-
tax Act, there must be some real, substantive and systematic course of business or conduct before
it can be said that a business or vocation exists the profits of which are taxable as such under the
Act (Upper India Chamber of Commerce, Cawnpore vs. CIT (1947) 15 ITR 263 (All). Also it was
observed in Addl CIT vs. Ram Kripal Tripathi (1980) 125 ITR 408 (All) that the expression
“profession” involves the idea of an occupation requiring purely intellectual skill or manual skill
controlled by the intellectual skill of the operator, as distinguished from an occupation or business
which is substantially the production or sale, or arrangements for the production or sale, of
commodities. “Profession” is a word of wide import and includes “vocation” which is only a way of
living and a person can have more than one vocation, and the vocation need not be for livelihood
nor for making any income nor need it involves systematic and organised activity. It was observed
in Dr. P. Vadamalayan vs. CIT (supra) at page 96) that the term “business” as used in the fiscal
statute cannot ordinarily be understood in its etymological sense. According to the Shorter Oxford
Dictionary, “business” includes a state occupation, profession or trade; profession in a wide sense
means any calling or occupation by which a person habitually earns his living. Even so, “trade” is
explained as the practice of some occupation, business or profession habitually carried on. As is
not unusual several jurists and eminent judges while attempting to define the limits of one or the
other of the words “business”, profession and trade”, entered the “labyrinth together but made
exits by different paths”. The Supreme Court in Narain Swadeshi Weaving Mills vs. Commissioner
of Excess Profits Tax (1954) 26 ITR 765 (SC), said that the word “business” connotes some real,
substantial and systematic or organised course of activity or conduct with a set
purpose. Venkatarama Aiyar J.,speaking for the court in Mazagaon Dock Ltd. vs. CIT (1958) 34
ITR 368 at page 376 (SC), explained “business” as a word of wide import and in fiscal statutes it
must be construed in a broad rather than a restricted sense. The Supreme Court
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in Lakshminarayan Ram Gopal and Son Ltd. vs. Government of Hyderabad (1954) 25 ITR 449 at
page 459 held:

CAPITAL GAINS, INCOME FROM OTHER SOURCES

What is a Capital Gain?

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain.
This gain or profit is comes under the category ‘income’, and hence you will need to pay tax
for that amount in the year in which the transfer of the capital asset takes place. This is called
capital gains tax, which can be short-term or long-term.

Capital gains are not applicable to an inherited property as there is no sale, only a transfer of
ownership. The Income Tax Act has specifically exempted assets received as gifts by way of
an inheritance or will. However, if the person who inherited the asset decides to sell it,
capital gains tax will be applicable.

Short- and long-term Capital Gains

A capital asset that is held for less than three years is deemed to be a short-term asset. If sold, it attracts tax at the
normal rates. An asset that has been held for more than three years is deemed as long-term asset, and attracts tax at
concessional rates when sold. The gains arising out of short- term assets are charged as Short-term Capital Gains
and those gains arising from the long tem assets are charged under as Long-term Capital Gains

However, in the case of securities such as equity or preference shares, debentures, government issuing, and units of
mutual funds and the Unit Trust of India (UTI), the assets are deemed short-term if they are held for less than a year.
Conversely, these assets are deemed long-term if they are held for more than a year.

Income from other sources

Income of every kind, which is not chargeable to income tax under the heads salary, income from house property,
profits and gains of business and profession, capital gains can be taxed under the head "income from other sources".

This is income that is not chargeable to tax under any other head of income. Such income covers...

a. Dividend

Under Section 10(33), any amount declared or paid by an Indian company by way of dividend is tax-exempt in the
hands of shareholders. Therefore, any dividend income received from a company that is not an Indian company will be
taxable in the hands of the recipient.

b. Winnings from lotteries, crossword puzzles, horse races and game shows

In the case of winnings from lotteries, crossword puzzles, races (including horse races), card games, game shows and
other games of any sort, or from gambling or betting of any form or nature whatsoever, Rs. 5,000 is exempt from tax.
Tax will be deducted at source on the rest of the winnings at the rate of 30 per cent (plus surcharge).

Winnings from game shows like Kaun Banega Crorepati will be covered by this clause from 1 June 2001. Winnings
before this date will not be subject to TDS; you will have to pay tax yourself.
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c. Interest on securities

The income from interest on securities is chargeable to tax if the securities are held as an investment, and not as
stock-in-trade. If the securities are held as stock-in-trade, the interest income is taxable under the head ‘profits and
gains from business or profession’. Although interest income is taxed under the head ‘income from other sources’, a
deduction is available in some cases under section 80L.

d. Others

a. The interest on bank deposits and loans (except in the case of assessees in the money-lending
business).
b. Income from letting-out machinery, plant, furniture or buildings on hire if they are not chargeable to tax
under the head ‘profits and gains from business or profession’.
c. Interest received on a tax refund
d. Ground rent
e. Royalty
f. Director’s fees from a company.

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for
those held over a shorter period.

Terms You Need to Know:

Full value consideration The consideration received or to be received by the seller
as a result of transfer of his capital assets. Capital gains are chargeable to tax in the
year of transfer, even if no consideration has been received.

Cost of acquisition The value for which the capital asset was acquired by the
seller.

Cost of improvement Expenses of a capital nature incurred in making any

additions or alterations to the capital asset by the seller. Note that improvements
made before April 1, 2001, is never taken into consideration.
NOTE: In certain cases where the capital asset becomes the property of the taxpayer otherwise
than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement
incurred by the previous owner would also be included.

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration
Step 2: Deduct the following:

o Expenditure incurred wholly and exclusively in connection with such

transfer
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o Cost of acquisition
o Cost of improvement

Step 3: This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred
exclusively for such transfer Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration
Step 2: Deduct the following:

o Expenditure incurred wholly and exclusively in connection with such

transfer
o Indexed cost of acquisition
o Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC,
54F, and 54B
Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less:expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate
to the sale or transfer of the capital asset are allowed to be deducted. These are the
expenses which are necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of
equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1
lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on
shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year
without the benefit of indexation.

In the case of sale of house property:

These expenses are deductible from the total sale price:

a. Brokerage or commission paid for securing a purchaser
b. Cost of stamp papers

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c. Travelling expenses in connection with the transfer – these may be incurred after the transfer
has been affected.
d. Where property has been inherited, expenditure incurred with respect to procedures associated
with the will and inheritance, obtaining succession certificate, costs of the executor, may also be
allowed in some cases.
In the case of sale of shares:
You may be allowed to deduct these expenses:
a. Broker’s commission related to the shares sold
b. STT or securities transaction tax is not allowed as a deductible expense
Where jewellery is sold:
Here, and a broker’s services were involved in securing a buyer, the cost of these services can be
deducted.Note that expenses deducted from the sale price of assets for calculating capital gains
are not allowed as a deduction under any other head of income tax return, and you can claim the
only once.

Exemption on Capital Gains

Example: Manya bought a house in July 2004 for Rs 50 lakh, and the full value of
consideration received in FY 2016-17 is Rs 1.8 crore. Since this property has been
held for over 3 years, this would be a long-term capital asset. The cost price is
adjusted for inflation and indexed cost of acquisition is taken.

Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs
1.17 crore. The net capital gain is Rs 63, 00,000. Long-term capital gains are taxed
at 20%. For a net capital gain of Rs 63, 00,000, the total tax outgo will be Rs
12,97,800.

This is a significant amount of money to be paid out in taxes. This can be lowered by
taking benefit of exemptions provided by the Income Tax Act on capital gains when
profit from the sale is reinvested into buying another asset.

Section 54: Exemption on Sale of House Property on

Purchase of Another House Property
The exemption The exemption under section 54 is available when the capital gains
from the sale of house property are reinvested into buying or constructing two
another house properties (prior to Budget 2019, the exemption of the capital gains
was limited to only 1 house property).The exemption on two house properties will be
allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed
Rs. 2 crores. The taxpayer has to invest the amount of capital gains and not the
entire sale proceeds. If the purchase price of the new property is higher than the

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amount of capital gains, the exemption shall be limited to the total capital gain on
sale.
Conditions for availing this benefit
1. The new property can be purchased either 1 year before the sale or 2 years after the sale of the
property.
2. The gains can also be invested in the construction of a property, but construction must be
completed within three years from the date of sale.
3. In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or
constructed from the capital gains to claim this exemption.
4. Please note that this exemption can be taken back if this new property is sold within 3 years of
its purchase/completion of construction.

Section 54F: Exemption on capital gains on sale of any asset

other than a house property
Exemption under Section 54F is available when there are capital gains from the sale of a long-
term asset other than a house property. You must invest the entire sale consideration and not only
capital gain to buy a new residential house property to claim this exemption. Purchase the new
property either one year before the sale or 2 years after the sale of the property. You can also use
the gains to invest in the construction of a property. However, the construction must be completed
within 3 years from the date of sale.

Section 54EC: Exemption on Sale of House Property on

Reinvesting in specific bonds
Exemption is available under Section 54EC when capital gains from sale of the first
property are reinvested into specific bonds.

 If you are not keen to reinvest your profit from the sale of your first property
into another one, then you can invest them in bonds for up to Rs. 50 lakhs
issued by National Highway Authority of India (NHAI) or Rural Electrification
Corporation (REC).
 The money invested can be redeemed after 3 years, but they cannot be sold
before the lapse of 3 years from the date of sale. With effect from the FY
2018-2019, the period of 3 years has been increased to 5 years;
 The homeowner has six month’s time to invest the profit in these bonds. But to
be able to claim this exemption, you will have to invest before the tax filing
deadline.

 Saving Tax on Sale of Agricultural Land

 In some cases, capital gains made from the sale of agricultural land may be entirely exempt
from income tax or it may not be taxed under the head capital gains.

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 a. Agricultural land in a rural area in India is not considered a capital asset and therefore
any gains from its sale are not chargeable to tax. For details on what defines an agricultural
land in a rural area, see above.
 b. Do you hold agricultural land as stock-in-trade? If you are into buying and selling land
regularly or in the course of your business, in such a case, any gains from its sale are
taxable under the head Business and Profession.
 c. Capital gains on compensation received for compulsory acquisition of urban agricultural
land are tax exempt under Section 10(37) of the Income Tax Act.
 If your agricultural land wasn’t sold in any of these cases, you can seek exemption under
Section 54B.

Section 54B: Exemption on Capital Gains From Transfer of

Land Used for Agricultural Purpose
When you make short-term or long-term capital gains from transfer of land used for
agricultural purposes – by an individual or the individual’s parents or Hindu
Undivided Family (HUF) – for 2 years before the sale, exemption is available under
Section 54B. The exempted amount is for the investment in a new asset or capital
gain, whichever is lower. You must reinvest into a new agricultural land within 2
years from the date of transfer.

The new agricultural land, which is purchased to claim capital gains exemption,
should not be sold within a period of 3 years from the date of its purchase. In case
you are not able to purchase agricultural land before the date of furnishing of your
income tax return, the amount of capital gains must be deposited before the date of
filing of return in the deposit account in any branch (except rural branch) of a public
sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.

Income from Other Sources Tax

Understanding the head of Income from Other Sources is residuary in nature. It includes incomes which are not
taxable in other heads of income.

Income from Other Sources is one of the heads of income chargeable to tax under the Income tax Act. 1961. Any
income that is not covered in the other four heads of income is taxable under income from other sources, because of
this, it is known as residuary head of income. All the incomes excluded from salary, capital gains, house property or
business & profession (PGBP) are included in IFOS, except those which are exempt under the Income Tax Act.
Section 56- Incomes taxable only in Income from Other
Sources are
1. Dividend Income;

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2. Income earned from winning lotteries, crossword puzzles, races (including horse race),
gambling or betting of any kind;
3. Money or movable/immovable property received without consideration or inadequate
consideration during previous year;
4. Interest on compensation or enhanced compensation received;
5. Advance money received or money received in negotiation for transfer of a capital
asset (only if the money is forfeited and it doesn't result in the transfer of such asset).
Incomes taxable under IFOS, only if not taxable under Profits and Gains of Business or Profession (PGBP):
1. Any sum contributed towards provident funds, ESI, etc. by employee to the employer,
only if not deposited in the relevant fund;
2. Interest earned on Securities;
3. Income received from the letting of a plant, machinery or furniture, with or without
building.
4. Incomes taxable under IFOS, only if not taxable under PGBP or Salaries:
5. Keyman Insurance Policy;
6. Salary of MP/MLA.
Income Computation and Disclosure Standards: Section 145 states that Income from Other Sources must be
computed on the regular accounting methods followed by the assessee. It can be either cash or mercantile system of
accounting. The Central Government has notified Income Computation and Disclosure Standards to be followed while
computing the income.
Section 57- Expenditures allowed as deductions
1. Expenses incurred for realisation of dividend or interest income;
2. Deductions to the extent amount remitted within due date are authorised in respect to
contribution towards funds for the welfare of employees;
3. Family Pension- deduction is allowed to the extent of 33-1/3% of pension or Rs.
15000 whichever is less;

4. Deductions for current repairs, insurance and depreciation, will be allowed for income
earned by way of lease rental;
5. A deduction equal to 50% will be allowed for interest received on compensation or
enhanced compensation.

Section 58- Sum not allowed as deductions while computing

taxable income
1. Personal expenditure;
2. Interest or salary payable outside India without TDS deduction;
3. Wealth tax;

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4. Expenditure concerning winnings from lotteries, crossword puzzles, races, and

gambling, etc.; and
5. Expenses specified in Section 40A.

Income Tax Assessee

An assessee is any individual who is liable to pay taxes to the government against any kind
of income earned or any losses incurred by him for a particular assessment year. Each and
every person who has been taxed in the previous years for income earned by him is treated as
an Assessee under the Income Tax Act, 1961.

An Assessee may be any individual liable to pay taxes for himself or to pay tax on behalf of
somebody else. The Income Tax Act, 1961 has classified Assessee in different categories. An
Assessee may either be a normal Assessee, a Representative Assessee, a Deemed Assessee or
an Assessee in Default.
Let us understand what the various categories of Assesses as laid down in the
Act are and who all belong to the respective categories of being an Assessee:

1. Normal Assessee:

A normal Assessee is an individual who is liable to pay taxes for the income earned by
him for a particular financial year. Each and every Individual who has paid taxes in
preceding years against the income earned or losses incurred by him is liable to make
payments to the government in the form of tax. Any individual who is supposed to make
payments to the government in the form of interest or penalty or anybody who is entitled
to tax refund under the IT Act is an Assessee. All such individuals are grouped under the
category of Normal Assessee.

2. Representative Assessee:

Many times, it so happens that an individual is liable to pay taxes for income or losses
incurred not only by him, but also for income or losses incurred by a third party. Such an
individual is known as Representative Assessee. Basically, he acts as a representative for
people who themselves are not in a position to file and pay their taxes themselves.
Generally, the people who need representatives are non-residents, minors or lunatics. And
the people representing them are either their agents or guardians. Such people are
deemed to be Representative Assesses

3. Deemed Assessee:

Deemed Assessee is an individual who is put in a position to pay taxes for some other
person by the legal authorities. Generally, the individuals who are treated as Deemed
Assesses are:

 The executors or the legal heir of the property of a deceased person, who in written
has passed on his property to the executor, is treated as a Deemed Assessee.

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 The eldest son or any other legal heir of a deceased individual (who has expired
without writing his will) is treated as a Deemed Assessee.
 The guardian of a minor, a lunatic or an idiot is treated as a Deemed Assessee.
 The agent of a Non-Resident Indian (having Income Sources in India) is treated as a
deemed Assessee.

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4. Assessee-in-default:

An Assessee-in-default is an individual who has failed to fulfill his legal duty of

paying tax to the government. An employer is deemed to be an Assessee in default if he
fails to submit the TDS deducted by him to the government. An employer is supposed to
disburse salary to his employees after deducting TDS from their salary and submit the
same to the government. However, if he fails to do so then he is treated as an Assessee-
in-default.

Roles/Responsibilities and Duties of an Assessee

The Assesses must make sure to file their returns on time and pay taxes as and when
due. However, many times an Assessee might fail to file his return on time. In this case,
he might receive a notice from the IT department or the concerned Assessing Officer,
asking for details as to why the return has not been filed for that particular financial year.
The Assessee in this case has to mandatorily send a reply to the Assessing officer stating
the reason behind his failure to file his returns on time and also file the same as soon as
he receives the notice.

 The Assessee must make sure to file his tax returns for the evaded income for the
particular assessment year as soon as he receives the notice from the department.
 Having filed the returns, he may request the assessing officer for a copy which
clearly indicates the reasons for which the notice has been issued by the officer to
him.
 If the Assessee feels that the reasons stated in the copy are not valid, and that he is
not satisfied with the reasons, he may choose to file an object and challenge the
notice and its validity.
 The Assessee must also make sure that he has solid reasons to file the objection
and that he has rightfully decided to raise questions on the notice issued by the
government to him.
 The Assessee may also choose to put forward a request to the concerned Assessing
Officer and ask him to give other reasons, if the claims made by Assessee are
dismissed by the officer.
 With the help of a writ petition filed with the respective High Court, the Assessee
may choose to challenge the legality of the notice much before the completion of
the scheduled assessment or re-assessment.
 With the help of a writ petition filed with the respective High Court, the Assessee
may also choose to challenge the legality of the notice even after completion of the
scheduled assessment.
 The Assessee has to mandatorily furnish details pertaining to his income returns
within a period of 30 days from the date of issuance of the notice and not from the
date on which the notice has been received by the Assessee. The details pertaining
to the income for which tax payment has been avoided and other related income

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details must be clearly furnished and submitted to the concerned officer in order to
avoid problems at a later stage.
 The Assessee has to ascertain that :* He has put forward a request to the Assessing
Officer asking for reasons as to why the notice has been issued by him.
* He has lodged an objection to the given notice and the reasons given to him by
the Assessing Officer as he finds them to be unsatisfactory.
* He has knowingly challenged the validity of the issued notice.

SET OFF AND CARRY FORWARD LOSS

Set off of losses

Set off of losses means adjusting the losses against the profit or income of that particular year.
Losses that are not set off against income in the same year can be carried forward to the
subsequent years for set off against income of those years. A set-off could be an intra-head set-off
or an inter-head set-off.
a. An intra-head set-off
b. An inter-head set-off

a. Intra-head Set Off

The losses from one source of income can be set off against income from another source under
the same head of income.
For eg: Loss from Business A can be set off against profit from Business B, where Business A is
one source and Business B is another source and the common head of income is “Business”.
Exceptions to an intra-head set off:
1. Losses from a Speculative business will only be set off against the profit of the speculative
business. One cannot adjust the losses of speculative business with the income from any other
business or profession.
2. Loss from an activity of owning and maintaining race-horses will be set off only against the profit
from an activity of owning and maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-
term capital loss can be set off against both long-term capital gains and short-term capital gain.
4. Losses from a specified business will be set off only against profit of specified businesses. But
the losses from any other businesses or profession can be set off against profits from the specified
businesses.

b. Inter-head Set Off

After the intra-head adjustments, the taxpayers can set off remaining losses against income from
other heads.
Eg. Loss from house property can be set off against salary income
Given below are few more such instances of an inter-head set off of losses:

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1. Loss from House property can be set off against income under any head
2. Business loss other than speculative business can be set off against any head of income
except except income from salary.
One needs to also note that the following losses can’t be set off against any other head of income:
a. Speculative Business loss
b. Specified business loss
c. Capital Losses
d. Losses from an activity of owning and maintaining race-horses

Carry forward of losses

After making the appropriate and permissible intra-head and inter-head adjustments, there could
still be unadjusted losses. These unadjusted losses can be carried forward to future years for
adjustments against income of these years. The rules as regards carry forward differ slightly for
different heads of income. These have been discussed here:

Losses from House Property :

 Can be carry forward up to next 8 assessment years from the assessment
year in which the loss was incurred
 Can be adjusted only against Income from house property
 Can be carried forward even if the return of income for the loss year is
belatedly filed.

Losses from Non-speculative Business (regular business)

loss :
 Can be carry forward up to next 8 assessment years from the assessment
year in which the loss was incurred
 Can be adjusted only against Income from business or profession
 Not necessary to continue the business at the time of set off in future years
 Cannot be carried forward if the return is not filed within the original due date.

Speculative Business Loss :

 Can be carry forward up to next 4 assessment years from the assessment
year in which the loss was incurred
 Can be adjusted only against Income from speculative business
 Cannot be carried forward if the return is not filed within the original due date.
 Not necessary to continue the business at the time of set off in future years

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Specified Business Loss under 35AD :

 No time limit to carry forward the losses from the specified business under
35AD
 Not necessary to continue the business at the time of set off in future years
 Cannot be carried forward if the return is not filed within the original due date
 Can be adjusted only against Income from specified business under 35AD

Capital Losses :
 Can be carry forward up to next 8 assessment years from the assessment
year in which the loss was incurred
 Long-term capital losses can be adjusted only against long-term capital gains.
 Short-term capital losses can be set off against long-term capital gains as well
as short-term capital gains
 Cannot be carried forward if the return is not filed within the original due date

Losses from owning and maintaining race-horses :

 Can be carry forward up to next 4 assessment years from the assessment
year in which the loss was incurred
 Cannot be carried forward if the return is not filed within the original due date
 Can only be set off against income from owning and maintaining race-horses
only

Points to note:
1.A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax,
cannot set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries,
races, card games, betting etc.

INCOMES EXEMPT FROM TAX

What is Exempt Income?
Any income earned which is not subject to income tax is called exempt income. As per Section 10 of the Income
Tax Act, 1961, there are certain types of income which will be subjected to income tax within a financial year,
provided they meet certain guidelines and conditions.

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Types of Exempt Income

Following are the types of income that are exempt from tax-

1. House Rent Allowance.

2. Allowance on transportation, children’s education, subsidy on hostel fee.
3. Exemption on Housing Loan.
4. Income defined as per Section 10, Section 54 of the Income Tax Act, 1961.
5. Leave and Travel Allowance.

Income Exempt from Tax as per Section 10

Mentioned below is the list of income exempt from tax specific to Section 10:

1. Agriculture Income [Section 10(1)]

2. Amount received out of family income, Hindu Undivided Family (H.U.F.) [Section 10(2)]
3. Share of profit, [Section 10(2A)]
4. Interest paid to Non-Resident [Section 10(4)(i)]
5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]
6. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]
7. Leave Travel Concession or Assistance [Section 10(5)]
8. Remuneration or Salary received by an individual who is not a citizen of India [Section 10(6)] a.
Remuneration [U/s 10(6)(ii)] b. Remuneration received as an employee of foreign enterprise [U/s 10(6)
(vi)] c. Employment on a foreign ship [U/s 10(6)(viii)] d. Remuneration received by an employee of
foreign government [U/s 10(6)(xi)]
9. Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B),
(6BB) and (6C)]
10. Perquisites/Allowances paid by Government to its Employees serving outside India [Section 10(7)]
11. Employees of Foreign Countries working in India under Cooperative Technical Assistance Programme
[Section 10(8)]
12. Income of a Consultant [Section 10(8A)]
13. Income of Employees of Consultant [Section 10(8B)]
14. Income of any member of the family of individuals working in India under cooperative technical
assistance programmes [Section 10(9)]
15. Gratuity [Section 10(10)] a. Gratuity received by Government servants [Section 10(10)(i)] b. Gratuity
Received by a Non-Government Employee covered by Payment of Gratuity Act, 1972 [Section 10(10)(ii)]
16. Commuted value of Pension Received [Section 10(10A)]
17. Amount received as Leave Encashment on Retirement [Section 10(10AA)]
18. Retrenchment Compensation received by Workmen [Section 10(10B)]
19. Payment received under Bhopal Gas Leak Disaster (Processing of Claims) Act 1985 [Section 10 (10BB)]
20. Compensation received in case of any disaster [Section 10(10BC) ]
21. Retirement Compensation from a Public Sector Company or any other Company [Section 10(10C)]
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22. Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)]

23. Amount received under a Life Insurance Policy [Section 10(10D)]
24. Statutory Provident Fund [Section 10(11)]
25. Recognized Provident Fund [Section 10(12)]
26. Superannuation Fund [Section 10(13)]
27. House Rent Allowance-HRA [Section 10(13A)]
28. Business Expenditure Allowance [Section 10(14)]
29. Interest Incomes [Section 10(15)]
30. Scholarship [Section 10(16)]
31. Allowance of M.P./M.L.A.I or M.L.C. [Section 10(17)]
32. Awards Instituted by Government [Section 10(17A)]
33. Pension received by certain winners of gallantry awards [Section 10(18)]
34. Family pension received by family members of armed forces including para military forces [Section
10(19)]
35. Income of a Local Authority [Section 10(20)]
36. Income of Scientific Research Association [Section 10(21)]
37. Income of a News Agency [Section 10(22B)]
38. Income of some Professional Institutions [Section 10(23A)]
39. Exemption of Income Received by Regimental Fund [Section 23AA] a. Income of a Fund set-up for the
welfare of employees or their dependents [Section 10(23AAA)] b. Income of a pension fund set up by
LIC or other insurer [Section 10(23AAB)]
40. Income of State Level Khadi and Village Industries Board [Section 10(23BB)] a. Income of certain
Authorities set up to manage Religious and Charitable Institutions [Section 10(23BBA)] b. Income of
European Economic Community [Section 10(23BBB)] c. Income of a SAARC Fund for regional projects
[Section 10(23BBC)] d. Any income of Insurance Regulatory and Development Authority [Section
10(23BBE)] e. Income of Prasar Bharti [Section 10(23BBH)] [Inserted by the Finance Act 2012, w.e.f.
2013-14]
41. Any income received by a person on behalf of following Funds [Section 10(23C)]
42. Income of Mutual Fund [Section 10(23D)]
43. Exemption of income of a securitization trust [Section 10(23DA)j [w.e.f. A.Y. 2014-15]
44. Income of Investor Protection Fund [Section 10(23EA)]
45. Exemption of income of investor protection fund of depository [Section 10(23ED)] [w.e.f. A.Y. 2014-15]
46. Exemption for Certain Incomes of a Venture Capital Company or Venture Capital Fund from Certain
Specified Business or Industries [Section 10 (23FB)]
47. Income of Registered Trade Unions [Section 10(24)]
48. Income of Provident and Superannuation Funds [Section 10(25)]
49. Income of Employee’s State Insurance Fund [Section 10 (25A)]
50. Income of Schedule Tribe Members [Section 10(26) and 10(26A)]
51. Income of Sikkimese individual [Section 10(26AAN] (With retrospective effect from 1-4-1990)
52. Regulating the marketing of agricultural produce [Section 10[26AAB]

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53. Income of a corporation set-up for promoting the interests of Scheduled Castes, Scheduled Tribes or
Backward Classes [Section 10(26B)]
54. Income of a corporation set-up to protect the interests of Minorities [Section 10(26BB)]
55. Any income of a Corporation established for Ex-Servicemen [Section 10(26BBB)]
56. Income of cooperative society looking after the interests of Scheduled Castes or Scheduled Tribes or
Both [Section 10(27)]
57. Any income accruing or arising to Commodity Boards etc. [Section 10(29A)]
58. Amount received as subsidy from or through the Tea Board [Section 10(30)]
59. Amount received as subsidy from or through the concerned Board [Section 10(31)]
60. Income of Child Clubbed U/s 64 (IA) [Section 10(32)]
61. Income by way of dividend from Indian company [Section 10(34)]
62. Exemption of income to a shareholder on buyback of shares of unlisted company [Section 10 (34A)
[w.e.f. A.Y. 2014-15]
63. Exemption of income from Units [Section 10(35)]
64. Exemption of income from Securitization Trust [Section 10(35A)] [w.e.f A.Y. 2014-15]

Exempt Income vs Tax Deduction

A deduction is an amount which reduces the total taxable income of an individual. Exempt income is like an
exclusion, any income earned, which is categorized under exempt income does not contribute to the total
income of the person.

How to declare Exempt Income in Tax Return?

You can declare exempt income while filing for income tax every financial year.

Disclosure of Exempt Income for Salary and Non-Salary

Allowances
For salary account holders, you need to make a disclosure of exempt income under Schedule S - Details of
Income from Salary’ while filing income tax as per ITR-2. The various exemptions are:

1. House Rent Allowance

2. Leave Travel Allowance
3. Leave Encashment Amount
4. Pension Amount
5. Gratuity Amount
6. Any form of perquisites received
7. Amount received from a Voluntary Retirement Scheme

For self-employed or non-salary account holders, there are certain incomes categorized under exempt income.
They include dividends, agricultural income, interest on funds, capital gains which has to be disclosed under
Schedule EI while filing income tax as per ITR-1.
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PERMISSIBLE DEDUCTIONS AND CHAPTER VIA

DEDUCTIONS

Deductions on Section 80C, 80CCC,

80CCD & 80D
There are various deductions a taxpayer can claim from his/her total income to bring
down taxable income and thereby reduce the tax outgo. In this article, let us discuss
some of the important deductions under Section 80C a taxpayer can claim.

1. Section 80C
Deductions on Investments
You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In simple terms,
you can reduce up to Rs 1,50,000 from your total taxable income, and it is available for individuals
and HUFs.
filing your Income Tax Return. The Income Tax Department will refund the excess
money to your bank account.

VI-A deduction – Section 80C

A deduction of Rs. 1,50,000 can be claimed on your total income u/s 80C. This
deduction is allowed to an Individual / HUF.

Below given are several investments, expenses, and payments allowed to be

claimed under section 80C. Also, the maximum deduction allowed cannot
exceed Rs. 1,50,000.

Investments
1. Investment in Public Provident Fund (PPF)

A PPF account can be opened and deposit made in the account can be claimed
for deduction. A maximum of Rs. 1,50,000 is allowed to be invested in one
financial year. The minimum investment required in each year is Rs. 500.
Interest is compounded annually and is reset quarterly. Interest on PPF account

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is fully tax-free. The PPF account matures after 15 years. Receipts on maturity
or withdrawals are tax-free. The amount invested is allowed to be withdrawn
after 5 years. PPF account deposit in the name of your spouse or child can also
be claimed for the tax deduction in your tax return.

2. Purchase of NSCs

National Savings Certificate or NSC is eligible for deduction in the year they are
purchased. These can be bought from designated Post Office. Their term is for 5
years and interest earned is compounded annually. Interest earned is taxable.
Interest earned is also eligible for deduction under section 80C during the term
of the NSCs (except the last year).

3. Investment in Sukanya Samridhi Account

A maximum of Rs 1,50,000 can be deposited in the Sukanya Samridhi Account

for a girl child. The interest rate is compounded annually. This interest is fully
exempt from tax. A minimum of Rs 1,000 must be deposited in a year. Receipts
on maturity from the account are tax-free. The account matures after 14 years.

4. Investment in ELSS

ELSS or Equity Linked Savings Scheme is a type of mutual fund investment.

Investments made in ELSS funds during the financial year are eligible for
deduction under section 80C. These funds have a 3-year lock-in period.

5. ULIPS or Unit Linked Insurance Plan

ULIPS sold with life insurance are also eligible for deduction under section 80C.
This includes Contribution to Unit Linked Insurance Plan of LIC Mutual Fund e.g.
Dhanraksha 1989 and contribution to Other Unit Linked Insurance Plan of UTI.
Deduction claimed under ULIP will be withdrawn if the policy terminates before
paying the premium for 5 years. ULIP proceeds after maturity is exempt from
tax. ULIPin the name of your spouse or child can also be claimed for the tax
deduction in your tax return.

6. Five Year Post Office Time Deposit Scheme

This is similar to bank fixed deposits. Although available for varying time
duration like one year, two years, three years and five years, only 5-Yr post-
office time deposit (POTD) qualifies for tax saving. Interest is compounded
quarterly but paid annually. The Interest is entirely taxable.

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7. Fixed deposit with a bank

Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years.

Amount deposited under Senior Citizens Saving Scheme

The amount deposited under Senior Citizens Saving Scheme: A recent addition
to the list, Senior Citizen Savings Scheme (SCSS) is a small savings schemes
but is meant only for senior citizens. Interest is payable quarterly instead of
compounded quarterly. Thus, unclaimed interest on these deposits won’t earn
any further interest. Interest income is chargeable to tax. The account may be
opened by an individual,

 Who has attained an age of 60 years or above on the date of opening of

the account?
 Who has attained the age 55 years or more but less than 60 years and
has retired under a Voluntary Retirement Scheme or a Special Voluntary
Retirement Scheme on the date of opening of the account within three months
from the date of retirement.
 No age limit for the retired personnel of Defence services provided they
fulfill other specified conditions.

8. Subscription to any notified securities / notified deposits scheme. e.g. NSS

9. Contribution to notified Pension Fund set up by Mutual Fund or UTI.

10. Sum paid as a subscription to Home Loan Account Scheme of the National
Housing Bank or contribution to any notified deposit scheme / pension fund set
up by National Housing Bank.

11. Subscription to deposit scheme of a public sector, company engaged in

providing housing finance (public deposit scheme of HUDCO).

12. Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara and Jeevan
Akshay) or Units of UTI / notified Mutual Funds.

13. Subscription to equity shares / debentures forming part of any approved

eligible issue of capital made by a public company or public financial
institutions.

14. Subscription to any notified bonds of NABARD (National Bank for Agriculture
and Rural Development).

Expenses
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1. EPF or Employee’s share of PF Contribution

Employee contribution to EPF is eligible for deduction under section 80C i.e.
12% of your Basic + DA is deducted by the employer and deposited as your
contribution in Employee’s Provident Fund Scheme or Recognized Provident
Fund.

2. Life Insurance Premium Payment

The policy must be in the taxpayer’s name or spouse’s or any child’s name
(child may be dependent/independent, minor/major, or married/unmarried).
The deduction is valid on insurance policies purchased after 1st April 2012 only
if the premium is less than 10% of sum assured. Benefits for existing purchased
policies continue. The deduction is also allowed on payments made by
Government employees to Central Government Employees Insurance Scheme.
Receipts on maturity are tax-free. Deduction claimed will be withdrawn if the
policy terminates with 2 years.

3. Children’s Tuition Fee Payment

The deduction can be claimed for Tuition fees paid to any school, college,
university or other educational institution situated within India for the purpose
of full-time education of any two children (including payments for play school,
pre-nursery and nursery).

4. Principal Repayments on Loan for purchase of House

Property

Principal repayment of loan taken for buying or constructing a residential house

property is also eligible for deduction in 80C. The deduction is also allowed for
stamp duty, registration fees and other expenses of transfer of such property to
the taxpayer. However, if the property is transferred or sold before the expiry of
5 years from the end of the financial year in which its possession was taken;
the total deduction allowed for various years shall be taxed in that year.

5. Sum paid for securing Deferred Annuity

A deduction is allowed on the sum paid under non-commutable deferred

annuity for an individual on the life of the taxpayer, spouse or any child. This is
also allowed on sum deducted from the salary payable to Govt. Servant for
securing deferred annuity for self, spouse or child. Payment limited to 20% of
salary or actual contribution, whichever is less.

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2. Section 80CCC – Insurance Premium

Deduction for Premium Paid for Annuity Plan of LIC or Other
Insurer
Section 80CCC provides a deduction to an individual for any amount paid or
deposited in any annuity plan of LIC or any other insurer. The plan must be for
receiving a pension from a fund referred to in Section 10(23AAB). Pension received
from the annuity or amount received upon surrender of the annuity, including interest
or bonus accrued on the annuity, is taxable in the year of receipt.

3. Section 80CCD – Pension Contribution

Deduction for Contribution to Pension Account
a. Employee’s contribution under Section 80CCD (1)

You can claim this if you deposit in your pension account. Maximum deduction you
can avail is 10% of salary (in case the taxpayer is an employee) or 20% of gross
total income (in case the taxpayer being self-employed) or Rs 1.5 lakh – whichever
is less.

Until FY 2016-17, maximum deduction allowed was 10% of gross total income for
self-employed individuals.
b.Deduction for self-contribution to NPS – section 80CCD (1B) A new section 80CCD (1B) has
been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a
taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.

c. Employer’s contribution to NPS – Section 80CCD (2) Claim additional deduction on your
contribution to employee’s pension account for up to 10% of your salary. There is no monetary
ceiling on this deduction.

4. Section 80 TTA – Interest on Savings Account

Deduction from Gross Total Income for Interest on Savings
Bank Account
If you are an individual or an HUF, you may claim a deduction of maximum Rs
10,000 against interest income from your savings account with a bank, co-operative
society, or post office. Do include the interest from savings bank account in other
income.

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Section 80TTA deduction is not available on interest income from fixed deposits,
recurring deposits, or interest income from corporate bonds.

5. Section 80GG – House Rent Paid

Deduction for House Rent Paid Where HRA is not Received
a. Section 80GG deduction is available for rent paid when HRA is not received. The taxpayer,
spouse or minor child should not own residential accommodation at the place of employment
b. The taxpayer should not have self-occupied residential property in any other place
c. The taxpayer must be living on rent and paying rent
d. The deduction is available to all individuals

Deduction available is the least of the following:

a. Rent paid minus 10% of adjusted total income
b. Rs 5,000/- per month
c. 25% of adjusted total income*
*Adjusted Gross Total Income is arrived at after adjusting the Gross Total Income for
certain deductions, exempt income, long-term capital gains and income related to
non-residents and foreign companies.

An online e-filing software like that of ClearTax can be extremely easy as the limits
are auto-calculated. So, you do not have to worry about making complex
calculations.

From FY 2016-17 available deduction has been raised to Rs 5,000 a month from Rs
2,000 per month.

6. Section 80E – Interest on Education Loan

Deduction for Interest on Education Loan for Higher Studies
A deduction is allowed to an individual for interest on loans taken for pursuing higher
education. This loan may have been taken for the taxpayer, spouse or children or for
a student for whom the taxpayer is a legal guardian.

80E deduction is available for a maximum of 8 years (beginning the year in which
the interest starts getting repaid) or till the entire interest is repaid, whichever is
earlier. There is no restriction on the amount that can be claimed.
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7. Section 80EE – Interset on Home Loan

Deductions on Home Loan Interest for First Time Home
Owners
FY 2017-18 and FY 2016-17 This deduction is available in FY 2017-18 if the loan
has been taken in FY 2016-17. The deduction under section 80EE is available only
to home-owners (individuals) having only one house property on the date of
sanction of the loan. The value of the property must be less than Rs 50 lakh and the
home loan must be less than Rs 35 lakh. The loan taken from a financial institution
must have been sanctioned between 1 April 2016 and 31 March 2017. There is an
additional deduction of Rs 50,000 available on your home loan interest on top of
deduction of Rs 2 lakh (on interest component of home loan EMI) allowed under
section 24.

FY 2013-14 and FY 2014-15 During these financial years, the deduction available
under this section was first-time house worth Rs 40 lakh or less. You can avail this
only when your loan amount during this period is Rs 25 lakh or less. The loan must
be sanctioned between 1 April 2013 and 31 March 2014. The aggregate deduction
allowed under this section cannot exceed Rs 1 lakh and is allowed for FY 2013-14
and FY 2014-15.

8. Section 80CCG – RGESS

Rajiv Gandhi Equity Saving Scheme (RGESS)
The deduction under this section 80CCG is available to a resident individual, whose
gross total income is less than Rs.12 lakh. To avail the benefits under this section
the following conditions should be met:
a. The assessee should be a new retail investor as per the requirement specified under the
notified scheme.
b. The investment should be made in such listed investor as per the requirement specified under
the notified scheme.
c. The minimum lock in period in respect of such investment is three years from the date of
acquisition in accordance with the notified scheme.
Upon fulfillment of the above conditions, a deduction, which is lower of the following
is allowed.

 50% of the amount invested in equity shares; or

 Rs 25,000 for three consecutive Assessment Years.

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Rajiv Gandhi Equity Scheme has been discontinued starting from 1 April 2017.
Therefore, no deduction under section 80CCG will be allowed from FY 2017-
18. However, if you have invested in the RGESS scheme in FY 2016-17, then you
can claim deduction under Section 80CCG until FY 2018-19.

9. Section 80D – Medical Insurance

Deduction for the premium paid for Medical
Insurance
You (as an individual or HUF) can claim a deduction of Rs.25,000 under section
80D on insurance for self, spouse and dependent children. An additional deduction
for insurance of parents is available up to Rs 25,000, if they are less than 60 years
of age. If the parents are aged above 60, the deduction amount is Rs 50,000, which
has been increased in Budget 2018 from Rs 30,000.

In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction
available under this section is up to Rs.1 lakh.

Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum
deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a
cumulative additional deduction of Rs. 5,000 is allowed for preventive health check.

10. Section 80DD – Disabled Dependent

Deduction for Rehabilitation of Handicapped
Dependent Relative
Section 80DD deduction is available to a resident individual or a HUF and is
available on:
a. Expenditure incurred on medical treatment (including nursing), training and rehabilitation of
handicapped dependent relative
b. Payment or deposit to specified scheme for maintenance of handicapped dependent relative.
i. Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000.
ii. Where there is severe disability (disability is 80% or more) – fixed deduction of Rs 1,25,000.
To claim this deduction a certificate of disability is required from prescribed medical
authority. From FY 2015-16 – The deduction limit of Rs 50,000 has been raised to
Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

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11. Section 80DDB – Medical Expenditure

Deduction for Medical Expenditure on Self or
Dependent Relative
a. For individuals and HUFs below age 60
A deduction up to Rs.40,000 is available to a resident individual or a HUF. It is available with
respect to any expense incurred towards treatment of specified medical diseases or ailments for
himself or any of his dependents. For an HUF, such a deduction is available with respect to
medical expenses incurred towards these prescribed ailments for any of the HUF members.
b. For senior citizens and super senior citizens
In case the individual on behalf of whom such expenses are incurred is a senior citizen, the
individual or HUF taxpayer can claim a deduction up to Rs 1 lakh. Until FY 2017-18, the deduction
that could be claimed for a senior citizen and a super senior citizen was Rs 60,000 and Rs 80,000
respectively. This has now become a common deduction available upto Rs 1 lakh for all senior
citizens (including super senior citizens) unlike earlier.
c. For reimbursement claims

Any reimbursement of medical expenses by an insurer or employer shall be reduced

from the quantum of deduction the taxpayer can claim under this section.

Also remember that you need to get a prescription for such medical treatment from
the concerned specialist in order to claim such deduction. Read our detailed article
on Section 80DDB.

12. Section 80U – Physical Disability

Deduction for Person suffering from Physical
Disability
A deduction of Rs.75,000 is available to a resident individual who suffers from a
physical disability (including blindness) or mental retardation. In case of severe
disability, one can claim a deduction of Rs 1,25,000.

From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to Rs
75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

13. Section 80G – Donations

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Deduction for donations towards Social Causes

The various donations specified in u/s 80G are eligible for deduction up to either
100% or 50% with or without restriction. From FY 2017-18 any donations made in
cash exceeding Rs 2,000 will not be allowed as deduction. The donations above Rs
2000 should be made in any mode other than cash to qualify for 80G deduction.
a. Donations with 100% deduction without any qualifying limit

 National Defence Fund set up by the Central Government

 Prime Minister’s National Relief Fund
 National Foundation for Communal Harmony
 An approved university/educational institution of National eminence
 Zila Saksharta Samiti constituted in any district under the chairmanship of the
Collector of that district
 Fund set up by a State Government for the medical relief to the poor
 National Illness Assistance Fund
 National Blood Transfusion Council or to any State Blood Transfusion Council
 National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental
Retardation and Multiple Disabilities
 National Sports Fund
 National Cultural Fund
 Fund for Technology Development and Application
 National Children’s Fund
 Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect
to any State or Union Territory
 The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the
Air Force Central Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone
Relief Fund, 1996
 The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and
October 6,1993
 Chief Minister’s Earthquake Relief Fund, Maharashtra
 Any fund set up by the State Government of Gujarat exclusively for providing
relief to the victims of earthquake in Gujarat
 Any trust, institution or fund to which Section 80G(5C) applies for providing
relief to the victims of earthquake in Gujarat (contribution made during January
26, 2001 and September 30, 2001) or
 Prime Minister’s Armenia Earthquake Relief Fund
 Africa (Public Contributions — India) Fund
 Swachh Bharat Kosh (applicable from financial year 2014-15)
 Clean Ganga Fund (applicable from financial year 2014-15)
 National Fund for Control of Drug Abuse (applicable from financial year 2015-
16)

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b. Donations with 50% deduction without any qualifying limit

 Jawaharlal Nehru Memorial Fund

 Prime Minister’s Drought Relief Fund
 Indira Gandhi Memorial Trust
 The Rajiv Gandhi Foundation

c. Donations to the following are eligible for 100% deduction

subject to 10% of adjusted gross total income

 Government or any approved local authority, institution or association to be

utilized for the purpose of promoting family planning
 Donation by a Company to the Indian Olympic Association or to any other
notified association or institution established in India for the development of
infrastructure for sports and games in India or the sponsorship of sports and
games in India

d. Donations to the following are eligible for 50% deduction subject

to 10% of adjusted gross total income

 Any other fund or any institution which satisfies conditions mentioned in

Section 80G(5)
 Government or any local authority to be utilized for any charitable purpose
other than the purpose of promoting family planning
 Any authority constituted in India for the purpose of dealing with and satisfying
the need for housing accommodation or for the purpose of planning,
development or improvement of cities, towns, villages or both
 Any corporation referred in Section 10(26BB) for promoting the interest of
minority community
 For repairs or renovation of any notified temple, mosque, gurudwara, church
or other places.

