1.
Discuss the power of Taxation and Constitutional limitations
Constitutional Provisions Relating to Taxation in India
Taxation serves as the backbone of government revenue, allowing the funding of critical public
services such as education, healthcare, and infrastructure development. In a federal system like
India, it is essential to clearly define taxation powers to avoid conflicts between the Union and the
States. The Constitution of India lays out comprehensive provisions to ensure an equitable and
efficient taxation system, balancing the responsibilities and needs of both levels of government.
This article provides an in-depth exploration of these constitutional provisions, focusing on key
articles and their implications.
Need for Constitutional Provisions on Taxation
The framers of the Indian Constitution recognized the necessity of dividing taxation powers
between the Union and State governments to reflect their distinct roles. The Union oversees
national responsibilities, such as defense, foreign affairs, and infrastructure, while the States
manage areas like public health, education, and local governance.
To maintain a balanced fiscal framework, the Constitution also imposes certain restrictions and
guidelines:
● No arbitrary taxation: Articles such as 265 ensure that taxes are levied only through
legitimate laws.
● Specific powers: The Union cannot tax agricultural income, while States cannot levy taxes
on inter-State trade.
● Uniformity in trade: Articles like 286 protect free trade across State borders.
Key Constitutional Provisions on Taxation
The taxation framework is detailed under Articles 265 to 289. Below is a breakdown of significant
articles:
Article 265 – Authority of Law
● Provision: No tax shall be levied or collected except by the authority of law.
● Significance: This article ensures that taxes cannot be imposed arbitrarily and must be
backed by valid legislation.
● Landmark Case: Tangkhul v. Simerei Shailei – The Supreme Court held that the absence
of a legal framework renders tax collection unconstitutional.
Article 266 – Consolidated Funds
● Provision: All revenues raised by the Union or State governments must be credited to their
respective Consolidated Funds.
● Significance: Ensures transparency and accountability in the utilization of public funds.
● Example: Expenditure from the Consolidated Fund requires parliamentary or legislative
approval, strengthening fiscal discipline.
Article 268 – Duties Levied by the Union but Collected by States
● Provision: Stamp duties on certain instruments and excise duties on medicinal and toilet
preparations are examples of taxes levied by the Union but collected and retained by the
States.
● Significance: This ensures financial assistance to States while maintaining uniformity in
taxation policies.
Article 269 – Taxes Assigned to States
● Provision: Taxes on the sale or purchase of goods in the course of inter-State trade and taxes
on railway freights are collected by the Union but assigned to the States.
● Example: This mechanism helps in redistributing tax revenue to cater to State needs.
Article 269(A) – Goods and Services Tax on Inter-State Trade
● Provision: GST on supplies in the course of inter-State trade or commerce is levied and
collected by the Union, with the proceeds shared between the Union and States.
● Significance: This article emerged after the 101st Constitutional Amendment,
revolutionizing indirect taxation by introducing a unified GST regime.
Article 270 – Taxes Shared Between Union and States
● Provision: Taxes levied by the Union, such as income tax, are shared with the States based
on the Finance Commission’s recommendations.
● Landmark Case: T.M. Kanniyan v. Income Tax Officer – Reinforced the importance of
equitable sharing of income tax revenues.
Article 271 – Surcharge on Union Taxes
● Provision: Parliament may impose a surcharge on taxes for specific purposes.
● Significance: The proceeds of such surcharges are credited entirely to the Consolidated
Fund of India, offering flexibility in raising additional revenue for national priorities