14. Section 80GGB – Company

Contribution

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Deduction on contributions given by companies to

Political Parties
Section 80GGB deduction is allowed to an Indian company for the amount
contributed by it to any political party or an electoral trust. Deduction is allowed for
contribution done by any way other than cash.

15. Section 80GGC – Contribution to

Political Parties
Deduction on contributions given by any person to
Political Parties
Deduction under section 80GGC is allowed to an individual taxpayer for any amount
contributed to a political party or an electoral trust. It is not available for companies,
local authorities and an artificial juridical person wholly or partly funded by the
government. You can avail this deduction only if you pay by any way other than
cash.

16. Section 80RRB – Royalty of a Patent

Deduction with respect to any Income by way of
Royalty of a Patent
80RRB Deduction for any income by way of royalty for a patent, registered on or
after 1 April 2003 under the Patents Act 1970, shall be available for up to Rs.3 lakh
or the income received, whichever is less. The taxpayer must be an individual
patentee and an Indian resident. The taxpayer must furnish a certificate in the
prescribed form duly signed by the prescribed authority.

17. Section 80 TTB – Interest Income

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Deduction of Interest on Deposits for Senior

Citizens
A new section 80TTB has been inserted vide Budget 2018 in which deductions with
respect to interest income from deposits held by senior citizens will be allowed. The
limit for this deduction is Rs.50,000.

No further deduction under section 80TTA shall be allowed. In addition to section 80

TTB, section 194A of the Act will also be amended so as to increase the threshold
limit for TDS on interest income payable to senior citizens. The earlier limit was Rs
10,000, which was increased to Rs 50,000 as per the latest Budget.

18. Deductions-Summary

Section 80 Deduction Table

Allowed Limit
Section Deduction on (maximum) FY 2018-19

80C Investment in PPF Rs. 1,50,000

– Employee’s share of PF contribution
– NSCs
– Life Insurance Premium payment
– Children’s Tuition Fee
– Principal Repayment of home loan
– Investment in Sukanya Samridhi Account
– ULIPS
– ELSS
– Sum paid to purchase deferred annuity
– Five year deposit scheme
– Senior Citizens savings scheme
– Subscription to notified securities/notified deposits
scheme
– Contribution to notified Pension Fund set up by
Mutual Fund or UTI.
– Subscription to Home Loan Account scheme of the
National Housing Bank
– Subscription to deposit scheme of a public sector or
company engaged in providing housing finance
– Contribution to notified annuity Plan of LIC
– Subscription to equity shares/ debentures of an
approved eligible issue
– Subscription to notified bonds of NABARD

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Allowed Limit
Section Deduction on (maximum) FY 2018-19

80CCC For amount deposited in annuity plan of LIC or any -

other insurer for a pension from a fund referred to in
Section 10(23AAB)

80CCD(1) Employee’s contribution to NPS account (maximum -

up to Rs 1,50,000)

80CCD(2) Employer’s contribution to NPS account Maximum up to 10% of

salary

80CCD(1B Additional contribution to NPS Rs. 50,000

)

80TTA(1) Interest Income from Savings account Maximum up to 10,000

80TTB Exemption of interest from banks, post office, etc. Maximum up to 50,000
Applicable only to senior citizens

80GG For rent paid when HRA is not received from Least of :
employer – Rent paid minus 10%
of total income
– Rs. 5000/- per month
– 25% of total income

80E Interest on education loan Interest paid for a period

of 8 years

80EE Interest on home loan for first time home owners Rs 50,000

80CCG Rajiv Gandhi Equity Scheme for investments in Lower of

Equities – 50% of amount
invested in equity shares;
or
– Rs 25,000

80D Medical Insurance – Self, spouse, children – Rs. 25,000

Medical Insurance – Parents more than 60 years old or – Rs. 50,000
(from FY 2015-16) uninsured parents more than 80

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Allowed Limit
Section Deduction on (maximum) FY 2018-19

years old

80DD Medical treatment for handicapped dependent or – Rs. 75,000

payment to specified scheme for maintenance of – Rs. 1,25,000
handicapped dependent
– Disability is 40% or more but less than 80%
– Disability is 80% or more

80DDB Medical Expenditure on Self or Dependent Relative – Lower of Rs 40,000 or

for diseases specified in Rule 11DD the amount actually paid
– For less than 60 years old – Lower of Rs 1,00,000
– For more than 60 years old or the amount actually
paid

80U Self-suffering from disability : – Rs. 75,000

– An individual suffering from a physical disability – Rs. 1,25,000
(including blindness) or mental retardation.
– An individual suffering from severe disability

80GGB Contribution by companies to political parties Amount contributed (not

allowed if paid in cash)

80GGC Contribution by individuals to political parties Amount contributed (not

allowed if paid in cash)

80RRB Deductions on Income by way of Royalty of a Patent Lower of Rs 3,00,000 or

income received

ASSESSMENT, KINDS OF ASSESSMENT

Article discusses about Meaning of assessment, Scope/Procedure/Time limit of
Assessment under section 143(1)/ section 143(3)/ section 144/ section 147.
Every taxpayer has to furnish the details of his income to the Income-tax Department. These
details are to be furnished by filing up his return of income. Once the return of income is filed up by
the taxpayer, the next step is the processing of the return of income by the Income Tax
Department. The Income Tax Department examines the return of income for its correctness. The
process of examining the return of income by the Income-Tax department is called as

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“Assessment”. Assessment also includes re-assessment and best judgment assessment under
section 144.
Under the Income-tax Law, there are four major assessments given below:
 Assessment under section 143(1), i.e., Summary assessment without calling the
assessee.
 Assessment under section 143(3), i.e., Scrutiny assessment.
 Assessment under section 144, i.e., Best judgment assessment.
 Assessment under section 147, i.e., Income escaping assessment.
Assessment under section 143(1)
This is a preliminary assessment and is referred to as summary assessment without calling the
assessee (i.e., taxpayer).
Scope of assessment under section 143(1)
Assessment under section 143(1) is like preliminary checking of the return of income. At this stage
no detailed scrutiny of the return of income is carried out. At this stage, the total income or loss is
computed after making the following adjustments (if any), namely:-
(i) any arithmetical error in the return; or
(ii) an incorrect claim (*), if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set-off of loss is claimed
was furnished beyond the due date specified under section 139(1); or
(iv) disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return; or
(v) disallowance of deduction claimed u/s 10AA, 80IA to 80-IE, if the return is furnished beyond the
due date specified under section 139(1); or
(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been
included in computing the total income in the return. However, no such adjustment shall be made
in relation to a return furnished for the assessment year 2018-19 and thereafter.
However, no such adjustment shall be made unless an intimation is given to the assessee of such
adjustment either in writing or in electronic mode. Further, the response received from the
assessee, if any, shall be considered before making any adjustment, and in case where no
response is received within 30 days of the issue of such intimation, such adjustments shall be
made.
For the above purpose “an incorrect claim apparent from any information in the return” means a
claim on the basis of an entry in the return :-
(i) of an item which is inconsistent with another entry of the same or some other item in such
return;
(ii) in respect of which the information is required to be furnished under the Act to substantiate
such entry and has not been so furnished; or
(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may
have been expressed as monetary amount or percentage or ratio or fraction;
Procedure of assessment under section 143(1)

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 After correcting arithmetical error or incorrect claim (if any) as discussed above, the
tax and interest and fee*, if any, shall be computed on the basis of the adjusted
income.
 Any sum payable by or refund due to the taxpayer shall be intimated to him.
 An intimation shall be prepared or generated and sent to the taxpayer specifying the
sum determined to be payable by, or the amount of refund due to the taxpayer.
 An intimation shall also be sent to the taxpayer in a case where the loss declared in the
return of income by the taxpayer is adjusted but no tax or interest is payable by or no
refund is due to him.
 The acknowledgement of the return of income shall be deemed to be the intimation in
a case where no sum is payable by or refundable to the assessee or where no
adjustment is made to the returned income.
*As per section 234F (as inserted by Finance Act, 2017 with effect from Assessment Year 2018-
19), a fee shall be levied where the return of income is not filed within the due dates prescribed
under section 139(1). The amount of fee is as follows:-
(a) Rs. 5,000, if the return is furnished on or before the 31st day of December of the assessment
year;
(b) Rs. 10,000 in any other case:
Provided that if the total income of the person does not exceed Rs. 5,00,000, the amount of fee
shall not exceed Rs. 1000.
Time-limit
Assessment under section 143(1) can be made within a period of one year from the end of the
financial year in which the return of income is filed.
Assessment under section 143(3)
This is a detailed assessment and is referred to as scrutiny assessment. At this stage a detailed
scrutiny of the return of income will be carried out is to confirm the correctness and genuineness of
various claims, deductions, etc., made by the taxpayer in the return of income.
Scope of assessment under section 143(3)
The objective of scrutiny assessment is to confirm that the taxpayer has not understated the
income or has not computed excessive loss or has not underpaid the tax in any manner.
To confirm the above, the Assessing Officer carries out a detailed scrutiny of the return of income
and will satisfy himself regarding various claims, deductions, etc., made by the taxpayer in the
return of income.
Procedure of assessment under section 143(3)
 If the Assessing Officer considers it necessary or expedient to ensure that the taxpayer
has not understated the income or has not computed excessive loss or has not
underpaid the tax in any manner, then he will serve on the taxpayer a notice requiring
him to attend his office or to produce or cause to be produced any evidence on which
the taxpayer may rely, in support of the return.

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 To carry out assessment under section 143(3), the Assessing Officer shall serve such
notice in accordance with provisions of section 143(2).
 Notice under section 143(2) should be served within a period of six months from the
end of the financial year in which the return is filed.
 The taxpayer or his representative (as the case may be) will appear before the
Assessing Officer and will place his arguments, supporting evidences, etc., on various
matters/issues as required by the Assessing Officer.
 After hearing/verifying such evidence and taking into account such particulars as the
taxpayer may produce and such other evidence as the Assessing Officer may require
on specified points and after taking into account all relevant materials which he has
gathered, the Assessing Officer shall, by an order in writing, make an assessment of
the total income or loss of the taxpayer and determine the sum payable by him or
refund of any amount due to him on the basis of such assessment.

E-Assessments
The Finance Act, 2018 has inserted a new sub-section (3A) in Section 143 that the Central Govt.
may make a scheme for the purpose of making assessment so as to impart greater efficiency,
transparency and accountability by:
A. Eliminating the interface between the Assessing Officer and the assessee in the course of
proceeding to the extent technologically feasible;
B. Optimising utilization of the resources through economies of scale and functional specialization;
C. Introducing a team-based assessment with dynamic jurisdiction.
As part of e-governance initiative to facilitate conduct of assessment proceedings electronically,
Income-tax Dept. has launched ‘E-Proceeding’ facility. Under this initiative, CBDT has made it
mandatory for the tax officers to take recourse of electronic communications for all limited and
complete scrutiny. The CBDT had issued the instructions and notice formats for conducting
scrutiny assessments electronically. As per the instruction, except search related assessments, all
scrutiny assessments shall be conducted only through the ‘E-Proceeding’ functionality available at
e-filing website of Income-tax Dept.
Time-limit
As per Section 153, the time limit for making assessment under section 143(3) is:-
1) Within 21 months from the end of the assessment year in which the income was first
assessable. [For assessment year 2017-18 or before]
2) 18 months from the end of the assessment year in which the income was first assessable. [for
assessment year 2018-19]
3) 12 months from the end of the assessment year in which the income was first assessable
[Assessment year 2019-20 and onwards]
Note:- If reference is made to TPO, the period available for assessment shall be extended by 12
months.
Assessment under section 144

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This is an assessment carried out as per the best judgment of the Assessing Officer on the basis
of all relevant material he has gathered. This assessment is carried out in cases where the
taxpayer fails to comply with the requirements specified in section 144.
Scope of assessment under section 144
As per section 144, the Assessing Officer is under an obligation to make an assessment to the
best of his judgment in the following cases:-
 If the taxpayer fails to file the return required within the due date prescribed under
section 139(1) or a belated return under section 139(4) or a revised return under
section 139(5).
 If the taxpayer fails to comply with all the terms of a notice issued under section
142(1).
Note: The Assessing Officer can issue notice under section 142(1) asking the taxpayer to file the
return of income if he has not filed the return of income or to produce or cause to be produced
such accounts or documents as he may require and to furnish in writing and verified in the
prescribed manner information in such form and on such points or matters (including a statement
of all assets and liabilities of the taxpayer, whether included in the accounts or not) as he may
require.
 If the taxpayer fails to comply with the directions issued under section 142(2A).
Note : Section 142(2A) deals with special audit. As per section 142(2A), if the
conditions justifying special audit as given in section 142(2A) are satisfied, then the
Assessing Officer will direct the taxpayer to get his accounts audited from a chartered
accountant nominated by the principal chief commissioner or Chief Commissioner or
Principal Commissioner or Commissioner and to furnish a report of such audit in the
prescribed form.
 If after filing the return of income the taxpayer fails to comply with all the terms of a
notice issued under section 143(2), i.e., notice of scrutiny assessment.
 If the assessing officer is not satisfied about the correctness or the completeness of the
accounts of the taxpayer or if no method of accounting has been regularly employed
by the taxpayer.
 From the above criteria, it can be observed that best judgment assessment is resorted
to in cases where the return of income is not filed by the taxpayer or if there is no
cooperation by the taxpayer in terms of furnishing information / explanation related to
his tax assessment or if books of accounts of taxpayer are not reliable or are
incomplete.
Procedure of assessment under section 144
 If the conditions given above calling for best judgment are satisfied, then the
Assessing Officer will serve a notice on the taxpayer to show cause why the
assessment should not be completed to the best of his judgment.
 No notice as given above is required in a case where a notice under section 142(1) has
been issued prior to the making of an assessment under section 144.
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 If the Assessing Officer is not satisfied by the arguments of the taxpayer and he has
reason to believe that the case demands a best judgment, then he will proceed to carry
out the assessment to the best of his knowledge.
 If the criteria of the best judgment assessment are satisfied, then after taking into
account all relevant materials which the Assessing Officer has gathered, and after
giving the taxpayer an opportunity of being heard, the Assessing Officer shall make
the assessment of the total income or loss to the best of his knowledge/judgment and
determine the sum payable by the taxpayer on the basis of such assessment.

Time-Limit
As per Section 153, the time limit for making assessment under section 144 is:-
1) Within 21 months from the end of the assessment year in which the income was first
assessable. [For assessment year 2017-18 or before]
2) 18 months from the end of the assessment year in which the income was first assessable. [for
assessment year 2018-19]
3) 12 months from the end of the assessment year in which the income was first assessable
[Assessment year 2019-20 and onwards]
Note:- If reference is made to TPO, the period available for assessment shall be extended by 12
months.
Assessment under section 147
This assessment is carried out if the Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment for any assessment year
Scope of assessment under section 147
 The objective of carrying out assessment under section 147 is to bring under the tax
net any income which has escaped assessment in original assessment.
 Original assessment here means an assessment under sections 143(1), 143(3), 144 and
147 (as the case may be).
 In other words, if any income has escaped (*) from being taxed in the original
assessment made under section 143(1) or section 143(3) or section 144 or section 147,
then the same can be brought under tax net by resorting to assessment under section
147.
 In the following cases, it will be considered as income having escaped assessment:
 Where no return of income has been furnished by the taxpayer, although his total
income or the total income of any other person in respect of which he is assessable
during the previous year exceeded the maximum amount which is not chargeable to
income-tax.
 Where a return of income has been furnished by the taxpayer but no assessment has
been made and it is noticed by the Assessing Officer that the taxpayer has understated
the income or has claimed excessive loss, deduction, allowance or relief in the return.

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 Where the taxpayer has failed to furnish a report in respect of any international
transaction which he was required to do under section 92E.
 Where an assessment has been made, but:
i. income chargeable to tax has been under assessed; or
ii. income has been assessed at low rate; or
iii. income has been made the subject of excessive relief; or
iv. excessive loss or depreciation allowance or any other allowance has been
computed;
 Where a person is found to have any asset (including financial interest in any entity)
located outside India.
 Where a return of income has not been furnished by the assessee and on the basis of
information or document received from the prescribed income-tax authority under
section 133C(2), it is noticed by the Assessing Officer that the income of the assessee
exceeds the maximum amount not chargeable to tax.
 Where a return of income has been furnished by the assessee and on the basis of
information or document received from the prescribed income-tax authority under
section 133C(2), it is noticed by the Assessing Officer that the assessee has
understated the income or has claimed excessive loss, deduction, allowance or relief in
the return.

Procedure of assessment under section 147

 For making an assessment under section 147, the Assessing Officer has to issue notice
under section 148 to the taxpayer and has to give him an opportunity of being heard.
The time-limit for issuance of notice under section 148 is discussed in later part.
 If the Assessing Officer has reason to believe that any income chargeable to tax has
escaped assessment for any assessment year, then he may assess or reassess such
income and also any other income chargeable to tax which has escaped assessment
and which comes to his notice subsequently in the course of the proceedings under this
section. He is also empowered to re-compute the loss or the depreciation allowance or
any other allowance, as the case may be, for the assessment year concerned.
 Items which are the subject matters of any appeal, reference or revision cannot be
covered by the Assessing Officer under section 147.

Time-limit for completion of assessment under section 147

As per Section 153, the time limit for making assessment under section 147 is:-
1) Within 9 months from the end of the financial year in which the notice under section 148 was
served (if notice is served before 01-04-2019).

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2) 12 months from the end of the financial year in which notice under section 148 is served (if
notice is served on or after 01-04-2019).
Note:- If reference is made to TPO, the period available for assessment shall be extended by 12
months.
Time-limit for issuance of notice under section 148
> Notice under section 148 can be issued within a period of 4 (*) years from the end of the
relevant assessment year. If the escaped income is Rs. 1,00,000 or more and certain other
conditions are satisfied, then notice can be issued upto 6 years from the end of the relevant
assessment year.
> In case the escaped income relates to any asset (including financial interest in any entity)
located outside India, notice can be issued upto 16 years from the end of the relevant assessment
year.
Notice under section 148 can be issued by AO only after getting prior approval from the prescribed
authority.

Types of Income Tax Assessment:

1. Self Assessment –u/s 140A
2. Summary assessment –u/s 143(1)
3. Scrutiny assessment –u/s 143(3)
4. Best Judgment Assessment –u/s 144
5. Protective assessment
6. Re-assessment or Income escaping assessment –u/s 147
7. Assessment in case of search –u/s 153A

Self Assessment u/s 140A

This type of Income Tax Assessment is the one in which the assessee calculate the tax by
himself, usually to accompany his calculation with payment of the amount he regards as due.

Tax payable is required to be furnished under section 139 or section 142 or section 148 or section
153A, after taking TDS and deducting Advance tax paid.

Time limit:
There are no specific dates to pay Self Assessment Tax. Payment of Self Assessment Tax and
non-filing of the returns should be paid within 31st July of every year.

Procedure
 Direct Mode of Payment

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Self Assessment Tax can be paid by filling a tax payment challan, ITNS 280. Challans are
available in the designated branches of banks associated with the Income Tax Department.

 Online Mode of Payment

Assessee can pay tax online through different websites.

Summary assessment u/s 143(1)

Assessment under section 143(1) is like initial checking of the return of income. Under this section,
Income tax department sent intimation u/s 143(1) to the taxpayer. A Comparative Income Tax
computation is sent by the Department. In income tax assessment, total income or loss incurred is
computed.

Time Limit:
Assessment u/s 143(1) can be made within a period of one year from the end of financial year in
which the return is filed.

Scrutiny Assessment u/s 143(3)

Scrutiny assessment is the assessment of the return filed by the assessee by giving an
opportunity to the assessee to substantiate the declared income and expenses and the claims of
deductions, losses, exemptions, etc. in the return with the help of evidence.It is managed by the
Committee through a single work plan. Specific work is undertaken through the committee and by
establishing informal panels (for in-depth activities) or working groups.

The assessing officer gets the opportunity to conduct an inquiry and aims at ascertaining whether
the income in the return is correctly shown by the assessee or not. The claims for deductions,
exemptions etc. are legally and factually.

If there is any omission, discrepancies, inaccuracies, etc. Then the assessing officer makes an
own assessment for the assessee by taking all facts in mind.

Type of cases
 Manual scrutiny cases.
 Compulsory Scrutiny cases.
Manual scrutiny cases as follows:
 Not filing Income Tax Return.
 State lesser income or more tax as compared to earlier year.
 Mismatch in TDS credit between claim and 26AS.

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 Non-declaration of exempted income.

 Claiming for large refunds in return of Income.
 Taking double benefit due to the Job change.

Compulsory Scrutiny cases as follows:

 Case 1: relating addition in the earlier assessment year of Rs. 10 lakhs/Rs. 10
crore excess on a substantial and recurring question of law or fact which is
confirmed in appeal or is pending before an appellate authority may come
under compulsory scrutiny.
 Case 2: CASS (Computer Added Scrutiny Selection) cases are also selected
under compulsory cases. All such cases are separately intimated by DGIT
(system) to the jurisdictional concerned.
 Case 3: Where specific and verifiable information pointing on tax evasion is
given to Government Department/ Authorities.
 Case 4: Rejection of the approval u/s 10 (23C) of the Act or withdrawing the
approval already is passed by the authority, yet the assessee found claiming
tax exemption under the aforesaid provision of the Act.

Best Judgment Assessment u/s

144
The best judgment assessment means evaluation or estimation in the context income tax law of
income of the assessee by the assessing officer. In the case of best judgment assessment, the
assessing officer will make the assessment based on best reasoning i.e. they will not act
dishonestly. The assessee will neither be dishonest in assessment nor have a bitter attitude
towards the officer. This is a type of income tax assessment which involves the input of both the
assessee and the officer equally.

Types
 Compulsory Assessment: Assessing officer (AO) finds that there is non-
cooperation by the assessee or found to be a defaulter in supplying
information to the department.
 Discretionary/optional assessment: When AO is dissatisfied with the
authenticity/validity of the accounts given by the assessee or where no regular
method of accounting has been followed by the assessee.

Cases
 Case 1: If a person fails to make return u/s 139(1) and has not made a return
or a revised return under sub-section (4) or (5) of that section; or

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 Case 2: If any person fails to comply with all the terms of notice under section
142(1) or fails to follow directions mentioned to get account audited u/s section
142(2A); or
 Case 3: If a person after filing a return fails to comply with all the terms of
notice received under section 143(2) requiring presence or production of
evidence and documents; or
 Case 4: If the Assessing Officer is not satisfied with the correctness or
completeness of the accounts or documents.
 Case 5: A person has a right to file an appeal u/s 246 or to craft an application
for revision u/s 264 to the commissioner.

Also keep in mind, after giving a chance to the assessee of being heard, then only best judgment
assessment can be made.

Protective assessment
This is a type of assessments that focus on those assessments which are made to ‘protect’ the
interest of the revenue.

Though, there is no provision in the income tax act authorizing the levy of income tax on a person
other than whom the income tax is payable. It is open to the authorities to make a protective or an
alternative assessment if it is not ascertainable who is really liable to pay the tax among a few
possible persons.

For example
If there are doubts on a rental income belongs to Mr. A or Mr. B. Then, the assessing officer at his
own discretion may add the rental income to any one of them on a protective basis. This is done
ensure that finality, the owner of the income has not denied the addition of income because of
limitation of time.

In making a protective assessment, the authorities are simply making an assessment and leaving
it as a paper assessment until the matter is decided. A protective order of assessment can be
passed but not a protective order of penalty.

Re-Assessment (or) Income

escaping assessment u/s 147
Income Escaping Assessment under section 147 is the assessment which is done by the
Assessing Officer if there is a reason for him to believe that income chargeable to tax has escaped
assessment for any assessment year. It gives power to him to re-assess or re-compute income,
turnover etc. which has escaped assessment.

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Objective
The objective of carrying out assessment u/s 147 is to bring them under the tax net, any income
which has escaped assessment in the original assessment.

Time limit
 Completion of assessment under section 147
Under section 147, notice is issued within 9 months from the end of the financial year in
which notice u/s 148 is also served.

 Notice issued under section 148

Under section 148, notice can be issued within a period of 4 years from the end of the relevant
assessment.

Case 1: If escaped income amounts to Rs. 1, 00,000 or more and then notice can be issued for up
to 6 years from the end of the relevant assessment year.

Case 2: If escaped income is associated with any assets (including financial interest in any entity)
i.e. located outside India, and then notice can be issued up to 16 years from the end of the
relevant assessment year.

Notice u/s 148 can be issued by AO only after getting prior approval from the prescribed authority
mentioned in section 151.

Assessment in case of search u/s

153A
Under this type of Income Tax Assessment, the Assessing Officer will:

 Issue notice to such person requires furnishing within such period, as specified
in the notice. Clause (b) referred to the return of income of each assessment
year falling within six assessment years and is verified in prescribed form.
Setting forth such other particulars as may be prescribed and the provisions of
this Act shall, so far as may be, apply accordingly as if such return were a
return required to be furnished under section 139;
 Assessor re-assess the total income of six assessment years immediately
preceding the assessment year relevant to the previous year in which such
search is conducted or requisition is made.

Note: Section 153A issues a notice for 6 years, preceding the search not for the year of search
and no return is required to be filed (for the year of search) u/s 153A. File only a regular return u/s
139.

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Time limit for completion of

assessment u/s 153A/153C: [153B]
Case 1: Person searched under section 153A

 21 months from the end of the financial year this does not include the last
authorization for search u/s 132 or requisition u/s 132A.
 Similar time limits shall apply in respect of the year of search also.

Case 2: Any other person 153C

As provided in above clause (a) or clause (b) or 9 months from the end of the Financial Year
where BOA/documents/assets seized/requisitioned are handed over to the assessing officer
(AO), whatever is latest.

Conclusion
All types of income tax assessment should be taken seriously. Moreover, file the income tax return
accurately and mention all the proofs to avoid any type of income tax assessment in front of the
assessing officer.

INCOME TAX AUTHORITIES-APPOINTMENTS-

POWERS & FUNCTIONS

Income Tax Authorities

Income tax authority [Explanation (a) to section 133A]:
"Income-tax authority" means a Commissioner, a Joint Commissioner, a
Director, a Joint Director, an Assistant Director or a Deputy Director or an
Assessing Officer, or a Tax Recovery Officer, and for the purposes of clause (i)
of subsection (1), clause (i) of sub-section (3) and sub-section (5), includes an
Inspector of Income-tax.

1.1. Various Authorities

Section of the Income Tax Act, 1961 provides for the administrative and
judicial authorities for administration of this Act. The Direct Tax Laws Act, 1987
has brought far-reaching changes in the organizational structure. The
implementation of the Act lies in the hands of these authorities. The change in
designation of certain authorities and creation of certain new posts in the
structure are the main features of amendments made by The Direct Tax Laws

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Act, 1987. The new features of authorities has been properly depicted in a
chart on the facing page. These authorities have been grouped into two main
wings :

(i) Administrative [ Income Tax Authorities ][ Sec.

116 ]
a. the Central Board of Direct Taxes constituted under the Central Boards of
Revenue Act, 1963 (54 of 1963),
b. Directors-General of Income-tax or Chief Commissioners of Income-tax,
c. Directors of Income-tax or Commissioners of Income-tax or
Commissioners of Income-tax (Appeals),
1. (cc) Additional Directors of Income-tax or Additional Commissioners
of Income-tax or Additional Commissioners of Income-tax (Appeals),
2. (cca) Joint Directors of Income-tax or Joint Commissioners of Income-
tax.
d. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax
or Deputy Commissioners of Income-tax (Appeals),
e. Assistant Directors of Income-tax or Assistant Commissioners of Income-
tax,
f. Income-tax Officers,
g. Tax Recovery Officers,
h. Inspectors of Income-tax.

(ii) Assessing Officer [ Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner
or Assistant Director or Deputy Director or the Income-tax Officer who is vested
with the relevant jurisdiction by virtue of directions or orders issued under sub-
section (1) or sub-section (2) of section 120 or any other provision of this Act,
and the Joint Commissioner or Joint Director who is directed under clause (b) of
sub-section (4) of that section to exercise or perform all or any of the powers
and functions conferred on, or assigned to, an Assessing Officer under this Act;

Importance of Assessing Officer :

In the organizational setup of the income tax department Assessing Officer
plays a very vital role. He is the primary authority who initiates he proceedings
and is directly connected with the public. Form the time of filing of return till the
assessement is completed he plays a pivotal role . He can start proceedings for
non filing of return, imposition of penalties etc. Orders passed by him can be
challenged only on approval. The department can revise his orders only if it is
proved that there are prejudicial to the revenue and that too only by the
Commissioner of Income Tax.

(iii) Appointment of Income-Tax Authorities [ Sec.

117 ]
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1. Power of Central Government : The Central Government may appoint

such persons as it thinks fit to be income-tax authorities. It kept with itself
the powers to appoint authorities upto and above rank of an Assistant
Commissioner of Income-Tax [ Sec. 117 (1) ]
2. Power of the Board and Other Higher Authorities : Subject to the
rules and orders of the Central Government regulating the conditions of
service of persons in public services and posts, the Central Government
may authorize the Board, or a Director-General, a Chief Commissioner or
a Director or a Commissioner to appoint income-tax authorities below the
rank of an Assistant Commissioner or Deputy Commissioner. [ Sec. 117
(2) ]
3. Power to appoint Executive and Ministerial Staff : Subject to the
rules and orders of the Central Government regulating the conditions of
service of persons in public services and posts, an income-tax authority
authorized in this behalf by the Board may appoint such executive or
ministerial staff as may be necessary to assist it in the execution of its
functions.

(iv) Control of Income-Tax Authorities [ Sec. 118 ]

The Board may, by notification in the Official Gazette, direct that any income-
tax authority or authorities specified in the notification shall be subordinate to
such other income-tax authority or authorities as may be specified in such
notification.

Powers of Income-tax authorities.—

(1) The Income-tax Officer, Appellate Assistant Commissioner, Commissioner and Appellate
Tribunal shall, for the purposes of this Act, have the same powers as are vested in a Court under
the Code of Civil Procedure, 1908 (V of 1908), when trying a suit in respect of the following
matters, namely:—
(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer of a banking company, and
examining him on oath;
(c) compelling the production of books of account and other documents; and
(d) issuing commissions.
(2) Subject to any rules made in this behalf, any Income-tax Officer specially authorised by the
Commissioner in this behalf may,—
(i) enter and search any building or place where he has reason to believe that any books of
account or other documents which in his opinion will be useful for, or relevant to, any
proceeding under this Act may be found and examine them, if found;
(ii) seize any such books of account or other documents or place marks of identification
thereon or make extracts or copies therefrom;

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(iii) make a note or an inventory of any other article or thing found in the course of any
search under this section which in his opinion will be useful for, or relevant to, any
proceeding under this Act;
and the provisions of the Code of Criminal Procedure, 1898 (V of 1898), relating to searches
shall apply so far as may be to searches under this section.
(3) Subject to any rules made in this behalf, any authority referred to in sub section (1) may
impound and retain in its custody for such period as it thinks fit any books of account or other
documents produced before it in any proceeding under this Act:
Provided that an Income-tax Officer shall not—
(a) impound any books of account or other documents without recording his reasons for so
doing; or
(b) retain in his custody any such books or documents for a period exceeding fifteen days
(exclusive of holidays) without obtaining the approval of the Commissioner therefor.
(4) Any proceeding before any authority referred to in this section shall be deemed to be a
judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section
196 of the Indian Penal Code (XLV of 1860).]

POWERS OF OTHER INCOME TAX AUTHORITIES:

Powers of the Income Tax Authorities vary with the nature of the position acquired. Given below are the
various tax authorities along with the powers they hold under that position.

Director General/ Director:

The Director General/ Director, appointed by the Central Government, are required to perform such
functions as maybe assigned by the Central Government, are required to perform such functions as may be
assigned by the Central Board of Direct Taxes. This position enjoys the following powers under different
provisions of the Act:

a. To give instructions to the Income-Tax officers

b. To enquire or investigate into concealment
c. To search and seizure
d. To requisite books of account
e. To survey
f. To make any enquiry

Commissioners of Income Tax:

Commissioners are appointed by the Central Government. Generally, they are appointed to head income-tax
administration of a specified area. As the head of administration, a Commissioner of income-tax enjoys
certain administrative as well as judicial powers. A commissioner may exercise powers of an assessing
officer. It has the power to transfer any case from one or more assessing officers to any other assessing
officer. It can grant approval for an order issued by the assessing officer. Prior approval is required for
reopening of an assessment. Its, also, has the power to revise an order passed by an assessing officer in
addition to many other powers as given in the Income Tax Act, 1961.

Commissioner (Appeals):
Commissioners of Income-Tax (Appeals) are appointed by the Central Government. It is an appellate
authority vested with the following judicial powers:
a. Power regarding discovery, production of evidence etc.
b. Power to call information.

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c. Power to inspect registers of companies.

d. Power to set off refunds against tax remaining payable.
e. Power to dispose of appeals.
f. Power to impose penalty.

Joint Commissioners:
Joint Commissioners are appointed by the Central Government. The main function of the authority is to
detect tax- evasion and supervise subordinate officers. Under the different provisions of the Act, the Joint
Commissioner enjoys the power to accord approval to adopt fair market value as full consideration, instruct
income tax officers, exercise powers of income tax officers, the power to call information, to inspect
registers of companies, to make any enquiry among other powers.

Income-Tax Officers:
While Income-Tax officers of Class I services are appointed by the Central Government, Income-tax
Officers of Class II services are appointed by the Commissioner of Income-Tax. Powers, functions and
duties of Income-Tax officers are provided in many sections, some of which are Power of search and
seizure, Power of assessment, Power to call for information, Power of Survey etc.

Inspectors of Income-Tax:
They are appointed by the Commissioner of Income-Tax. Inspectors of Income-Tax have to perform such
functions as are assigned to them by the Commissioner or any other authority under whom they are
appointed to work.

THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE INCOME-TAX AUTHORITIES:

The Income Tax Act, 1961 specifies the scope of the powers handed to the income-tax authorities. Given
below are some of the important powers of the Income Tax Authorities and their scope as given in the
Sections provided under the Income Tax Act, 1961:

Power to Transfer Cases [Section 127]:

CBDT can transfer the case from Assessing Officer to another A.O. subordinate to him after giving a
reasonable opportunity of being heard to the concerned assessee. However, no opportunity of being heard
shall be required if the case is to be transferred from one A.O. to another A.O. within the same city, town or
locality. Disputes regarding jurisdiction shall be resolved by the concerned CCIT or CIT on mutual
understanding. However, for any disagreement, the matter shall be referred to CBDT and CBDT shall
resolve the dispute by way of issuing a notification in the Official Gazette of India.

Opportunity of Being Reheard [Section 129]:

Whenever, an Income Tax Authority ceases to exercise jurisdiction over a particular case and is being
succeeded by another Income Tax Authority, then the successor Income Tax Authority shall continue the
pending proceeding from the same stage at which it was left over by the predecessor Income Tax Authority.
There shall be no requirement on the part of the successor Income Tax Authority to reissue any notice
already issued by his predecessor. However, if the concerned assessee demands that before the successor
Income Tax Authority continues the proceeding, he shall be given an opportunity of being reheard to explain
his case to the successor Income Tax Authority, then in such case, an opportunity of being reheard has to be
given to the assessee. (However, such an opportunity of being reheard is required to be given only if the
concerned assessee demands for it and not otherwise).The time of A.O. lost in giving such opportunity of
being reheard to the assessee, shall be excluded while calculating time limit to complete the assessment.

Discovery, Production of Evidence etc. [Section 131]:

The Assessing Officer, Deputy Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals), the
Chief Commissioner and the Dispute Resolution Panel referred to in section 144C have the powers vested in
a Civil Court under the Code of Civil Procedure, 1908 while dealing with the following matters:
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(i) discovery and inspection;

(ii) enforcing the attendance of any person, including any officer of a banking company and examining him
on oath;
(iii) compelling the production of books of account and documents; and
(iv) issuing commissions

Search and Seizure [Section 132]:

Today it is not hidden from income tax authorities that people evade tax and keep unaccounted assets. When
the prosecution fails to prevent tax evasion, the department has to take actions like search and seizure.
Under this section, wide powers of search and seizure are conferred on the income-tax authorities. The
provisions of the Criminal Procedure Code relating to searches and seizure would, as far as possible, apply
to the searches and seizures under this Act. Contravention of the orders issued under this section would be
punishable with imprisonment and fine under section 275A.

Power to Requisition Books of Account etc. [Section 132A]:

Where the Director or the Director-General or Commissioner or the Chief Commissioner in consequence of
information in his possession, has reason to believe that (a), (b), or (c) as mentioned under section 132(1)
and the book of accounts or other documents or the assets have been taken under custody by any authority or
officer under any other law, then the Chief Commissioner or the Director General or Director or
Commissioner can authorize any Joint Director, Deputy Director, Joint Commissioner, Assistant
Commissioner, Assistant Director, or Income tax Officer to require the authority to provide sue books of
account, assets or any documents to the requisitioning officer, when such officer is of the opinion that it is no
longer necessary to retain the same in his custody.

Application of Retained Assets [Section 132B]:

This section provides that the seized assets can be appropriated against all tax liabilities of the assessee.
However, if the nature of source of acquisition of seized assets is explained satisfactorily by the assessee,
then, such assets are required to be released within a period of 120 days from the date on which last of the
authorisations for search under section 132 is executed after meeting any existing liabilities. For this
purpose, it has been provided that the assessee should make an application to the Assessing Officer within a
period of 30 days from the end of the month in which the asset was seized. The assessee shall be entitled to
simple interest at ½% per month or part of a month, if the amount of assets seized exceeds the liabilities
eventually, for the period immediately following the expiry of 120 days from the date on which the last of
the authorisations for search under section 132 or requisition under section 132A was executed to the date of
completion of the assessment under section 153A or under Chapter XIV-B.

Power to call for information [Sections 133]:

The Commissioner The Assessing Officer or the Joint
Commissioner may for the purpose of this Act:
(a) Can call any firm to provide him with a return of the addresses and names of partners of the firm and
their shares;
(b) Can ask any Hindu Undivided Family to provide him with return of the addresses and names of members
of the family and the manager;
(c) Can ask any person who is a trustee, guardian or an agent to deliver him with return of the names of
persons for or of whom he is an agent, trustee or guardian and their addresses;
(d) Can ask any person, dealer, agent or broker concerned in the management of stock or any commodity
exchange to provide a statement of the addresses and names of all the persons to whom the Exchange or he
has paid any sum related with the transfer of assets or the exchange has received any such sum with the
particulars of all such payments and receipts;

Power of Survey [Section 133A]:

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The term 'survey' is not defined by the Income Tax Act. According to the meaning of dictionary 'survey'
means casting of eyes or mind over something, inspection of something, etc. An Income Tax authority can
have a survey for the purpose of this Act. The objectives of conducting Income Tax surveys are:

(a)To discover new assessees;

(b)To collect useful information for the purpose of assessment;
(c)To verify that the assessee who claims not to maintain any books of accounts is in-fact maintaining the
books; (d)To check whether the books are maintained, reflect the correct state of affairs.

Power to Collect Certain Information [Section 133B]:

For the purpose of collection of information which may be useful for any purpose, the Income tax authority
can enter any building or place within the limits of the area assigned to such authority, or any place or
building occupied by any person in respect of whom he exercises jurisdiction.

Power to Inspect Registers of Companies [Section 134]:

The Assessing Officer, the Joint Commissioner or the Commissioner (Appeals), or any person subordinate to
him authorised in writing in this behalf by the Assessing Officer, the Joint Commissioner or the
Commissioner (Appeals), as the case may be, may inspect and if necessary, take copies, or cause copies to
be taken, of any register of the members, debenture holders or mortgagees of any company or of any entry in
such register.

Other Powers [Sections 135 and 136]:

The Director General or Director, the Chief Commissioner or Commissioner and the Joint Commissioner are
competent to make any enquiry under this act and for all purposes they shall have the powers vested in an
Assessing Officer in relation to the making of enquiries. If the Investigating officer is denied entry into the
premises, the Assessing Officer shall have all the powers vested in him under sections 131(1) and (2). All the
proceedings before Income tax authorities are judicial proceedings for purposes of section 196 of the Indian
Penal Code, 1860, and fall within the meaning of sections 193 and 228 of the Code. An income-tax authority
shall be deemed to be a Civil Court for the purposes of section 195 of the Criminal Procedure Code, 1973.

JURISDICTION OF INCOME-TAX AUTHORITIES:

Income Tax authorities are required to exercise their powers and perform their functions in accordance with
directions given by the Board. Tax authority higher in rank, if directed by Board, shall exercise the powers
and perform tie functions of the Income- Tax authority lower in rank. The directions of CBDT include
direction to authorize any Income Tax authority to issue instructions to their subordinates. In issuing
instruction or orders, the Board or the Income-Tax authority may adopt any one or more of the following
criteria -
(a) Territorial area
(b) Person or classes of persons
(c) Incomes or classes of incomes
(d) Cases or classes of cases

The Board can also authorize Director General or Chief Commissioner or Commissioner to issue orders in
writing to the effect that the functions conferred or assigned to the Assessing Officer in respect of the above
four criteria shall be exercised or performed by Joint Commissioner or Joint Director.

Also, the Assessing Officer has been vested with jurisdiction over any area or limits of such area -
1. If a person carries on business or profession only in that area. In respect of that person; or
2. If a person carries on business or profession in more than one place, then the principal place of business or
profession situated in that area; or
3. In respect of any other person residing within that area.

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Any dispute relating to jurisdiction to assess any person by an Assessing Officer shall be determined by
Director General /Chief Commissioner/Commissioner of Income Tax If the dispute is relating to areas
within the jurisdiction of different Director General /Chief Commissioner/ Commissioner, then such issue is
to be solved mutually among themselves. If the above authorities are not in agreement among themselves
such matter has to be decided by the Board or Director General/ Chief Commissioner/ Commissioner
authorized by the Board.

CONCLUSION:
It is believed that tax-authorities are independent judicial officers who are required to pass reasoned orders
based on their own reasoning un-influenced by instructions or advice from their superior officers. The
Central Excise adjudication manual published in 1988 (that was its last publication), in para 39 directed that
Board Orders and reference numbers should not be quoted in the Adjudication Orders. It was further advised
that Law Ministry’s opinion is confidential and should never be communicated in the same language to even
sub-ordinate officers. There are several Assistant Commissioners who boast “I am an adjudicating authority
and not bound by the Board orders”.
This has resulted in a considerable degree of uncertainty in financial management with respect to taxes. For
example it is hard to determine for the assesses, the binding value of circulars issued by CBDT under
Section 119 of the Income Tax Act, 1961. Also, these circulars blatantly contradict statutory provisions that
have been given binding effect, displace the authoritative pronouncements of the Higher Judiciary and cause
an erosion of the constitutionally-mandated effect of Supreme Court declarations under Article 141.

In recent times the catena of judicial pronouncements and statue provisions are creating quite a
stir. However, there is still a need to further define and redefine and implement the extent to which Income
Tax authorities are required to exercise their powers and perform their functions so as to prevent harassment
of assesses, tax-evasion, unnecessary discrimination in collection of tax and to help assesses effectively
manage taxes.

Functions

FUNCTIONS AND STRUCTURE OF THE DEPARTMENT OF REVENUE The Department of Revenue is mainly
responsible for the following functions: -

1. All matters relating to levy and collection of Direct Taxes.

2. All matters relating to levy and collection of Indirect Taxes.
3. investigation into economic offences and enforcement of economic laws.
4. Prevention and combating abuse of Narcotic drugs and psychotropic substances and
illicit traffic therein.
5. Enforcement of FEMA and recommendation of detention under COFEPOSA.
6. Work relating to forfeiture of property under Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976 and Narcotics Drugs and Psychotropic
Substances Act, 1985.
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7. Levy of taxes on sales in the course of inter-state trade or commerce.

8. Matters relating to consolidation/reduction/exemption from payment of Stamp duty
under Indian Stamp Act, 1899.
9. Residual work of Gold Control
10.Matters relating to CESTAT.
11.Cadre Control of IRS (Group-A) and IRS (C&CE) (Group-A).

The Department of Revenue administers the following Acts:-

1. Income Tax Act, 1961;
2. Wealth Tax Act, 1958;
3. Expenditure Tax Act, 1987;
4. Benami Transactions (Prohibition) Act, 1988;
5. Companies (Profits) Sur-tax, Act, 1964;
6. Compulsory Deposit (Income Tax Payers) Scheme Act, 1974;
7. Chapter VII of Finance (No.2) Act, 2004 (Relating to Levy of Securities Transactions
Tax);
8. Chapter V of Finance Act 1994 (relating to Service Tax);
9. Central Excise Act, 1944 and related matters;
10.Customs Act, 1962 and related matters;
11.Central Sales Tax Act, 1956;
12.Narcotics Drugs and Psychotropic Substances Act, 1985;
13.Prevention of illicit Tariff in Narcotic Drugs and Psychotropic Substances Act, 1988;
14.Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976;
15.Indian Stamp Act, 1899 (to the extent falling within jurisdiction of the Union);
16.Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
17.Foreign Exchange Management Act, 1999; and
18.Prevention of Money Laundering Act, 2002.

The administration of the Acts mentioned at Sl.Nos.3, 5,6 and 7 is limited to the cases pertaining to the period
when these laws were in force.
1. Commissionerates/Directorates under Central Board of Excise and Customs;
2. Commissionerates/Directorates under Central Board of indirect Taxes and Customs;
3. Central Economic Intelligence Bureau;
4. Directorate of Enforcement;
5. Central Bureau of Narcotics;
6. Chief Controller of Factories;
7. Appellate Tribunal of Forfeited Property;
8. Income Tax Settlement Commission;
9. Customs and Central Excise Settlement Commission;
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10.Customs, Excise and Service Tax Appellate Tribunal;

11.Authority for Advance Rulings for Income Tax;
12.Authority for Advance Rulings for Customs and Central Excise;
13.National Committee for Promotion of Social and Economic Welfare;
14.Competent Authorities appointed under Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976 & Narcotic Drugs and Psychotropic
Substances Act, 1985; and,
15.Financial Intelligence Unit, India (FIU-IND)

Functions of the various Divisions/Organisations in the Deptt. of Revenue. ADMINISTRATION DIVISION: All
administrative matters of Department of Revenue. Maintenance of CR Dossiers of the staff and officers of the
Secretariat proper of the Department and IRS (IT), IRS (Custom & Central Excise) of the level of Chief
Commissioners and above. SALES TAX DIVISION: Administration of sales tax laws (Validation) Act, 1956,
Central Sales Tax, State-level Value Added Tax (VAT), Indian Stamp Act, 1989 etc. NARCOTICS CONTROL
DIVISION: Framing of licensing policy for cultivation of Opium poppy, production of opium and export and pricing
of opium. Coordination of the working of Committee of Management and issues relating of UN and International
Organisations . COMMITTEE OF MANAGEMENT: Administering the departmental undertakings viz. Govt.
Opium and Alkaloid work Neemuch (M.P.) and Ghazipur which are engaged in processing of raw opium for
export purposes and also for extraction of alkaloids from opium, which are used by the Pharmaceutical
industry. REVISION APPLICATION UNIT: Work relating to revision applications filed against the orders of
Commissioners of Customs (Appeals) and Commissioners of Central Excise (Appeals) and the cases filed
before 11.10.1982 against CBIC. INTEGRATED FINANCE UNIT: Tendering advice in all financial matters
pertaining to Department of Revenue and the field formations under CBDT & CBIC. Deals with expenditure and
financial proposals. Prepare expenditure budget for grants relating to Department of Revenue, Direct Taxes &
Indirect Taxes. CENTRAL BOARD OF indirect taxes and Customs: All matters relating to levy and collection
of indirect taxes. CENTRAL BOARD OF DIRECT TAXES: All matters relating to levy and collection of direct
taxes. COMPETENT AUTHORITIES: Administration of Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976 and issues relating to Competent Authorities and Appellate Tribunal for
Forfeited Property. APPELLATE TRIBUNAL FOR FOFEITED PROPERTY: Work relating to forfeiture of
property under Smugglers and Foreign Exchange Manipulators (Forfeiture of property) Act, 1976 and Chapter
VA of Narcotics Drugs and Psychotropic Substances Act, 1985. CUSTOMS, EXCISE, SERVICE TAX
APPELLATE TRIBUNAL: Hearing appeals against the orders of Executive Commissioners and Commissioners
(Appeals). NATIONAL COMMITTEE FOR PROMOTION OF SOCIAL AND ECONOMIC
WELFARE: Recommending projects of social and economic welfare to the Central Government for issuance of
notification under section 35 AC of the Income Tax Act, 1961. AUTHORITY FOR ADVANCE RULINGS: Giving
advance rulings on a question of law or fact specified in an application filed by Non-Residents in relation to
transaction, which has been undertaken or proposed to be undertaken by the applicant. CUSTOMS AND
CENTRAL EXCISE SETTLEMENT COMMISSION: Settlement of applications filed by the assessees under the
Customs Act and Central Excise Act. SETTLEMENT COMMISSION (IT/WT): Settlement of applications filed by
the assessees under the Income Tax Act, 1961 and the Wealth Tax Act, 1957. CENTRAL ECONOMIC
INTELLIGENCE BUREAU: Coordinating and strengthening of the intelligence gathering activities, the

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investigative efforts and enforcement action by various agencies concerned with investigation into economic
offences and enforcement of economic laws. ENFORCEMENT DIRECTORATE: Responsible for enforcement of
the provision of Foreign Exchange Regulation Act. Recommending cases for detention under the Conservation
of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. Under Foreign Exchange Management
Act, 1999, the Enforcement Directorate is mandated primarily as the investigation and adjudicating
agency. FINANCE INTELLIGENCE UNIT: To coordinate and strengthen collection and sharing of financial
intelligence through an effective national, regional and global network to combat money laundering and related
crimes. FINANCE MINISTER, MINISTER OF STATE(FINANCE), SECRETARY (REVENUE), Chairman (CBDT),
Chairman (CBIC), AS(R) Administration of all direct taxes enactments and rules made thereunder. For detailed
execution the Board has under it the following attached and subordinate offices:-

1. Chief Commissioner of Income Tax

2. Director General of Income Tax (Inv.)
3. Director General of Income Tax (Admn.)
4. Director General of Income Tax (Exmp.)
5. Director General of Income Tax (Training)
6. Additional Director General of Income Tax (Training)
7. Commissioner of Income Tax
8. Commissioner of Income Tax(Appeals)
9. Members Appropriate Authority
10.Directorate of Income Tax(IT)
11.Directorate of Income Tax(Audit)
12.Directorate of Income Tax (Recovery)
13.Directorate of Income Tax (Inv.)
14.Directorate of Income Tax (RSP&PR)
15.Directorate of Income Tax (Systems).
16.Directorate of Income Tax (Spl. Inv.)
17.Directorate of Income Tax (Exemption)
18.Directorate of Income Tax (O&MS)
19.Principal Chief Controller of Accounts.

Administration of all indirect taxes enactments and rules made thereunder. Entrusted with
matters relating to Anti-Smuggling. For the performance of its administrative & Executive
functions the Board is assisted by the following attached and subordinate offices: -

1. Chief Commissioner of Customs.

2. Chief Commissioner of Central Excise.
3. .Chief Commissioner of Customs & Central Excise.
4. Commissioner of Central Excise.
5. Commissioner of Central Excise (Judicial).
6. Commissioner of Customs.
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7. Commissioner of Customs (Judicial).

8. Commissioner of Customs (Preventive).
9. Commissioner of Customs & Central Excise.
10.Commissioner of Customs & Central Excise (Appeals).
11.Directorate of Inspection.
12.Directorate of Revenue Intelligence.
13.Directorate General of Central Excise Intelligence.
14.National Academy of Customs, Excise & Narcotics.
15.Directorate of Logistics – Director.
16.Directorate of O&M Services - Director.
17.Directorate of Data Management.- Director.
18.Directorate of Publicity & Public Relations. - Directors.
19.Directorate of Systems: Director.
20.Directorate of Valuation: Director.
21.Custom, Excise & Service Tax Appellate Tribunal.
22.Directorate of Vigilance, Commissioner (Vig.).
23.Commissioner (TRU).
24.Commissioner(Review).
25.Chief Chemist, Central Revenue Control Laboratory.
26.Principal Chief Controller of Accounts.

Besides administration of the Head quarters, the Addl. Secretary (R) is entrusted with the
matters relating to the Money Laundering Act, the Indian Stamp Act, Central/State Taxes
including CST, AED,VAT, Economic Security, Opium Wing and the implementation of
Official Language Act and the Rules framed thereunder. The Department of Revenue (Main)
has under its aegis the following bodies / organizations

1. Settlement Commission(IT&WT)
2. Customs & Central Excise Settlement Commission
3. Offices of five Competent Authorities [SAFEM (FOP) Act, 1976 & NDPS Act, 1985]
4. Appellate Tribunal for Forfeited Property
5. Customs Excise & Service Tax Appellate Tribunal.
6. Enforcement Directorate
7. Authority on Advance Ruling (IT)
8. Authority on Advance Ruling (Customs & Central Excise)
9. Finance Intelligence Unit.

F.A., J.S.(R.A.), Narcotics Commissioner, Chief Controller of Opium & Alkaloid Factory Coordination &
strengthen ing of the intelligence gathering activities the Investigative efforts and enforcement action by various
agencies concerned with investigation into economic laws. The Bureau is responsible for maintaining liaison with
the concerned departments and directorates both at the Central & State Govt. level, and in addition is

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responsible for the overall direction and the control of the Investigative agencies within the D/o Revenue itself.
The Bureau is also responsible for the administration of COFEPOSA Act, 1974. As Head of Economic
Intelligence Council, coordination amongst various enforcement agencies dealing with economic offences,
functions include formulation of coordinated action plan against tax evaders and black money operators, suggest
measures for dealing with various modus operandi adopted by them and advise Govt. on amendment of laws
etc. for plugging loopholes. All financial budget & expenditure matters relating to the Deptt. Including the CBIC,
CBDT & the field formations of the Department. Revision Application under Customs Act, 1962 and central
Excise and Salt Tax, 1944 (other than cases covered by (CESTAT). Superintendence & control over cultivation of
opium poppy and production of opium and prevention of diversion of opium to illicit channels Over all
administration of the Government Opium and Alkaloid works undertaking at Ghazipur and Neemuch; export of
opium and import of opiate drugs for medicinal use; sale of excise opium and opiate drugs to manufacturing
chemists within the country.

PROVISIONS RELATING TO COLLECTION AND

RECOVERY OF TAX-FILING OF RETURNS

Modes of Recovery of Tax [Section 122]

Section-122 provides that in case assessee fails to pay any sum imposed by
way of interest, fine, penalty, or any other sum payable under the provisions of
this Act, the same shall be recoverable in the manner specified in the Act for
the recovery of arrears of tax.

“Tax Recovery Officer” means :

1. A Collector or an Additional collector
2. Any such officer empowered to effect recovery of arrears of land revenue
or other public demand under any law relating to land revenue or other
public demand for the time being in force in the State as ma be
authorized by the State Government , by general or special notification in
the Official Gazettee, to exercise the powers of a Tax Recovery Officer.
3. Any Gazetted Officer of the Central or s State Govt. who may be
authorized by the Central Govt. by general or special notification in the
Officer Gazette, to exercise the powers of a Tax Recovery Office

Modes of Recovery of Tax [Section 122]

Section-122 provides that in case assessee fails to pay any sum imposed by
way of interest, fine, penalty, or any other sum payable under the provisions of
this Act, the same shall be recoverable in the manner specified in the Act for

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the recovery of arrears of tax.

“Tax Recovery Officer” means :

1. A Collector or an Additional collector
2. Any such officer empowered to effect recovery of arrears of land revenue
or other public demand under any law relating to land revenue or other
public demand for the time being in force in the State as ma be
authorized by the State Government , by general or special notification in
the Official Gazettee, to exercise the powers of a Tax Recovery Officer.
3. Any Gazetted Officer of the Central or s State Govt. who may be
authorized by the Central Govt. by general or special notification in the
Officer Gazette, to exercise the powers of a Tax Recovery Office
When an assessee is in default or is deemed to be in default in making a
payment of tax, the Tax Recovery Officer may draw up under his signature a
statement in the prescribed form specifying the amount of arrears due from
the assessee and shall proceed to recover from such assessee the amount
specified in the certificate by one or more of the modes mentioned below, in
accordance with the rules laid down in the Second Schedule :
a. attachment and sale of the assessee’s movable property ;
b. attachment and sale of the assessee’s immovable property ;
c. arrest of the assessee and his detention in prison ;
d. appointing a receiver for the management of the assessee’s movable and
immovable properties.

A- Tax Recovery Officer by whom recovery is to be

effected [ Sec. 223 ]
1. The Tax Recovery Officer competent to take action shall be—
a. the Tax Recovery Officer within whose jurisdiction the assessee
carries on his business or profession or within whose jurisdiction the
principal place of his business or profession is situate, or
b. the Tax Recovery Officer within whose jurisdiction the assessee
resides or any movable or immovable property of the assessee is
situate,
Jurisdiction assigned to the Tax Recovery Officer under the orders or
directions issued by the Board, or by the Chief Commissioner or
Commissioner who is authorised in this behalf by the Board.
2. Where an assessee has property within the jurisdiction of more than one
Tax Recovery Officer and the Tax Recovery Officer by whom the certificate

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is drawn up—
a. is not able to recover the entire amount by sale of the property,
movable or immovable, within his jurisdiction, or
b. is of the opinion that, for the purpose of expediting or securing the
recovery of the whole or any part of the amount under this Chapter,
it is necessary so to do, he may send the certificate or, where only a
part of the amount is to be recovered, a copy of the certificate
certified in the prescribed manner and specifying the amount to be
recovered to a Tax Recovery Officer within whose jurisdiction the
assessee resides or has property and, thereupon, that Tax Recovery
Officer shall also proceed to recover the amount under this Chapter
as if the certificate or copy thereof had been drawn up by him.

B- Other Mode of Recovery of Tax [ Section 226 ]

Where no certificate has been drawn up, the Assessing Officer may recover the
tax by any one or more of the modes provided in this section.
Where a certificate has been drawn up, the Tax Recovery Officer may recover
the tax by any one or more of the modes provided in this section.

B-1 (i) Deduction from Salary

If any assessee is in receipt of any “Salaries” income, the Assessing Officer or
Tax Recovery Officer may approach such person paying salary to deduct arrears
of tax from the salary of the assessee, and such person shall comply with any
such requisition and shall pay the sum so deducted to the credit of the Central
Government or as the Board directs.
But any part of the salary exempt from attachment in execution of degree of a
civil court, shall be exempt from any requisition made under this sub-section.

B-2 (ii) Collection from persons who owe money to

assesee :
1. The Assessing Officer or Tax Recovery Officer may, at any time or from
time to time, by notice in writing require any person from whom money is
due or may become due to the assessee or any person who holds or may
subsequently hold money for or on account of the assessee to pay to the
Assessing Officer or Tax Recovery Officer (when the money becomes due
or is held) the amount which may be sufficient to pay the amount due by
the assessee in respect of arrears or the whole of the money when it is
equal to or less than that amount.
2. A notice may be issued to any person who holds or may subsequently
hold any money for or on account of the assessee jointly with any other

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person and the shares of the joint holders in such account shall be
presumed, until the contrary is proved, to be equal.
3. A copy of the notice shall be forwarded to the assessee at his last address
known to the Assessing Officer or Tax Recovery Officer, and in the case of
a joint account to all the joint holders at their last addresses known to the
Assessing Officer or Tax Recovery Officer.
4. Save as otherwise provided in this sub-section, every person to whom a
notice is issued under this sub-section shall be bound to comply with such
notice, and, in particular, where any such notice is issued to a post office,
banking company or an insurer, it shall not be necessary for any pass
book, deposit receipt, policy or any other document to be produced for
the purpose of any entry, endorsement or the like being made before
payment is made, notwithstanding any rule, practice or requirement to
the contrary.
5. Any claim respecting any property in relation to which a notice under this
sub-section has been issued arising after the date of the notice shall be
void as against any demand contained in the notice.
6. Where a person to whom a notice under this sub-section is sent objects to
it by a statement on oath that the sum demanded or any part thereof is
not due to the assessee or that he does not hold any money for or on
account of the assessee, then nothing contained in this sub-section shall
be deemed to require such person to pay any such sum or part thereof, as
the case may be, but if it is discovered that such statement was false in
any material particular, such person shall be personally liable to the
Assessing Officer or Tax Recovery Officer to the extent of his own liability
to the assessee on the date of the notice, or to the extent of the
assessee’s liability for any sum due under this Act, whichever is less.
7. The Assessing Officer or Tax Recovery Officer may, at any time or from
time to time, amend or revoke any notice issued under this sub-section or
extend the time for making any payment insection226 pursuance of such
notice.
8. The Assessing Officer or Tax Recovery Officershall grant a receipt for any
amount paid in compliance with a notice issued under this sub-section,
and the person so paying shall be fully discharged from his liability to the
assessee to the extent of the amount so paid.
9. Any person discharging any liability to the assessee after receipt of a
notice under this sub-section shall be personally liable to the Assessing
Officer or Tax Recovery Officer to the extent of his own liability to the
assessee so discharged or to the extent of the assessee’s liability for any
sum due under this Act, whichever is less.
10. If the person to whom a notice under this sub-section is sent fails to
make payment in pursuance thereof to the Assessing Officer or Tax
Recovery Officer he shall be deemed to be an assessee in default in
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respect of the amount specified in the notice and further proceedings may
be taken against him for the realisation of the amount as if it were an
arrear of tax due from him, in the manner provided in sections 222 to 225
and the notice shall have the same effect as an attachment of a debt by
the Tax Recovery Officer in exercise of his powers under section 222.

B-3 (iii) Application to Court for payment of money in

court’s custody [ Sec. 226(4)]
The Assessing Officer or Tax Recovery Officer may apply to the court in whose
custody there is money belonging to the assessee for payment to him of the
entire amount of such money, or, if it is more than the tax due, an amount
sufficient to discharge the tax.

B-4 (iv) Distraint and Sale of Movable Property [ Section

226(5)]
The Assessing Officer or Tax Recovery Officer may, if so authorised by the Chief
Commissioner or Commissioner by general or special order, recover any arrears
of tax due from an assessee by distraint and sale of his movable property in the
manner laid down in the Third Schedule.

B-5 (v) Recovery through State Government [ Section

227]
If the recovery of tax in any area has been entrusted to a State Government,
the State Government may direct, with respect to that area or any part thereof;
that tax shall be recovered therein with, and as an addition to, any municipal
tax or local rate, by the same person and in the same manner as the municipal
tax or local rate is recovered.

ELECTRONIC FILING
The process of electronically filing Income tax Returns/Forms through the internet is known as e-Filing.
e-Filing of Returns/Forms is mandatory for
1. In the case of an Individual/HUF
 Where accounts are required to be audited under section 44AB;
 Where the above is not applicable and
 The return is furnished in ITR - 3 or in ITR - 4; or
 The individual/HUF being a resident (other than not ordinarily resident) has Assets, including
financial interest in any entity, located outside India, or signing authority in any account
located outside India, or income from any source outside India;

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 Any relief in respect of tax paid outside India under section 90 or 90A or deduction under
section 91 is claimed.
 Where an assessee is required to furnish an Audit Report specified under sections 10(23C)
(iv), 10(23C) (v), 10(23C) (vi), 10(23C) (via), 10A, 10AA, 12A(1) (b), 44AB, 44DA, 50B, 80 -
IA, 80 - IB, 80 - IC, 80 - ID, 80JJAA, 80LA, 92E, 115JB, 115VW or give a notice under section
11(2)(a) shall e-File the same. These Audit Reports are to be e-Filed and any person required
to obtain these Audit Reports are required to e - File the return.
 Total income exceeds five lakh rupees or any refund is claimed (other than Super Senior
Citizen furnishing ITR1 or ITR2)
 In cases where accounts are required to be audited under section 44AB, the return is required
to be e-Filed under digital signature (DSC).
 In cases where accounts are not required to be audited under section 44AB, the return is
required to be e - Filed using any one of the three manners namely i) Digital Signature
Certificate (DSC) or ii) Electronic Verifi cation Code (EVC), or iii) Verification of the return in
Form ITR - V.
2. In all cases of company the return is required to be e-Filed under digital signature (DSC)
3. In the case of a person required to file ITR - 7:
 For a political party the return is required to be e - Filed under digital signature (DSC)
 In any other case of ITR 7, the return is required to be e-Filed using any one of the three
manners namely i) DSC or ii) EVC or iii) ITR V D.
4. In case of Firm or Limited Liability Partnership or any person (other than a person mentioned in 1, 2 &
3 above) who are required to file return in Form ITR - 5
 Where accounts are required to be audited under section 44AB, the return is required to be e
- Filed under digital signature (DSC)
 In any other case the return is required to be e - Filed using any one of the three manners
namely i) DSC or ii) EVC or iii) ITR V.
5. A company and an assessee being individual or HUF who is liable to audit u/s 44AB are required to
furnish Form BB (Return of Net Wealth) electronically using DSC.
6. Information to be furnished for payments, chargeable to tax, to a non - resident not being a company,
or to a foreign company in Form 15CA.
7. Appeal to the Commissioner (Appeals) in Form 35.

Types of e-Filing
There are three ways to file Income Tax Returns electronically:

1. Option 1 - Use Digital Signature Certificate (DSC) to e-File. There is no further action
needed, if filed with a DSC.
2. Option 2 - e-File without Digital Signature Certificate. In this case an ITR-V Form is
generated. The Form should be printed, signed and submitted to CPC, Bangalore using

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Ordinary Post or Speed Post (without Acknowledgement) ONLY within 120 days from
the date of e-Filing. There is no further action needed, if ITR-V Form is submitted.
3. Option 3 - e-File the Income Tax Return through an e-Return Intermediary (ERI) with
or without Digital Signature Certificate (DSC).

I.T PORTAL WORKING AND REFUND OF TAX

What is Income Tax Refund?
Income tax refund is a process by which the Income Tax Department returns any excess
tax paid by a taxpayer during a particular financial year (FY). This happens when the
amount of tax paid by a taxpayer is more than his/her actual tax liability for that
particular FY. The excess tax can be claimed as an income tax refund under Section 237 of
the Income Tax Act, 1961. The amount of income tax refund claimed by a taxpayer by
filing ITR is subject to verification by the Income Tax Department.
When can you claim an Income Tax Refund?
The following are key instances when an Income Tax Refund can be claimed:

 You did not furnish all the investment proofs to your organization. As a result, the
amount of taxes deducted by your employer exceeded your actual tax liability for
the particular FY.
 Excess TDS was deducted on your interest income from bank FDs or bonds.
 The advance tax paid by you on self-assessment exceeded your tax liability for the
applicable FY as per the regular assessment.
 In case of double taxation, for example – when a person is a citizen of one country
but derives income from another country. However, there are a few countries with
which India has Double Taxation Avoidance Agreement (DTAA). This means you can
claim a tax refund if you are a non-resident Indian working in a foreign country with
which India has DTAA. For example, you hold a non-resident ordinary (NRO) deposit
in an Indian bank. The interest earned on such deposits shall be taxed as per the
applicable slab rate. However, if you qualify to be a tax resident of the foreign
country where you reside, you may claim a tax refund for the TDS deducted on
interests earned in India on your NRO deposit.

How to Claim Income Tax Refund?

Earlier Income Tax Form 30 was required to claim an income tax refund. However, with
the advent of e-transfer of refunds, it can now be claimed by simply filing the ITR. The ITR
should further be verified, either physically or electronically within 120 days of filing.
Please note that the excess tax for which a refund is claimed should be reflected in Form
26AS. Moreover, the refund is subject to verification by the Income Tax Department. It is
credited only if the refund claim is found to be valid by the department.
How to Check Income Tax Refund Status?
Income Tax Refund status can be checked from either of the following:

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 On the NSDL website or

 On the e-filing portal of Income Tax Department

Time Limit for Claiming Income Tax Refund

As the entire process of claiming a refund depends on the submission of ITR, the time
limit for the claiming an IT refund is the same. For any assessment year, the time period
for filing your returns and claiming a refund is the end of the assessment year. Thus, for
AY 2019-20, the last date to claim an income tax refund is 31st March 2020, the last date
for delayed filing of ITR for FY 2018-19.

Income Tax Refund in Special Cases

 Under Section 238 of the Income Tax Act, 1961, if a person is unable to claim tax
refund due to death, insolvency, incapacity, liquidation or any other cause, then his
legal representative, trustee, guardian, or receiver can claim the refund on his/her
behalf.
 Moreover, if a person’s income is included in the total income of any other person,
then the latter can claim income tax refund for such income. For example, a
parent/guardian can claim refund on behalf of minor child if, the minor’s income is
added to that of the parent or guardian.

Income Tax Refund on Appeal

When refund of any amount is due to a taxpayer as a result of any order passed in
response to an appeal, then the refund amount will be credited without making a claim for
such a refund. In other words, there is no requirement for the tax assessee to place any
additional request for refund from the taxpayer’s side in such cases. It should be noted
that if the assessment was canceled with a direction to make a fresh assessment, the
refund shall become due only after making the fresh assessment.

Interest on Income Tax Refund

An interest is compulsorily paid by the Income Tax Department, if the amount of refund is
10% or more of the total tax paid. As per Section 244A of the Income Tax Act, simple
interest at the rate of 0.5% per month or part of the month on the amount of tax refund is
paid.

The interest is calculated from 1st April of the applicable assessment year till the date of
refund, if the return of income is furnished on or before the due date of ITR filing. While in
cases of delayed income tax filing, the interest on the refund amount is calculated from
the date of furnishing return to the date on which refund is granted.

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Income Tax Refund and Outstanding Tax

Dues

If a person is eligible for a tax refund and at the same time has some outstanding tax
dues, the Assessing Officer or the Commissioner can use the refund amount to set-off/
adjust the outstanding tax payment. In such cases, a taxpayer will get partial tax refund
credited to his/her account. The IT Department informs in writing to such a person of the
proposed action under this section.

Tax Treatment of Income Tax Refund

Amount of income tax refund corresponds to the excess tax that was paid by you, and
thus not considered as an income. Hence, it is not taxable. However, the interest received
over the income tax refund is considered as an income and is subjected to income tax as
per the applicable tax slab.

Important points about Income Tax Refund

 E-file your returns before the due date for speedy processing of income tax refund.
 Ensure that the amount of excess tax paid by you is also reflected in Form 26AS.
 Ensure that the details of bank account mentioned at the time of ITR filing are
correct to prevent any delay in the credit of the tax refund amount. In case you
furnish incorrect details, “Refund Unpaid” will be displayed as the income tax return
status.
 Timely review the income tax refund status to take the applicable corrective
measures, if any.

APPEAL AND REVISION PROVISIONS

Order passed by assessing officer (AO)
First appeal – To commissioner (Appeals) – u/s 246A
♣ By Assessee
♣ Form no. 35
♣ Within 30 days – however commissioner (appeal) may condone delay
♣ No appeal in following cases
 Order levying interest u/s 234A, 234B, and 234C
 Revision order u/s 264
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 Order of authority for advance ruling

 Order of Settlement Commission

♣ Fees for filing appeal

 Where total Income / loss computed by AO is Rs. 1 lakh or below – Rs. 250
 Where total Income / loss computed by AO exceed Rs. 1 lakh but below Rs. 2 lakh – Rs.
500
 Where total Income / loss computed by AO exceeds Rs. 2 Lakh – Rs. 1000
 Any matter not specified in three above – Rs. 250

♣ Tax payable before filing of appeal

 Where return filed – tax due on income returned by him
 Where return not filed – amount equal to the amount of advance tax which was payable by
him

♣ Time limit to decide appeal

Within one year from the end of the financial year in which such appeal is filed
Second appeal – To ITAT – u/s 253
♣ By Assessee / department
♣ Form no. 36
♣ Within 60 days – however ITAT may condone delay
♣ Filing of cross objections – opposite party shall file memorandum of cross objections within
30 days of receipt of notice of filing appeal against order of Commissioner (Appeals)
♣ No appeal in following cases
 Against order passed by CIT u/s 264

♣ Fees for filing appeal

o Where total Income / loss computed by AO is Rs. 1 lakh or below – Rs. 500
o Where total Income / loss computed by AO exceed Rs. 1 lakh but below Rs. 2
lakh – Rs. 1500
o Where total Income / loss computed by AO exceeds Rs. 2 Lakh – 1% of
assessed income or 10000/- whichever is lower
o Any matter not specified in three above – Rs. 500

♣ Time limit to decide appeal

o Within 4 year from the end of the financial year in which such appeal is filed
Third appeal – To High Court – writ petition u/s 260A
♣ By Assessee / department
♣ In the form of a memorandum of appeal
♣ Within 120 days – however High court may condone delay
♣ Fees for filing appeal
o As may be specified in the relevant law relating to court fees filing appeals to
high court
♣ Determination of issue – the high court may determine any issue which
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o has not been determined by the appellate tribunal (ITAT)

o has been wrongly determined by the appellate tribunal (ITAT)

♣ to be heard by not less than two judges bench

♣ High Court has power to recall its order – if sufficient cause is shown and fact that the
♣ order was passed on merits makes no difference
♣ High court cannot determine issue not raised before ITAT (CIT vs. Air India Ld.)
Fourth & last appeal To Supreme Court( SC)- writ petition u/s 261
♣ By Assessee / department
♣ Only if high court certifies the case to be fit for appeal to SC, however aggrieved party may
make an application under article 136 for special leave
♣ SC decisions are binding for non-appellants as well. Law declared by SC is binding on all Courts
and Tribunals in view of article 141 of constitution.
♣ If department has not challenged the correctness of the law laid down by the High Court and has
accepted it in case of one assesse, then it is not open to the department to challenge the
correctness in case of other assessees without just cause.

Revision
Revision by the Principal Commissioner or commissioner – u/s 263
by CIT himself if order is prejudicial to the interest of revenue
♣ May call for and examine the record of any proceeding under the Act, and if he consider that any
order passed therein by the AO is erroneous in so far as it is prejudicial to the interest of revenue.
♣ Can modify, cancel or direct fresh assessment
♣ Opportunity of being heard to assessee is must
♣ Time limit: cannot revise AO order after the expiry of 2 years from the end of financial year in
which the order sought to be revised was passed.
♣ Revision order should be speaking order
♣ Order for which revision is taken up should be in existence and served.
Revision by the Principal Commissioner or commissioner – u/s 264
On application of assess or Suo motu by CIT, provided revision is in favour of assessee
♣ Revision of orders not covered under section 263
♣ Shall not revise any order under this section in the following cases:
a) Suo motu, Where the order has been made more than one year previously
b) On application of assesse, where application has been made after one year from the
date of order communicated or came to his knowledge, whichever is earlier
c) Where appeal has been filed to CIT( appeals)
d) Where appeal is not filed but the time to file appeal has not expired

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♣ Time limit: shall pass an order within one year from the end of the financial year in which the
application is filed by the assesse. But no time limit in cases where order is to be passed to give
effect to any finding / direction contained in any order of the Appellate tribunal, National Tax
Tribunal, High Court or the Supreme Court.
♣ Revision order should be speaking order
♣ No appeal can be filed against such orders under Income Tax Act, However writ under Article
226/227 is possible.

SUMMARY APPEAL & REVIEW

APPEALS AND REVISIONS UNDER INCOME TAX ACT, 1961
The Constitution of India gurantees the citizens of the country certain fundamental rights.
Therefore , under any system of rule of law, the right to appeal for redressal of one’s grievances is
generally in built.
Under the Income Tax Act, 1961 following two alternatives are available to the assessee if he is
not satisfied with the order passed by the Assessing Officer;
1) APPEAL : First appeal against the order of the Assessing Officer shall, except in certain
cases( Refusing to grant registration u/s 12AA and approval u/s 80G ), lie with the commissioner
(Appeals) u/s 246A.
2) REVISION : Alternativly, if the appeal is not preferred, or if could not be filed within the time limit
allowed, the assesse can apply u/s 264 to the Commissioner of Income Tax for revision of the
order of the Assessing Officer. This is known as revision in favour of the assessee. The
Commissioner of Income Tax can also take up suo moto the case foe revsion u/s 264. In some
cases, the Commissioner of Income Tax can also take up the case for revision u/s 263. This is
known as revision of the order of the Assessing Officer which is erroneous and prejudicial to the
interest of
revenue.
The assessee is given a right of appeal by the Income tax Act where he feels aggrieved by the
order of the assessing authority. However, the assessee has no inherent right of appeal unless the
statute specifically provides that a particular order is appealable. There are four stages of appeal
under the Income-tax Act, 1961 as shown hereunder –
Assessment Order
(passed u/s 143(3), 144, 153A, 147 etc)
↓
First Appeal Commissioner
( Filed u/s 246A electronically in form 35 within 30 days of order passed)
↓
Second Appeal Appellate Tribunal
( Filed u/s 253 in form 36 within 60 days of order passed by CIT (appeals)
↓
Third Appeal High Court u/s 260A
↓

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Final Appeal Supreme Court u/s 261

REVISIONS
u/s 263 and 264
Section 263: The Principal Commissioner or Commissioner may call for and examine the record
of any proceeding under this Act, and if he considers that any order passed therein by the
Assessing officer is erroneous in so far as it is
prejudicial to the interests of the revenue, he may after giving an opportunity of being heard pass
such order thereon as the circumstances of the case justify, including an order enhancing or
modifying the assessment, or cancelling the assessment and directing a fresh assessment .
However, Assessee has an option to file an appeal in INCOME TAX APPELLATE TRIBUNAL
against the revision order passed by CIT u/s 263.
Section 264: The Principal Commissioner or Commissioner may, either of his own motion or on
an application by the assessee for revision, call for the record of any proceeding under this act in
which any such order has been passed and may make such inquiry or cause such inquiry to be
made and subject to the provisions of this act, may pass such order thereon, not being an order
prejudicial to the assessee, as he thinks fit.
However, In this case income tax act does not provide any remedy for filling appeal to higher
income tax authority. But , assessee has an option , he can take the benefit of Constitution of
India. Article 226 provides every citizen of india remedy to file WRIT petition in High Court against
the order passed by income tax department.
APPEALS
As already discussed in above mentioned intro, the first appeal against the order of Assessing
Officer shall lie to the Commissioner (Appeals) and it can only be filed by assesse only.
An assesse or any deductor or any collector who has been aggrieved by the orders (like order
passed under section 147, 144, 143(3) etc) passed by the certain income tax authorities can file its
first appeal to commissioner appeals u/s 246A of the income tax, act 1961.
Form of Appeal and limitation ( section 249 and Rules 45 & 46 )
1. Form : An appeal to the commissioner ( appeals) shall be made in Form 35.
2. Manner of furnishing the appeal:
a. By furnishing the form electronically under digital signature, if the return of income is
furnished under digital signature.
b. By furnishing the form electronically through electronic verification code in a case not
covered under sub clause (a)
c. In case where the assessee has the option to furnish the return of income in paper form,
he can exercise both options of filing form in paper form or electronically.
Time limit for filing the form [section 249(2)]
The appeal should be filed within a period of 30 days of date of service of notice of demand or
order passed by the authority. Further Commissioner may admit an appeal after the expiration of
the prescribed period of 30 days, if he is satisfied that the appellant had sufficient cause for not
presenting it within the prescribed period.

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OFFENCES AND PENALTIES

A timely and consistent paying of taxes and filing of returns ensures the government has money
for public welfare at any point of time. To make sure that taxpayer does not default in paying taxes
or disclosing the information, there are several penalties prescribed under the Act.
A penalty a punishment imposed on the taxpayer for being non-compliant. Listed below is a
summary of some of the important and most common penalties.

1. Default in making payment of tax

The amount of penalty leviable will be as determined by the Assessing Officer. However, the
amount will not exceed the amount of tax in arrears

2. Under-reporting of income
 If the income assessed/ re-assessed exceeds the income declared by the
assessee, or in cases where return has not been filed and income exceeds the
basic exemption limit, penalty at 50% of tax payable on such under reported
income shall be levied.

 200% of the tax is payable if under-reporting results from misreporting of

income

3. Failure to maintain books of accounts and

other documents
 Normally, the amount of penalty leviable is ₹25,000

 In case, the assessee is a person who has entered into international

transaction, the penalty will be 2% of the value of such international
transactions or specified domestic transactions

4. Undisclosed income
 Where the income determined includes undisclosed income, a
penalty @10% is payable. However, no such penalty will be leviable, if such
income was included in the return and tax was paid before the end of the
relevant previous year.

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 Where Search has been initiated on/ after 1/7/2012 but before 15/12/2016,

a. If undisclosed income is admitted during the course of search and assessee pays tax and
interest and files return, a penalty @ 10% of such undisclosed income is payable.
b. If undisclosed income is not admitted but the same is furnished in the return filed after such
search, 20% of such undisclosed income is payable.
c. In all other cases, penalty is leviable @ 60%

 Where Search has been initiated on/ after 15/12/2016,

a. If undisclosed income is admitted during the course of Search and assessee pays tax and
interest and files return, a penalty @ 30% of such undisclosed income is payable.
b. In all other cases, penalty is leviable @ 60%

5. Audit and Audit Report

 If the assessee fails to get his accounts audited, obtain audit report, or
furnish report of such auditor, a penalty will be leviable at the ₹1,50,000 or ½
% of the total sale/ Turnover/ gross receipts whichever is lesser.

 Failure of assessee to furnish Audit report related to foreign transaction, a

penalty @ ₹1,00,000 will be payable

6. TDS/TCS
o Where a person fails to deduct tax at source, he will be liable to pay a
penalty equal to the amount of tax which he has failed to deduct/ pay.

o Where a person fails to collect tax at source, he will be liable to pay a

penalty equal to the amount of tax which he has failed to collect.

 Failure to furnish TDS/TCS statement or furnishing incorrect

statements, shall attract a penalty ranging from ₹10,000 to ₹1,00,000

 Failure to furnish information/ furnishing inaccurate information related to TDS

deduction related regarding Non residents shall attract a penalty
of ₹100,000

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7. Penalty for using modes other than Account

payee cheque/ draft/ ECS
 If a person takes/ accepts loan/ deposit except by way of Account payee
cheque/ account payee draft/ ECS, and if the aggregate amount exceeds
₹20,000, he shall be liable to pay a penalty of an amount equal to such loan/
deposit.

 If, an amount of ₹2,00,000 or more is received in aggregate from a person in

a day/ single transaction/ relating to one event, a penalty equal to such
amount will be payable.

If a person repays loan/ deposit and such amount so repaid exceeds ₹20,000 and such amount
has been repaid except by way of Account payee cheque/ account payee draft/ ECS, an
amount equal to such loan/ deposit shall be payable.

8. Failure to furnish statements/ information

 Failure to furnish a statement of financial transaction or reportable
account shall attract a penalty of ₹500 for each day of failure. And if the
failure is in response to a notice to report on specified financial transaction, the
penalty shall be ₹1,000 for each day of failure

 A penalty of ₹50,000 shall be attracted for furnishing inaccurate statement of a

financial transaction/ reportable account

 Failure of an eligible investment fund to furnish any statement / information/

documents within the prescribed time shall attract a penalty of ₹5,00,000

 Failure to furnish any information/ document in relation to international

transaction shall attract a penalty of 2% of the value of such transaction

 Failure to furnish any information/ document by an Indian Concern related with

international transaction, shall attract a penalty of 2% of the value of
transaction or ₹50,000 in some cases.

 If a report/ certificate is required to be furnished by an Accountant/ Merchant

Banker/ Registered Valuer and such information is found to be incorrect, a
penalty of ₹10,000 for each incorrect report/ information is payable

 Failure to furnish information by any person who is attending/ helping carrying

the business/ profession of any person, in whose building/ place the income
tax authority has entered for collecting information shall attract a penalty of
upto ₹1,000

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 Non furnishing of report by any reporting entity which is obliged to

furnish Country by Country report will attract penalty as follows:

Period of delay Penalty

Less than or equal to 1 month ₹5000 per day

Continuing default ₹50,000 per day from the beginning of service

of order

Submission of inaccurate ₹5,00,000

information

9. Others
 Failure to apply/quote/ intimate PAN/ quoting false PAN shall attract a penalty
of ₹10,000

 Failure to apply/quote TAN/ quoting false TAN shall attract a penalty

of ₹10,000

 In case of the following defaults, ₹10,000 will be the penalty leviable,

1. Refusal to answer questions put by the department

2. Refusal to sign statements made in income tax proceedings
3. Non compliance with summons to give evidence/ produce books of accounts
4. Failure to comply with a notice

UNIT III
INDIRECT TAX REGIME
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CONCEPT OF GOODS AND SERVICE TAX (GST) - THE CONSTITUTION (122nd

AMENDMENT) ACT 2017. THE CENTRAL GOODS AND SERVICES TAX ACT
2017 - DUAL GST MODEL TAXATION - GST COUNCIL - CENTRAL GST (CGST);
GST LEVY ON TRANSACTIONS - SALE, TRANSFER, PURCHASE, BARTER,
LEASE, OR IMPORT OF GOODS AND/OR SERVICES. IGST/SGST/UTGST -
COMPENSATION LAW TO STATE GOVERNMENTS GSTN - GST NETWORK
PORTAL; TAX INVOICE, GST ON IMPORTS AND EXPORTS, BENEFITS OF GST
TO TRADE, INDUSTRY, E-COMMERCE AND SERVICE SECTOR AND THE
CONSUMERS AT LARGE, IMPACT OF GST ON GDP OF INDIA AND INFLATION.

CONCEPT OF GOODS AND SERVICE TAX (GST)

Goods And Services Tax:

GST (Goods and Services Tax) is the biggest indirect tax reform of India. GST is a
single tax on the supply of goods and services. It is a destination based tax. GST will
subsume Central Excise Law, Service Tax Law, VAT, Entry Tax, Octroi, etc.

Importance of GST in Indian Economy:

GST Regime:
GST is one of the biggest indirect tax reforms in the country. GST is expected to bring together
state economies and improve overall economic growth of the nation.
GST is a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as
services at the national level. It will replace all indirect taxes levied on goods and services by states
and Central.
There are around 160 countries in the world that have GST in place. GST is a destination based
taxed where the tax is collected by the State where goods are consumed. India is going to
implement the GST from July 1, 2017 and it has adopted the Dual GST model in which both States
and Central levies tax on Goods or Services or both.
SGST – State GST, collected by the State Govt.
CGST – Central GST, collected by the Central Govt.
IGST – Integrated GST, collected by the Central Govt.

Need for GST in India:

Introduction of GST is considered to be a significant step in the reform of indirect taxation in
India. Amalgamating of various Central and State taxes into a single tax would help mitigate the

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double taxation, cascading, multiplicity of taxes, classification issues, taxable event, and etc., and
leading to a common national market.
VAT rates and regulations differ from state to state. On the other hand, GST brings in uniform tax
system across all the states. Here, the taxes would be divided between the Central and State
government.

Benefits of GST:

To trade To Consumers
· Reduction in · Simpler Tax system · Create unified common
multiplicity of taxes national market for
India, giving a boost to
Foreign investment and
“Make in India”
campaign
· Mitigation of · Reduction in prices of · Boost export and
cascading/ double goods & services due to manufacturing activity
taxation elimination of cascading and leading to
substantive economic
growth
· More efficient · Uniform prices · Help in poverty
neutralization of taxes throughout the country eradication by generating
especially for exports more employment
· Development of · Transparency in · Uniform SGST and
common national market taxation system IGST rates to reduce the
incentive for tax evasion
· Simpler tax regime · Increase in
employment
opportunities
· Fewer rates and
exemptions
· Distinction between
Goods & Services no
longer required

Other Benefits of Goods And Services Tax:

 Will prevent cascading of taxes as Input Tax Credit will be available across goods and services at
every stage of supply.
· Harmonization of laws, procedures and rates of tax.

· More efficient neutralization of taxes especially for exports thereby making our products more
competitive in the international market and give boost to Indian Exports.

· Improve the overall investment climate in the country which will naturally benefit the
development in the states.

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· Average tax burden on companies is likely to come down which is expected to reduce prices and
lower prices mean more consumption, which in turn means more production thereby helping in
the growth of the industries . This will create India as a “Manufacturing hub”.

· Will improve environment of compliance as all returns to be filed online, input credits to be
verified online, encouraging more paper trail of transactions.

· Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax
return, common tax base, common system of classification of goods and services will lend
greater certainty to taxation system.

· Timelines to be provided for important activities like obtaining registration, refunds, etc.

· GST will be beneficial with more transparency, efficient compliance, ramp up in GDP growth to
the Centre, states, industrialists, manufacturers, the common man and the country at large.
Conclusion

GST will bring in transparent and corruption-free tax administration, removing the
current shortcomings in indirect tax structure. GST is business friendly as well as
consumer friendly.GST in India is poised to drastically improve the positions of each
of these stakeholders.We need a change in the taxation system which is better than
earlier taxation. This need for change leads us to ‘need for GST’.

GST will allow India to better negotiate its terms in the international trade
forums.GST aimed at increasing the taxpayer base by bringing SMEs and the
unorganized sector under its compliance. This will make the Indian market more
stable than before and Indian companies can compete with foreign companies.

1. What is GST?
GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service
Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July
2017; Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based
tax that is levied on every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and
services. This law has replaced many indirect tax laws that previously existed in India.
GST is one indirect tax for the entire country.
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So, before Goods and Service Tax, the pattern of tax levy was as follows:

Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales,
Central GST and State GST are charged. Inter-state sales are chargeable to Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is
a comprehensive, multi-stage, destination-based tax that is levied on every value addition.”

Multi-stage
There are multiple change-of-hands an item goes through along its supply chain: from
manufacture to final sale to the consumer.
Let us consider the following case:

 Purchase of raw materials

 Production or manufacture
 Warehousing of finished goods
 Sale to wholesaler
 Sale of the product to the retailer
 Sale to the end consumer

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Goods and
Services Tax is levied on each of these stages which makes it a multi-stage tax.

Value Addition

T
he manufacturer who makes biscuits buys flour, sugar and other material. The value
of the inputs increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large quantities of
biscuits and labels it. That is another addition of value after which the warehouse sells it to the
retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the biscuits
thus increasing its value.
GST is levied on these value additions i.e. the monetary value added at each stage to achieve the
final sale to the end customer.

Destination-Based
Consider goods manufactured in Maharashtra and are sold to the final consumer in Karnataka.
Since Goods & Service Tax is levied at the point of consumption. So, the entire tax revenue will go
to Karnataka and not Maharashtra.

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2. Journey of GST in India

The GST journey began in the year 2000 when a committee was set up to draft law.
It took 17 years from then for the Law to evolve. In 2017 the GST Bill was passed in
the Lok Sabha and Rajya Sabha. On 1st July 2017 the GST Law came into force.

3. Advantages Of GST
GST has mainly removed the Cascading effect on the sale of goods and services.
Removal of cascading effect has impacted the cost of goods. Since the GST regime
eliminates the tax on tax, the cost of goods decreases. GST is also mainly
technologically driven. All activities like registration, return filing, application for
refund and response to notice needs to be done online on the GST Portal; this
accelerates the processes.

4. What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.

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 CGST: Collected by the Central Government on an intra-state sale (Eg:

transaction happening within Maharashtra)
 SGST: Collected by the State Government on an intra-state sale (Eg:
transaction happening within Maharashtra)
 IGST: Collected by the Central Government for inter-state sale (Eg:
Maharashtra to Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Old Regime

Regime

Sale within CGST + VAT + Central Revenue will be shared equally

the State SGST Excise/Service tax between the Centre and the State

Sale to IGST Central Sales Tax There will only be one type of tax
another State + Excise/Service (central) in case of inter-state sales.
Tax The Centre will then share the
IGST revenue based on the
destination of goods.

Illustration:
 Let us assume that a dealer in Gujarat had sold the goods to a dealer
in Punjab worth Rs. 50,000. The tax rate is 18% comprising of only IGST.

In such case, the dealer has to charge Rs. 9,000 as IGST. This revenue will go to
the Central Government.

 The same dealer sells goods to a consumer in Gujarat worth Rs. 50,000. The
GST rate on the good is 12%. This rate comprises of CGST at 6% and SGST
at 6%.

The dealer has to collect Rs. 6,000 as Goods and Service Tax. Rs. 3,000 will go to the Central
Government and Rs. 3,000 will go to the Gujarat government as the sale is within the state.

5. Tax Laws before GST

In the earlier indirect tax regime, there were many indirect taxes levied by both state
and centre. States mainly collected taxes in the form of Value Added Tax (VAT).
Every state had a different set of rules and regulations. Interstate sale of goods
was taxed by the Centre. CST (Central State Tax) was applicable in case of
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interstate sale of goods. Other than above there were many indirect taxes like
entertainment tax, octroi and local tax that was levied by state and centre. This led
to a lot of overlapping of taxes levied by both state and centre. For example, when
goods were manufactured and sold, excise duty was charged by the centre. Over
and above Excise Duty, VAT was also charged by the State. This lead to a tax on tax
also known as the cascading effect of taxes. The following is the list of indirect taxes
in the pre-GST regime:

 Central Excise Duty

 Duties of Excise
 Additional Duties of Excise
 Additional Duties of Customs
 Special Additional Duty of Customs
 Cess
 State VAT
 Central Sales Tax
 Purchase Tax
 Luxury Tax
 Entertainment Tax
 Entry Tax
 Taxes on advertisements
 Taxes on lotteries, betting, and gambling

CGST, SGST, and IGST has replaced all the above taxes. However, the
chargeability of CST for Inter-state purchase at a concessional rate of 2%, by issue
and utilisation of c-Form is still prevalent for certain Non-GST goods such as: (i)
Petroleum crude; (ii) High-speed diesel; (iii) Motor spirit (commonly known as
petrol); (iv) Natural gas; (v) Aviation turbine fuel; and (vi) Alcoholic liquor for human
consumption. in respect of following transactions only:

 Resale
 Use in manufacturing or processing
 Use in the telecommunication network or in mining or in the generation or
distribution of electricity or any other power

6. What changes has GST brought in?

In the pre-GST regime, every purchaser including the final consumer paid tax on tax. This tax on
tax is called Cascading Effect of Taxes.
This indirect tax system under GST has improved the collection of taxes as well as boosted the
development of Indian economy by removing the indirect tax barriers between states and
integrating the country through a uniform tax rate.

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Illustration:
Based on the above example of biscuit manufacturer along with some numbers, let’s
see what happens to the cost of goods and the taxes in the earlier and GST
regimes. Tax calculations in earlier regime:

Action Cost 10% Tax Total

Manufacturer 1,000 100 1,100

Warehouse adds a label and repacks @ 300 1,400 140 1,540

Retailer advertises @ 500 2,040 204 2,244

Total 1,800 444 2,244

Along the way, the tax liability was passed on at every stage of the transaction and
the final liability comes to rest with the customer. This is called the Cascading
Effect of Taxes where a tax is paid on tax and the value of the item keeps
increasing every time this happens. Tax calculations in current regime:

Action Cost 10% Actual Total

Tax Liability

Manufacturer 1,000 100 100 1,100

Warehouse adds label and repacks @ 300 1,300 130 30 1,430

Retailer advertises @ 500 1,800 180 50 1,980

Total 1,800 180 1,980

In the case of Goods and Services Tax, there is a way to claim credit for tax paid in
acquiring input. What happens in this case is, the individual who has paid a tax
already can claim credit for this tax when he submits his taxes. In the end, every
time an individual is able to claim the input tax credit, the sale price is reduced and
the cost price for the buyer is reduced because of lower tax liability. The final value
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of the biscuits is therefore reduced from Rs. 2,244 to Rs. 1,980, thus reducing the
tax burden on the final customer. GST regime also brought a centralised system of
waybills by the introduction of “E-way bills”. This system was launched on 1st April
2018 for Inter-state movement of goods and on 15th April 2018 for intra-state
movement of goods in a staggered manner. Under the e-way bill system,
manufacturers, traders & transporters are now able to generate e-way bills for the
goods transported from the place of its origin to its destination on a common portal
with ease. Tax authorities are also benefitted as this system has reduced time at
check -posts and help reduce tax evasion.

THE CONSTITUTION (122nd AMENDMENT), ACT 2017

Union Finance Minister Shri Arun Jaitley Intoduces the Constitution Amendment Bill on
Goods and Services Tax (GST) in Lok Sabha;
New Article 246a Proposed to Confer Simultaneous Power to Union and State Legislatures
to Legislate on GST ;
Centre To Compensate States for Loss of Revenue Arising on Account of Implementation of
the GST for a period up to Five Years
The Union Cabinet approved on 17th December,2014 the proposal for introduction of a Bill in the
Parliament for amending the Constitution of India to facilitate the introduction of Goods and
Services Tax (GST) in the country. The Union Finance Minister Shri Arun Jaitley introduced the
said Bill in the Lok Sabha today.
The proposed amendments in the Constitution will confer powers both to the Parliament and State
legislatures to make laws for levying GST on the supply of goods and services in the same
transaction.
GST will simplify and harmonise the indirect tax regime in the country. GST will broaden the tax
base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless
transfer of input tax credit from one state to another in the chain of value addition, there is an in-
built mechanism in the design of GST that would incentivize tax compliance by traders. It is thus,
expected that introduction of GST will foster a common and seamless Indian market and
contribute significantly to the growth of the economy.
Following are the salient features of this Bill:
• A new Article 246A is proposed which will confer simultaneous power to Union and State
legislatures to legislate on GST.
• A new Article 279A is proposed for the creation of a Goods & Services Tax Council which will be
a joint forum of the Centre and the States. This Council would function under the Chairmanship of
the Union Finance Minister and will have Ministers in charge of Finance/Taxation or Minister
nominated by each of the States & UTs with Legislatures, as members. The Council will make
recommendations to the Union and the States on important issues like tax rates, exemptions,
threshold limits, dispute resolution modalities etc.
• It is proposed to do away with the concept of ‘declared goods of special importance’ under the
Constitution.

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• Centre will compensate States for loss of revenue arising on account of implementation of the
GST for a period up to five years. A provision in this regard has been made in the Amendment Bill
(The compensation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth
year and 50% in the fifth year).
The proposed GST has been designed keeping in mind the federal structure enshrined in the
Constitution and will have the following important features:
• Central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs
Duty (CVD) and Special Additional Duty of Customs (SAD), etc. will be subsumed in GST.
• At the State level, taxes like VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and
Entry Tax, Purchase Tax and Luxury Tax, etc. would be subsumed in GST.
• All goods and services, except alcoholic liquor for human consumption, will be brought under the
purview of GST. Petroleum and petroleum products have also been Constitutionally brought under
GST. However, it has also been provided that petroleum and petroleum products shall not be
subject to the levy of GST till notified at a future date on the recommendation of the GST Council.
The present taxes levied by the States and the Centre on petroleum and petroleum products, i.e.,
Sales Tax/VAT, CST and Excise duty only, will continue to be levied in the interim period.
• Both Centre and States will simultaneously levy GST across the value chain. Centre would levy
and collect Central Goods and Services Tax (CGST), and States would levy and collect the State
Goods and Services Tax (SGST) on all transactions within a State.
• The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-
State supply of goods and services. There will be seamless flow of input tax credit from one State
to another. Proceeds of IGST will be apportioned among the States.
• GST is a destination-based tax. All SGST on the final product will ordinarily accrue to the
consuming State.
• GST rates will be uniform across the country. However, to give some fiscal autonomy to the
States and Centre, there will a provision of a narrow tax band over and above the floor rates of
CGST and SGST.
• It is proposed to levy a non-vatable additional tax of not more than 1% on supply of goods in the
course of inter-State trade or commerce. This tax will be for a period not exceeding 2 years, or
further such period as recommended by the GST Council. This additional tax on supply of goods
shall be assigned to the States from where such supplies originate.
Highlights of the Bill

 The Bill amends the Constitution to introduce the goods and services tax (GST).

 Parliament and state legislatures will have concurrent powers to make laws on GST. Only the centre
may levy an integrated GST (IGST) on the interstate supply of goods and services, and imports.

 Alcohol for human consumption has been exempted from the purview of GST. GST will apply to
five petroleum products at a later date.

 The GST Council will recommend rates of tax, period of levy of additional tax, principles of supply,
special provisions to certain states etc. The GST Council will consist of the Union Finance Minister,
Union Minister of State for Revenue, and state Finance Ministers.

 The Bill empowers the centre to impose an additional tax of up to 1%, on the inter-state supply of
goods for two years or more. This tax will accrue to states from where the supply originates.

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 Parliament may, by law, provide compensation to states for any loss of revenue from the introduction
of GST, up to a five year period.

Key Issues and Analysis

 An ideal GST regime intends to create a harmonised system of taxation by subsuming all indirect
taxes under one tax. It seeks to address challenges with the current indirect tax regime by
broadening the tax base, eliminating cascading of taxes, increasing compliance, and reducing
economic distortions caused by inter-state variations in taxes.

 The provisions of this Bill do not fully conform to an ideal GST regime. Deferring the levy of GST
on five petroleum products could lead to cascading of taxes.

 The additional 1% tax levied on goods that are transported across states dilutes the objective of
creating a harmonised national market for goods and services. Inter-state trade of a good would be
more expensive than intra-state trade, with the burden being borne by retail consumers. Further,
cascading of taxes will continue.

 The Bill permits the centre to levy and collect GST in the course of inter-state trade and commerce.
Instead, some experts have recommended a modified bank model for inter-state transactions to ease
tax compliance and administrative burden.

THE CENTRAL GOODS AND SERVICES TAX ACT 2017

1. The Central Goods and Services Tax Bill, 2017 was introduced in Lok Sabha
on March 27, 2017. The Bill provides for the levy of the Central Goods and
Services Tax (CGST).
2. Levy of CGST: The centre will levy CGST on the supply of goods and services
within the boundary of a state. Supply include sale, transfer and lease made
for a consideration to further a business.
3. Tax rates: The tax rates of CGST will be recommended by the GST Council.
This rate will not exceed 20%. In addition, the Bill allows certain taxpayers
whose turnover is less than Rs 50 lakh to pay GST at a flat rate on turnover
(known as composition levy), instead on the value of supply of goods and
services. This rate will be capped at 2.5%.
4. Exemptions from CGST: The centre may exempt certain goods and services
from the purview of GST through a notification. This will be based on the
recommendations of the GST Council.
5. Liability to pay CGST: The liability to pay CGST in relation to supply of goods
and services will arise on the date of: (i) issue of invoice, (ii) receipt of
payment, whichever is the earliest.
6. Taxable amount (value of supply): CGST will be levied on the supply of goods
and services, whose value includes: (i) price paid on the supply; (ii) taxes and
duties levied under a different tax law; (iii) interest, late fee, penalties for
delayed payments, among others.
7. Input tax credit: Every taxpayer while paying taxes on outputs, may take
credit equivalent to taxes paid on inputs. However, this will not be applicable
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on supplies related to: (i) personal consumption, (ii) supply of food, outdoor
catering, health services, etc.
8. Registration: Every person who makes supply of goods and services and
whose turnover exceeds Rs 20 lakh will have to register in every state where
he conducts business. The turnover threshold is Rs 10 lakh for special
category states.
9. Returns: Every taxpayer would have to self-assess and file tax returns on a
monthly basis by submitting: (i) details of supplies provided, (ii) details of
supplies received, and (iii) payment of tax. In addition to the monthly
returns, an annual return will have to be filed by each taxpayer.
10. Refunds and welfare fund: Any taxpayer may apply for refund of taxes in
cases including: (i) payment of taxes in excess, or (ii) unutilized input tax
credit. Upon such application, the refund may be credited to the taxpayer, or
to a Consumer Welfare Fund. The Fund will be used for the purpose of
consumer welfare.
11. Prosecution and appeals: For offences such as mis-reporting of: (i) goods
and services supplied, or (ii) details furnished in invoices, a person may be
fined, imprisoned, or both by the CGST Commissioner. Such orders can be
appealed before the Goods and Services Tax Appellate Tribunal, and further
before the High Court.
12. Transition to the new regime: Taxpayers with unutilised input tax credit
obtained under the current laws such as CENVAT may utilise it under GST. In
addition, businesses may also avail input tax credit on stock purchased
before the start of implementation of GST.
13. Anti-profiteering measure: The central government may by law set up an
authority or designate an existing authority to examine if reduction in tax
rate has resulted in commensurate reduction in prices of goods and services.
The powers of the authority will be prescribed by the government.
14. Compliance rating: Every taxpayer shall be assigned a GST compliance
rating score based on his record of compliance with the provisions of this
Bill. The compliance rating score will be updated at periodic intervals and be
placed in the public domain.

DUAL GST MODEL TAXATION

Before discussing GST details we shall first discuss what is dual GST and why is it required. The
Dual GST is assumed to be a simple tax with one or two Central Goods and Service Tax (CGST)
and State Goods and Services Tax (SGST) rates.

In India both Centre and State have been assigned the powers to levy and collect taxes through
appropriate legislation. Both the Centre and State Government have distinct responsibilities to
perform according to the division of powers as prescribed in the Constitution that needs resources

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for implementation. A dual GST is therefore, is appropriately aligned with the Constitutional
requirement of fiscal federalism.

Features of the proposed dual model

 GST shall have two components one levied by the Centre (referred to as Central GST), and the other
levied by the States (referred to as State GST)
 Central GST and the State GST would be applicable to all transactions of goods and services
 Central GST and State GST are to be paid to the accounts of the Centre and the States individually
 Central GST and State GST are to be treated individually, therefore taxes paid against the Central GST
shall be allowed to be taken as input tax credit (ITC)
 Cross utilization of ITC between the Central GST and the State GST would not be permitted except in
the case of inter-State supply of goods and services Cross utilization of ITC between the Central GST
and the State GST would not be permitted except in the case of inter-State supply of goods and services
 Credit accumulation on account of refund of GST should be avoided by both the Centre and the States
except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax
etc.
 Uniform procedure for collection of both Central GST and State GST would be prescribed in the
respective legislation for Central GST and State GST.
 Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross
annual turnover and a floor tax rate with respect to gross annual turnover.
 The taxpayer would need to submit periodical returns, in common format as far as possible, to both the
Central GST authority and to the concerned State GST authorities.
 Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 14/15 digits

Dual GST:- Many countries in the world have a single unified GST system i.e. a single tax
applicable throughout the country. However, in federal countries like Brazil and Canada, a dual
GST system is prevalent whereby GST is levied by both the federal and state or provincial
governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax
(CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every
transaction of supply of goods and services.
Impact on Prices of Goods and Services:-The GST is expected to foster increased efficiencies
in the economic system thereby lowering the cost of supply of goods and services. Further, in the
Indian context, there is an expectation that the aggregate incidence of the dual GST will be lower
than the present incidence of the multiple indirect taxes in force. Consequently, the
implementation of the GST is expected to bring about, if not in the near term but in the medium to
long term, a reduction in the prices of goods and services. The expectation is that the dealers
would start passing on the benefit of the reduced tax incidence to the customers by way of
reduced prices. As regards services, it could be that their short term prices would go up given the
expectation of an increase in the tax rate from the present 10% to approximately 14% to 16%.
Benefits of Dual GST: – The Dual GST is expected to be a simple and transparent tax with one
or two CGST and SGST rates. The dual GST is expected to result in:-
 reduction in the number of taxes at the Central and State level
 decrease in effective tax rate for many goods
 removal of the current cascading effect of taxes
 reduction of transaction costs of the taxpayers through simplified tax compliance
 increased tax collections due to wider tax base and better compliance

Separate enactments for the Central and State GST:-There will be separate
enactments. The CGST will be a common code throughout India. Further, each
State will legislate its own enactment to levy and collect the SGST. However, it is
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understood that a white paper will be released by the Federal

Government/Empowered Committee of State Finance Ministers based on which
each State will legislate. The expectation is therefore is that a majority of the
provisions will be uniform across the States.

GST COUNCIL
A single common “Goods and Services Tax (GST)” was proposed and given a go-ahead in 1999
during a meeting between the Prime Minister Atal Bihari Vajpayee and his economic advisory
panel. Mr Vajpayee set up a committee headed by the then finance minister of West Bengal, Asim
Dasgupta to design a GST model.
Later, Finance Minister P Chidambaram in February 2006 continued work on the same. It finally
was implemented on July 1st, 2017 to be a comprehensive, destination-based indirect tax that has
replaced various indirect taxes that were implemented by the State and Centre such as VAT,
excise duty, and others. The government of India also formed a GST Council to govern the
rules the Goods and Services Tax.
Why do we need a GST Council?
The GST council is the key decision-making body that will take all important decisions regarding
the GST. The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and
tax deadlines, keeping in mind special rates and provisions for some states. The predominant
responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services
across the nation
How is the GST Council structured?
The Goods and Services Tax (GST) is governed by the GST Council. Article 279 (1) of the
amended Indian Constitution states that the GST Council has to be constituted by the President
within 60 days of the commencement of the Article 279A.
According to the article, GST Council will be a joint forum for the Centre and the States. It consists
of the following members:

 The Union Finance Minister, Arun Jaitley will be the Chairperson

 As a member, the Union Minister of State will be in charge of Revenue of
Finance
 The Minister in charge of finance or taxation or any other Minister nominated
by each State government, as members.

GST Council recommendations

Article 279A (4) specifies that the Council will make recommendations to the Union and the States
on the important issues related to GST, such as, the goods and services will be subject or
exempted from the Goods and Services Tax.
They lay down GST laws, principles that govern the following:

 Place of Supply
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 Threshold limits
 GST rates on goods and services
 Special rates for raising additional resources during a natural calamity or
disaster
 Special GST rates for certain States

Features of GST Council that you must know:

 GST Council office is set up in New Delhi

 Revenue Secretary is appointed as the Ex-officio Secretary to the GST
Council
 Central Board of Excise and Customs (CBEC) is included as the chairperson
as a permanent invitee (non-voting) to all proceedings of the GST Council
 Create a post for Additional Secretary to the GST Council
 Create four posts of commissioner in the GST Council Secretariat (This is at
the level of Joint Secretary)
 GST Council Secretariat will have officers taken on deputation from both the
Central and State Governments

The cabinet also provides funds for meetings the expenses (recurring and nonrecurring) of the
GST Council Secretariat. This cost is completely borne by the Central government.
The GST Council meets to discuss and lay GST laws that will benefit dealers across the nation.
The outcome of the previous latest GST Council meet was that the Council decided to implement
GST provisions on e-way bills that requires goods of more than Rs.50,000 in value to be
registered online before they can be moved. They have also extended the deadline to file GSTR-1.
The Council will also set up anti-profiteering screening committees that will make the National Anti-
Profiteering Authority stronger under the GST law.
Other than laying GST laws, the GST Council have taken decisions as such:

 The threshold limit for exemption of GST would be set at Rs.20 lakh per year for all States
(except for special category states)
 The threshold for special States is set at Rs 10 lakh per year
 For composition scheme is set at Rs. 75 lakh for all States (except for the North East States
and Himachal Pradesh – Set at Rs 50 lakh per year)
 Ice cream, tobacco, pan masala, and other edible ice manufacturers shall not be eligible for
composition levy (except for restaurant services)

GST Council also looks into drafting GST rules on registration, payment, valuation, input tax credit,
composition, return, refund and invoice, and transitional provisions, among other things.

CENTRAL GST (CGST)

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What is Central Goods and Services Tax

(CGST)?
Under GST, CGST is a tax levied on Intra State supplies of both goods and services by the Central
Government and will be governed by the CGST Act. SGST will also be levied on the same Intra
State supply but will be governed by the State Government.
This implies that both the Central and the State governments will agree on combining their levies
with an appropriate proportion for revenue sharing between them. However, it is clearly mentioned
in Section 8 of the GST Act that the taxes be levied on all Intra-State supplies of goods and/or
services but the rate of tax shall not be exceeding 14%, each.

1. CGST Full Form and CGST Meaning

The full form of CGST under GST law is Central Goods and Service Tax. It is called as CGST Act 2017. The
CGST act has been enacted to make a provision for levy and collection of tax on intra-state supply of goods or
services or both by the Central Government and the matters connected therewith or incidental thereto.

2. Origin and Commencement of CGST Act

 CGST Act extends to whole of India excluding the states of Jammu and Kashmir.
 Jammu and Kashmir will need to approve levy of GST in its State assembly, on account of its special
powers on taxation under the Constitution. Once this is done, GST shall be introduced in the State.
 The CGST Act shall come into force from a date which will be notified by the Central Government in
Official Gazette, i.e. from the appointed date.
 Different provisions may be made applicable from different dates as may be notified.

3. Objective of CGST Act 2017

Under erstwhile taxation laws, Central Government levied taxes on, manufacture of certain goods in the form of
Central Excise duty, provision of certain services in the form of service tax, inter-State sale of goods in the form
of Central Sales tax.

Similarly, the State Governments levied taxes on retail sales in the form of value added tax, entry of goods in the
State in the form of entry tax, luxury tax and purchase tax, etc. Accordingly, there is multiplicity of taxes which
are being levied on the same supply chain.

Difficulties faced under erstwhile taxation laws shall be listed as below :

 cascading of taxes as taxes levied by the Central Government are not available as set off against the
taxes being levied by the State Governments;
 certain taxes levied by State Governments are not allowed as set off for payment of other taxes being
levied by them ;
 the variety of Value Added Tax Laws in the country with disparate tax rates and dissimilar tax practices
divides the country into separate economic spheres; and

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 the creation of tariff and non-tariff barriers such as octroi, entry tax, check posts, etc., hinder the free flow
of trade throughout the country. Besides that, the large number of taxes results in high cost of compliance for
the taxpayers in the form of number of returns, payments, etc.
In view of the aforesaid difficulties, all the above mentioned taxes are subsumed in a single tax called the goods
and services tax which will be levied on supplies which includes goods and services at each stage of supply
chain starting from manufacture or import and till the last retail level.

So any tax which were levied by the Central Government or the State Governments on the supply of goods or
services has now been converged in goods and services tax, which is a dual levy where the Central Government
will levy and collect tax in the form of central goods and services tax (CGST Act 2017) and the State
Government will levy and collect tax in the form of state goods and services tax (SGST Act 2017) on intra-State
supply of goods or services or both.

4. Salient Features of CGST Act 2017

The features of Central Goods and Services Tax Act, 2017, are as follows :

 to levy tax on all intra-State supplies of goods or services or both

 to broaden the base of the input tax credit by making it available in respect of taxes paid on supply of
goods or services or both used or intended to be used in the course or furtherance of business;
 to impose obligation on electronic commerce operators to collect tax at source, at such rate not
exceeding one per cent of the value of taxable supplies(net), out of payments to suppliers supplying goods or
services through their portals;
 to provide for self assessment of the taxes payable by the registered person;
 to provide for conduct of audit of registered persons in order to verify compliance with the provisions of
the Act;
 to provide for recovery of arrears of tax using various modes including detaining and sale of goods,
movable and immovable property of defaulting taxable person;
 to provide for powers of inspection, search, seizure and arrest to the officers;
 to establish the Goods and Services Tax Appellate Tribunal by the Central Government for hearing
appeals against the orders passed by the Appellate Authority or the Revisional Authority;
 to make provision for penalties for contravention of the provisions of the proposed Legislation;
 to provide for an anti-profiteering clause in order to ensure that business passes on the benefit of
reduced tax incidence on goods or services or both to the consumers; and
 to provide for elaborate transitional provisions for smooth transition of existing taxpayers to goods and
services tax regime.

5. Taxonomy of CGST Law

 The CGST Act, 2017 comprises of 174 Sections in 21 Chapters and three Schedules on supplies without
consideration, treatment of activities as to goods or services and activities which shall be considered as
neither goods or services.
 These Schedules are as under :
 Schedule I. Activities to be treated as supply even if made without consideration
 Schedule II. Activities to be treated as supply of goods or supply of services

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 Schedule III. Activities or transactions which shall be treated neither as a supply of goods nor a
supply of services.

GST LEVY ON TRANSACTIONS

GST is a levy of tax on the value addition on every transaction of supply of Goods and / or
Services up to final consumption with availability of set-off credit of taxes paid at previous
stages. It is a compressive indirect tax to be levied concurrently by Central and State/ Union
Territory Govt. It will replace all indirect taxes levied on goods and services by the Central
and State governments. In summary, the end consumer will borne the tax amount only once
resulting in to avoidance of tax on tax (cascading effect).

Levy and collection of Central/ State Goods and Services Tax [Section 8]

I. General levy of tax Section 8(1) says that there shall be levied a tax called the
Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of goods
and/or services on the value determined under section 15 and at such rates as may be notified
by the Central/ State Government in this behalf, but not exceeding 14%, on the
recommendation of the Council and collected in such manner as may be prescribed.

II. Payment of tax Section 8(2) says that CGST/SGST shall be paid by every taxable person
in accordance with the provisions of this Act.

III. Tax on Reverse charge Section 8(3) says that the Central or a State Government may, on
the recommendation of the Council, by notification, specify categories of supply of goods
and/or services the tax on which is payable on reverse charge basis and the tax thereon shall
be paid by the recipient of such goods and/or services and all the provisions of this Act shall
apply to such person as if he is the person liable for paying the tax in relation to the supply of
such goods and/or services.

IV. Tax to be paid by the electronic commerce operator Section 8(4) says that the Central or a
State Government may, on the recommendation of the Council, by notification, specify
categories of services the tax on which shall be paid by the electronic commerce operator if
such services are supplied through it, and all the provisions of this Act shall apply to such
electronic commerce operator as if he is the person liable for paying the tax in relation to the
supply of such services. First proviso to section 8(4) says that where an electronic commerce
operator does not have a physical presence in the taxable territory, any person representing
such electronic commerce operator for any purpose in the taxable territory shall be liable to
pay tax. Second proviso to section 8(4) says that where an electronic commerce operator
does not have a physical presence in the taxable territory and also he does not have a

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representative in the said territory, such electronic commerce operator shall appoint a person
in the taxable territory for the purpose of paying tax and such person shall be liable to pay
tax.

Composition Levy [Section 9]

I. Conditions for composition scheme Section 9(1) says that in spite of anything to the
contrary contained in the Act but subject to section 8(3), on the recommendation of the
Council, the proper officer of the Central or a State Government may, subject to such
conditions and restrictions as may be prescribed, permit a registered taxable person, whose
aggregate turnover in the preceding financial year did not exceed Rs. 50 lakhs, to pay, in lieu
of the tax payable by him, an amount calculated at such rate as may be prescribed, but not
less than 2.5% in case of a manufacturer and 1% in any other case, of the turnover in a State
during the year

II. Composition scheme not available in certain situations The first proviso to section 9(1)
says that no such permission shall be granted to a taxable person (i) who is engaged in the
supply of services, or (ii) who makes any supply of goods which are not leviable to tax under
this Act, or (iii) who makes any inter-State outward supplies of goods, or (iv) who makes any
supply of goods through an electronic commerce operator who is required to collect tax at
source under section 56, or (v) who is a manufacturer of such goods as may be notified on
the recommendation of the Council.

III. All persons having same PAN shall opt for composition Further, the second proviso to
section 9(1) says that no such permission shall be granted to a taxable person unless all the
registered taxable persons, having the same PAN as held by the said taxable person, also opt
to pay tax under the provisions of section 9(1).

IV. Composition scheme stand withdrawn as aggregate turnover exceeds Rs. 50 lakhs
Section 9(2) says that the permission granted to a registered taxable person under section
9(1) shall stand withdrawn from the day on which his aggregate turnover during a financial
year exceeds Rs. 50 lakhs.

V. No collection of tax, no claim of input tax credit Section 9(3) says that a taxable person to
whom the provisions of section 9(1) apply shall not collect any tax from the recipient on
supplies made by him nor shall he be entitled to any credit of input tax.

VI. Consequences of violation of conditions Section 9(4) says that if the proper officer has
reasons to believe that a taxable person was not eligible to pay tax under section 9(1), such
person shall, in addition to any tax that may be payable by him under other provisions of this
Act, be liable to a penalty and the provisions of section 66 or 67, as the case may be, shall
apply mutatis mutandis for determination of tax and penalty.

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Where is the power to levy GST derived from?

Article 246A of the Constitution, which was introduced by the Constitution (101st Amendment) Act, 2016 confers
concurrent powers to both, Parliament and State Legislatures to make laws with respect to GST i. e. central tax
(CGST) and state tax (SGST) or union territory tax (UTGST). However, clause 2 of Article 246A read with Article 269A
provides exclusive power to the Parliament to legislate with respect to inter-State trade or commerce i.e. integrated tax
(IGST).

What is the taxable event under GST?

Taxable event under GST is supply of goods or services or both. CGST and SGST/ UTGST will be levied on intra-
State supplies. IGST will be levied on inter-State supplies.

Whether supplies made without consideration will also come within

the purview of supply under GST?
Yes, but only those activities which are specified in Schedule I to the CGST Act / SGST Act. The said provision has
been adopted in IGST Act as well as in UTGST Act also.

Will giving away essential commodities by a charitable institution be

taxable activity?
In order to be a supply which is taxable under GST, the transaction should be in the course or furtherance of business.
As there is no quid pro quo involved in supply for charitable activities, it is not a supply under GST.

Who can notify a transaction to be supply of goods or services?

Central Government or State Government, on the recommendations of the GST Council, can notify an activity to be
the supply of goods and not supply of services or supply of services and not supply of goods or neither a supply of
goods nor a supply of services.

What are composite supply and mixed supply?

How are these two different from each other? Ans. Composite supply is a supply consisting of two or more taxable
supplies of goods or services or both or any combination thereof, which are bundled in natural course and are
supplied in conjunction with each other in the ordinary course of business and where one of which is a principal
supply. For example, when a consumer buys a television set and he also gets warranty and a maintenance contract
with the TV, this supply is a composite supply. In this example, supply of TV is the principal supply, warranty and
maintenance service are ancillary. Mixed supply is combination of more than one individual supplies of goods or
services or any combination thereof made in conjunction with each other for a single price, which can ordinarily be
supplied separately. For example, a shopkeeper selling storage water bottles along with refrigerator. Bottles and the
refrigerator can easily be priced and sold separately.

What is the treatment of composite supply and mixed supply under

GST?
Composite supply shall be treated as supply of the principal supply. Mixed supply would be treated as supply of that
particular goods or services which attracts the highest rate of tax.

Are all goods and services taxable under GST?

Supplies of all goods and services are taxable except alcoholic liquor for human consumption. Supply of petroleum
crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be

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taxable with effect from a future date. This date would be notified by the Government on the recommendations of the
GST Council.

SALE, TRANSFER, PURCHASE, BARTER, LEASE, OR

IMPORT OF GOODS AND/OR SERVICES

Definition of Supply under GST

Definition of ‘supply’ Under section 2(92) read with section 3 ‘supply’ includes all forms of
supply of goods and/or services such as sale, transfer, barter, exchange, licence, rental,
lease or disposal made or agreed to be made for a consideration by a person in the
course or furtherance of business. Schedule I specified the supply.

Analysis: Supply is the term replaced for the term sale; no scope has been left for any confusion
and the definition includes every term which shall be coined as sale. Even the supply which is
made or agreed to be made without a consideration will also amount to sale.

Any transfer of title to goods is a supply of goods, transfer of right to use goods [section 4(8) of
APVAT Act, 2005], Hire purchase transactions, transfer of business assets are also brought under
the ambit of term ‘supply’ as per Schedule II.

1.Supply includes

(a)all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license,
rental, lease or disposal made or agreed to be made for a consideration by a person in the course
or furtherance of business,

(b)importation of service, whether or not for a consideration and whether or not

in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without a

consideration

2.Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is
to be treated as a supply of goods or a supply of services.

Activities which are not Supply

Activities and transactions specified in Schedule III –

 Services by an employee to the employer in the course of or in relation to his

employment;

 Services of funeral, burial, crematorium or mortuary including transportation of the

deceased.

 Actionable claims, other than lottery, betting and gambling

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 Sale of land / Sale of building after occupation or completion will not attract GST.
Thus, sale of building before completion or before occupancy will attract GST

Such activities or transactions undertaken by the Central Government, a State Government or any
local authority in which they are engaged as public authorities, as may be notified by the
Government on the recommendations of the Council.

Deemed Supply of Goods & Services

Following matters will be treated as deemed supply of goods and services and will attract GST :

1.In case of Transfer of title in goods, OR, Right in goods, OR of undivided share in goods
without the transfer of title, OR, transfer under an agreement which stipulates that property will
pass at a future date upon payment of full consideration

2.In case of Land & Building, – Any lease, tenancy, easement, license to occupy land or
building ( both for commercial or residential purpose, fully or partly)

3.Treatment or Process , which is being applied to another person’s goods is a supply

4.Transfer of Business Assets – Where goods forming part of the assets of a business are
transferred or disposed of, and are no longer forming part of business OR Where goods held for
business are put to use for any private use, in such a way, as not for business OR Where any
person ceases to be a taxable person, any goods earlier forming part of business, unless (a) the
business is transferred as a going concern to another person, or (b) the business is carried on by a
personal representative who is deemed to be a taxable person With or Without for a
Consideration

5.Supply of Services – Following shall be treated as deemed “supply of Services” :

 renting of immovable property;

 construction of a complex, building, civil structure or a part thereof, including a

complex or building intended for a sale to a buyer, wholly or partly, except where the
entire consideration has been received after issuance of completion certificate;

 Temporary transfer or permitting the use or enjoyment of any intellectual property

right;

6.Composite Supply – Following shall be treated as deemed “supply of Services” :

o works contract as defined in section 2 (119) of CGST Act

o Supply, by way of or as part of any service or in any other manner

whatsoever, of goods, being food or any other article for human consumption or any
drink ( other than alcoholic liquor for human consumption), where such supply or
service is for cash, deferred payment or other valuable consideration.

7.Supply of goods – supply of goods by any unincorporated association or body of persons to a

member thereof for cash, deferred payment or other valuable consideration.

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Inward Supply or Purchases– “Inward Supply” in relation to a person, shall mean receipt of
goods and/or services whether by purchase, acquisition or any other means and whether or not
for any consideration

Outward Supply or Sales – “Outward Supply” in relation to a person, shall mean supply of
goods and/or services, whether by sale, transfer, barter, exchange, license, rental, lease or
disposal made or agreed to be made by such person in the course or furtherance of business

Continuous Supply – Means a supply of services which is provided, or agreed to be provided,

continuously or on recurrent basis, under a contract, for a period exceeding three months with
periodic payment obligations and includes supply of such services as the Government may,
subject to such conditions, by notification, specify.

‘Fringe benefits’ to employees & directors under GST

Supply of Goods or Services between related persons will be supply even if made without
consideration – Para 2 of Schedule I of CGST Act . Also, employer & employee are related
persons as per 15 of CGST Act.

Further, para 4(b) of Schedule II of CGST Act, states that goods held or used for the purposes of
the business are put to any private use or are used, or made available to any person for use, for
any purpose other than a purpose of the business, whether or not for a consideration, the usage or
making available of such goods is a supply of services.

This will cover “ Fringe Benefits” given to employees or directors by a company and should be
subject to GST. This is a back-door entry for FBT, which was earlier in Income Tax Act, and was
very litigative.

Mixed Supply under GST

Mixed Supply – means two or more individual supplies of goods or services, or any combination
thereof, made in conjunction with each other by a taxable person for a single price where such
supply does not constitute a composite supply.

Example – A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry
fruits, aerated drink and fruit juices when supplied for a single price is a mixed supply. Each of
these items can be supplied separately and is not dependent on any other. It shall not be a mixed
supply if these items are supplied separately.

Taxability – The tax liability on a mixed supply comprising two or more supplies shall be treated
as supply of that particular supply which attracts the highest rate of tax .

Composite Supply & Principal Supply under GST

Composite Supply is a supply made by a taxable person to a recipient comprising two or more
supplies of goods or services, or any combination thereof, which are naturally bundled and
supplied in conjunction with each other in the ordinary course of trade, one of which is a principal
supply

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Example – Where goods are packed and transported with insurance, the supply of goods, packing
materials, transport and insurance is a composite supply and supply of goods is the principal
supply.

Principal Supply Means: The supply of goods or services which constitutes the predominant
element of a composite supply and to which any other supply forming part of that composite
supply is ancillary and does not constitute, for the recipient an aim in itself, but a means for better
enjoyment of the principal supply.

Zero Rated Supply under GST

Zero Rated Supply Means export of goods or services or both; or supply of goods or services or
both to a Special Economic Zone developer or a Special Economic Zone unit (eligible for ITC).

Important Points to Note

1.Supply of goods or services or both is “ taxable event “ in GST as that event triggers liability to
pay GST

2.Supply of goods and services for consideration is always taxable

3.Supply by taxable person to related person is subject to GST even if there is no consideration
that is no amount charged and will cover the followings :

This will cover transactions between group companies ( like deputation of persons, supply of goods
on loan basis, common facilities shared by group companies), transactions between branches

4.Free Gifts to related persons will be subject to GST

5.Benefits provided to employee by the employers like transport, meals, telephone. However, gifts
upto Rs. 50K to employees will not be subject to GST, but input credit will have to be reversed.

6.Supply by principal to agent is subject to GST, GST is payable on supplies to C & F agents.
However, commission agent has to pay GST only on his commission.

7.Import of services from related persons or from business establishment outside India is subject
to GST even if there is no consideration. Branch / Head office in India receiving free services from
Head Office / Outside India will be subject to GST.

8.Lottery, betting and gambling is subject to GST

9.Lottery tickets are goods and GST will be payable. GST will also be payable on services relating
to betting and gambling

10.Some services provided by government are taxable and mostly will be subject to reverse
charge.

SUMMARY
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What is a supply under GST?

The expression “supply” simply means all forms of supply of goods/ services. It is made for a
consideration during the course of business and includes the following:

 Sale
 Transfer
 Barter
 Exchange
 License
 Rental
 Lease
 Disposal
 Import of services for a consideration (if even it is not in the course or
furtherance of business)

Certain activities specified in Schedule I of GST Act will also be treated as supply.

Why is the concept of mixed supply & composite supply

important?
Specific rates for goods and services have been defined by the GST Council. GST Rate for each
type of goods and services have been defined in the GST Law. So if you are supplying a particular
good or a service rates are easy to identify. However, sometimes supply of a good and service
may be connected or may be done together even though not connect. Say for example, an AC is
supplied and AC installation services are also supplied along with it. The GST Act defines how
such supply must be rated.

Therefore, the concept of composite supply and mixed supply becomes important. It helps to
determine the correct GST rate and provides uniform tax treatment under GST for such supplies.

What is a bundled supply?

A bundled supply is a combination of goods and/or services. This concept was mainly found in
service tax where a bundled service meant a combination of two or more services.

How to determine if it is naturally bundled, i.e., it cannot be

separated?
The question of bundled supply in the ordinary course of business depends on the normal
practices followed in the industry. Here are some ways to identify them:

1. If buyers mostly expect such services to be provided as a package, then the

package will be treated as naturally bundled.

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For example, most business conventions look for combination of hotel accommodation, auditorium
and food.
2. If most of the service providers in the industry provide a package of services then it can be
considered as naturally bundled. For example, air transport and food on board is a bundle offered
by most airlines.
3. The nature of the various services in a bundle of services will also help to identify whether the
services are bundled.
If there is a main service and the others are ancillary service then it becomes a bundled service.
For example, five- star hotels often provide free laundry services on staying at the hotel. Renting
the room is the primary service and laundry is ancillary. A person can opt for laundry services only
if he is staying at the hotel

Other indicators of bundling of services in the ordinary course of business (but they are not a
foolproof identification):
– There is a single price for the package even if the customers opt for less
– The components are normally advertised as a package
– The different components are not available separately

What is composite supply under GST?

Composite supply means a supply is comprising two or more goods/services, which are naturally
bundled and supplied in with each other in the ordinary course of business, one of which is a
principal supply.
It means that the items are generally sold as a combination.
The items cannot be supplied separately.

How to determine if it is a composite supply?

A supply of goods and/or services will be treated as composite supply if it fulfills the following
criteria:

 Supply of 2 or more goods or services together AND

 It is a natural bundle, i.e., goods or services are usually provided together in

the normal course of business.

 They cannot be separated.

What tax rate will apply?

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The tax rate of the principal supply will apply on the entire supply.
Example:
Goods are packed and transported with insurance. The supply of goods, packing materials,
transport and insurance is a composite supply. Insurance, transport cannot be done separately if
there are no goods to supply. Thus, the supply of goods is the principal supply.
Tax liability will be the tax on the principal supply i.e., GST rate on the goods.
If the second condition is not fulfilled it becomes a mixed supply.

What is mixed supply under GST?

 Mixed supply under GST means a combination of two or more goods or
services made together for a single price.
 Each of these items can be supplied separately and is not dependent on any
other.

Under GST, a mixed supply will have the tax rate of the item which has the highest rate of
tax.
For example-
A Diwali gift box consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drink
and fruit juices supplied for a single price is a mixed supply. All are also sold separately. Since
aerated drinks have the highest GST rate of 28%, aerated drinks will be treated as principal supply
and 28% will apply on the entire gift box.

How to determine if it is a mixed supply or a composite

supply?
You have to rule out that the supply is a composite supply. A supply can be a mixed supply only if it
is not a composite supply.
If the items can be sold separately, i.e., the supplies not naturally bundled in the ordinary course of
business, then it would be a mixed supply.

For example:
If a person buys canned foods, sweets, chocolates, cakes, dry fruits, aerated drink and fruit juices
separately and not as a Diwali gift box, then it is not considered a mixed supply. All items will be
taxed separately.

Differences between mixed and composite

supplies

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Particulars Composite Supply Mixed supply

Main item Principal item Item with highest tax rate

Tax rate applicable Tax rate of principal item Highest tax rate of all the items

Time of supply
Time of supply in case of composite supply
If the principal supply is a service (for example, air transport and food on board) then the
composite supply will be treated as a supply of services. The provisions relating to time of supply
of services will apply.

Similarly, in the case of purchasing and transporting the goods, the supply of goods is the principal
supply. The composite supply will qualify as supply of goods and the provisions relating to time of
supply of goods will apply.

Time of supply in case of mixed supplies

If the highest tax rate belongs to a service then the mixed supply will be treated as the supply of
services. The provisions relating to time of supply of services would be applicable.

Similarly, if the highest tax rate belongs to goods then the mixed supply will be treated as supply of
goods. The provisions relating to time of supply of services would be applicable.

For more details on time of supply of goods and services please refer to our various articles.

Further examples
Example 1
Booking train tickets: You are booking a Rajdhani train ticket which includes meal. It is a bundle of
supplies. It is a composite supply where the products cannot be sold separately. You will not buy
just the train meal and not the train ticket. The transportation of passenger is, therefore, the
principal supply.

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Rate of tax applicable to the principal supply will be charged to the whole composite bundle.
Therefore, rate of GST applicable to transportation of passengers by rail (5%) will be charged by
IRCTC on the booking of Rajdhani ticket.

Example 2: Buy detergent Get bucket free

Many shops offer a free bucket with detergent purchased. This is a mixed supply as it does not
satisfy the 2nd condition, i.e., it can be sold separately. You can buy either just a bucket or just
detergent. The highest rate of GST will then apply. Since detergents have the higher rate (28%),
this rate will apply on the whole mixed bundle.

Example 3: Works Contract

A works contract is a mixture of service and transfer of goods. For example, construction of a new
building where a combination of materials like bricks, cement, sand along with services of
labourers, engineers, architects etc. produce a building (goods).

It is a classic example of composite supply. But to avoid the

confusion under earlier tax law, GST Act clearly clarifies works
contract as a supply of service with specific tax rates.

Example 4: Restaurant
Restaurant business provides a bundled supply of preparation of food and serving the same.
It is also a classic example of a composite supply. However, to avoid the confusion under earlier
tax law, GST Act clearly clarifies restaurants as a supply of service with specific tax rates.

IGST/SGST/UTGST
Framework under the Goods and Services Tax:
Under the GST law taxes can be further classified into these four types:

1) Central goods and services tax (CGST)

2) State goods and services tax (SGST)

3) Union territory goods and services tax ( UTGST)

4) Integrated goods and services tax (IGST)

Now, let us understand each one in detail. Starting with our discussion first with CGST.

What is Central Goods and Services Tax (CGST)

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Central Goods and Services Tax or CGST is the indirect tax levied by the Central Government. It is
levied on the transaction of goods and services which are undertaken within the state i.e.
intrastate. The tax collected under the head “CGST” is payable to the central government treasury.

The CGST is charged to compensate the central government for previously existed indirect taxes
such as

 Central Excise Duty,

 Service Tax,
 Duties of Custom,
 Surcharges,
 Cesses, etc.

The CGST is charged along with SGST or UTGST and at the same rates. This is done as per the
Dual GST model followed in India, where both central and state governments have their separate
taxation legislatures.

What is State Goods and Services Tax (SGST)?

State Goods and Services Tax or SGST represents the tax imposed by the State Government.
SGST is levied on the transaction of intrastate sales of goods and services, i.e. sales made within
a state.

SGST is charged along with and at the equal rates that of CGST on a good or service. This tax is
charged by all the states of India but has also been adopted by two union territories of

 Puducherry and
 Delhi,

because both of these union territories have their own legislative assembly and council.

The tax revenue under SGST goes to the State Government treasury or the eligible Union
Territory, where the consumption of goods or service has taken place.

What is the Union Territory Goods and Services Tax

(UTGST)?
Union Territory Goods and Services Tax or UTGST is just the way similar to SGST. The only
difference is that the tax revenue goes to the treasury for respective administration of union
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territory where the goods or services have finally been consumed. There is a key difference
between union territory and states. The Union Territory directly comes under the supervision of the
Central Government and does not have its own elected government as in case of States.

UGST is also charged at the same rates that of CGST. But, amongst UTGST or SGST only one at
a time shall be levied together with CGST in each case.
Currently, there are 7 union territories in India:

 Chandigarh
 Lakshadweep
 Daman and Diu
 Dadra and Nagar Haveli
 Andaman and Nicobar Islands
 Delhi
 Puducherry

But out of these Delhi and Puducherry levy SGST and not UTGST because they have their own
elected members and Chief Minister. Hence, they function as partial – states. As the SGST Act
cannot be applied on a union territory which does not have its own legislature. The UTGST Act has
been introduced by the GST Council.

What is Integrated Goods and Services Tax (IGST)?

IGST is levied on all interstate supply of goods and services by the Central Government. Unlike,
CGST, SGST, & UTGST which are levied upon the supply of goods or services within a state.

IGST has provided a standardization to taxation on the supply of goods and services made
outside the state. This applies both on a supply made outside the state and those made outside
the country.

The rate of IGST would always be approximately equal to the CGST rate plus SGST rate.

For Example:-
Now, let’s us take a situation to understand all the taxes under GST in a nimble way;

Suppose the sale of goods is done worth Rs 10 lakhs. It attracts GST @ 18%. Consider the
computation GST payable under relevant heads in the following scenarios

 The sale is done within the same state i.e. intrastate sales
 Sale is done within the union territory i.e. intrastate sales
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 The sale is done to another state i..e interstate sales

Situation Analysis

Sales within the same state Intra-state Supply

Sales within the same union territory Intra-state Supply

Supply to another state Inter-state Supply

Question
Let us assume that

 Goods worth Rs. 20,000 are sold by Shubham from Gujarat to dealer Rahul in
Gujarat
 Dealer Rahul resells such goods to trader Mahesh in Uttar Pradesh for Rs.
22000
 Trader Mahesh now sells such goods to consumer XYZ in Uttar Pradesh for
Rs 29,000

Solution

 Since Shubham sells goods to Rahul in Gujarat, the supply takes place in the
same state (Gujarat in this case). Hence, this is in the nature of Intra state
supply. Further, for this Intra State transaction between Shubham and
Rahul, CGST@9% and SGST@9% each shall be applicable.
 In the second instance, dealer Rahul resells such goods in different state i.e.
Uttar Pradesh to Mahesh. This is the case of inter state supply. Hence, IGST
@18% shall be calculated on this particular transaction between Rahul and
Mahesh.
 And at the end, Mahesh sells such goods to end user in the same state of
Uttar Pradesh to XYZ. Since,supply within the state falls under an Intra state
supply CGST@9% and SGST@9% each shall be levied on this supply.

How to set off GST amounts?

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Goods and Services Tax (GST) is a destination based tax. This means the revenue goes to the
treasury of the state government in which supply has finally been consumed. We will understand
the concept and trace how GST credits are set off amongst state government by taking the same
example dealt above.

Particular Amount collected as Tax By State and Central

s

Ste Transaction Sale Gujarat Uttar Central

p between price Pradesh

1 Shubham 20,00 20000*9=180 —— 20000*9=1800

to Rahul 0 0

2 Rahul To 22000 22000*IGST@18 396

Mahesh % 0

(-) CGST ITC 180

0

(-) SGST ITC 180

0

Net 360

3 Mahesh to 29000 29000*9% 261 29000*9%= 2610

XYZ = 0

(-) Balance 135 (-) IGST ITC=

IGST credit 0 2610
=

Net 126 Net 0

0

4 Total 1800 1260 2160

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Receipt

5 Adjustment adjust Coming from (+450)

with centre(+1350)
Centre
(-
1800)

Final Tax 0 2610 261

Revenue to 0
respective
governmen
t

What determines if CGST, SGST or IGST is

applicable?
To determine whether Central Goods & Services Tax (CGST), State Goods & Services Tax (SGST)
or Integrated Goods & Services Tax (IGST) will be applicable in a taxable transaction, it is
important to first know if the transaction is an Intra State or an Inter-State supply.

 Intra-State supply of goods or services is when the location of the supplier and the place
of supply i.e., location of the buyer are in the same state. In Intra-State transactions, a seller
has to collect both CGST and SGST from the buyer. The CGST gets deposited with
Central Government and SGST gets deposited with State Government.

 Inter-State supply of goods or services is when the location of the supplier and the place
of supply are in different states. Also, in cases of export or import of goods or services or
when the supply of goods or services is made to or by a SEZ unit, the transaction is
assumed to be Inter-State. In an Inter-State transaction, a seller has to collect IGST from
the buyer.

 What is Central Goods and Services Tax

(CGST)?
 Under GST, CGST is a tax levied on Intra State supplies of both goods and services by the
Central Government and will be governed by the CGST Act. SGST will also be levied on the
same Intra State supply but will be governed by the State Government.
 This implies that both the Central and the State governments will agree on combining their
levies with an appropriate proportion for revenue sharing between them. However, it is

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clearly mentioned in Section 8 of the GST Act that the taxes be levied on all Intra-State
supplies of goods and/or services but the rate of tax shall not be exceeding 14%, each.

What is State Goods and Services Tax (SGST)?

Under GST, SGST is a tax levied on Intra State supplies of both goods and services by the State
Government and will be governed by the SGST Act. As explained above, CGST will also be levied
on the same Intra State supply but will be governed by the Central Government.
Note: Any tax liability obtained under SGST can be set off against SGST or IGST input tax credit
only.
An example for CGST and SGST:
Let’s suppose Rajesh is a dealer in Maharashtra who sold goods to Anand in Maharashtra worth
Rs. 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such
case, the dealer collects Rs. 1800 of which Rs. 900 will go to the Central Government and Rs. 900
will go to the Maharashtra Government.

What is Integrated Goods and Services Tax

(IGST)?
Under GST, IGST is a tax levied on all Inter-State supplies of goods and/or services and will be
governed by the IGST Act. IGST will be applicable on any supply of goods and/or services in both
cases of import into India and export from India.
Note: Under IGST,

 Exports would be zero-rated.

 Tax will be shared between the Central and State Government.

An example for IGST:

Consider that a businessman Rajesh from Maharashtra had sold goods to Anand from Gujarat
worth Rs. 1,00,000. The GST rate is 18% comprised of 18% IGST. In such case, the dealer has to
charge Rs. 18,000 as IGST. This IGST will go to the Centre.

Why the split into SGST, CGST, and IGST?

India is a federal country where both the Centre and the States have been assigned the powers to
levy and collect taxes. Both the Governments have distinct responsibilities to perform, as per the
Constitution, for which they need to raise tax revenue.
The Centre and States are simultaneously levying GST.
The three types tax structure is implemented to help taxpayers take the credit against each other,
thus ensuring “One Nation, One Tax”.

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COMPENSATION LAW TO STATE

GOVERNMENTS GSTN
 The Goods and Services Tax (Compensation to States) Amendment Bill, 2018 was introduced in Lok
Sabha by the Minister of Finance, Mr. Piyush Goyal on August 7, 2018. It amends the Goods and
Services Tax (Compensation to States) Act, 2017. The Act provides for compensation to states for
any loss in revenue due to the implementation of GST.

 Compensation Fund: The Act allows the central government to levy a GST Compensation
Cess on the supply of certain goods and services. The receipts from the cess are deposited to a GST
Compensation Fund. The amount deposited in the Fund is used to compensate states for any loss in
revenue following the implementation of GST.

 Under the Act, any unutilised amount in the Compensation Fund at the end of the transition period
(five years from the date on which the state brings its State GST Act into force) is distributed in the
following manner: (i) 50% of the amount is shared between the states in proportion to their total
revenue, and (ii) remaining 50% is a part of the centre’s divisible pool of taxes.

 The Bill inserts a provision specifying that any unutilised amount (as recommended by the GST
Council) in the Compensation Fund at any time during the transition period will be distributed in the
following manner: (i) 50% of the amount will be shared between the states in proportion to their base
year revenue (2015-16), and (ii) remaining 50% will be part of the centre’s divisible pool of taxes.

 The Act specifies that compensation payable to states has to be released at the end of every two
months. The Bill states that in case of shortfall in this amount of compensation, it may be recovered
in the following manner: (i) 50% of the amount from the centre, and (ii) the remaining 50% from the
states in proportion to their base year revenue. However, this amount should not exceed the total
amount transferred to the centre and states.

GST Compensation to States

States who have suffered any losses due to the GST implementation will receive
compensation according to the GST Compensation to States Bill which was passed
in March 2017. This is for 5 years starting from the date the state implements the
GST Act.
The Lok Sabha introduced the GST Compensation to States Bill in March 2017, and the bill was
created to compensate states in case they have suffered any loss in revenue owing to GST
implementation. The compensation offered by the bill will be for a five-year period starting from the
date when the State GST Act is implemented by the state.
So far as the calculation of the compensation amount in any fiscal year is concerned, 2015-16
shall be considered as the base year. The revenue growth rate for any state over the course of the
five years will be considered at 14% per year. The revenue of the base year comprises of the tax
revenues of the state from central sales tax, state VAT, local body tax, octroi, entry tax, taxes on
advertisements, taxes on luxuries, etc. However,the revenue of the base year will not include
taxes related to the supply of certain petroleum products and alcohol for human consumption.
So far as the calculation of compensation and its release is concerned, the compensation that will
be paid to a state must be calculated on a provisional basis and released at the completion of
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every two months. Moreover, a yearly calculation of the overall revenue will be done and it will be
audited by the Comptroller and Auditor General of India.
A GST Compensation Cess could be charged on the supply of particular commodities and
services, and the receipts from said cess shall be deposited to a GST Compensation Fund. The
cap of the cess will be 135% in case of pan masala, Rs.4,170 + 290% per 1,000 tobacco sticks,
Rs.400 per tonne in case of coal, and 15% for all other commodities and services including
aerated water and motor cars.
In case any money remains unutilised in the Compensation Fund when the compensation period
ends, it will be distributed as follows: 50% of the fund will be shared between the states in the ratio
of the states’ revenues, and the other 50% will become part of the centre’s divisible tax pool.

States’ Finances Will Not be Hurt by GST – Centre

Among the main points discussed regarding the new GST regime is whether or not the finances of
states would be affected by it, and if the centre would compensate the states for the losses they
could potentially incur as a result of the new regime. Since GST is a tax that is based on the
destination where the goods or services are supplied, the consuming states are expected to
benefit from it. However, producing states such as Karnataka, Maharashtra, Haryana, Tamil Nadu
and Gujarat may be adversely affected. The implementation of the new regime was objected by
these states, resulting in the Centre agreeing to a formula which will see these states get
compensated in case there is a revenue loss.
The Centre was advised by the 14th Finance Commission to ensure that states are compensated
100% for the loss in revenue following the implementation of the new regime during the first three
years. The compensation provided during the fourth year will be 75%, while the compensation
during the fifth year will fall to 50%. While states that demanded 100% compensation for all five
years were disappointed, there was solace in the fact that at least the first three years will see
them compensated in full.

Payment of Compensation
The implementation of GST has seen a number of cesses being subsumed, including the Krishi
Kalyan Cess and Swachh Bharat Cess among others. However, the cess of crude oil and
education cess on imported commodities will still be applicable under GST. The government,
however, requires additional revenue to ensure that the affected states are compensated, which
led the GST Council to a decision to impose extra cesses for five years on a few commodities that
fall above the 28% tax bracket. The commodities which will attract the extra cesses include coal,
tobacco products, motor vehicles (including all kinds of cars, yachts and personal aircrafts). The
extra cesses charged on these products will not be applicable after five years, according to Arun
Jaitley, the Finance Minister. It was also said that the states which incur losses will have to look
out for alternative revenue sources.

GST NETWORK PORTAL

The Goods and Service Tax Network (or GSTN) is a non-profit, non-government
organization. It will manage the entire IT system of the GST portal, which is the
mother database for everything GST. This portal will be used by the government to
track every financial transaction, and will provide taxpayers with all services – from
registration to filing taxes and maintaining all tax details.
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Structure of GSTN
Private players own 51% share in the GSTN, and the rest is owned by the government. The
authorized capital of the GSTN is ₹10 crore (US$1.6 million), of which 49% of the shares are
divided equally between the Central and State governments, and the remaining is with private
banks.
The GSTN has also been approved for a non-recurring grant of Rs. 315 crores. The contract for
developing this vast technological backend was awarded to Infosys in September 2015.
The GSTN is chaired by Mr. Navin Kumar, an Indian Administrative Service servant (1975 batch),
who has served in many senior positions with the Govt. of Bihar, and the Central Govt.

Shareholder Shareholding

Central Government 24.5%

State Governments & EC 24.5%

HDFC 10%

HDFC Bank 10%

ICICI Bank 10%

NSE Strategic Investment Co 10%

LIC Housing Finance Ltd 11%

Total 100%

Salient Features of the GSTN

The GSTN is a complex IT initiative. It will establish a uniform interface for the taxpayer and also
create a common and shared IT infrastructure between the Centre and States.

1. Trusted National Information Utility

The GSTN is a trusted National Information Utility (NIU) providing reliable, efficient and robust IT
backbone for the smooth functioning of GST in India.

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2. Handles Complex Transactions

GST is a destination based tax. The adjustment of IGST (for inter-state trade) at the government
level (Centre & various states) will be extremely complex, considering the sheer volume of
transactions all over India. A rapid settlement mechanism amongst the States and the Centre will
be possible only when there is a strong IT infrastructure and service backbone which captures,
processes and exchanges information.
Please read our article to know more about how the Centre and the States will settle IGST.

3. All Information Will Be Secure

The government will have strategic control over the GSTN, as it is necessary to keep the
information of all taxpayers confidential and secure. The Central Government will have control
over the composition of the Board, mechanisms of Special Resolution and Shareholders
Agreement, and agreements between the GSTN and other state governments. Also, the
shareholding pattern is such that the Government shareholding at 49% is far more than that of any
single private institution.

4. Expenses Will Be Shared

The user charges will be paid entirely by the Central Government and the State Governments in
equal proportion (i.e. 50:50) on behalf of all users. The state share will be then apportioned to
individual states, in proportion to the number of taxpayers in the state.

Volume Type of expenses

of expenses

Maximum IT system designed by Infosys

expenses

2nd part Fraud Analytics Tools, security audit and other security
functions(will be outsourced based on tender)

3rd part Operating expenses such as salary, rent, office expenses, internal IT
facilities

Functions of GSTN
GSTN is the backbone of the Common Portal which is the interface between the taxpayers and
the government. The entire process of GST is online starting from registration to the filing of
returns.
It has to support about 3 billion invoices per month and the subsequent return filing for 65 to 70
lakh taxpayers.
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The GSTN will handle:

 Invoices
 Various returns
 Registrations
 Payments & Refunds

What is the GSTIN?

The Goods and Service Tax Identification Number (GSTIN) is the unique number each taxpayer
will receive once they have registered on the common portal. It is based on a taxpayer’s PAN.

TAX INVOICE
Information Required in a GST Invoice
The tax invoice issued must clearly mention information under the following 16 headings:
1. Name, address and GSTIN of the supplier
2. Tax invoice number (it must be generated consecutively and each tax invoice will have a unique
number for that financial year)
3. Date of issue
4. If the buyer (recipient) is registered then the name, address and GSTIN of the recipient
5. If the recipient is not registered AND the value is more than Rs. 50,000 then the invoice
should carry:
i. name and address of the recipient
ii. address of delivery
iii. state name and state code
6. HSN code of goods or accounting code of services**
7. Description of the goods/services
8. Quantity of goods (number) and unit (metre, kg etc.)
9. Total value of supply of goods/services
10. Taxable value of supply after adjusting any discount
11. Applicable rate of GST
(Rates of CGST, SGST, IGST, UTGST and cess clearly mentioned)
12. Amount of tax
(With breakup of amounts of CGST, SGST, IGST, UTGST and cess)
13. Place of supply and name of destination state for inter-state sales
14. Delivery address if it is different from the place of supply
15. Whether GST is payable on reverse charge basis
16. Signature of the supplier
** HSN Code:
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 Turnover less than 1.5 crores- HSN code is not required to be mentioned
 Turnover between 1.5 -5 crores can use 2-digit HSN code
 Turnover above 5 crores must use 4-digit HSN code

A typical tax invoice with all the 16 mandatory fields under

GST will look like this:

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** GST Council may notify about:

 the number of digits of HSN code for goods or the accounting code for
services and the various classes of registered persons should be mentioned
 the class of registered persons who will not be required to mention the codes

Tax Invoices Format for Exports

In cases of exports, the invoice must also contain a declaration citing that GST has been paid on
such exports. The text to be used in such cases is below:

 “Supply Meant For Export On Payment Of IGST”

– if IGST has been paid on the exports

 “Supply Meant For Export Under Bond Or Letter Of Undertaking Without

Payment Of IGST”

– if IGST has not been paid

In export invoices, the following details related to the buyer are mandatory:
i. Name and address of the buyer
ii. Delivery address
iii. Destination country
iv. Number and date of application for removal of goods for export

Reasons for Not Issuing a Tax Invoice

A registered person may not issue a tax invoice when:

1. the recipient is not a registered person AND

2. the recipient does not require such invoice

The registered person shall issue a consolidated tax invoice for such supplies at the end of each
day in respect of all such supplies.
In all other cases, the registered person MUST issue a tax invoice. Failure to do so is
an offence under GST Act and will attract penalty.

Raising Copies of Invoice

The GST Law requires businesses to keep copies of all of their invoices. The details of this are
furnished below.
Invoices for Supply of Goods
The invoice must be prepared in triplicate. They will be clearly marked as:

1. Original Copy for the use of the recipient

2. Duplicate Copy for the use the transporter
3. Triplicate Copy for the use of the supplier
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Invoices for Supply of Services

The invoice must be prepared in duplicate and clearly marked as:

1. Original Copy for the use of the recipient

2. Duplicate Copy for the use the supplier

Form GSTR-1 will contain the serial number of invoices issued during the tax period along with
other details of purchases.
Registered persons selling exempted goods/services or paying GST under composition scheme
will need to issue a separate bill of supply. We have a separate article dealing with this subject.

GST ON IMPORTS AND EXPORTS

The current Indirect tax regime in India is complex as there are multiplicity of taxes, elaborate
compliance obligations and tax cascading. The Information Technology / Information Technology
Enabled Services sector has been fraught with disputes due to ambiguity in provisions as well as
multiple taxation including dual taxation.

Under the proposed GST regime all the key Indirect tax legislations would be subsumed and hence
it is expected that it would result in a simpler tax regime especially for the Information
Technology / Information Technology Enabled Services.

GST is a destination based tax on consumption of goods or services. It is also the policy of the
Government of India to export the goods and/or services not the taxes out of India. Thus, exports
will become cheaper making Indian products or services will be more competitive in the
international markets.

This module would cover in-depth impact of GST on export and import of goods and services under
GST.

Definition of India in GST

Section 2 (56) of CGST Act, 2017 defines “India“, which means the territory of India as referred to
in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters,
continental shelf, exclusive economic zone or any other maritime zone as referred to in the
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976
(80 of 1976), and the air space above its territory and territorial waters.

Meaning of Export & Import of Goods

Section 2 (5) defines of IGST Act, 2017 defines – “Export of Goods”, with its grammatical
variations and cognate expressions, means taking out of India to a place outside India.

Section 2 (10) defines of IGST Act, 2017 defines – “import of goods” with its grammatical
variations and cognate expressions, means bringing goods into India from a place outside India.

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Meaning of Export & Import of Services

“Import of Services” as defined under Section 2 (11) of IGST Act, 2017 means the supply
of any service, when –

1.The supplier of service is located outside India;

2.The recipient of service is located in India; and

3.The place of supply of service is in India

Meaning of Export & Import of Services

“Export of Services” as defined under Section 2 (6) of IGST Act, 2017 means
the supply of any service, when –
1.the supplier of service is located in India;

2.the recipient of service is located outside India;

3.the place of supply of service is outside India;

4.the payment for such service has been received by the supplier of service in convertible foreign
exchange; and

5.the supplier of service and the recipient of service are not merely establishments of a distinct
person in accordance with Explanation 1 in section 8;

6.Explanation 1.— For the purposes of this Act, where a person has,—

 n establishment in India and any other establishment outside India;

 an establishment in a State or Union territory and any other establishment outside

that State; or

 an establishment in a State or Union territory and any other establishment being a

business vertical registered within that State or Union territory then such
establishments shall be treated as establishments of distinct persons.

Broad Scheme of Taxation on Imports

As per provisions of the IGST law import of goods into India shall be deemed to be a supply in the
course of inter-State trade or commerce. It has also been provided that Integrated Tax on goods
imported into India shall be levied and collected in accordance with the provisions of Section 3 of
the Customs Tariff Act, 1975 at the point when duties of Customs are levied on the said goods
under the Customs Act, 1962, on a value as determined under the Customs Tariff Act, 1975

The Taxation Laws (Amendment) Act, 2017 provides that IGST on imports will be levied at value of
imported article as determined under the Customs Act plus duty of customs and any other sum
chargeable in addition to customs duty (excluding GST and GST Cess). This in effect makes levy of
IGST at par with present levy of CVD which is on basic value plus customs duty.

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As per the definition of ‘supply’ under CGST law, import of services for a consideration whether or
not in the course or furtherance of business is deemed to be supply and as per the IGST law,
supply of services in the course of import into the territory of India, shall be deemed as supply of
services in the course of inter- State trade or commerce. Accordingly, Integrated Tax would be
levied on import of services. Although the provisions are yet to be notified, the Integrated Tax on
import of services would be payable by the recipient under reverse charge.

Further, there would be no change in applicability of countervailing duty levied under section 9BB
of the Customs Tariff Act, 1975 (and different from the additional duty of Customs levied under
section 3, ibid., also known as CVD), anti-dumping or safeguard duties, where ever imposed by the
Government.

Treatment of Exports under GST

As per the provisions of IGST law, export of goods and/or services are to be treated as “zero rated
supplies” and a registered taxable person exporting goods or services shall be eligible to claim
refund under one of the following two options:

 Export under bond or letter of undertaking without payment of Integrated Tax and
claim refund of unutilized input tax credit.

 Export on payment of Integrated Tax and claim refund of the tax so paid on goods
and services exported. The aforesaid refunds will be subject to rules, safeguards and
procedures as may be prescribed.

Export of services at ZERO rated

Exports are being zero rated, and therefore input taxes paid would be allowed as refund.
However, to determine whether the services qualify as export, it would be important to analyse
the conditions prescribed for “export of service”.

The definition of “export of service” is similar to the present law, and therefore no new conditions
are prescribed. However, place of supply rules would need to be evaluated on a case-to-case
basis to determine the tax applicability on such services.

The default rule for place of supply for export of service shall be the location of the service
recipient, where the address on record of the recipient exists with the exporter. Hence, it will be
critical for exporters to ensure that the address of service recipient on record can be established
before the authorities on request.

The typical IT/ ITES services that may fall under the default rule include software development,
BPO operations, software consultancy, etc. Apart from these, certain services like software
support/ maintenance and intermediary services will also move to the default rule, as there are no
exceptions carved out for these, unlike under the present law.

There are exceptions to the above default rule, wherein training services could be based on the
performance location of training, but at the same time, online training is not specified, and
therefore could fall under default rule.

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Thus, A detailed analysis of the nature of services and its place of supply would need to be carried
out to determine whether the services would be treated as exports and zero rated.

GST on Software transactions including cloud computing

Packaged software provided on media is likely to be covered under “goods”, and therefore is likely
to be taxed based on the rate of tax and place of supply for goods. However, customised software
may not qualify as “goods”, and therefore may be treated as services.

However, with respect to software supplied electronically, the same may not be covered under
“goods” as the definition of goods does not include intangible property. Hence, it would be covered
under “service”. This is likely to put to rest the vexed issue of dual taxation of software supplied
electronically under the present laws.

In the context of cloud computing, the draft law provides that transfer of right in goods without
transfer of title, including leasing transaction, shall be treated as a service. Hence, cloud services
shall be treated as supply of “service” and therefore, the debate of dual taxes of VAT and service
tax will not arise under GST.

Continuation of exemptions for STP/ SEZ units

No exemptions have been specified in the draft law for STP and SEZ units. Upfront exemption from
customs duty/ excise duty for STP units and SEZ units (including service tax and CST exemption
for SEZs) may not continue as GST will be payable on imports or procurements as per the draft
law.

The GST paid on such procurements will be eligible as refund and therefore, will impact the
working capital requirements of such units.

The efficacy of the STP scheme therefore seems doubtful upon transition to the GST regime, as the
benefit may be restricted only to BCD paid on import of non-IT products.

Upfront exemption of service tax for SEZ units (by way of Form A1/ A2) is also likely to be
converted to refund.

Refund of input tax credit in case of export of goods

 In case of zero rated supplies made without payment of tax, refund of input tax
credit will be available as per proviso (i) to section 54(2) of CGST Act.

 No refund of unitized input tax credit shall be allowed in cases other than exports
including zero rated supplies or in cases where the credit has accumulated on account
of rate tax on inputs being higher than the rate of tax on output supplies, other than nil
rated or fully exempt supplies – first proviso to section 54(3) of CGST Act.

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 No refund of unutilized input tax credit shall be allowed in cases where the goods
exported out of India are subjected to export duty – second proviso to section 54(3) of
CGST Act.

 No refund of input tax credit shall be allowed if the supplier of goods or services
avails duty drawback of CGST / SGST / UTGST or claims refund of IGST paid on such
supplies – third proviso to section 54 (3) of CGST Act.

Drawback – “Drawback” in relation to any goods manufactured in India and exported, means the
rebate of duty, tax or cess chargeable on any imported inputs or on any domestic inputs or input
services used in the manufacture of such goods – section 2(42) of CGST Act.

Deemed Exports
India gets foreign aid from World Bank, Asia Development bank etc. for various prestigious projects
in India for which global tenders are invited and India gets aid in foreign currency.

Indian manufacturers and suppliers of services from India have to quote in competition with
foreign suppliers. Evaluation of bids is done without considering customes duty. Since the supply
of goods and services are for projects financed with free foreign exchange, these supplies are
treated as ‘deemed exports’.

Similarly, supplies to EOU units and services do not leave the country. Suppliers of goods and
services get payment in Indian rupees and not in foreign currency.

Deemed exports refer to those transactions in which goods supplied do not leave country, and
payment for such supplies is received in para 7.02 of Foreign Trade Policy 2015-2020 shall be
regarded as ‘deemed exports’, provided that goods are manufactured in India.

As per Foreign Trade Policy 2015-2020, followings are treated as deemed exports:

 Supplies against Advance Authorisation/ DFIA

 Supplies to EOU / STP / EHTP / BTP

 Supplies against EPCG authorization

 Supply of marine freight containers

 Supplies to projects against international competitive bidding

 Supplies to projects with zero customs duty

 Supply of goods to mega power projects against International Competitive Bidding

 Supplies to UN Agencies

 Supply of goods to nuclear projects through competitive bidding

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Supplies outside India which do not constitute export of goods or

services
 Supply of service to a person located outside India where place of supply of service
is in India. For example – a property rented out in Mumbai to a person residing in Dubai;
agent located in India providing service to a New York based exporter for selling goods
to China.

 Supply of services where consideration is received in Indian currency or a currency

other than convertible currency. For example supply of consultancy service by an Indian
consulting firm to an overseas entity, payment for which is made in Indian rupees by
Indian branch of overseas entity.

 Services provided to overseas branch would not be eligible as export of services

due to specific exclusion for such transactions in the definition of “export of service”.
This could entail reversal of input credits as such supply would be treated as non-
taxable and not as zero rated.

Definition of import of service also excludes services imported from overseas branch. However,
the law has certain contradictions and therefore clarity to be obtained on this.

Export Promotion under GST

Exports are priority of any country, Goods and services are to be exported, taxes are not to be
exported. WTO stipulates free and fair global trade. Giving export incentives will be against
principle of fair trade and hence export incentives are not allowed under WTO. However, goods
and services can be free of domestic taxes.

Supplies to SEZ unit and SEZ Developer are treated at par with physical exports. Provisions in
CGST Act have been designed by make exports tax free. Export benefits under GST – In relation to
GST, following are the concessions / incentives for exports:

(1) Exemption from GST on final products or (2) Refund of GST paid on inputs. Exporting units
need raw materials without payment of taxes and duties, to enable them to compete with world
market. Government has devised following schemes for this purpose:

(a)Special Economic Zones at various places where inputs are allowed to be imported without
payment of duty and finished goods are exported, and (b) Export Oriented Undertakings (EOU),
and, (c) Duty Drawback Scheme, and (d) Schemes of Advance Authorisation, DEPB and DFIA.

Elaborate procedures have been prescribed for the above, to ensure that the benefits are not
misused.

Tax treatment of export of goods and services to Nepal and Bhutan

In terms of para 2.52 of the Indian Foreign Trade Policy (2015-2020) exports proceeds from Nepal
and Bhutan can be realized in Indian rupees. Despite receipt of export proceeds in India, rupee
exports of goods to Nepal and Bhutan will be treated at par with export to any other country as
definition of ‘export of goods’ under IGST Law attaches no condition other than ‘taking goods out

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of India to a place outside India’. However in case of export of services, in case export proceeds
are received in Indian rupees, it will not qualify as ‘export’ as the definition of ‘export of services’
mandates receipt of payment in ‘convertible foreign exchange’.

Taxes on Import to continue after GST

Even after introduction of GST following duties may not be subsumed under GST regime and they
may continue to be levied as usual. These duties are:

 Basic Customs Duty

 Anti-Dumping Duty

 Safeguard Duties

After the introduction of full and complete GST major import gaining sectors include leather
and leather products; furniture and fixtures; agricultural sectors; coal and lignite; agricultural
machinery; industrial machinery; other machinery; iron and steel; railway transport
equipment; printing and publishing; and tobacco products. The moderate gainers include
metal products; non-ferrous metals; and transport equipment other than railways. Imports are
expected to decline in textiles and readymade garments; minerals other than coal, crude
petroleum, gas and iron ore; and beverages.

Points to Note – To Sum Up

 In relation to GST, following are the concessions / incentives for exports : (1)
Exemption from GST on final products or (2) Refund of GST paid on inputs.

 Export of goods or services or both and supplies of goods or services or both to SEZ
unit or SEZ developer will be zero rated supply – section 16 (1) of IGST Act.

 Credit of input tax may be availed for making zero-rated supplies, even if such
supply is exempted supply – section 16(2) of IGST Act.

 Refund of unutilized input tax credit shall not be allowed in cases where the goods
exported out of India are subjected to export duty.

 Refund of input tax credit shall not be allowed if the supplier of goods or services
avails duty drawback of CGST / SGST / UTGST or claims refund of IGST paid on such
supplies [Thus, duty drawback of customs portion can be availed].

 Benefits will be available to ‘ deemed exports’ also. Mostly, the benefit will be
through refund route and not direct exemption.

 If goods are imported, IGST and GST Compensation Cess will be payable.

 If goods are taken to warehouse and then cleared from warehouse, IGST and GST
Compensation Cess will payable at the time of removal of warehouse.

 IGST Act or CGST Act make no provision in respect of high seas sale i.e. sale in
course of imports. In absence of such specific provision, it seems IGST will be payable if

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sale takes place within Exclusive Economic Zone i.e. within 200 nautical miles inside
sea.

BENEFITS OF GST TO TRADE, INDUSTRY, E-COMMERCE,

SERVICE SECTOR AND THE CONSUMERS AT LARGE

1. GST eliminates the cascading effect of tax

GST is a comprehensive indirect tax that was designed to bring the indirect taxation under one
umbrella. More importantly, it is going to eliminate the cascading effect of tax that was evident
earlier.
Cascading tax effect can be best described as ‘Tax on Tax’. Let us take this example to
understand what is Tax on Tax:
Before GST regime:
A consultant offering services for say, Rs 50,000 and charged a service tax of 15% (Rs 50,000 *
15% = Rs 7,500).
Then say, he would buy office supplies for Rs. 20,000 paying 5% as VAT (Rs 20,000 *5% = Rs
1,000).
He had to pay Rs 7,500 output service tax without getting any deduction of Rs 1,000 VAT already
paid on stationery.
His total outflow is Rs 8,500.
Under GST

GST on service of Rs 50,000 @18% 9,000

Less: GST on office supplies (Rs 20,000*5%) 1,000

Net GST to pay 8,000

2. Higher threshold for registration

Earlier, in the VAT structure, any business with a turnover of more than Rs 5 lakh (in most states)
was liable to pay VAT. Please note that this limit differed state-wise. Also, service tax was
exempted for service providers with a turnover of less than Rs 10 lakh.
Under GST regime, however, this threshold has been increased to Rs 20 lakh, which exempts
many small traders and service providers.

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Let us look at this table below:

Tax Threshold Limits

Excise 1.5 crores

VAT 5 lakhs in most states

Service Tax 10 lakhs

GST 20 lakhs (10 lakhs for NE states)

3. Composition scheme for small businesses

Under GST, small businesses (with a turnover of Rs 20 to 75 lakh) can benefit as it gives an option
to lower taxes by utilizing the Composition scheme. This move has brought down the tax and
compliance burden on many small businesses.

4. Simple and easy online procedure

The entire process of GST (from registration to filing returns) is made online, and it is super
simple. This has been beneficial for start-ups especially, as they do not have to run from pillar to
post to get different registrations such as VAT, excise, and service tax.
Our ClearTax GST software is already on a roll filing GST returns

5. The number of compliances is lesser

Earlier, there was VAT and service tax, each of which had their own returns and compliances.
Below table shows the same:

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Under GST, however, there is just one, unified return to be filed. Therefore, the number of returns
to be filed has come down. There are about 11 returns under GST, out of which 4 are basic returns
which apply to all taxable persons under GST. The main GSTR-1 is manually populated and
GSTR-2 and GSTR-3 will be auto-populated.

6. Defined treatment for E-commerce operators

Earlier to GST regime, supplying goods through e-commerce sector was not defined. It had
variable VAT laws. Let us look at this example:
Online websites (like Flipkart and Amazon) delivering to Uttar Pradesh had to file a VAT
declaration and mention the registration number of the delivery truck. Tax authorities could
sometimes seize goods if the documents were not produced.
Again, these e-commerce brands were treated as facilitators or mediators by states like Kerala,
Rajasthan, and West Bengal which did not require them to register for VAT.
All these differential treatments and confusing compliances have been removed under GST. For
the first time, GST has clearly mapped out the provisions applicable to the e-commerce sector and
since these are applicable all over India, there should be no complication regarding the inter-state
movement of goods anymore.
Read a more detailed analysis of the impact of GST on e-commerce.

7. Improved efficiency of logistics

Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid
the current CST and state entry taxes on inter-state movement. These warehouses were forced to
operate below their capacity, giving room to increased operating costs.
Under GST, however, these restrictions on inter-state movement of goods have been lessened.

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As an outcome of GST, warehouse operators and e-commerce aggregators players have shown
interest in setting up their warehouses at strategic locations such as Nagpur (which is the zero-
mile city of India), instead of every other city on their delivery route.
Reduction in unnecessary logistics costs is already increasing profits for businesses involved in
the supply of goods through transportation.
Visit here to read more about the impact of GST on logistics.

8. Unorganized sector is regulated under GST

In the pre-GST era, it was often seen that certain industries in India like construction and textile
were largely unregulated and unorganized.
Under GST, however, there are provisions for online compliances and payments, and for availing
of input credit only when the supplier has accepted the amount. This has brought in accountability
and regulation to these industries.
Let us now look at disadvantages of GST. Please note that businesses need to overcome these
disadvantages to run the business smoothly.

GST Benefits
The Goods and Services Tax (GST) has several benefits that help in integrating the
economy while making Indian products more competitive internationally. It also
makes compliance with tax rates and procedures easier.
The Goods and Services Tax (GST) is imposed on the supply of products and/or services within
the country. It subsumes multiple indirect taxes that are imposed by the State Governments or the
Central Government, such as Service Tax, Purchase Tax, Central Excise Duty, Value Added Tax,
Entry Tax, Luxury Tax, Local Body Taxes, etc.
GST offers benefits to the government, the industry, as well as the citizens of India. The price of
goods and services is expected to reduce under the new reform, while the economy will receive a
healthy boost. It is also expected to make Indian products and services internationally competitive.
Common Portal

Uniformity in Taxation
The objective of GST is to drive India towards becoming an integrated economy by charging
uniform tax rates and eliminating economic barriers, thereby making the country a common
national market. The subsuming of the aforementioned State and Central indirect taxes into just
one tax will also provide a major lift to the Government’s ‘Make in India’ campaign, as goods that
are produced or supplied in the country will be competitive not only in national markets, but in the
international ones as well. Moreover, IGST (Integrated Goods and Services Tax) will be levied on
all imported goods. IGST will be equal to State GST + Central GST, more or less, thus bringing
uniformity in taxation on both local as well as imported goods.

Helping Government Revenue Find Buoyancy

GST is forecast to help the Government Revenue find buoyancy by expanding the tax base whilst
enhancing the taxpayer compliance. The reform is also expected to improve the country’s ranking

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so far as the ‘Ease of Doing Business Index’ is concerned. To add to it, it is also estimated to
enhance the GDP by 1.5% - 2%.

Cascading of Taxes
The cascading of taxes will be prevented by GST as the whole supply chain will get an all-
inclusive input tax credit mechanism. Business operations can be streamlined at each stage of
supply thanks to the seamless accessibility to input tax credit across products or services.

Simpler and Lesser Number of Compliances

Compliance will be simpler through the harmonisation of tax rates, procedures, and laws.
Synergies and efficiencies are expected across the board thanks to common formats/forms,
common definitions, and common interface via the GST portal. Inter-state disputes such as those
on e-commerce taxation and entry tax that currently prevail will no longer cause concerns, while
multiple taxation on the same transactions will also be removed. Compliance costs will also reduce
as a result.
The previous tax regime had service tax and VAT, and they both had their own compliances and
returns. GST will merge them and lower the number of returns as well as the time spent on tax
compliances. GST has around 11 returns under it. Four of them are basic returns that are
applicable to all taxable entities under GST. Although the number of returns could increase, the
main GSTR-1 shall be manually populated, while GSTR-2, GSTR-3, AND GSTR-4 shall be auto-
populated.

Common Procedures
The procedures for refund of taxes and registration of taxpayers will be common, while the formats
of tax return will be uniform. The tax base will also be common, as will the system of assortment of
products or services in addition to the timelines for each activity, thereby ensuring that taxation
systems have greater certainty.
Common Portal
Since technology will be used heavily to drive GST, taxpayers will have a common portal (GSTN).
The procedures for different processes like registration, tax payments, refunds, returns, etc., will
be automated and simplified. Whether it is the filing of returns, filing of refund claims, payment of
taxes, or even registration, all processes will be done online via GSTN. The verification of input tax
credit will be done online too, and input tax credit across the country will be matched electronically,
thereby turning the process into an accountable and transparent one. As a result, the process will
also be much quicker since the taxpayer will not have to interact with the tax administration.
Lowered Tax Burden on Industry and Trade
The average tax burden on industry and trade is expected to lower because of GST, resulting in a
reduction of prices and increased consumption, which will eventually increase production and
ultimately enhance the development of various industries. Domestic demand is set to increase and
local businesses will have greater opportunities, thus generating more jobs within the country.
Regulation of Unorganised Industries
Certain sectors in the country, such as textile and construction, are highly unorganised and
unregulated. GST aims to ensure that payments and compliances are done online, and input
credit can only be availed when the supplier accepts the amount, thus ensuring that these
industries have regulation and accountability.
Composition Scheme

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Small businesses can find respite from tax burdens through the composition scheme. Small
businesses that earn turnovers ranging from Rs.20 lakh to Rs.50 lakh will be subject to lower
taxes.
These are some of the main benefits offered by GST. In the following sections we shall take a brief
look at the advantages of the regime to the common man, the economy, and industry and trade.

Benefits to the Common Man

 A good number of products and/or services are either exempt from tax or
charged at 5% or less.
 The poor will receive their due.
 Small traders will find themselves on a level playing field.
 Simplified tax structure with fewer exemptions.
 Products and services will be allowed to move freely across the country.
 Increased competition between manufacturers and businesses will benefit
consumers.
 Items such as movie-ticket prices, two-wheelers, televisions, stoves, washing
machines, SUVs and luxury cars, two-wheelers, etc. will be cheaper.
Benefits to the Economy
 Creation of a unified common market.
 Increase in manufacturing processes.
 Enhancement of exports and investments.
 Generation of more jobs through enhanced economic activity.
Benefits to Industry and Trade
 Uniform procedures for registration, filing of returns, payment of taxes, and tax
refunds.
 Elimination of cascading of taxes thanks to the seamless flow of tax credit
from the supplier or manufacturer to the retailer or user.
 Small scale suppliers can make the most of the composition scheme to make
their goods less expensive.
 Higher efficiency with regards to the neutralisation of taxes so that exports are
globally competitive.

IMPACT OF GST ON GDP OF INDIA AND

INFLATION
GST the biggest tax reform in India founded on the notion of “one nation, one market, one tax” is
finally here. The moment that the Indian government was waiting for a decade has finally arrived.
The single biggest indirect tax regime has kicked into force, dismantling all the inter-state barriers
with respect to trade. The GST rollout, with a single stroke, has converted India into a unified
market of 1.3 billion citizens. Fundamentally, the $2.4-trillion economy is attempting to transform
itself by doing away with the internal tariff barriers and subsuming central, state and local taxes
into a unified GST.

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The rollout has renewed the hope of India’s fiscal reform program regaining momentum and
widening the economy. Then again, there are fears of disruption, embedded in what’s perceived as
a rushed transition which may not assist the interests of the country.
Will the hopes triumph over uncertainty would be determined by how our government works
towards making GST a “good and simple tax”. The idea behind implementing GST across the
country in 29 states and 7 Union Territories is that it would offer a win-win situation for everyone.
Manufacturers and traders would benefit from fewer tax filings, transparent rules, and easy
bookkeeping; consumers would be paying less for the goods and services, and the government
would generate more revenues as revenue leaks would be plugged. Ground realities, as we all
know, vary. So, how has GST really impacted India? Let’s take a look.

GST: The Short-Term Impact

From the viewpoint of the consumer, they would now have pay more tax for most of the goods and
services they consume. The majority of everyday consumables now draw the same or a slightly
higher rate of tax. Furthermore, the GST implementation has a cost of compliance attached to it. It
seems that this cost of compliance will be prohibitive and high for the small scale manufacturers
and traders, who have also protested against the same. They may end up pricing their goods at
higher rates.

What the Future Looks Like

Talking about the long-term benefits, it is expected that GST would not just mean a lower rate of
taxes, but also minimum tax slabs. Countries where the Goods and Service Tax has helped in
reforming the economy, apply only 2 or 3 rates – one being the mean rate, a lower rate for
essential commodities, and a higher tax rate for the luxurious commodities. Currently, in India, we
have 5 slabs, with as many as 3 rates – an integrated rate, a central rate, and a state rate. In
addition to these, cess is also levied. The fear of losing out on revenue has kept the government
from gambling on fewer or lower rates. This is very unlikely to see a shift anytime soon; though the
government has said that rates may be revisited once the RNR (revenue neutral rate) is reached.
The impact of GST on macroeconomic indicators is likely to be very positive in the medium-term.
Inflation would be reduced as the cascading (tax on tax) effect of taxes would be eliminated. The
revenue from the taxes for the government is very likely to increase with an extended tax net, and
the fiscal deficit is expected to remain under the checks. Moreover, exports would grow, while FDI
(Foreign Direct Investment) would also increase. The industry leaders believe that the country
would climb several ladders in the ease of doing business with the implementation of the most
important tax reform ever in the history of the country.

Summing Up
On priority, it is up to the government to address the capacity building amongst the lesser-
endowed participants, such as the small-scale manufacturers and traders. Ways have to be found
for lowering the overall compliance cost, and necessary changes may have to be made for the
good of the masses. GST will become good and simple, only when the entire country works as a
whole towards making it successful.

Impact of GST on Indian Economy

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GST is a game-changing reform for the Indian Economy, as it will bring the net
appropriate price of the goods and services. The various factors that have impacted
Indian economy are:
1. Increases competitiveness
The retail price of the manufactured goods and services in India reveals that the total
tax component is around 25-30% of the cost of the product. After implementation of
GST, the prices have gone down, as the burden of paying taxes has been reduced to
the final consumer of such goods and services. There is a scope to increase
production, hence, competition increases.
2. Simple Tax Structure
Calculation of taxes under GST is simpler. Instead of multiple taxation under different
stages of supply chain, GST is a one single tax. This saves money and time.
3. Economic Union of India
There is freedom of transportation of goods and services from one state to another
after GST. Goods can be easily transported all over the country, which is a benefit to
all businesses. This encourages increase in production and for businesses to focus on
PAN-India operations.
4. Uniform Tax Regime
GST being a single tax, it has made it easier for the taxpayer to pay taxes uniformly.
Previously, there used to be multiple taxes at every stage of supply chain, where the
taxpayer would get confused, which a disadvantage.
5. Greater Tax Revenues
A simpler tax structure can bring about greater compliance, this increases the number
of tax payers and in turn the tax revenues collected for the government. By
simplifying structures, GST would encourage compliance, which is also expected to
widen the tax base.
6. Increase in Exports
There has been a fall in the cost of production in the domestic market after the
introduction of GST, which is a positive influence to increase the competitiveness
towards the international market.
Impact of GST on Different Sectors
1. Consumer Goods & Services
The GST rates for the FMCG industry is set at 18-20%. While most are happy with the
introduction of GST, the ones who are heavily affected are opposed.
2. Transportation
The rates for cabs has been lowered to 5% and for air travel also. So, this is a
welcome move for those in this sector.
3. E-Commerce
Post GST, e-commerce operators collect 1% of the net value of the taxable supplies,
which is called Tax Collected at Source (TCS).
4. Entertainment & Hospitality Sector
This sector was affected as this sector falls in the 28% category. Movie tickets, hotel
rates will now be costlier.
5. Financial Products and Services
The, financial services such as funds and insurances, (Non-Banking Financial
Company) are most impacted.
6. Start-Ups
GST has a positive influence towards start-ups. It had got both advantages and
disadvantages for start-ups. However, as a start-up, already facing the stress of a new
business, the question of how the new GST will impact your business, must be difficult
for you.

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7. Inflation and Economic Activity

GST is a Inflationary measure. However, the rise in the tax rate on services to 18% is
expected to raise inflation.
8. Stock Transfer
Post the introduction of GST, tax is levied on branch transfers and input tax can be
claimed later.
9. Export of Goods & Services
At all stages of the supply chain there is no tax, post GST. Moreover, the availability of
input credits is welcomed.
10. Gold and Gold Jewellery Prices
Post GST the tax rate was set to 18% initially then brought down to 5% tax rate
11. Rent
Since the implementation of GST the exemption limit for renting out commercial
property is Rs. 20 lakhs and there is not GST on house rent.
12. SEZ
Under GST regime, SEZ’s have benefitted from a zero-tax rate.
13. Affordable Housing
Purchase of houses is non-taxable, however under construction house will carry a GST
tax rate. The GST rates for homes purchased under CLSS, EWS, LIG, MIG1/11 will be
8%, after deducting cost of land. However, those doesn’t qualify CLSS, etc, will have
to pay 12% GST on constructed houses.
14. Real Estate Sector
This sector has mostly benefitted from the introduction of GST, as much of this sector
is becoming more transparent.
15. Logistics
The rate pre-GST was above 26% and post the implementation of GST there was
reduction to 18-21%, which was good news for the sector.
16. Manufacturing Industry
GST, demands businesses to set-up mechanism for meeting the requirements of GST.
Therefore, once the companies adapt the requirements, the compliance costs will go
down drastically.
17. Automobile Industry
GST absorbed indirect tax regime, which attracted several duties and taxes on the
sale of vehicles and spares and accessories.
18. Chemical Industry
Implementation of GST is believed to be positive to the chemical industry, especially
in the long term.
19. Tobacco Industry
The new GST rates are less than the combined taxes during pre-GST regime.
20. Stainless Steel Industry
GST had made a very good impact on steel industry. After issuing new tax rates, it has
become more favourable to steel industry. The GST rate for primary steel industries is
imposed at 18%, which is helpful for them to grow.
21. Textile Industry
Despite some changes under the GST regime, the textile sector benefitted with the
implementation of the regime.
22. Coal Sector
After the GST implementation, the coal transportation rates have done down to 5%
through trains, and thus the logistics costs has been decreased.
23. Power Sector
Overall impact of GST on power sector is positive. Domestic coal, is in the 5% tax slab.
The impact of GST will be positive for the electrical and the lighting sectors as the rate
is now 18%.

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24. Exports
In the pre-GST tax system, import of the goods carried several import duties,
however, after GST, IGST has replaced the indirect taxes that was earlier imposed on
import of goods and services.
25. Domestic appliances and Electrical Machinery
There is not a huge impact in this industry as the new GST rates around 25%, which is
similar to the rates pre-GST.
26. Job works
Special provisions exist for removal of goods for job-work and receiving back goods
after processing from the job-worker carry no GST. The benefit of these provisions is
extended both to the principal and the job-worker.
27. Various segments of Indian Railways
The impact of GST in this sector is very minimal as the rate is kept at the lowest tax
rate of 5% to ensure passengers benefit the most.
28. Hospitality Industry
This is another industry that has benefited as the previous tax regime levied up to
27% tax. Post GST, the tax rates have been reduced.
29. Aviation Sector
The industry has mixed feelings about the introduction of GST, especially the GST
rates for airline fuel.
30. Pharmaceutical Industry
This industry will see an increase in costs after GST implementation as the cost of
medicines will rise by 2.3% in the 12% bracket and medicines with 5% will see no
increase in MRP.
31. Cement Industry
GST will not affect this industry drastically, the tax rates imposed will get absorbed in
the cost of cement production.
32. Digital Advertising Industry
This industry which is fast growing, is a cheaper method for companies as GST will
have less effect in this sector, as compared to traditional marketing.
33. Sweet makers
They are trying to figure out if they need to pay 28% tax on it as many of our
chocolate variations have more than 5% cocoa content. Badam milk, basundi and
rasmalai are also a concern as we aren’t sure if they are sweets (5% tax) or beverages
(12% tax).
34. Handicraft Sector
One of the largest sector of the country, which is most affected by GST. Therefore,
GST is not welcomed by the artisans.
35. Alcohol Industry
There is no GST on alcohol, instead there is an increase in the price of alcohol. Price of
a beer is going to raise by 15% and wine and other hard drinks will be increasing by
4%.

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UNIT IV
INDIRECT TAX REGIME
IGST - INTEGRATED GST LEVIED BY THE CENTRAL GOVERNMENT,
INTERSTATE TRANSACTIONS AND IMPORTED GOODS OR SERVICES - STATE
GST(SGST); THE STATE GOODS AND SERVICE TAX LAW, POWER OF
CENTRAL GOVERNMENT TO LEVY TAX ON INTERSTATE TAXABLE SUPPLY,
IMPACT OF GST ON STATE REVENUE; IMDEMNIFYING STATE REVENUE
LOSS; UTGST - UNION TERRITORY GOODS AND SERVICE TAX LAW - GST
EXEMPTION ON THE SALE AND PURCHASE OF SECURITIES, SECURITIES
TRANSACTION TAX (STT)

IGST - INTEGRATED GST LEVIED BY THE

CENTRAL GOVERNMENT

1. Basic understanding about IGST Act and knowing what is

IGST full form
The IGST full form under GST law is Integrated Goods and Service Tax. It is called as IGST Act 2017.

The scope of IGST Model gives meaning to the GST Act of which IGST is one of the component. The IGST Act
clarifies that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable
goods and services with appropriate provision for consignment or stock transfer of goods and services.

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The seller making supply outside the state will pay IGST on value addition after adjusting available credit of
IGST, CGST, and SGST on his purchases. And the exporting State will transfer to the Centre the credit of SGST
used in payment of IGST.

On the other hand, the Importing dealer will claim credit of IGST while discharging his output tax liability in his
own State. The Centre will then transfer to the importing State the credit of IGST used in payment of SGST.

The relevant information will also be submitted to the Central Agency which will act as a clearing house
mechanism, verify the claims and inform the respective governments to transfer the funds.

2. What is IGST?
"Integrated Goods and Services Tax” (IGST) means tax levied under this Act on the supply of any goods and/or
services in the course of inter-State trade or commerce and for this purpose,

A supply of goods and/or services in the course of import into the

territory of India shall be deemed to be a supply of goods and/or
Finer point 1 services in the course of inter-State trade or commerce.

An export of goods and/or services shall be deemed to be a supply

of goods and/or services in the course of inter-State trade or
Finer point 2 commerce.

Integrated goods and services tax (IGST) would mean the tax levied under IGST Act on the supply of any goods
and / or services in the course of inter-state trade or commerce.

Integrated GST shall also apply to import of goods and services into India. The basic ideology stipulates that any
supply of goods or services in the course of import of goods or services into Indian territory shall be deemed to
be supply involving inter-state trade or commerce and hence liable to IGST.

For transactions that are look alike of import transactions and export of goods and services, shall be deemed to
be supply in course of inter-state trade or commence.

Interstate trade or commence will, therefore include :

 Supplies made in the course of – Inter-state trade or commence

 Import into Indian territory (deemed to be inter-state)
 Export (deemed to be inter-state)
Thus, Integrated GST shall apply to inter-state transactions and import as well as export transactions (deemed
to be inter-state transactions) relating to supply of goods and / or services.

3. Origin and commencement of IGST Act

The Act is called the Integrated Goods and Services Tax Act, 2017 (in short IGST), an Act enacted to levy, collect
and administer IGST in India.

This Act shall be applicable to whole of India, i.e., including the State of Jammu & Kashmir. And shall come into
force from a date which will be notified by the Central Government by way of a notification.
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4. Salient features of IGST Act 2017

 Continuance of uninterrupted ITC chain on inter-State transactions.
 No requirement to pay tax upfront or substantial blockage of funds for the inter-State seller or buyer.
 No claim of refund of taxes paid in exporting State, as ITC is used up while paying the tax.
 Self monitoring model.
 Activity of streamlining is limited to inter-State dealers and Central and State Governments
should be able to streamline their processes expeditiously.

 As Dealers making inter- state supplies will be e registered and correspondence with them will be by e
mail, the compliance level will improve substantially.
 The IGST Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into
account.
5. Taxonomy of IGST law
The IGST Act comprises of the following 11 Chapters, 33 Sections and 8 Definitions.

6. IGST Example
Mr. X, a trader registered in Bangalore, sold goods to Mr. Y, a registered trader in Chennai, for Rs. 10 Lakhs and
further Mr. Y sold these goods to Mr. Z, a registered retailer from Jaipur, for Rs. 11 Lakhs.

 Mr. X will collect IGST at the CGST + SGST rate on Rs. 10 Lakhs.
 As we all know that CGST SGST and IGST full form expands to
Central GST/ State GST and Integrated GST respectively.
For First transaction
 Mr. Y will get the credit which he can use for further payment of his
between Mr. X and Mr. Y
GST.

 Mr. Y will collect IGST at the CGST + SGST rate on Rs. 11 Lakhs.
For Second transaction
 Mr. Z will get the credit which he can use for further payment of his
between Mr. Y and Mr. Z
GST.

 Tamil Nadu will get the SGST on Rs. 10 Lakhs from Karnataka on
the first transaction between Mr. X and Mr. Y.
Who pockets the taxes
 Tamil Nadu will also be collecting tax on the second transaction
here? [Note : Key point to
between Mr. Y and Mr. Z on the amount of Rs. 11 Lakhs which it will
remember : GST is a
further transfer to the Central Government (CGST) and to the Rajasthan
consumption based tax.]
government (SGST).

What conclusion could be derived from this IGST example ? Inter-State trade will definitely benefit as the
interstate transactions do not have to be taxed twice.

This is in contrast to erstwhile tax laws where if you purchased goods from Chennai, you pay tax there and then
again in your state in which you ultimately sell it. This helps the traders to increase their Inter-State trade by
lowering tax burden.

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INTERSTATE TRANSACTIONS AND IMPORTED

GOODS OR SERVICES
Question : How will be Inter-State Transactions of Goods and
Services be taxed under GST in terms of IGST method ?
Answer : The Empowered Committee has accepted the
recommendation for adoption of IGST model for taxation of inter-State
transaction of Goods and Services. The scope of IGST Model is that Centre
would levy IGST which would be CGST plus SGST on all inter-State
transactions of taxable goods and services. The inter-State seller will pay
IGST on value addition after adjusting available credit of IGST, CGST, and
SGST on his purchases. The Exporting State will transfer to the Centre the
credit of SGST used in payment of IGST. The Importing dealer will claim
credit of IGST while discharging his output tax liability in his own State. The
Centre will transfer to the importing State the credit of IGST used in
payment of SGST. The relevant information is also submitted to the Central
Agency which will act as a clearing house mechanism, verify the claims and
inform the respective governments to transfer the funds.
The major advantages of IGST Model are:

a) Maintenance of uninterrupted ITC chain on inter-State transactions.

b) No upfront payment of tax or substantial blockage of funds for the inter-

State seller or buyer.

c) No refund claim in exporting State, as ITC is used up while paying the tax.

d) Self monitoring model.

e) Level of computerisation is limited to inter-State dealers and Central and

State Governments should be able to computerise their processes
expeditiously.

f) As all inter-State dealers will be e-registered and correspondence with

them will be by
e-mail, the compliance level will improve substantially.

g) Model can take ‘Business to Business’ as well as ‘Business to Consumer’

transactions into account.

The government of India rolled out Goods and Services Tax to overcome the
challenges faced by the taxpayers under previous indirect tax regime. The issues
like tax on tax and multiple taxes resulted in taxpayers paying higher taxes.
Furthermore, increased compliance with regard to filing multiple tax returns lead to
delays and increased non – payment of taxes.

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With the advent of GST, the government is on the path of bringing a common national
market with unified tax rates. Further, it has been able to reduce tax compliance and
simplify return filing by going online with GST. Although this has led to increased
transparency and easy return filing relative to previous tax regime. There is still a
whole lot that government intends to do over time via modifications in the GST
Council Meetings.

Needless to say, GST and its benefits have impacted taxpayers across the nation and
various industries. Some of these include:
 Hoteliers
 Restaurant Owners
 Packaged Food Industry
 Exporters
 Importers
 Freelancers
 Job Workers
 Real Estate Business Owners
 Manufacturers
 Handicraft Industry
 Tourism Industry
 Small Business Owners (Registered Under Composition Scheme)
 E- Commerce Sellers
In this article, we will see how imports are taxed under GST. Therefore, we first need
to know what constitutes import of goods and services and the nature of such supplies
under GST.

Nature of Supply in Case of Imports

Article 269A of the constitution provides for the nature of supply of goods and services
imported into India. As per this article,

“any supply in the course of import into

India shall be taken as supply in the course
of interstate trade.”
Here supply includes the supply of goods or services or both.
In other words, any imports made into India would be deemed as interstate supplies
under GST. And Integrated Goods and Services Tax (IGST) shall be levied on such
supplies since imports are treated as interstate supplies .

Section 7(2) of the IGST act further provides that any supply of imported goods that
takes place before such goods cross India’s customs frontiers are deemed as
interstate supplies.
Understanding IGST
The goods and services tax (GST) divides all sales into two types of transactions —
interstate and intrastate. Imports are treated as interstate sales, which means that

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they’re subject to integrated tax, or IGST. That means when you import products, you
pay one IGST rate to the central government. The money is then split between the
central and your state government, which is considered on the basis of the place of
supply. That way, you don’t need to worry about paying separate state and central
taxes.

What is Import of Goods Under GST?

As per the IGST act 2017, import of goods is defined as “bringing goods into India
from a place outside India.” Now, let’s understand how import of goods are taxed
under GST given this definition in the backdrop.

Taxes for Imported Goods

IGST is charged on imports since such supplies are deemed as interstate supplies.
This is in addition to the applicable custom duties.

Section 5(1) of the IGST act provides for circumstances when IGST would be
applicable. It states IGST is charged on all interstate supplies (goods or services or
both) except the supply of alcoholic liquor for home consumption. Provided IGST on
imported goods is charged:

 and collected according to the provisions of section 3 of the Customs

Tariff Act, 1975 and
 on such a value as is decided under tariff act at a time when duties
of customs are charged on such goods under Customs Act 1962.
The above provision suggests that IGST is collected and paid only along with customs
duty. In other words, it cannot be collected anytime before. Custom duty is collected
and paid only at the time goods clear customs frontier.

Thus, IGST on import of goods is charged in addition to the Basic Customs Duty (BCD).
BCD is charged on goods that are imported into Indian territories under the Custom
Tariff Act.

Further, in addition to IGST and BCD, GST Compensation Cess is also charged on
certain luxury and demerit goods under the GST ( Compensation to States) Cess act,
2017.
How are IGST and Cess Levied on Imported Goods?
IGST is charged on goods imported into India in addition to the Basic Custom Duty.
Hence, the value of goods for calculating IGST is taken as:

Value of Goods for Calculating IGST = the Assessable Value of Goods + Basic
Customs Duty + Any Other Duty Chargeable on the Goods in Question under any Law
for the time being in force
Similarly, the value of goods on which GST Cess is calculated is:

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Value of Goods for Calculating GST Cess = the Assessable Value of Goods + Basic
Customs Duty + Any Other Duty Chargeable on the Goods in Question under any Law
for the time being in force
As you can see, IGST is not added to the assessable value of goods for calculating GST
Cess.

Let’s consider an example to understand how IGST is calculated on import of goods.

Example for Calculating IGST on Import of Goods
Say for instance, the value of goods imported into India is Rs. 10,000. Following are
the rates of duties and taxes leviable on such imported goods:

 Basic Custom Duty @ 10%

 Education Cess @ 3%
 IGST @18%
 Compensation Cess @ 15%
Given this case , let us see how IGST and Compensation Cess would be calculated on
the import of goods:

Assessable Value = Rs. 10,000

Basic Custom Duty (BCD) = Rs. 1000 (0.10 x 10,000)
Education Cess (E. Cess) = Rs. 30 (0.03 x 1000)
Value on which IGST is charged = Rs. 11,030 (Rs. 10,000 + Rs. 1000 + Rs. 30)
IGST = Rs. 1985.4 (0.18 x 11,030)
Value on which Compensation Cess is charged = Rs. 11,030 (Rs. 10,000 + Rs.
1000 + Rs. 30)
Compensation Cess (C. Cess) = Rs. 1654.5 (0.15 x 11,030)
Total Duty to be Paid = Rs. 4669.9 (BCD + E.Cess + IGST + C.Cess)
It must be noted that there are certain imported goods on which Anti Dumping Duty
or Safeguard Duty is also charged. In such cases, the value of goods for the purpose
of calculating both IGST and Cess would also include Anti Dumping Duty or Safeguard
Duty.

Value of Goods for Calculating IGST and Compensation Cess = the Assessable
Value of Goods + Basic Customs Duty + Any Other Duty Chargeable on the Goods in
Question under any Law for the time being in force + Anti Dumping Duty + Safeguard
Duty
Is IGST Levied on Passenger Baggage?
Passenger Baggage is not subject to IGST and Compensation Cess. That is, full
exemption is provided from IGST on passenger baggage. However, Basic Custom Duty
at the rate of 35% is charged. Further, education cess is also applicable on a value
over and above the duty free allowances provided under Baggage Rules, 2016.

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IGST on Goods that are Imported into India, Stored into a

Warehouse and are Sold While in the Warehouse Before
Clearance from Customs
According to the Customs Tariff Act 1962, goods can be removed from the custom
station to warehouse without payment of duty. The importer can deposit the goods at
the customs designated warehouses from the custom station with no payment of duty.

The tariff act has been modified to include ‘warehouse’ in the definition of the ‘custom
area’.

Section 2(11) of the Customs Tariff Act defines ‘Customs Area’ as “an area of
custom station. It includes any area in which imported goods or export goods are kept
before clearance by customs authorities. Customs further include warehouse.”
Section 13 of the Tariff act defines ‘customs station’. It includes “any customs port,
customs airport, international courier terminal, foreign post office or land customs
station.

However, these warehoused goods could be transferred from importer to any other
person. This sale or transfer may take place at a price higher than the assessable
value of these goods. Now, the transaction of such a nature would be deemed as
supply. And, therefore, would be taxed under IGST act, 2017.

As mentioned above, any supply of imported goods before such goods cross the
custom frontiers are taken as interstate supplies. Therefore, warehoused goods sold to
another person by the importer would be charged IGST.
IGST on High Sea Sales
It is important to know what constitutes High Sea Sales before understanding the
applicability of GST on such sales. High Sea Sales mean sales undertaken by the
original importer to a third person while the goods are still on the high seas. This
includes the sales that take place after the goods have left the port of loading and
before they reach the port of arrival.

This means that goods are sold by the original importer before such goods enter the
custom frontiers for clearance. That is, the title of goods is transferred to the third
person. Therefore, it is the third person who files custom declaration, that is the Bill of
Entry, after the High Sea Sales are undertaken by the importer. And IGST is charged
and collected only when the import declaration is filed by the third person before
customs authorities for customs clearance. Any value addition to such a high sea sale
would be included in the value of goods on which IGST is calculated.

ITC of Integrated Goods and Services

Tax (IGST)
The importer can claim the credit of the IGST and Compensation Cess paid at the time
of imports. Further, he can utilize such a credit to make payment of taxes on his
outward supplies. Both IGST and Compensation Cess can be utilized towards making
payment on taxes for outward supplies.
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However, the ITC of Compensation Cess can be used only for the payment towards
Compensation Cess.

Further, as per IGST act, the place of supply of imported goods is taken as the location
of the importer. Thus, if importer is located in Maharashtra, the state tax portion of the
IGST is given to the State of Maharashtra.

Import of Services
The IGST act 2017 defines import of services as supply of any service where the:

 supplier of said service is located outside India

 recipient of the said service is located in India and
 place of supply of the said service is in India
Further, the nature of service imported, its underlying consideration and purpose
determine if a particular import of service can be treated as supply. Here are the
various scenarios defining when an import of service is deemed as a supply:
Case I: Import of Service for Consideration Whether or
not in the Furtherance of Business
Say there is an import of service. Further, such an import is for a consideration but
may or may not be in furtherance of business. Thus, the import of service in such a
case is considered as a supply.

This implies that any import of service that takes place without consideration is not
considered as supply. It is not necessary that an import of service in exchange of
consideration is done for the furtherance of a business.
Case II: Import of Services by a Taxable Person from a
Related or Distinct Person
Say there is an import of service by a taxable person from a related or distinct person
as defined in section 25 of CGST act, 2017. Further, such an import of service is in
furtherance of business and may or may not be undertaken for a consideration. Such
an import of service is considered as a supply.

IGST on Import of Services

All import of services are subject to integrated tax under IGST act, 2017. The importer
of services, thus, is liable to pay IGST on reverse charge basis.
However, there are cases when Online Information and Database Access or Retrieval
Services (OIDAR) are imported by unregistered, non – taxable recipients. In such a
case, the supplier located outside India is liable to pay IGST. If the supplier is unable to
take registration and pay IGST, he will have to appoint a person in India and pay the
taxes.

This is done to make sure that importer is not required to pay IGST while removing
goods from custom station to warehouse.

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STATE GST(SGST)
1. What is SGST?
SGST is one of the tax components of GST in India. SGST Act expands to State Goods and Service Tax.

It is one of the three categories under Goods and Service Tax (CGST, IGST and SGST) with a concept of one
tax one nation. SGST falls under State Goods and Service Tax Act 2017.

A simple understanding could be that, when SGST is being introduced, the present state taxes of State Sales
Tax, VAT, Luxury Tax, Entertainment tax (unless it is levied by the local bodies), Taxes on lottery, betting and
gambling, Entry tax not in lieu of Octroi, State Cesses and Surcharges in so far as they relate to supply of goods
and services etc. are subsumed into one tax in GST called State GST.

All the tax proceeds collected under the head SGST is for State Government.

2. What determines whether CGST, SGST or IGST is

applicable for a supply
To identify whether Central Goods & Services Tax (CGST), State Goods & Services Tax (SGST) or Integrated
Goods & Services Tax (IGST) will be applicable in a taxable transaction, one needs to first know if the
transaction is an Intra State or an Inter-State supply.

 Intra-State supply of goods or services is when the location of the supplier and the place of supply i.e.,
location of the buyer are in the same state. In a transaction involving supply within the state, a seller has to
collect both CGST and SGST from the buyer. The Central GST gets deposited with Central Government and
State GST gets deposited with State Government.

 Inter-State supply of goods or services is when the location of the supplier and the place of supply are in
different states. Also, in cases of export or import of goods or services or when the supply of goods or services
is made to or by a SEZ unit, the transaction is assumed to be Inter-State. In an transaction involving supply
between two states or outside the state, a seller has to collect IGST from the buyer.

3. Difference between CGST and SGST

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4. Case study to understand CGST, SGST and IGST

A trader in Indore is selling a Printer worth Rs. 10,000 to a trader in Bhopal. The CGST for this transaction will be
14% whereas the SGST will be 14%. The trader will have to charge Rs. 1,400 as CGST and Rs. 1400 as SGST
from the trader in Bhopal and the respective amounts will be deposited in the Central and State Government
accounts.

Now, the trader from Bhopal (in the given example) is supplying this printer to his shop in Bengaluru. As this is
an inter-state trade, the Bhopal shop keeper will charge IGST of 28% i.e. Rs. 2800 on the basic value of the
product (Rs. 10,000) from his Bengaluru shop and deposit the IGST amount into the government account.

THE STATE GOODS AND SERVICE TAX LAW

Meaning of SGST
On this blog we have already talked about GST – Introduction and Working and this article is
based on State Goods and Services Tax, which is one of the 3 categories under Goods and
Services Tax (CGST, IGST and SGST) with a concept of one nation one tax.

It falls under the State Goods and Services Tax Act, 2017.

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It is levied on the Intra State movement of goods and services. The revenue collected under
State Goods and Services Tax is for the State Government. However, Input Tax Credit on it is
given partly to the Centre and partly to the States as it will be utilized against the payment of both
SGST and IGST.

Example

The above stated example shows how the taxes would be collected by both the centre and by the
state. Both CGST and SGST will be applicable on a single transaction.

In case you are confused about GST as a business owner, feel free to consult the GST experts at
LegalRaasta. You can get comprehensive assistance on GST Registration and GST Return
Filing. You can also use our GST software for doing end-to-end GST compliance.

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POWER OF CENTRAL GOVERNMENT TO LEVY TAX

ON INTERSTATE TAXABLE SUPPLY
How will Inter State Transactions be affected with the advent of GST? This is the basic question
which is hovering over common man’s mindset these days.
Will the situation be favourable or more adverse? Whether Rate to be increased/ decreased? Who
will levy the tax- Centre or State? Will State’s Revenues be reduced?????
This article will help you in getting answers to these basic questions. Firstly, we look at the
‘Present Indirect Tax Structure’ in India.
INTER STATE TRANSACTIONS- PRESENT SITUATION

PARTICULARS GOODS SERVICES

1. INTER STATE Power to levy Sales Tax on Power to levy Service tax on
TRANSACTIONS Inter State Transactions vests Inter State Transactions
with the Union Government. vests with the Union
Government.

2. INTRA STATE Power to levy Sales Tax on Power to levy Service tax on
TRANSACTIONS Intra State Transactions vests Intra State Transactions
with respective State vests with the Union
Governments. Government.
Now it is quite clear that the State Government has no role to play as far as Service Tax is
concerned. Only the Central Government can levy Service Tax whether the Service is rendered
within the State or outside it.
One more point, Sales Tax is segregated between the Centre and States for Interstate and Intra
State Transactions. Only one Government can levy the Sales Tax. No question of Sales Tax levy
by Dual Governments is present.
Goods Imported in India are subject to Import Duty under the Customs Act, 1962. Revenue goes
to the Union Government. State Governments are not entitled to any part of the Import Duty
anyhow.
Services Imported in India are taxable through ‘Reverse Charge Method’. It means Tax is paid by
the Service Recipient at the time of Import of Service. Usually, it is the Service Provider who pays
the Service Tax. Since, power of levy vests with the Centre, situs (place of provision) is not an
issue here.
DETERMINANT FACTORS FOR INTER STATE TRANSACTIONS UNDER GST
How to determine whether a Transaction is an Inter State Supply or not depends upon some
factors -:

Determinant Factors Particulars

1. Sale of Tangible Goods It may depend either upon movement of goods

or location of parties.

2. Sale of Intangible Goods It may depend either upon location of parties

And Provision of Services or consumption of service.

3. Composite Transactions (goods and They may be treated same as provision of

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services both) services.

GST is levied on destination or consumption principle. So, determining the place of supply is very
important as tax revenue accrues to the State where supplies occur or deemed to occur.
Like other countries, in India also a set of Rules (Place of Supply Rules) will be prescribed for
defining the ‘Place of Taxation’ or ‘Place of Supply’. These Rules will help in determining the place
where the supply of goods or services will take place plus whether the supplies are interstate or
intra state. A Supply is taxable in a given jurisdiction only if the supply is considered to take place
in that particular jurisdiction.
Factors determining jurisdiction for supply of Services or Intangible Property:
 Place of performance of service
 Place of enjoyment of service/intangible property
 Place of residence/location of recipient
 Place of residence/location of supplier
Services with Own Set of Rules for fixation of situs:
 Immovable Property services e.g., services of estate agents or architects
 Banking & other financial services
 Transport of goods by road
 Business auxiliary and event management services
 Advertisement given on PAN India basis in print or electronic form.

Special Rules for Mobile Services (no fixed place of performance or enjoyment):
 Passenger travel services
 Freight transportation services
 Telecommunication services
 Motor vehicle lease rentals
 E-commerce transactions
 Software development through electronic mode
 Supply of goods during transportation
For the above mentioned mobile services, Special rules may be designed to yield best results.
More certainty and clarity is assured in situations where place or location or residence of the
supplier or recipient is not clearly defined at the time of supply.
POSSIBLE PLACE OF TAXATION :
1.BUSINESS TO BUSINESS (B2B) – : Place of destination is normally the place where the
recipient is established or located.
2. BUSINESS TO CUSTOMER (B2C) – :
 Tangible Supplies: Place of destination could be the place where the supplier is located or
established, which is generally the place where the service is performed. E.g., haircuts, hotel
accommodation, local transport, entertainment services.
 Intangible/Mobile Supplies: Place of supply could be the place of residence of the customer
or the place where services are used or enjoyed. E.g., telecommunication, e-commerce services.
Now for proper application of sub national tax on inter state supplies of goods & services, suitable
mechanism is required. Instead of zero rating of inter state supplies, preferred approach is
required.
Various models are adopted by other countries for inter state transactions. Instead of discussing
all the models in detail & zero rating of inter state transactions; our focus will be on IGST
(Integrated Goods & Services Tax) Model. This is the ideal model for our country. IGST model
envisage levy of IGST by the Centre on all transactions during inter state taxable supplies.
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Features of IGST Model:

 Seller of the origin state will charge IGST (CGST+SGST) on inter state transactions.
 Inter state seller will now able to pay net IGST after utilising credit of input CGST & SGST.
 Inter state buyer will also avail input tax credit for payment of his own IGST, CGST or SGST
on the basis of tax invoice.
 Both buyer & seller shall report these transactions in their e-returns.
 Amount paid by the seller in his State along with input tax credit claimed by him will be
remitted by the Central Agency to the buying state. This mechanism is required to maintain GST a
destination based tax.
 B2B transactions will be able to get input tax credit without any break till it reaches the final
consumer.
IGST Model permits cross utilisation of credit of IGST, CGST & SGST for paying IGST unlike intra
state supply where CGST/SGST can be utilised only for paying CGST/SGST respectively. It would
meet the objective of providing seamless credit chain to taxpayer across states.
This model obviates the need for refunds to exporting dealers as well as the need for every state
to settle account with another state. Exporting state will transfer to the Centre the credit of SGST
used for payment of IGST. The Centre will transfer to the importing state the credit of IGST used
for payment of SGST. Now, finally the Central Government will act as a clearing house for all the
states through transfer of funds.
Illustration for IGST Model:
Mr. A is based in Maharashtra & Mr. B is based in Gujarat. Mr. A supplied goods to Mr. B and paid
17% IGST. Mr. A has Input credit of CGST 8% and SGST 8% from local purchases made by him.
Now, Mr. A is required to pay only 1% IGST to the Central Government. He will be able to utilise
input credit of 16% for paying IGST. Maharashtra will transfer to Centre 8% SGST used for
payment of IGST.
Mr. B who had purchased those goods supplied the same locally to Mr. C who is also based in
Gujarat. Now he is liable for SGST 10% and CGST 8 %. He will utilise credit of IGST of 17% first
for CGST 8% and 9% for SGST. He will be required to pay 1% in cash.
Gujarat Government is entitled to SGST since it is the destination state. Centre will transfer 9%
IGST credit used for payment of SGST to Gujarat.
Points to Remember:
1. Maharashtra Government will not get any tax anyhow since it is inter state supply from
Maharashtra to Gujarat.
2. Central Government will get 9 % IGST (8% from Maharashtra & 1% paid in cash by Mr. A) on
inter state supply of goods to Gujarat.
3. Gujarat Government will get 10 % SGST (9% from Central Government & 1 % paid in cash by
Mr. B) for intra state supply of goods.
4. B (based in Gujarat) has been allowed full credit of IGST paid by Mr. A (based in Maharashtra)
of 17%.
Key Enablers of IGST:
 Common e – Return for CGST, SGST & IGST
 Uniform e – Registration
 Common periodicity of returns for a class of dealers
 Uniform cut-off date for filing of returns
 Effective fund settlement among Centre & States.

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 System based validations on ITC availed, tax refunds

 Extensive Computerisation & strong IT infrastructure
 National Agency
 Trained and well equipped staff
Issues to be considered by the Government:
1. Specific provisions for determining nature of activity (whether the transaction is a sale or
service) are required.
2. For ascertaining consideration price of sale, specific rules are necessary. E.g., sometimes
freight element in a transaction of sale to other state is more than the base price of goods. Now
the confusion is whether freight element is part of sale or service.
3. Provisions are also required to allow inter GST set off between CGST & SGST of input tax. This
will avoid cascading effect of taxes.
4. Whether exemption in respect of import sale and high seas sales u/s 5(2) of the CST Act will be
continued or not?
5. Whether exemption to penultimate exports will be continued?
6. Whether exemption on subsequent sales u/s 6(2) of the CST Act will be continued?
7. Provisions are also required for sale or purchase of goods declared by Parliament to be of
special importance in interstate trade or commerce.
8. Rules are required for determination of value in case of transfer of goods to branches/
consignment agent/ inter related parties.
9. Measures are also required to avoid litigation which may arise due to fixation of situs. Revenue
sharing arrangements among the states on inter state transactions are to be prescribed.
Above issues need to be resolved before GST is to be implemented. ‘Prevention is better than
cure’ – same goes with GST. Every phase is to be looked seriously plus the ultimate consumer is
not to be penalised anyhow. Then only, reform will be successful.

IMPACT OF GST ON STATE REVENUE

A brief introduction to Goods and Service Tax (GST)
After long years of battle GST has finally been introduced on July 1 st, 2017. GST bill is focused to
remove tax barriers between states and creates a single market i.e. ‘One nation One Tax’. In the
pre-gst regime, multiple indirect taxes were levied by centre as well as state governments. Now, all
these taxes (CST, VAT, Excise, Entertainment etc.) have been subsumed into GST making tax
compliance simple and lean. All taxes will be collected at the point of consumption; consumers will
not end up paying ‘tax on tax’ which is what happens in the pre- gst regime. More than 150 plus
countries implemented GST and none of them rolled it back as inefficient or weak to the economy.
State Worries Post-GST
As GST is the destination based tax in case of interstate sales the revenue will accrue to the
states which consume the goods. However, in Pre-GST scenario Central sales tax as well as VAT
is also charged on supply of goods, CST being origin based tax which is replaced by Destination
based tax. Due to this the manufacturing state is going to lose its portion of revenue from
interstate sales. States autonomy has also been curtailed due to implementation of GST. Rolling of
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GST by states is very challenging, at one hand it has to take care of its revenue on the other hand
state has to maintain the balanced rate on goods and services.
Impact of GST on state revenues after 5 years
It is very difficult to ascertain the impact of GST on the revenue of states after 5 years but as per
the various reports of government and the renowned economist of the country GST perhaps will
have the positive as well as negative impact on the state finances.
‘GST is good in the medium to long run. Even in the short term the impact of GST on individual
states varies across states’.
– India ratings firm
So lets analyze the positive and negative impact of GST on the revenue of states after five years :-
Positive impact of GST
 GST will reduce the costs of goods and services which were charged to
double taxation with elimination of cascading effect it will reduce the compliance
cost also. In fact reduction of 1% of the cost will bring about 9-10% increase in profit
as asserted by CA Vineeta Sharma . Therefore, more profit will subsequently
[1]

increase the share in revenue.

 Lean and simple tax system will attract more investors to India, thus increase
in investment brings more business across the states, thereby ultimately result in
increase of the tax collection by the states.
 GST revenue of all states combined will grow at a Compound annual growth
rate (CAGR) of 16.6% in Fiscal Year 2018 over Fiscal year 2016, according to India
Ratings It may result in the prosperous or increased revenue for the states in the
near future.
 Competitiveness among businesses increased, gains to the government by
GST are considered to be higher as compared to the other taxes the benefit of
which accrues for the total development of the state in the medium term.
 Due to simple tax structure GST is easier to administer, it will eventually help
in the tax recovery and with most of the work online reducing paperwork and only
one type of tax return the service and the industry sector will flourish thus increasing
the states revenue.
 The average shortfall immediately after GST revenue collected by states
declined to 28.4% in august, 24% in September, 17.6% in October, 2017. Therefore
from the figures we can conclude that the figures are falling every month e. revenue
collection is increasing in every subsequent month, no matter how trivial it is.
‘The tax rate cuts may cause a revenue shortfall initially, but if the demand for such products as
well as compliance by businesses pick up, it could help to offset the revenue loss over a period’
– R.Muralidharan (senior director Deloitte India)
Negative impact of GST
 Although at the recent 25 GST council meet the council has cut rates for 29
th

goods and 53 services it perhaps did not have any effect on inflation which is
constantly rising after the implementation of GST. As India follows the Canadian
model of dual GST and in Canada the GST rate reductions of 2006 from 7% to 6%

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and again in 2008 to 5% did not have any effect on inflation, thereby reducing tax
revenue collection.
 According to Wall Street firm Goldman Sachs in a note ‘ India: question and
answer on GST growth impact could be muted’, has put out estimates that the Modi
governments GST model will not raise growth, will push consumer price inflation and
may result in increased tax revenue collection . [2]

 There is less revenue collection under GST in the short term as can be
deduced from the fact that within four months after the roll out of the GST states are
facing a revenue shortfall of over Rs.39,111 crore and the revenue shortfall for the
full fiscal year could be closer to Rs.90,000 crore against the estimated Rs.55,000
crore as said by Amit Mishra(West Bengal Finance Minister) while addressing the
annual general meeting of FICCI . [3]

 The centre has agreed to compensate the manufacturing states for any deficit
in their revenue for the period of five years. However, in case states revenue still fall
short after the period of five years who will borne the deficit occurred by the states
and such compensation also destabilize the centre’s budget.

IMDEMNIFYING STATE REVENUE LOSS

Government has compensated to the States/UTs for the reported revenue deficit on account of
implementation of Goods and Services Tax (GST). As per provisions in Section 7 of the GST
(Compensation to States) Act, 2017 loss of revenue to the States on account of implementation of Goods
and Services Tax shall be payable during transition period and compensation payable to a State shall be
provisionally calculated and released at the end of every two months during transition period of 5 years.

As per Section 4 of the said Act, financial year 2015-16 has been taken as the base year for calculating
compensation amount payable to States for loss of revenue during transition period. The projected nominal
growth rate of revenue subsumed for a state during the transition period shall be 14% per annum.

Introduction
GST Council has approved a bill for State compensation for revenue loss arising out of GST in the
country.A bill called Goods and Services (State compensation for loss of revenue) bill shall provide
for compensation to the states for loss of revenue arising on the account of implementation of the
Goods and Services Tax for a period of 5 Year as per section 18 of the Constitution Act.

Highlights of Compensation Bill are

as Follows
1 Provides for revenue loss compensation to the state for 5 years.

2 Nominal growth rate projected revenue has been decided @ 14%

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3 Base year to be financial year.

4 Taxes are subsumed to be considered.

5 Local Bodies taxes(other than state taxes) excluded.

6 Cess for 5 years GST compensation Cess to be levied.

7 Input tax credit of cess will be allowed.

Procedure of State compensation for

revenue loss
Parliament may, by law, provide for state compensation for revenue loss arising out of the
implementation of the GST, based on the recommendations of the GST Council. Such
compensation could be for a maximum period of 5 Years.

States will receive provisional compensation from Centre for loss of revenue from implementation
of GST in each quarter but the final annual number would be decided only after an audit carried
out by CAG. The compensation would be met through the levy of a cess called ‘GST
Compensation Cess’ on luxury items and sin goods like tobacco, for the first 5 years. Any excess
amount after the end of 5-year tenure in the ‘GST Compensation Fund’ so created, would be
divided between Centre and states.

Half of the excess amount would go to the Consolidated fund of India and would form part of the
overall tax kitty, which as per statute, is divided in a fixed proportion between the Centre and
states. The remaining 50% would be disbursed among the states in the ratio of their total revenues
from SGST in the last year of the transition period.

If any compensation paid to a state is found to be in excess of the amount actually due to them
after the Comptroller and Auditor General (CAG) audit, it would be adjusted against next year’s
compensation.

The loss of revenue to a state will be computed by the difference between the actual realization to
a state under Goods and Services Tax (GST) regime and the tax revenue it would have got under
the old indirect tax regime after considering a 14 % increase over the base year of 2015-16.

Any compensation paid to a state found to be in excess of the amount actually due to them after
the Comptroller and Auditor General (CAG) audit would be adjusted against next year’s
compensation, the draft law said. The loss of revenue to a state will be the difference between the
actual realization to a state under Goods and Services Tax (GST) regime and the tax revenue it
would have got under the old indirect tax regime after considering a 14 percent increase over the
base year of 2015-16.

UTGST - UNION TERRITORY GOODS AND SERVICE

TAX LAW
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1. UTGST full form and UTGST meaning

The UTGST Act expands to Union Territory Goods and Service Tax.

UTGST, the short form of Union Territory Goods and Services Tax, is nothing but the GST applicable on the
goods and services supply that takes place in any of the five territories of India, including Andaman and Nicobar
Islands, Dadra and Nagar Haveli, Chandigarh, Lakshadweep and Daman and Diu called as Union territories of
India.

Union Territory GST will be charge in addition to the Central GST (CGST)

2. What is UTGST?
The reason behind UTGST applicability in GST is that the common State GST (SGST) cannot be applied in an
Union Territory without legislature.

To address this issue, GST Council has decided to have Union Territory GST Law (UTGST) which would be at
par with SGST. However, SGST can be applied in Union Territories such as New Delhi and Puducherry, since
both have their individual legislatures, and can be considered as “States” as per GST process.

3. UTGST State List Includes

UTGST applies to only those union territories where we do not have separate legislature and those list includes
the following union territories :

 Chandigarh
 Lakshadweep
 Daman and Diu
 Dadra and Nagar Haveli
 Andaman and Nicobar islands

4. What are the 3 types of GST possible after UTGST’s

inception in GST
There could be the following combination of taxes applicable for any transaction:

 For Supply of goods and/or services within a state (Intra-State): CGST + SGST;
 For Supply of goods and/or services within Union Territories (Intra - UT): CGST + UTGST;
 For Supply of goods and/or services across States and/or Union Territories (Inter-State/ Inter-UT): IGST

5. Order of utilization of credits taking into account of

UTGST in GST
In the case of utilization of Input Tax Credit of UTGST in an orderly manner, the treatment to be followed is same
as that of SGST. To sum this up, Input Tax Credit of SGST or UTGST would first set-off against SGST or UTGST
respectively. Output Tax liabilities and balance, if any, can be set-off against IGST Credits available.

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6. UTGST Rates
Union Territory GST contains same tax rates of 0%, 5%, 12%, 18% and 28%. Tax exemption criteria for goods
and services decided by the government for SGST will be same for UTGST.

GST EXEMPTION ON THE SALE AND PURCHASE OF

SECURITIES

How is 'security' defined in GST?

For defining securities, CGST Act makes reference to section 2(h) of the Securities Contracts
(Regulation) Act, 1956 according to which “securities” include—
(i) Shares, scraps, stocks, bonds, debentures, debenture stock or other marketable securities of a
like nature in or of any incorporated company or other body corporate
(ii) Derivative
(iii) Units or any other instrument issued by any collective investment scheme to the investors in
such schemes
(iv) Security receipt as defined in clause (zig) of section 2 of the Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002
(v) Units or any other such instrument issued to the investors under any mutual fund scheme
(vi) Government securities
(vii) Such other instruments as may be declared by the Central Government to be securities; and
(viii) Rights or interest in securities”
Buying and selling of mutual funds or debentures, transactions in derivatives are transaction in
securities.
Although securities have been excluded from the definition of ‘goods’ or of ‘services’, ‘transaction
in securities’ have been included in the scope of exempt supplies while determining pro rata
reversal of input tax credits used for making both taxable and exempt supplies.

What is Exempt Supply?

Exempt supplies comprise the following three types of supplies:

1. Supplies taxable at a ‘NIL’ rate of tax* (0% tax);

2. Supplies that are wholly or partially exempted from CGST or IGST, by
way of a notification amending Section 11 of CGST Act or Section 6
of IGST Act;
3. Non-taxable supplies as defined under Section 2(78) – supplies that
are not taxable under the Act (For Example Alcoholic liquor for
human consumption.

Tax need not be paid on these supplies. Input tax credit attributable to exempt
supplies will not be available for utilization/setoff.

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*Zero-rated supplies such as exports would not be treated as supplies taxable at ‘NIL’
rate of tax;
Central or the State Governments are empowered to grant exemptions from
GST. Conditions are:

1. Exemption should be in public interest

2. By way of issue of notification
3. Must be recommended by the GST Council
4. Absolute exemption or conditional exemption may be for any goods
and / or services of any specified description.
5. Exemption by way of special order (not notification) may be granted
exceptional circumstances.
6. Registered person supplying the goods and / or services is not
entitled to collect tax higher than the effective rate, where the
supply enjoys an absolute exemption.

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Classification of Exemptions:
Supplier may be exempt – Exemption to the person making supplies-i.e supplier,
regardless of the nature of outward supply.
Ex: Services by Securities and Exchange Board of India, Services by Charitable
entities.
Certain Supplies may be exempt –Certain supplies due to their nature and type are
exempted from GST. All supplies that are notified would be eligible for the exemption.
Here, irrespective of who the the supplier is, exemption is allowed. not very much
relevant.
Ex: Services by way of sponsorship of sporting events, Services by way of public
conveniences

Types of Exemptions:
Absolute exemption: Exemption without any conditions.
Ex: Transmission or distribution of electricity by an electricity transmission or
distribution utility, Services by Reserve Bank of India.
Conditional Exemption: Exemption subject to certain conditions.
Ex: Services by a hotel, inn, guest house, club or campsite, by whatever name called,
for residential or lodging purposes, having declared tariff of a unit of accommodation
less than ` 1000/- per day”.
Conditional or partial exemption:
Intra-State supplies of goods and/or services received from an unregistered person by
a registered person is exempted from payment of tax under reverse charge provided
the aggregate value of such supplies received by a registered person from all or any
of the suppliers does not exceed ` 5000/- in a day.

SECURITIES TRANSACTION TAX (STT)

1. What is Securities Transaction Tax?

STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct
tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India.
STT is governed by Securities Transaction Tax Act (STT Act) and STT Act has specifically listed down
various taxable securities transaction i.e., transaction on which STT is leviable. Taxable securities include
equity, derivatives, unit of equity oriented mutual fund. It also includes unlisted shares sold under an offer
for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges. STT
is an amount to be paid over and above transaction value and hence, increases transaction value.
As already mentioned STT is leviable on taxable securities transaction. STT Act has also provided for value
of transaction on which STT is required to be paid and person who is responsible to pay STT i.e., either
buyer or seller. However, rate of STT will be decided by Government and modified from time to time if
necessary.

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Provisions of collection of STT works similar to TCS or TDS. STT is required to be collected by a
recognised stock exchange or by the prescribed person in the case of every Mutual Fund or the lead
merchant banker in the case of an initial public offer, as the case may be, and subsequently payable to the
Government on or before the 7th of the following month.
In case the above persons fail to collect the taxes, they are still obliged the discharge an equivalent amount
of tax to the credit of Central Government within 7th of the following month. Further, failure to collect or,
remit whatever has been collected will result in levy of interest and penal consequences too.

2. Scope of the term ‘securities’ liable

for STT
While the term ‘securities’ is not defined under STT Act, STT Act specifically allows borrowing of
definition of such terms not defined in STT Act but defined in Securities Contracts (Regulation) Act, 1956 or
Income-tax Act, 1961. The term ‘Securities’ is defined in Securities Contracts (Regulation) Act and includes
the following:

 Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable

securities of a like nature in or of any incorporated company or other body corporate.
 Derivatives.
 Units or any other instrument issued by any collective investment scheme to the
investors in such schemes.
 Government securities of equity nature.
 Equity oriented units of mutual fund.
 Rights or interest in securities.
 Securitized debt instruments.

Hence, securities include all of the above the purpose of STT levy that are traded on recognized stock
exchange. Off-market transactions are out of the purview of STT.

3. Levy of Securities Transaction Tax

Taxable securities transaction Rate of Person Value on which
STT responsible to STT is required
pay STT to be paid

Delivery based purchase of equity 0.1% Purchaser Price at which

share equity share is
purchased*

Delivery based sale of an equity share 0.1% Seller Price at which

equity share is
sold*

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Delivery based sale of a unit of 0.001% Seller Price at which

oriented mutual fund unit is sold*

Sale of equity share or unit of equity 0.025% Seller Price at which

oriented mutual fund in recognised equity share or
stock exchange otherwise than by unit is sold*
actual delivery or transfer and intra
day traded shares

Derivative – Sale of an option in 0.017% Seller Option premium

securities

Derivative – Sale of an option in 0.125% Purchaser Settlement price

securities where option is exercised

Derivative – Sale of futures in 0.01% Seller Price at which

securities such futures is
traded

Sale of unit of an equity oriented fund 0.001% Seller Price at which

to the Mutual Fund – Exchange unit is sold*
traded funds (ETFs)

Sale of unlisted shares under an offer 0.2% Seller Price at which

for sale to public included in IPO and such shares are
where such shares are subsequently sold*
listed in stock exchanges

PURCHASE OF UNITS OF NIL PURCHASER NA

EQUITY ORIENTED MUTUAL
FUNDS

* Please referRule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of
taxable equity or Equity oriented mutual fund transactions.

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4. STT on a physical delivery of

Derivatives – CBDT clarification dated 27
August 2018
Derivative contracts are generally settled in cash which means, stocks are not physically delivered and only
the profits are paid and received by the contracting parties. These transactions, as given in the table above,
are subject to an STT levy of 0.001 percent.
However, SEBI had in its Circular dated 11.4.2018 listed around 46 stocks, in respect of which derivative
contracts would be settled by way of physical delivery of shares as against cash. However, no clarity
emerged on the rate of STT that would apply to these kinds of transactions. Further, for such transactions,
the stock exchanges began to levy an STT of 0.1 percent (this is the rate of STT for delivery based equity
share transaction), which is almost 10 times of what is levied for derivative contracts settled in cash.
Hence, a petition was lodged by the Association of National Exchange Members of India (ANMI) against
the stock exchanges before the Bombay High Court to address the aforementioned concern of levy of 0.1
percent of STT on physical delivery of derivatives. The High Court has sought the comments of the Central
Board of Direct Taxes (CBDT) in this regard.
The CBDT, in response, has issued a clarification dated 27 August 2018, where it has observed that where a
derivative contract is being settled by physical delivery of shares, such transaction would be similar to a
transaction in equity shares where the contract is settled by actual delivery of shares. Therefore, the STT rate
as applicable to delivery based equity transactions would apply to such derivative transactions too.

5. STT and Income-tax

 Tax on capital gains

When STT levy was introduced in 2004, simultaneously new Section 10(38) was introduced to benefit
taxpayers who would incur STT. As per Income-tax Law, for transactions undertaken until 31 March 2018,
any capital gain on sale of shares or equity oriented mutual fund units (EOMF) which are subject to STT is
taxed at beneficial/Nil rate. While long term capital gain (if shares or EOMF are held for > 12 months) are
exempt from tax, short term capital gain on such securities are taxed at concessional rate of 15%.
However, in order to prevent abuse of exemption provisions by certain persons for declaring their
unaccounted income as exempt long-term capital gains by entering into sham transactions, Finance budget
2018 proposed to withdraw the exemption on long term capital gain and tax long term capital gains on
equity shares and EOMF at concessional rate of 10% with respect to transfer effected on or after 1 April
2018. However, gains accrued till 31 January 2018 are grandfathered i.e., in case of transfers upto 31
January 2018, cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by
fair market value as on 31st January 2018.

 Tax on business income

In case of person who is trading in securities and offering income/loss from such trading as business income,
STT paid is allowed to be deducted as business expense.

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UNIT V
CUSTOM LAW
LEGISLATIVE BACKGROUND OF THE LEVY PORTS-WAREHOUSE-
NATURE AND RESTRICTIONS ON EXPORTS AND IMPORTS-LEVY,
EXEMPTION AND COLLECTION ON CUSTOMS, DUTIES AND
OVERVIEW OF LAW AND PROCEDURE - CLEARANCE OF GOODS
FROM THE PORT, INCLUDING BAGGAGE - GOODS IMPORTED OR
EXPORTED BY POST AND STORES AND GOODS IN TRANSIT - DUTY
DRAWBACKS PROVISIONS, AUTHORITIES - POWERS AND
FUNCTIONS AND SEZ UNITS.

LEGISLATIVE BACKGROUND OF THE LEVY PORTS-

WAREHOUSE
Constitutional Provision: Entry 83 of the Union List of the Seventh Schedule to the
Constitution of India is empowered to levy the customs duty by the Central Government of
India. The term customs is not new for us. It was customary for a trader who brings the
goods to a particular kingdom to offer gifts to the king for allowing him to sell his goods in
that kingdom. The gifts given by the dealer to the king was nothing but a customary practice
in those days. In the modern days, these gifts are collected by the Government of India in the
form of Customs Duty from the importer who imports the goods from a country outside
India and from an exporter who exports the goods to a country outside India. The Customs
Act, was enacted by the Parliament in the year 1962, as per the List I of the Union List
Parliament has an exclusive right to make laws. The Customs Act regulates import and
export, protecting the Indigenous industry from other countries and so on. The Central
Government of India has power to make rules under section 156 of Customs Act, 1962, and
also has the power to issue Notifications from time to time for the purpose of smooth
functioning and effective administration of the Act. As per section 157 of the Custom Act,
1962, the Central Board of Excise and Customs (CBE&C), now renamed to Central Board of
Indirect Tax and Customs (CBIC), has been empowered to make regulations, consistent with

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provisions of the Act. The Commissioner of Customs has the power to issue the Public
notices which are also called trade notices.

INTRODUCTION

Custom Duty is an indirect tax, imposed under the Customs Act formulated in 1962. The
power to enact the law is provided under the Constitution of India under the Article 265,
which states that ―no tax shall be levied or collected except by authority of law‖. Entry No.
83 of List I to Schedule VII of the Constitution empowers the Union Government to legislate
and collect duties on import and exports. The Customs Act, 1962 is the basic statute which
governs entry or exit of different categories of vessels, aircrafts, goods, passengers etc., into
or outside the country. The Act extends to the whole of the India. Customs Act, 1962 just like
any other tax law is primarily for the levy and collection of duties but at the same time it has
the other and equally important purposes such as: (i) regulation of imports and exports; (ii)
protection of domestic industry; (iii) prevention of smuggling; (iv) conservation and
augmentation of foreign exchange and so on. Section 12 of the Custom Act provides that
duties of customs shall be levied at such rates as may be specified under the Customs Tariff
Act, 1975 or other applicable Acts on goods imported into or exported from India.

LEVY OF CUSTOM DUTY

There are four stages in any tax structure, viz., levy, assessment, collection and
postponement. The basis of levy of tax is specified in Section 12, charging section of the
Customs Act. It identifies the person or properties in respect of which tax or duty is to be
levied or charged. Under assessment, the liability for payment of duty is quantified and the
last stage is the collection of duty which is may be postponed for administrative
convenience. As per Section 12, customs duty is imposed on goods imported into or exported
out of India as per the rates specified under the Customs Tariff Act, 1975 or any other law.

On analysis of Section 12, we derive the following points:

(i) Customs duty is imposed on goods when such goods are imported into or exported out of
India;

(ii) The levy is subject to other provisions of this Act or any other law;

(iii) The rates of Basic Custom Duty are as specified under the Tariff Act, 1975 or any other
law;

(iv) Even goods belonging to Government are subject to levy, though they may be exempted
by notification(s) under Section 25. Custom Tariff Act, 1975 has two schedules. Schedule I
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prescribes tariff rates for imported goods, known as ―Import Tariff‖ and Schedule II
contains tariff for export goods known as ―Export Tariff.

WAREHOUSING

w.e.f. 14-5-2016, As per Section 2(43) of the Customs Act, 1962, “warehouse” means a
public warehouse licensed under section 57 or a private warehouse licensed under section 58
OR Special Warehouse license u/s 58A.

Features of Warehousing:

1. Importer can defer payment of import duties by storing the goods in a safe place

2. Importer allowed doing manufacturing in bonded warehouse and then re-exporting from
it.

3. The importer can be allowed to keep the goods up to One year without payment of duty
from the date he deposited the goods into warehouse.

4. This time period is extended to Three years for Export Oriented Units and the time period
still be extended to Five years if the goods are capital goods.

5. The importer minimizes the charges by keeping in a warehouse, otherwise the demurrage
charges at port is heavy.

6. Assistant Commissioner of Customs or Deputy Commissioner of Customs are competent

to appoint a warehouse as public bonded warehouse.

7. The Assistant Commissioner of Customs or Deputy Commissioner of Customs may

license private warehouse. The license to private warehouse can be cancelled by giving ONE
month notice.

8. Only dutiable goods can be deposited in the warehouse.

9. Green Bill of Entry has to be submitted by the importer to clear goods from warehouse for
home consumption.

10. Rate of duty is applicable as on the date of presentation of Bill of Entry (i.e. sub-bill of
entry or ex-bond bill of entry) for home consumption.

11. Reassessment is not allowed after the imported goods originally assessed and
warehoused.

12. The exchange rate is the rate at which the Bill of Entry (i.e. ‘into bond’) is presented for
warehousing.

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13. If the goods which are not removed from warehouse within the permissible period, then
subsequent removal called as improper removal. The rate of BCD which is applicable as on
the last date on which the goods should have been removed but not removed is applicable,
[Kesoram Rayon v Commissioner of Customs (1996)].

w.e.f. 14-5-2016:

(1) Section 59 of the Customs Act, 1962, Bond amount has been increased from twice of the
duty amount to thrice of the duty amount and security also will have to be given.

(2) Now, rent charges claimable will not be pre-requisite for non- compliances of any of the
provisions, since it is the issue of custodian i.e. owner of the warehouse.

Licensing of Public Warehousing:

Sec. 57 The Principal Commissioner of Customs or Commissioner of Customs may, subject

to such conditions as may be prescribed, license a public warehouse wherein dutiable goods
may be deposited.

Licensing of Private Warehouses:

Sec. 58 The Principal Commissioner of Customs or Commissioner of Customs may, subject

to such conditions as may be prescribed, license a private warehouse wherein dutiable goods
imported by or on behalf of the licensee may be deposited.

Licensing of Special Warehousing:

Sec. 58A (1) The Principal Commissioner of Customs or Commissioner of Customs may,
subject to such conditions as may be prescribed, license a special warehouse wherein
dutiable goods may be deposited and such warehouse shall be caused to be locked by the
proper officer and no person shall enter the warehouse or remove any goods therefrom
without the permission of the proper officer.

Sec. 58A (2) The Board may, by notification in the Official Gazette, specify the class of
goods which shall be deposited in the special warehouse licensed under sub-section (1).

NATURE AND RESTRICTIONS ON EXPORTS AND

IMPORTS-LEVY

Import / Export Restrictions /

Prohibitions under Customs law
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Under sub-section (d) of section 111 and sub-section (d) of Section 113, any goods
which are imported or attempted to be imported and exported or attempted to be
exported, contrary to any prohibition imposed by or under the Customs Act or any
other law for the time being in force shall be liable to confiscation. Section 112 of the
Customs Act provides for penalty for improper importation and Section 114 of the
Customs Act provides for penalty for attempt to export goods improperly. In respect of
prohibited goods the Adjudicating Officer may impose penalty upto five times the
value of the goods. It is, therefore, absolutely necessary for the trade to know what
are the prohibitions or restrictions in force before they contemplate to import or
export any goods.

The terms "Prohibited Goods" have been defined in sub-section 33 of

Section 2 of the Customs Act as meaning "any goods the import or export
of which is subject to any prohibition under the Customs Act or any other
law for the time being in force"

Under section 11 of the Customs Act, the Central Government has the
power to issue Notification under which export or import of any goods can
be declared as prohibited. The prohibition can either be absolute or
conditional. The specified purposes for which a notification under section
11 can be issued are maintenance of the security of India, prevention and
shortage of goods in the country, conservation of Foreign Exchange,
safeguarding balance of payments etc. The Central Govt. has issued many
notifications to prohibit import of sensitive goods such as coins, obscene
books, printed waste paper containing pages of any holy books, armored
guard, fictitious stamps, explosives, narcotic drugs, rock salt, saccharine,
etc.

Under Export and Import Policy, laid down by the DGFT, in the Ministry of
Commerce, certain goods are placed under restricted categories for
import and export. Under section 3 and 5 of the Foreign Trade
(Development and Regulation) Act, 1992, the Central Government can
make provisions for prohibiting, restricting or otherwise regulating the
import of export of the goods. As for example, import of second hand
goods and second hand capital goods is restricted. Some of the goods are
absolutely prohibited for import and export whereas some goods can be
imported or exported against a licence. For example export of human
skeleton is absolutely prohibited whereas export of cattle is allowed
against an export licence. Another example is provided by Notification
No.44(RE-2000) 1997 dated 24.11.2000 in terms of which all packaged
products which are subject to provisions of the Standards of Weights and
Measures (Packaged Commodities) Rules, 1997, when
produced/packed/sold in domestic market, shall be subject to compliance
of all the provisions of the said Rules, when imported into India. All
packaged commodities imported into India shall carry the name and
address of the importer, net quantity in terms of standard unit of weights
measures, month and year of packing and maximum retail sale price

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including other taxes, local or otherwise. In case any of the conditions is

not fulfilled, the import of packaged products shall be held as prohibited,
rendering such goods liable to confiscation.

Another restriction under the aforesaid Notification issued by the Ministry

of Commerce is that the import of a large number of products, presently
numbering 133, are required to comply with the mandatory Indian Quality
Standards (IQS) and for this purpose exporters of these products to India
are required to register themselves with Bureau of Indian Standards
(BIS). Non-fulfillment of the above requirement shall render such goods
prohibited for import.

Import and export of some specified goods may be restricted/prohibited

under other laws such as Environment Protection Act, Wild Life Act,
Indian Trade and Merchandise Marks Act, Arms Act, etc. Prohibition under
those acts will also apply to the penal provisions of the Customs Act,
rendering such goods liable to confiscation under section 111(d) of the
Customs Act (for import) and 113 (d) of the Customs Act (for export).

Any Importer or Exporter for being knowingly concerned in any fraudulent

evasion or attempted evasion of any prohibition under the Customs Act or
any other law for the time being in force in respect to any import or
export of goods, shall be liable to punishment with imprisonment for a
maximum term of three years (seven years in respect of notified goods)
under section 135 of the Customs Act. Any person who is reasonably
believed to be guilty of an offence, punishable under section 135, may be
arrested under the provisions of section 104 of the Customs Act.

Keeping in view the above penal provisions in the Customs Act to deal
with any deliberate evasion of prohibition/restriction of import of export
of specified goods, it is advisable for the Trade to be well conversant with
the provisions of EXIM Policy, the Customs Act, as also other allied Acts.
They must make sure that before any imports are effected or export
planned, they are aware of any prohibition/restrictions and requirements
subject to which alone goods can be imported/exported, so that they do
not get penalised and goods do not get involved in confiscation etc.
proceedings at the hands of Customs authorities.

EXEMPTION AND COLLECTION ON CUSTOMS

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Customs Duty
Goods are imported in or exported from India through sea, air or land. Goods may even come
through post parcel or as baggage when passengers travel in and out of the country. The Customs
Act was formulated in the year 1962 to prevent the illegal import and export of goods. Moreover,
all imported goods are subject to the duty to affording protection to indigenous industries as well
as to keep the imports to a minimum in the interests of Indian companies and to secure the
exchange rate of the Indian currency. In this article, we look at customs duty in India in detail.

Objective of Customs Act and Customs Duty

The following purposes are the reason why Customs Duty is levied on the import and export of
goods in India.

1. To restrict the imports for conserving foreign exchange.

2. To protect the imports and exports of goods for achieving the policy objectives of the
Government.
3. To regulate export
4. To co-ordinating legal provisions with other laws dealing with the foreign exchange such as
the Foreign Trade Act and the Foreign Exchange Regulation Act.
5. To safeguard domestic trade.
6. To protect the revenue of resources.
7. To protect the industries in India from unfair competition.
8. To prevent the smuggling of goods and activities related to the same.
9. To prevent the dumping of goods.

Types of Customs Duty in India

The different types of duties of customs collected are as follows.

1. Basic Custom Duty

2. Surcharge
3. Additional duty of customs
4. Special Additional duties
5. Other levies like Countervailing duty, Anti-dumping duty, Safeguard duty and so on. Also,
cess duty is leviable of certain goods.

Mode of Levy of Customs Duty

They are three modes of imposing Customs Duty. They are as follows:

Specific Duties
A Specific Custom Duty is a kind of duty imposed on every unit of a commodity imported or
exported. For example, INR 10 on each metre of cloth imported or INR 1,000/- on each TV set
imported. In these cases, the value of the commodity is not taken into consideration.

Ad Valorem Duties
Ad Valorem is the Latin for ‘According’ to the ‘Value’ or ‘Worth’. Ad Valorem custom duty is a duty
imposed on the total value of a commodity imported or exported. For example, 10 per cent of the
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F.O.B value of cloth imported or 20 per cent of the C.I.F value of TV sets imported. In the case of
Ad Valorem custom duty, the physical units of commodity are not taken into consideration.
Therefore it is the method of charging duty, tax, or fee according to the value of the goods and
services, instead of by a fixed rate, or by the weight or the quantity.

Compound Duties
Compound custom duty is a combination of specific and Ad Valorem custom duties. In this case,
the quantity, as well as the value of the commodity, is taken into consideration while computing
tariff.

Exemptions from Customs Duty

There are a few exemptions from Customs duty, and they are as follows.

 The Central Government can grant exemptions by issuing a notification. Capital goods and
spares can be imported under “project imports” at concessional/ Nil rate of customs duty.
 Section 25 of the Customs Act authorises the Central Government to issue notification
granting exemption from customs duty partially or wholly on any goods.
 The exemptions may be in respect of primary duty or auxiliary duty.
 General or specific exemptions may be granted. While general exemptions are in respect to
the user of goods, specific exemptions are in respect of various products.
 The exemptions are also granted subject to fulfilment of certain conditions.

Types of Exemptions
The following are the types of exemptions from Customs Duty.

1. By notification
2. By particular order on the Adhoc basis
3. General exemptions
4. Exemptions to Oil and Natural Gas Corporations Limited (ONGC)/ Oil India Limited (OIL)
5. Other exemptions

“Customs Duty Drawbacks”

“Drawbacks” about any goods manufactured in India and exported has either of the following
meanings.

1. Rebate of duty chargeable.

2. Rebate of duty of excise.
3. A drawback is equal to the Customs duty paid on imported inputs and the Excise duty paid
on indigenous inputs.

Value of the Customs Act

Customs Duty is an amount that is payable as a percentage of ‘value’ often called as ‘Assessable
Value’ or Customs Value. Sections 14(1) provides the following criteria for deciding ‘value’ for
Customs Duty.

1. Price at which such or like goods are ordinarily sold or offered for sale.

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2. Price for the delivery at the time and place for importation or exportation.
3. Price should be in the course of International Trade.
4. Seller and buyer have absolutely no interest in the business of each other, or one of them
has no interest in the other.
5. Price should be sole considerations for sale or offer for sale.
6. The rate of exchange as appropriate on the date of presentation of Bill of Entry as fixed by
CBE&C (Board) by Notification should be considered. This criterion is entirely appropriate for
valuing export goods. However, in the case of import goods valuation is required to be done
according to valuation rules as stated in Chapter 6 Para 5 of the CBE & C’s Customs Manual,
2001.

Scope and Coverage of Customs Law

Customs Law in India is covered under many Acts, rules, regulations and notifications. Some of the
essential laws concerning Customs Duty has been mentioned below.

The Customs Act of 1962

The Customs Act of 1962 is the most crucial Act that provides for the implementation and
collection of duty on goods imported and exported in the country. This Act also deals with the
Import and Export procedures, Prohibitions on importation and exportation of goods, penalties,
offences and much more.

The Customs Tariff Act of 1975

The Customs Tariff Act of 1975 contains two schedules. Schedule-1 gives the classification and
rate of duties for imports. On the other hand, Schedule-2 gave classification and rated of duties for
exports. In addition to these two schedules, the Customs Tariff Act makes provisions for duties like
additional duty (CVD), special duty, anti-dumping duty and protective duties.

Note: The Customs Act of 1962 regulates the levy of duties of customs while the Customs Tariff Act
of 1975 fixes the rates of the taxes.

Rules under the Customs Act

The Section 156 of the Customs Act of 1962 states that the Central Government has been
empowered to make regulations that are consistent with the provisions of the Act and to carry out
the main purposes of the Act. Multiple rules have been framed under these powers. The principal
rules of this Act have been mentioned below.

1. The Customs Valuation Rules of 1988: For the valuation of imported goods for calculating
duty payable.
2. The Customs and Central Excise Duties Drawback Rules of 1995: The mode of calculating
rules of duty drawback on exports.
3. Re-export of Imported Goods
4. Baggage Rules of 1998: This stated the rules and allowances for bringing in baggage from
abroad by Indian and tourists who visited the country. Duty-free baggage allowance carried
by an international passenger, when coming to India is INR 50,000/- per individual. Before
the 31st of March, 2016, the amount was INR 45,000/-. With effect from the First of April,
2016, all international passengers travelling to India need not file declarations if not
carrying dutiable goods as part of the baggage they bring along with them.

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5. Customs Rules of 1996: This states the import of goods at a concessional rate of duty for
manufacture of excisable goods. It also provides the procedure to be followed when goods
are imported into India for export purposes.

Regulations under the Customs Act

Under Section 157 of Customs Act of 1962, the Board has the authority to make rules that
are consistent with provisions of the Act to carry out the purposes of the Act. Various regulations
have been framed under these powers such as the ones stated below.

1. Project Import Regulations of 1986: Procedures for project imports

2. Customs House Agents Licensing Regulations of 1984

Other Specifics
Notifications under the Customs Act
Various sections authorise the Central Government to issue notifications. The main sections have
been stated below.

1. Section 25(1): This section is to grant partial or full exemption from the duty, and Section
11 states the prohibition of import or export of goods.
2. Other sections are: A few of the other sections are ones like Section 11B that specifies
notified goods and Section 11-I that determines specific goods.

Board Circulars
Central Bureau of Indirect Taxes and Customs is empowered under Section 151A of the Customs
Act. The Bureau has the power to issue instructions, and directions to the officers of customs and
they are required to observe and follow, This is for uniformity in the classification of goods or
concerning the levy of duty.

Customs Manual of 2001

The Manual gives an overview of the Customs Law and Procedures.

Public Notices
The Commissioners of Customs would issue Public Notices.

COLLECTION OF CUSTOMS DUTY

Custom Duty?
Under Section 2(22), goods includes the following
 Stores
 Vessels, aircraft, and vehicles
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 Baggage
 Currency and negotiable instruments
 Other moveable property

What is Custom Duty?

Custom duty is a type of indirect tax that is levied on all the goods that are imported to the country as well as
some goods exported from the country. The duty levied on the former is referred to as import duty while that on
the latter is referred to as the export duty. To simplify it, any tariff that is introduced on goods across national
borders is referred to as custom duty.

The duty levied depends on the value of the goods, its dimensions and weight along with a lot of other criteria.
While value-based duties are called valorem duties, quantity-based duties are called specific duties. On the
other hand, duties on values plus other factors are called compound duties.

Custom Duty in India

Custom Duty in the country falls under the Customs Act, 1962. As per this act, the government levies duties on
both import and export of goods along with their procedures, prohibitions, penalties etc. Matters pertaining to this
duty fall under the CBEC (Central Board of Excise and Customs), a division of the Department of Revenue of the
Ministry of Finance.

The CBEC helps in formulating policies w.r.t. the collection and imposition of custom duties including custom
duty evasions, prevention of smuggling etc. It oversees the tax administration of inland and foreign travel. It has
different divisions to take care of field work such as the Commissionerate of Customs, Central Revenues
Laboratory and Directorates etc.

Types of Custom Duty

Custom duties are levied on nearly all goods that are imported into the nation. While export duties are levied on
goods as specified by the Second Schedule, import duties are not levied on certain items like fertilizers, food
grains, lifesaving drugs etc. Custom duty can be classified into the following types:

 Basic Customs Duty: This duty is imposed on the value of goods at a specified rate as it is fixed on an
ad-valorem basis. After being amended time and again, it is currently regulated by the Customs Tariff
Act, 1975. The Central Government, however, holds the rights to exempt specific goods from this tax.
 Countervailing Duty: CVD or Additional Customs Duty is levied on imported goods that fall under
Section 3 of the Customs Tariff Act of 1975. It is the same as the Central Excise Duty which is levied on
similar goods that are produced in India.
 Education Cess: The cess used to be levied at 2% and an additional 1% of the aggregate of customs
duties.
 Protective Duty: This duty is imposed in order to shield the domestic industry against the imports at
rates that are recommended by the Tariff Commissioner.

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 Safeguard Duty: As the name suggests, this duty serves as a means of safeguarding the rise in
exports. Sometimes, if the government feels that a rise in exports can damage the existing domestic
industry, it may levy this duty.
 Anti-Dumping Duty: This duty is based on the dumping margin, i.e. the difference between the export
price and the normal price. It is only imposed when the goods that are imported are below the fair market
price.

Calculating Custom Duty

Custom duty can be calculated on either a specific or an ad valorem basis. The value of goods, for the latter, is
determined by Rule 3(i) of the Customs Valuation Rules, 2007. If there is no quantifiable data w.r.t. valuation
factors, then the valuation of the items is done using other means based on a system of hierarchy, as follows:

 Comparative Value Method: This method compares transaction values of items similar in nature (Rule
4)
 Comparative Value Method: This method compares transaction values of items similar in nature (Rule
5)
 Deductive Value Method: This method uses the sale price of items in the importing country (Rule 7)
 Comparative Value Method: This method uses costs related the fabrication, materials as well as profit
in the production country (Rule 8)
 Fallback Method: This method is based on the earlier methods that offer higher flexibility (Rule 9)

Custom Duty Online

The portal that contains online custom duty is the ICEGATE or Indian Customs Electronic Commerce/Electronic
Data Interchange (EC or EDI) Gateway. It allows the clients of the Customs Department an e-filing service that
includes trade and cargo carriers, which is collectively known as Trading Partner. Through ICEGATE, one can do
an electronic filing of Bill of Entry and shipping bills along with messages between the trading partner and
customs through email, web upload or FTP. This portal particularly helps airline and shipping agents who file
their manifests. Additionally, cargo logistics as well as custodians are able to have interactions with customs EDI
for pieces of information related to cargo and logistics. Besides e-filing, document tracking, e-payment, online
registration of IPR, PAN based CHA data, code status and verification of certain licenses can be done too. For
any queries and issues, the 24*7 helpdesk can be contacted by trading partners.

Payment of Custom Duty

In the world of the internet, payment of custom duty hasn’t been left far behind. It can easily be paid online with a
few simple steps:

 First, access the e-payment portal of ICEGATE

 Then, enter the import or export code or simply key in the login credentials given by ICEGATE
 Finally, click on e-payment
 You will be able to check all the e-challans that are in your name

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 You can then select the challan which you have to pay and choose the payment method or select the
bank
 You will be redirected to the payment gateway of the bank
 Initiate the payment
 Once it is done, you will be redirected to the ICEGATE portal
 The last step would be to click on the print button and save the payment copy.

Custom Duty Calculator

This calculator serves as a simple tool for calculating the custom duty you have to pay. You can gain access to it
at the ICEGATE portal. Upon accessing the custom duty calculator, you will have to enter the CTH or HS Code
of the goods that you plan to import. You will have to enter a description of maximum 30 characters and then
select the country of origin, be it for preferential duty or antidumping. If you want to see the list of goods, then
simply click on the search tab and the list matching your criteria will appear. You can choose the right one and
then gain access to a chart loaded with relevant information. In this dynamic chart, you can enter the values to
check the exact custom duty you ought to pay.

Custom Duty Rates

These rates can either be specific or ad valorem. The duty, in general, varies from the range 0-150%. The
average rate, however is 11.90%. There is a list to refer to for goods that are exempted from this duty.

There are other types of fee that are applicable to custom duty. Thy include:

 LC: Landing charge – 1% CIF

 CVD: Countervailing Duty – 0%, 6% or 12% (CIFD + LC)
 CEX: Education and Higher Education Cess – 3% CVD
 CESS: Education + Higher Education – 3% (Duty + CEX (Education and Higher Education Cess) + CVD)
 Additional CVD: 4% (CIFD + LC + CVD + CESS + CEX)

DUTIES AND OVERVIEW OF LAW AND PROCEDURE

India’s Import Policy: Procedures and Duties

In India, the import and export of goods is governed by the Foreign Trade (Development &
Regulation) Act, 1992 and India’s Export Import (EXIM) Policy.

India’s Directorate General of Foreign Trade (DGFT) is the principal governing body responsible
for all matters related to EXIM Policy.

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Importers are required to register with the DGFT to obtain an Importer Exporter Code
Number (IEC) issued against their Permanent Account Number (PAN), before engaging in EXIM
activities. After an IEC has been obtained, the source of items for import must be identified and
declared.

The Indian Trade Classification – Harmonized System (ITC-HS) allows for the free import of most
goods without a special import license.

Certain goods that fall under the following categories require special permission or licensing.

1) Licensed (Restricted) Items – Licensed items can only be imported after obtaining an import
license from the DGFT. These include some consumer goods such as precious and semi-precious
stones, products related to safety and security, seeds, plants, animals, insecticides,
pharmaceuticals and chemicals, and some electronic items.

2) Canalized Items – Canalized items can only be imported via specified transportation channels
and methods, or through government agencies such as the State Trading Corporation (STC).
These include petroleum products, bulk agricultural products such as grains and vegetable oils,
and some pharmaceutical products.

3) Prohibited Items – These goods are strictly prohibited from import and include tallow fat, animal
rennet, wild animals, and unprocessed ivory.

Import Procedures
All importers must follow detailed customs clearance formalities when importing goods into India.
A comprehensive overview of EXIM procedures can be found on the Indian Directorate of General
Valuation’s website.

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Bill of Entry

Every importer is required to begin by submitting a Bill of Entry under Section 46. This document
certifies the description and value of goods entering the country. The Bill of Entry should be
submitted as follows:

1) The original and duplicate for customs

2) A copy for the importer

3) A copy for the bank

4) A copy for making remittances

Under the Electronic Data Interchange (EDI), no formal Bill of Entry is required (as it is recorded
electronically) but the importer is required to file a cargo declaration after prescribing particulars
required for processing of the entry for customs clearance. Bills of Entry can be one of three types:

1) Bill of Entry for Home Consumption – This form is used when the imported goods are to be
cleared on payment of full duty. Home consumption means use within India. It is white colored and
hence often called the ‘white bill of entry’.

2) Bill of Entry for Housing – If the imported goods are not required immediately, importers may
store the goods in a warehouse without the payment of duty under a bond and then clear them
from the warehouse when required on payment of duty. This will enable the deferment of payment
of the customs duty until goods are actually required. This Bill of Entry is printed on yellow paper
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and is thus often called the ‘yellow bill of entry’. It is also called the ‘into bond bill of entry’ as the
bond is executed for the transfer of goods in a warehouse without paying duty.

3) Bill of Entry for Ex-Bond Clearance – The third type is for ex-bond clearance. This is used for
clearance from the warehouse on payment of duty and is printed on green paper.

It is important to note that the rate of duty applicable is as it exists on the date a good is removed
from a warehouse. Therefore, if the rate changes after goods have been cleared from a customs
port, the customs duty as assessed on a yellow bill of entry (Bill of Entry for Housing) and paid on
the value listed on the green bill of entry (Bill of Entry for Ex-Bond Clearance) will not be the same.

Other non-EDI documents

If a Bill of Entry is filed without using the Electronic Data Interchange system, the following
documents are also generally required:

 Signed invoice;
 Packing list;
 Bill of lading or delivery order/air waybill;
 GATT declaration form;
 Importer/CHA declaration;
 Import license wherever necessary;
 Letter of credit/bank draft;
 Insurance document;
 Industrial license, if required;
 Test report in case of chemicals;
 Adhoc exemption order;
 DEEC Book/DEPB in original, where applicable;
 Catalogue, technical write up, literature in case of machineries, spares or
chemicals as may be applicable;
 Separately split up value of spares, components, and machinery; and,
 Certificate of Origin, if preferential rate of duty is claimed.

Import Duties
The Indian government levies several types of import duties on goods. These include:

Basic Customs Duty

Basic Customs Duty (BCD) is the standard tax rate applied to goods, or the standard preferential
rate in the case of goods imported from specified countries.
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The rates of customs duties are outlined in the First and Second Schedules of the Customs Tariff
Act, 1975.

The First Schedule specifies rates of import duty and the Second specifies rates of export duty.
BCD is divided into standard and preferential rates, with goods imported from countries holding
trade agreements with the Indian central government eligible for lower preferential rates.

IGST and Compensation Cess

Additional duties of customs, commonly referred to as the Countervailing Duty (CVD) and Special
Additional Duty of Customs (SAD), has been be replaced by the levy of the Integrated Goods and
Services Tax (IGST), barring a few exceptions, such as pan masala and certain petroleum
products. The IGST replaces the previous system of federal and state categories of indirect
taxation.

A Customs Duty calculator is made available on the online portal of excise and customs,
the ICEGATE website. There are seven rates prescribed for IGST– Nil, 0.25 percent, 3 percent 5
percent, 12 percent, 18 percent, and 28 percent. The actual rate applicable to an item will depend
on its classification and will be specified in Schedules notified under Section 5 of the IGST Act,
2017.

Further, a few items such as aerated water products, tobacco products, and motor vehicles,
among others, will attract an additional levy of the GST Compensation Cess, over and above
IGST. The Cess is calculated on the transaction value or the price at which the goods are sold.

The Goods and Services Tax (Compensation to States) Act, 2017 was enacted to levy
Compensation Cess for providing compensation to Indian states for the loss of revenue arising on
account of implementation of the Goods and Services Tax from July 1, 2017.

The Compensation Cess on goods imported into India shall be levied and collected in accordance
with the provisions of Section 3 of the Customs Tariff Act, 1975, at the point when duties of
customs are levied on the said goods under Section 12 of the Customs Act, 1962, on a value
determined under the Customs Tariff Act, 1975.

Anti-Dumping Duty

The central government may impose an anti-dumping duty if it determines a good is being
imported at below fair market price, and an importer will be notified if this is the case.

The duty cannot exceed the difference between the export and normal price (margin of dumping).

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This does not apply to goods imported by 100 percent Export Oriented Units (EOU) and units in
Free Trade Zones (FTZs) and Special Economic Zones (SEZs).

If an importer is notified by the federal government then an Anti-Dumping duty is to be imposed,

the notification will remain valid for five years with the possibility of being extended to 10 years.

Safeguard Duty

Unlike Anti-Dumping Duty, the imposition of Safeguard Duty does not require the central
government to determine a good is being imported at below fair market price.

Safeguard Duty is imposed if the government decides that a sudden increase in exports is
causing, or threatens to cause, serious damage to a domestic industry.

A notification regarding the imposition of Safeguard Duty is valid for four years with the possibility
of being extended to 10 years.

Protective Duty

A protective duty is sometimes imposed to protect domestic industry from imports.

If the Tariff Commission issues a recommendation for the imposition of a Protective Duty, the
central government may choose to impose this at a rate that does not exceed that recommended
by the Tariff Commission.

The federal government can specify the period up to which the protective duty will remain in force,
reduce or extend the period, and adjust the effective rate.

Social Welfare Surcharge

The Education Cess and Secondary and Higher Education Cess on imported goods is now
abolished and replaced by the Social Welfare Surcharge.

This surcharge will be levied at the rate of 10 percent of the aggregate duties of customs, on
imported goods.

CLEARANCE OF GOODS FROM THE PORT,

INCLUDING BAGGAGE
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Any commercial cargo, whether it is for import or export, requires customer clearance.
Simply put, this means that businesses engaged in exporting and importing goods to and
from the country need to clear specific customs barriers as outlined by the government.

The customs clearance process typically involves preparing documents that may be
submitted electronically or physically with the consignment. This helps concerned
authorities to calculate taxes and duties that will be levied on the cargo.

The type of documents required for customs clearance usually depends on the type of goods
being shipped. It may also vary depending on the country of origin and the destination of the
cargo. However, as a thumb rule, there are a set of general documents that most businesses
need to comply with when importing or exporting goods.

List of Documents for Customs Clearance and Forwarding

Here is a list of documents that are needed for customs clearance and forwarding of goods to
and from India:

Pro Forma Invoice

The Pro Forma Invoice documents the intention of the exporter to sell a predetermined
quantity of goods or products. This invoice is generated as per the outlined terms and
conditions agreed upon between the exporter and the importer, through a recognised medium
of communication such as email, fax, telephone or in person. It is similar to a ‘Purchase
Order’, which is issued prior to completing the sales transaction.

Customs Packing List

The customs packing list states the list of items included in the shipment that can be matched
against the pro forma invoice by any concerned party involved in the transaction. This list is
sent along with the international shipment and is especially convenient for transportation
companies as they know exactly what is being shipped. Individual customs packing lists are
secured outside each individual container to minimise the risk of exporting incorrect cargo
internationally.

Country of Origin or COO Certificate

The Country of Origin Certificate is a declaration issued by the exporter that certifies that the
goods being shipped have been completely acquired, produced, manufactured or processed
in a particular country.

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Customs Invoice

A customs invoice is a mandatory document for any export trade. The customs clearance
department will ask for this document first as it contains information about the order,
including details such as description, selling price, quantity, packaging costs, weight or
volume of the goods to determine customs import value at the destination port, freight
insurance, terms of delivery and payment, etc. A customs representative will match this
information with the order and decide whether to clear this for forwarding or not.

Shipping Bill

A shipping bill is a traditional report where the downside is asserted and primarily serves as a
measurable record. This can be submitted through a custom online software system
(ICEGATE). To obtain the shipping bill, the exporter will need the following documents:

 GR Forms for shipment to all the countries

 Packing list (with various details such as information about the content, quantity, the
gross and net weight of each package)
 Export License
 Indent
 Acceptance of Contract
 Invoices (with all relevant information such as the number of packages, quantity,
price, correct specification of goods, etc.)
 Purchase Order
 Letter of Credit
 AR4 and Invoice
 Examination or QC Certificate
 Port Trust document

Bill of Lading

Bill of Lading is a legal document issued by the carrier to the shipper. It acts as evidence of
the contract for transport for goods and products, mentioned in the bill provided by the
carrier. It also includes product information such as type, quantity, and destination that the
goods are being carried to. This bill can also be treated as a shipment receipt at the port of
destination where it must be produced to the customs official for clearance by the exporter.
Regardless of the form of transportation, this is a must-have document that should
accompany the goods and must be duly signed by the authorised representative from the
carrier, shipper, and receiver. The Bill of Lading comes in handy if there is any asset theft.

Bill of Sight

Bill of Sight is a declaration from the exporter made to the customs department in case the
receiver is unsure of the nature of goods being shipped. The Bill of Sight permits the receiver
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of goods to inspect them before making payments towards applicable duties. Applying for a
bill of sight becomes necessary as it acts as a substitute document if the exporter does not
have all the must-have information and documents needed for the bill of entry. Along with
the bill of sight, the exporter also needs to submit a letter that allows for the clearance of
goods by customs.

Letter of Credit

Letter of credit is shared by the importer’s bank, stating that the importer will honour
payment to the exporter of the sum specified to complete the transaction. Depending on the
terms of payment between the exporter and importer, the order is dispatched only after the
exporter has this letter of credit.

Bill of Exchange

Bill of Exchange is an alternative payment option where the importer is to clear payments
for goods received from the exporter either on-demand or at a fixed or determinable future. It
is similar to promissory notes that can be drawn by banks or individuals. You can even
transfer a Bill of Exchange by endorsement.

Export License

Businesses must have an export license that they can provide to customs in order to export or
forward any products. This only needs to be produced when the shipper is exporting goods
to an international destination for the very first time. This type of license may vary
depending on the type of export you intend to make. This can be done by applying with the
licensing authority, and the permit is eventually issued by the Chief Controller of Exports
and Imports.

Warehouse Receipt

Warehouse Receipt receipt is generated once the exporter has cleared all relevant export
duties and freight charges post customs clearance. This is needed only when an ICD in
involved.

Health Certificates

Health Certificate is applicable only when there are food products that are of animal or non-
animal origin involved in international trade. The document certifies that the food contained
in the shipment is fit for consumption by humans and has been vetted to meet all standards
of safety, rules and regulations prior to exporting. This certificate is issued by authorised
governmental organisations from where the shipment originates.

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Although these documents are generally common submissions, additional documents may
be required in certain cases. For example, industrial license, test report, insurance certificate,
GATT declaration, registration cum membership certificate, documents for duty benefits or
central excise documents could be essential for certain types of imports.

BAGGAGE
Any baggage that you desire you send through cargo shipping will be treated as an
unaccompanied baggage. Regardless, a free allowance in such case cannot be considered in the
case of baggage clearance and is reasonably charged to the customs duty at 35% Ad valorem +
3% Education Cess. In addition to this, only personal items including items like all used items of
personal wear including shirts, suits, shoes, shoe brush & polish, blouses, sarees, undergarments,
pants, neckties, handkerchiefs, dentures, gloves, cosmetics in use, towels, toiletries, bedding,
blankets, used bedding, umbrella, walking sticks, used shoes, hair dryer, hearing aid, shaving kit,
spectacles, one watch etc. can be imported free of duty. Application of the Baggage Rules are also
extended to an unaccompanied baggage except where they have been specifically excluded from
the cargo shipment. An unaccompanied baggage must be in the personal possession abroad at the
destination of the passenger mandatorily and shall be dispatched within one month of his/her
arrival in India or within further reasonable period as and when the Deputy / Assistant
Commissioner of Customs may allow. The unaccompanied baggage may land in India two months
before the arrival of the passenger himself/herself or within such period, but under no
circumstance exceeding one year.

If you are an Indian citizen who has stayed abroad for more than two years and your short visits to
India are less than 180 days in total within the last 2 years, you are eligible to claim the
Concessional rate of duty under Transfer of Residence.

GOODS IMPORTED OR EXPORTED BY POST AND

STORES AND GOODS IN TRANSIT

CHAPTER XI - SPECIAL PROVISIONS

REGARDING BAGGAGE, GOODS IMPORTED OR
EXPORTED BY POST, AND STORES Baggage
77. Declaration by owner of baggage. - The owner of any baggage
shall, for the purpose of clearing it, make a declaration of its contents
to the proper officer.
78. Determination of rate of duty and tariff valuation in respect of
baggage. - The rate of duty and tariff valuation, if any, applicable to
baggage shall be the rate and valuation in force on the date on which a
declaration is made in respect of such baggage under section 77.
79. Bona fide baggage exempted from duty. -
1. The proper officer may, subject to any rules made under sub-
section (2), pass free of duty -
a. any article in the baggage of a passenger or a member of
the crew in respect of which the said officer is satisfied that

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it has been in his use for such minimum period as may be

specified in the rules;
b. any article in the baggage of a passenger in respect of
which the said officer is satisfied that it is for the use of the
passenger or his family or is a bona fide gift or souvenir;
provided that the value of each such article and the total
value of all such articles does not exceed such limits as may
be specified in the rules.
2. the Central Government may make rules for the purpose of
carrying out the provisions of this section and, in particular, such
rules may specify -
a. the minimum period for which any article has been used by
a passenger or a member of the crew for the purpose of
clause (a) of sub-section (1);
b. the maximum value of any individual article and the
maximum total value of all the articles which may be passed
free of duty under clause (b) of sub-section (1);
c. the conditions (to be fulfilled before or after clearance)
subject to which any baggage may be passed free of duty.
3. Different rules may be made under sub-section (2) for different
classes of persons.
80. Temporary detention of baggage. - Where the baggage of a
passenger contains any article which is dutiable or the import of which
is prohibited and in respect of which a true declaration has been made
under section 77, the proper officer may, at the request of the
passenger, detain such article for the purpose of being returned to him
on his leaving India and if for any reason, the passenger is not able to
collect the article at the time of his leaving India, the article may be
returned to him through any other passenger authorised by him and
leaving India or as cargo consigned in his name.
81. Regulations in respect of baggage. - The Board may make
regulations, -

1. providing for the manner of declaring the contents of any

baggage;
2. providing for the custody, examination, assessment to duty and
clearance of baggage;
3. providing for the transit or transhipment of baggage from one
customs station to another or to a place outside India.

Goods imported or exported by post

zzz. Label or declaration accompanying goods to be treated as entry. -
In the case of goods imported or exported by post, any label or
declaration accompanying the goods, which contains the description,
quantity and value thereof, shall be deemed to be an entry for import
or export, as the case may be, for the purposes of this Act.
aaaa. Rate of duty and tariff valuation in respect of goods imported or
exported by post. -

1. The rate of duty and tariff value, if any, applicable to any goods
imported by post shall be the rate and valuation in force on the
date on which the postal authorities present to the proper officer

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a list containing the particulars of such goods for the purpose of

assessing the duty thereon :
Provided that if such goods are imported by a vessel and the list
of the goods containing the particulars was presented before the
date of the arrival of the vessel, it shall be deemed to have been
presented on the date of such arrival.
2. The rate of duty and tariff value, if any, applicable to any goods
exported by post shall be the rate and valuation in force on the
date on which the exporter delivers such goods to the postal
authorities for exportation.
78. Regulations regarding goods imported or to be exported by
post. - The Board may make regulations providing for -

1. the form and manner in which an entry may be made in respect of

any specified class of goods imported or to be exported by post,
other than goods which are accompanied by a label or declaration
containing the description, quantity and value thereof;
2. the examination, assessment to duty, and clearance of goods
imported or to be exported by post;
3. the transit or transhipment of goods imported by post, from one
customs station to another or to a place outside India.

Stores
zzz. Stores may be allowed to be warehoused without assessment to
duty. - Where any imported goods are entered for warehousing and the
importer makes and subscribes to a declaration that the goods are to
be supplied as stores to vessels or aircrafts without payment of import
duty under this Chapter, the proper officer may permit the goods to be
warehoused without the goods being assessed to duty.
aaaa. Transit and transhipment of stores. -

1. Any stores imported in a vessel or aircraft may, without payment

of duty, remain on board such vessel or aircraft while it is in
India.
2. Any stores imported in a vessel or aircraft may, with the
permission of the proper officer, be transferred to any vessel or
aircraft as stores for consumption therein as provided in section
87 or section 90.
78. Imported stores may be consumed on board a foreign-going
vessel or aircraft. - Any imported stores on board a vessel or aircraft
(other than stores to which section 90 applies) may, without payment
of duty, be consumed thereon as stores during the period such vessel
or aircraft is a foreign-going vessel or aircraft.
79. Application of section 69 and Chapter X to stores. - The provisions
of section 69 and Chapter X shall apply to stores (other than those to
which section 90 applies) as they apply to other goods, subject to the
modifications that-

1. for the words "exported to any place outside India" or the word
"exported", wherever they occur, the words "taken on board any
foreign-going vessel or aircraft as stores" shall be substituted;

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2. in the case of drawback on fuel and lubricating oil taken on board

any foreign-going aircraft as stores, sub-section (1) of section 74
shall have effect as if for the words "ninety-eight per cent", the
words "the whole" were substituted.
zzz. Stores to be free of export duty. - Goods produced or
manufactured in India and required as stores on any foreign-going
vessel or aircraft may be exported free of duty in such quantities as
the proper officer may determine, having regard to the size of the
vessel or aircraft, the number of passengers and crew and the length
of the voyage or journey on which the vessel or aircraft is about to
depart.
aaaa. Concessions in respect of imported stores for the Navy. -

1. Imported stores specified in sub-section (3) may without payment

of duty be consumed on board a ship of the Indian Navy.
2. The provisions of section 69 and Chapter X shall apply to stores
specified in sub-section (3) as they apply to other goods, subject
to the modifications that -
a. for the words "exported to any place outside India" or the
word "exported" wherever they occur, the words "taken on
board a ship of the Indian Navy" shall be substituted;
b. for the words "ninety-eight per cent" in sub-section (1) of
section 74, the words "the whole" shall be substituted.
3. The stores referred to in sub-sections (1) and (2) are the
following: -
a. stores for the use of a ship of the Indian Navy;
b. stores supplied free by the Government for the use of the
crew of a ship of the Indian Navy in accordance with their
conditions of service.

CHAPTER VIII - GOODS IN TRANSIT

52. Chapter not to apply to baggage, postal articles and stores. - The
provisions of this Chapter shall not apply to (a) baggage, (b) goods
imported by post, and (c) stores.
53. Transit of certain goods without payment of duty. - Subject to the
provisions of section 11, any goods imported in a conveyance and
mentioned in the import manifest or the import report, as the case may
be, as for transit in the same conveyance to any place outside India or
any customs station may be allowed to be so transited without
payment of duty.
54. Transhipment of certain goods without payment of duty. -
1. Where any goods imported into a customs station are intended
for transhipment, a bill of transhipment shall be presented to the
proper officer in the prescribed form.

Provided that where the goods are being transhipped under an

international treaty or bilateral agreement between the
Government of India and Government of a foreign country, a
declaration for transhipment instead of a bill of transhipment
shall be presented to the proper officer in the prescribed form .

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2. Subject to the provisions of section 11, where any goods

imported into a customs station are mentioned in the import
manifest or the import report, as the case may be, as for
transhipment to any place outside India, such goods may be
allowed to be so transhipped without payment of duty.
3. Where any goods imported into a customs station are mentioned
in the import manifest or the import report, as the case may be,
as for transhipment -
a. to any major port as defined in the Indian Ports Act, 1908
(15 of 1908), or the customs airport at Mumbai, Calcutta,
Delhi or Chennai or any other customs port or customs
airport which the Board may, by notification in the Official
Gazette, specify in this behalf, or
b. to any other customs station and the proper officer is
satisfied that the goods are bonafide intended for
transhipment to such customs station,

the proper officer may allow the goods to be transhipped,

without payment of duty, subject to such conditions as may
be prescribed for the due arrival of such goods at the
customs station to which transhipment is allowed.
55. Liability of duty on goods transited under section 53 or
transhipped under section 54. - Where any goods are allowed to be
transited under section 53 or transhipped under sub-section (3) of
section 54 to any customs station, they shall, on their arrival at such
station, be liable to duty and shall be entered in like manner as goods
are entered on the first importation thereof and the provisions of this
Act and any rules and regulations shall, so far as may be, apply in
relation to such goods.
56. Transport of certain classes of goods subject to prescribed
conditions. - Imported goods may be transported without payment of
duty from one land customs station to another, and any goods may be
transported from one part of India to another part through any foreign
territory, subject to such conditions as may be prescribed for the due
arrival of such goods at the place of destination.

Import of Goods Through Post

The import and export of goods by post are provided by the Postal Department through its Sub-
Foreign Post Offices and Foreign Post Offices. Customs facilities for assessment, examination,
clearance etc. are available at these Post Offices. Limited facility for export clearances is also
provided at Export Extention Counters opened by the Postal Department where parcels for export
are accepted and cleared by the Customs.

Legal Provisions
Goods that are imported through posts are classified under Chapter Heading 9804 of
the Customs Tariff Act, 1975 and the rate of duty that is applicable is charged on every good
that is allowed for importing through posts. Heading 9804 applies to goods that are permitted for
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import through posts, exempted from prohibition under Foreign Trade (Development and
Regulation) Act, 1992. The goods against an import license or Customs Clearance Permit cannot
be imported through posts. Moreover, motor vehicles, alcoholic drinks and goods that are
imported through courier are not covered under Heading 9804. Goods that are imported or
exported by posts are governed by Sections 82,83 and 84 of the Customs Act, 1962 and the
procedure requires for the clearance of goods through posts is stated in Rules regarding Postal
Parcels and Letter Packets from Foreign Ports In/ Out of India of 1953.

Goods not to be Filed

To import and export of goods through posts, any label or declaration accompanying the packet or
parcel mentioning details like description, quantity and the value of the goods is treated as an
entry for import or export of the goods and no separate manifest for such goods is require to be
filed.

Filing of Bill of Entry

The relevant date for the rate of duty and tariff value that is applicable to goods for import through
posts is the date on which the postal authorities present the list containing the details of the goods
for assessment to the concerned officer of customs. Therefore, the presentation of the list is
equivalent to the filing of Bill of Entry so far as the assessment of goods that are imported by
post.

Entry Inward of the Vessel

When the post parcels come through a vessel and the list presented by the postal authorities is
presented before the arrival of the vessel, the rate of duty and the tariff value that is applicable
shall be as on date of arrival of the vessel which is the Entry Inward of the vessel. For export
goods, the relevant date for the rate of duty and tariff value applicable is the date on which the
exporter delivers the goods to postal authorities for exportation.

Clearance of Letter Mail Articles

Letter Mail Articles are usually cleared by the Customs at the time of the arrival and sorting unless
they hold contraband or dutiable articles. In such cases, the Letter Mail will be further examined at
the Foreign Post Offices or Sub-Foreign Post Offices.

Importability of Dutiable Items Through Posts

Import of dutiable goods through letter, packet or parcel is strictly prohibited unless a letter or
packets contains a declaration that states the nature, weight and value of the contents on the
front side or if such a declaration is attached alongside specifying that the letter/ packet may be
opened for Customs examination. Dutiable goods are not imported by posts if Customs is not
satisfied with the details of nature, weight and the value of the contents in the declaration. Items
that are for personal use which are exempted from the prohibitions under the FTP or the Customs
Act 1962, can be imported by the postal channel on payment of appropriate duties under the Tariff
Heading 9804 of the Customs Tariff Act, 1975. If the Customs duty payable does not exceed Rs.
100, it will be exempted.

Import of Gifts Through Post

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Bona fide gifts that are up to a value limit of Rs. 10,000 imported by posts are exempted from
Basic and Additional Customs duties vide Notification No. 171/93-Cus., dated 16-09-1993. In
addition to this, items that are not prohibited for importation under Foreign Trade (Development
and Regulation Act, 1992 can also be imported as gifts. The sender of the gift may not be residing
in the country from where the goods have been despatched and any person abroad can send gifts
to relatives, business associates, friends, companies and acquaintances. The gifts have to be for
bona fide personal use. The rule is followed so that the person receives gifts genuinely free and
the payment is mode made for it through other means. The frequency and quantity of the gifts
should not give rise to the belief that it has been used as a route in transferring money. These gifts
can be received by individuals, societies, institutions like schools and colleges and by even
corporate bodies.

Calculation of Value Limit

To calculate a value limit of Rs. 10,000 for imports of gifts, postal charges or the airfreight will not
be taken into consideration. The value of Rs. 10,000 is taken as the value of goods in the country
from where these were despatched. If the value of gifts received exceeds Rs. 10,000, the receiver
has to pay the Customs duty on the whole consignment, even if the goods were received free,
unsolicited. Moreover, at the discretion, of the Assistant/ Deputy Commissioner, if the goods are
restricted for import, the receiver has liability for a penalty for such import, even if the goods have
been sent unsolicited. These restricted goods are also liable to confiscation and the receiver has to
pay redemption fine in lieu of confiscation in addition to duty and penalty. Certain restricted goods
like narcotic drugs, arms, ammunition, obscene films/ printed material etc. are liable to absolute
confiscation and the receiver is liable to penal action, even if the goods have been sent
unsolicited.

Customs duty is chargeable on gift assessed over Rs. 10,000 by the Customs. For post parcels, the
department collects the assessed duty from the receiver of the gift and subsequently deposits it
with the customs.

Import of Samples Through Post

Bonafide Commercial samples and prototypes that are imported by posts are exempted from
Customs duty, subjected to the value limit of Rs. 10,000 if the samples are supplied for free of
cost.

Importers with IEC Code

Those importers having an IEC code number can import commercial samples through posts
without payment of duty upto a value of Rs. 1000,000 or 15 units in number within a duration of
12 months. These goods shall be marked as ‘Samples’. The importer is required to submit a
declaration to the effect that the samples are solely used for the purpose of being shown to the
exporters for securing or executing export orders. The importer is also required to undertake if the
declaration os fake, where he has to pay an appropriate duty on the goods that are imported as
commercial samples.

Import Of Indian and Foreign Currencies by Post

According to the provisions of Foreign Exchange Management Act 1999, no individual can bring or
send India any foreign exchange or Indian currency unless a special or general permission is
granted by the RBI. Import of Indian currencies and coins by post is also not allowed.

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Conditions to Import Currencies by Post

In order to decrease the pendency and to avoid delay in clearance of mail articles, Customs may
permit the import of both Indian and foreign currencies that are received by residents by post if
the value is not more than Rs. 5,000. subjected to the conditions that are given below.

 Approval is granted by the Assistant/ Deputy Commissioner of Customs.

 A detailed record has to be maintained of the exemptions granted.
 The Record of the name and addresses of the remitter and addressee in India has to be
maintained.
 If a spurt id noticed in the number of covers that is received in a specific time period, the
matter should be reported to the respective Regional Office of RBI.

Parcels or packets containing foreign/ Indian currency, etc., valuing more than Rs. 5,000 will be
detained and adjudicated on merits and will be released on the basis of ‘No Objection Certificate’
from the RBI.

A general permit will be given to the Authorised Dealers to import currency notes from their
overseas branches/ correspondents for meeting their normal banking requirements. There is no
particular clearance required from RBI for these imports.

Procedure in Case of Postal Imports

Rules regarding the Postal Parcels and Letter Packets from Foreign Ports in/ out India follow a
procedure for landing and clearing at notified ports/ airports/ LCSs of parcels and packets that are
forwarded by foreign mails or passenger vehicles or airliners. This procedure is broadly classified
as follows.

 The boxes or bags holding the parcels shall be labelled as ‘Postal Parcel’, ‘Parcel Post’,
Parcel Mail’, ‘Letter Mail’, and will be permitted to pass at specified Foreign Parcel
Department of the Foreign Post Offices and Sub-Foreign Post Offices.
 The postmaster on receipt of the parcel mail gives it to the Customs the required
documents.

The following are the required documents that have to be furnished to the Customs.

1. A memo mentioning the total number of parcels that are received from each country of
origin.
2. Parcel Bills in the form of a sheet (in triplicate) and the senders’ declaration (if available)
and any other relevant documents that may be required for examination, assessment etc
by the Customs Department.
3. The relative Customs Declarations and dispatch notes.
4. Other information that is required in connection with the preparation of the Parcel Bills that
the Post Office is able to furnish.

DUTY DRAWBACKS PROVISIONS

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Duty Drawback provisions are made to grant rebate of duty or tax chargeable on
any imported / excisable materials and input services used in the manufacture of
export goods. The duties and taxes neutralized under the scheme are

(i) Customs and Union Excise Duties in respect of inputs and

(ii) Service Tax in respect of input services.

Duty Drawback is of two types:

(i) All Industry Rate and

(ii) Brand Rate. The legal framework is provided under Sections 75 and 76 of the Customs
Act, 1962 and the Customs and Central Excise Duties and Service Tax Drawback Rules,
1995 (Drawback Rules, 1995) issued under the provisions of Section 75 of the Customs
Act, 1962, Section 37 of the Central Excise Act, 1944 and Section 93 A read with section 94
of the Finance Act, 1994the Finance Act, 1994.

The duty drawback scheme has been notified for a large number of export products by the
Government after an assessment of the average incidence of Customs, Central Excise duties,
Service Tax and Transaction Cost suffered by the export products. Duty Drawback Scheme aims to
provide the refund/ recoupment of custom and excise duties paid on inputs or raw materials and
service tax paid on the input services used in the manufacture of export goods. In this article, we
look at the procedure for claiming Duty Drawback of export in India.

Customs Act, 1962

The Duty Drawback provisions are described under Section 74 and Section 75 under the Customs
Act, 1962. This Act laid down the various restrictions and conditions to claim drawback of duties
under certain situations.

 Section 74: As per section 74, if the re-exports of imported goods, which are identified
quickly and within two years from the date of payment of duty on the importation. Then an
exporter is eligible to claim 98% of the duty paid by him as drawback under section 74.
 Section 75: As per section 75, if the export of goods manufactured or processed out of
imported material with value addition, then a drawback should be allowed of duties of
customs chargeable on any imported materials of a class or description. If sale proceeds
not received within the stipulated period, a drawback is to be reversed or adjusted. Duty
Drawback under section 75 can be claimed either as a fixed percentage depending upon
the value of goods exported.

Goods Eligible for Drawback

The following are the eligible goods for the duty drawback.

 To export goods imported into India

 To export goods imported into India after having been taken for use
 To export goods manufactured/produced out of imported material
 To export goods manufactured/produced out of indigenous material
 To export goods manufactured /produced out of imported or and indigenous materials.

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Eligibility Criteria
The below following are the minimum criteria to claim for processing drawback claim.

 Any individual must be the legal owner of the goods at the time the goods are exported.
 You must have paid customs duty on imported goods.
 Duty drawback is available on most goods on which customs duty was paid on importation
and which has been exported.

Documents Required
The below following are the documents required for processing drawback claim.

 Triplicate copy of the Shipping Bill

 Copy of the Bill of entry
 Import Invoice
 Proof of payment of duty paid on the importation of goods.
 Approval from the Reserve Bank of India for re-exports of goods
 Copy of the Bill of Lading or Airway bill.
 Copy of the Bank Certified Invoices.
 Sixtuplicate Copy of AR-4
 Export invoice and packing list.
 Freight and Insurance certificate
 Copy of the Test report of goods
 Modvat Declaration
 A worksheet showing the drawback amount claimed
 DEEC Book and licence copy where applicable.
 Transhipment certificate where applicable
 Blank acknowledgement card in duplicate
 Pre-receipt for drawback amount on the reverse of Shipping Bill duly signed on the Rs1/-
revenue stamp

Duty Drawback Rates

The following are the drawback rates of which import duty with the fixed percentage shall be
allowed in respect of used goods after their importation and which have been out of customs
control.

S. The period between the date of clearance and the date Percent of drawback
No. when the goods are placed under Customs control for
export

1. Not more than 3 months 95%

2. More than 3 months but not more than 6 months 85%

3. 6-9 months 75%

4. 9-12 months 70%

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5. 12-15 months 65%

6. 15-18 months 60%

7. More than 18 months Nil

Procedure for Claiming Duty Drawback

The procedure for claiming duty drawback on export goods (whether AIR or Brand Rate) to be
claimed at the time of export and requisite particulars filled in the prescribed format of Shipping
Bill/Bill of Export under Drawback. If the processing of documents has been computerised, then
the exporter is not required to file any separate application for claiming duty drawback. In the case
of manual export, a separate application is to be submitted for claiming duty drawback. The claim
is to be accompanied by certain documents as laid down in the Drawback Rules 1995. Triplicate
copy of the shipping bill becomes the application only after the Export General Manifest is filed.

AUTHORITIES - POWERS AND FUNCTIONS

OFFICERS OF CUSTOMS
3. Classes of officers of customs.— There shall be the following classes of
officers of customs, namely:-
a. Chief Commissioners of Customs;
b. Commissioners of Customs;
c. Commissioners of Customs (Appeals);
(cc) Joint Commissioners of Customs;
d. Deputy Commissioners of Customs;
e. Assistant Commissioners of Customs or Deputy Commissioner of
Customs;
f. such other class of officers of customs as may be appointed for
the purposes of this Act.
4. Appointment of officers of customs. —

a. The Board may appoint such persons as it thinks fit to be officers

of customs.
b. Without prejudice to the provisions of sub-section (1), Board may
authorise a Chief Commissioner of Custom or a Joint or Assistant
Commissioner of Customs or Deputy Commissioner of Customs to
appoint officers of customs below the rank of Assistant
Commissioner of Customs or Deputy Commissioner of Customs.
4. Powers of officers of customs. -

a. Subject to such conditions and limitations as the Board may

impose, an officer of customs may exercise the powers and
discharge the duties conferred or imposed on him under this Act.
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b. An officer of customs may exercise the powers and discharge the

duties conferred or imposed under this Act on any other officer of
customs who is subordinate to him.
c. Notwithstanding anything contained in this section, a
Commissioner ( Appeals) shall not exercise the powers and
discharge the duties conferred or imposed on an officer of
customs other than those specified in Chapter XV and section
108.
2. Entrustment of functions of Board and customs officers on certain
other officers. - The Central Government may, by notification in the
Official Gazette, entrust either conditionally or unconditionally to any
officer of the Central or the State Government or a local authority any
functions of the Board or any officer of customs under this Act.

Classes, Appointment of officers of Customs & Central Excise Officer under Indirect Tax Laws
1. Introduction
1.1. It is essential that officers working in various wings of Customs, Excise and Service tax
department remain aware of legal provisions relating to their appointment, powers and functions
under three main tax laws dealing with in-direct taxes, namely, Customs Act, 1962; Central Excise
Act, 1944 and the Finance Act, 1994.
1.2. In addition to exercising powers under three indirect tax statutes, they also derive powers
given to them under various other allied laws such as NDPS Act,1985; PITNDPS Act, Chemical
Weapons Convention Act,2000 etc. in which certain powers for specific purposes have been given
to our departmental officers for implementation in the field.
1.3. As the officers of our department have been given powers under various allied Acts, similarly
the officers of various other departments have also been empowered under Customs Act, 1962 to
exercise power of Custom officers subject to such limitation as have been specified in such
empowering notification.
1.4. Therefore, to understand the topic, it would be appropriate to divide this topic into three parts:
(a). Legal provisions (including notifications)providing for appointment, powers of officers of
Customs, Central Excise and Service Tax department under three indirect tax statutes:
(b). Powers given to the officers of other departments under the indirect tax statutes.
(c). Legal provisions under various other allied Acts empowering officers of Customs, Central
Excise and Service Tax department to exercise powers under these Acts.

POWERS OF CUSTOM AUTHORITY

Sec 100. Power to search suspected persons entering or leaving India, etc.
Sec 101. Power to search suspected persons in certain other cases.
Sec 103. Power to screen or X-ray bodies of suspected persons for detecting secreted
goods.
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Sec 104. Power to arrest.—

Sec 105. Power to search premises.
Sec 106. Power to stop and search conveyances.—
Sec 106A. Power to inspect.
Sec 107. Power to examine persons.
Sec 108. Power to summon persons to give evidence and produce documents.
Sec 109. Power to require production of order permitting clearance of goods imported
by land.
Sec 109A. Power to undertake controlled delivery.
Sec 110. Seizure of goods, documents and things.
Sec 144. Power to take samples.

Sec 100. Power to search suspected persons entering or leaving India, etc.—
(1) If the proper officer has reason to believe that any person to whom this section applies
has secreted about his person, any goods liable to confiscation or any documents relating
thereto, he may search that person.
(2) This section applies to the following persons, namely:—
(a) any person who has landed from or is about to board, or is on board any vessel within the
Indian customs waters;
(b) any person who has landed from or is about to board, or is on board a foreign-going
aircraft;
(c) any person who has got out of, or is about to get into, or is in, a vehicle, which has
arrived from, or is to proceed to any place outside India;
(d) any person not included in clauses (a), (b) or (c) who has entered or is about to leave
India;
(e) any person in a customs area.

Sec 101. Power to search suspected persons in certain other cases.—

(1) Without prejudice to the provisions of section 100, if an officer of customs empowered in
this behalf by general or special order of the 2 [Principal Commissioner of Customs or
Commissioner of Customs], has reason to believe that any person has secreted about his
person any goods of the description specified in sub-section (2) which are liable to
confiscation, or documents relating thereto, he may search that person.
(2) The goods referred to in sub-section (1) are the following:—

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(a) gold;
(b) diamonds;
(c) manufactures of gold or diamonds;
(d) watches;
(e) any other class of goods which the Central Government may, by notification in the
Official Gazette, specify.

Sec 103. Power to screen or X-ray bodies of suspected persons for detecting secreted
goods.—
(1) Where the proper officer has reason to believe that any person referred to in sub-section
(2) of section 100 has any goods liable to confiscation secreted inside his body, he may
detain such person and produce him without unnecessary delay before the nearest magistrate.
(2) A magistrate before whom any person is brought under sub-section (1) shall, if he sees no
reasonable ground for believing that such person has any such goods secreted inside his
body, forthwith discharge such person.
(3) Where any such magistrate has reasonable ground for believing that such person has any
such goods secreted inside his body and the magistrate is satisfied that for the purpose of
discovering such goods it is necessary to have the body of such person screened or X-rayed,
he may make an order to that effect.
(4) Where a magistrate has made any order under sub-section (3), in relation to any person,
the proper officer shall, as soon as practicable, take such person before a radiologist
possessing qualifications recognized by the Central Government for the purpose of this
section, and such person shall allow the radiologist to screen or X-ray his body.
(5) A radiologist before whom any person is brought under sub-section (4) shall, after
screening or X-raying the body of such person, forward his report, together with any X-ray
pictures taken by him, to the magistrate without unnecessary delay.
(6) Where on receipt of a report from a radiologist under sub-section (5) or otherwise, the
magistrate is satisfied that any person has any goods liable to confiscation secreted inside his
body, he may direct that suitable action for bringing out such goods be taken on the advice
and under the supervision of a registered medical practitioner and such person shall be bound
to comply with such direction: Provided that in the case of a female no such action shall be
taken except on the advice and under the supervision of a female registered medical
practitioner.
(7) Where any person is brought before a magistrate under this section, such magistrate may
for the purpose of enforcing the provisions of this section order such person to be kept in
such custody and for such period as he may direct.
(8) Nothing in this section shall apply to any person referred to in sub-section (1), who
admits that goods liable to confiscation are secreted inside his body, and who voluntarily
submits himself for suitable action being taken for bringing out such goods. Explanation.—
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For the purposes of this section, the expression ―registered medical practitioner‖ means any
person who holds a qualification granted by an authority specified in the Schedule to the
Indian Medical Degrees Act, 1916 (7 of 1916), or notified under section 3 of that Act, or by
an authority specified in any of the Schedules to the Indian Medical Council Act, 1956 (102
of 1956).

FUNCTION OF CUSTOM AUTHORITY

1. Collection of Customs Duty on International Airports, Seaports, Custom Houses, International Air Cargo
Stations & International ICD's.
2. Collection of Customs Duty on Land Customs Station, Inland Container Depots (ICD's), Special
Economic Zones (SEZ's) & Container Freight Stations (CFS's).
3. Prevention of Smuggling on International Airports & Sea.
4. Prevention of Smuggling through Land Customs Station & Border Check Points.

SEZ UNITS
1. Special Economic Zone – Meaning
A special economic zone (SEZ) is a dedicated zone wherein businesses enjoy simpler
tax and easier legal compliances. SEZs are located within a country’s national
borders. However, they are treated as a foreign territory for tax purposes. This is why
the supply from and to special economic zones have a little different treatment than
the regular supplies. In simple words, even when SEZs are located in the same
country, they are considered to be located in a foreign territory. SEZs are not
considered as a part of India.
Based of this it can be clearly said that under GST, any supply to or by a Special
Economic Zone developer or Special Economic Zone unit is considered to be an Inter
state supply and Integrated Goods and Service tax (IGST) will be applicable .

2. Meaning of Export/ Import

SEZ’s are considered to be located in a foreign territory and thus the transactions with
SEZ’s can be classified as Exports and Imports.
Here, Export means:

 Taking goods or services out of India from a special economic zone

by any mode of transport or

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 Supply of goods or services from one unit/developer in the SEZ to

another unit in the same SEZ or another SEZ.

Import means:

 Bringing goods or services into a special economic zone from a place

located outside India, by any mode of transport or
 Receiving goods or services from one unit/developer in the SEZ by
another unit/developer located in the same SEZ or another SEZ.

3. GST and SEZ

Being in a SEZ can be advantageous to a certain extent when it comes to taxes. Any
supply of goods or services or both to a Special Economic Zone developer/unit will be
considered to be a zero-rated supply. That means these supplies attract Zero tax rate
under GST. In other words, supplies into SEZ are exempt from GST and are considered
as exports.
Therefore, the suppliers supplying goods to SEZs can:

 Supply under bond or LUT without payment of IGST and claim credit
of ITC; or
 Supply on payment of IGST and claim refund of taxes paid.

When a SEZ supplies goods or services or both to any one, it will be considered to be
a regular inter-state supply and will attract IGST. The exception to this is, when a SEZ
supplies goods or services or both to a Domestic Tariff Area (DTA), this will be
considered as an export to DTA (Which is exempt for the SEZ) and customs duties and
other Import duties will be payable by the person receiving these supplies in DTA.

4. E-Way Bill and SEZ

Under GST, transporters should carry an E-Way Bill when moving goods from one
place to another if the value of these goods are more than Rs. 50,000. SEZ supplies
are treated how the other inter-state supplies are treated. The SEZ units or developers
will have to follow the same EWB procedures as the others in the same industry follow.
In case of supplies from SEZ to a DTA or any other place, the registered person who
facilitates the movement of goods shall be responsible for the generation of e-Way
bill.
Let’s understand this with an Example:

 XYZ is and unit in an SEZ located in Karnataka

 A is the recipient of goods manufactured by the SEZ and is located in Bangalore.
 The value of the goods being transported this time is Rs. 75000.

FAQs
How is GST applicable in this case?

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As stated earlier, the movement from an SEZ is considered to be an interstate

movement. In this case, the goods have moved out of the SEZ, though it is moved
within the same state of Karnataka, it will be considered as an Inter-state supply and
IGST will be applicable on this supply.
Is EWB required to be generated? If yes, who is supposed to generate it?
Since the movement of goods from and to SEZ is considered as inter-state supply of
goods and the value of this supply is more than Rs. 50,000, EWB will have to be
generated. XYZ is required to generate an EWB. The transporter may choose to
generate the EWB if XYZ does not generate it. Further, it is important to note that, if
XYZ is an unregistered dealer under GST, and ‘A’ is a registered dealer, ‘A’ will have to
generate the EWB.

Facilities and Incentives

The incentives and facilities offered to the units in SEZs for attracting
investments into the SEZs, including foreign investment include:-

 Duty free import/domestic procurement of goods for development, operation and

maintenance of SEZ units
 100% Income Tax exemption on export income for SEZ units under Section 10AA of the
Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed
back export profit for next 5 years. (Sunset Clause for Units will become effective from
01.04.2020)
 Exemption from Minimum Alternate Tax (MAT) under section 115JB of the Income Tax
Act. (withdrawn w.e.f. 1.4.2012)
 Exemption from Central Sales Tax, Exemption from Service Tax and Exemption from
State sales tax. These have now subsumed into GST and supplies to SEZs are zero rated
under IGST Act, 2017.
 Other levies as imposed by the respective State Governments.
 Single window clearance for Central and State level approvals.

The major incentives and facilities available to SEZ developers include:-

 Exemption from customs/excise duties for development of SEZs for authorized

operations approved by the BOA.
 Income Tax exemption on income derived from the business of development of the SEZ
in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. (Sunset
Clause for Developers has become effective from 01.04.2017)
 Exemption from Minimum Alternate Tax (MAT) under Section 115 JB of the Income Tax
Act. (withdrawn w.e.f. 1.4.2012)
 Exemption from Dividend Distribution Tax (DDT) under Section 115O of the Income Tax
Act. (withdrawn w.e.f. 1.6.2011)
 Exemption from Central Sales Tax (CST).
 Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

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Question : What are the salient features of SEZ scheme?

Answer: The salient features of the SEZ scheme are:-

 A designated duty free enclave to be treated as a territory outside the customs territory of India for
the purpose of authorised operations in the SEZ;
 No licence required for import;
 Manufacturing or service activities allowed;
 The Units are only required to achieve Positive Net Foreign Exchange to be calculated cumulatively
for a period of five years from the commencement of production;
 Domestic sales subject to full customs duty and import policy in force;
 Full freedom for subcontracting;
 No routine examination by customs authorities of export/import cargo;
 SEZ Developers /Co-Developers and Units enjoy Direct Tax and Indirect Tax benefits as prescribed in
the SEZs Act, 2005.

Understanding Special Economic Zone

A special economic zone (SEZ) is a dedicated zone wherein businesses enjoy simpler
tax and legal compliance. SEZs are located within a country’s national borders,
however, they are treated as a foreign territory from taxability perspective.
Some of their key objective include:

 Increase in Foreign Trade by promotion of exports of goods and services

 Increased Foreign Investment
 Domestic Job creation and;
 Effective Administration and Compliance Procedures.
 Better Infrastructure Facilities

To promote entrepreneurs to set up units in these Economic Zone, various attractive

financial policies have been established. These policies include promotional offers and
simplicity in investing, taxation, trading, quotas, customs and labor regulations.
Moreover, units set up in these zones are offered special tax holidays.
The term special economic zone can further include:

 Free trade zones (FTZ)

 Export processing zones (EPZ)
 Free zones/ Free economic zones (FZ/ FEZ)
 Industrial parks/ industrial estates (IE)
 Free ports
 Bonded logistics parks (BLP
 Urban enterprise zones

As per the legal definition, A Special Economic Zone (SEZ) is a geographically bound
zone where the economic laws relating to export and import are more liberal as
compared to other parts of the country. Within SEZs, a unit may be set-up for the
manufacture of goods and other activities including processing, assembling, trading,
repairing, reconditioning, making of gold/silver, platinum jewelry etc. SEZ units are
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considered to be outside the customs territory of India. All supplies made to a unit
operating in SEZ are considered as Export out of India. Goods and services rendered
from SEZ to normal territory is considered as Import of such goods or services.

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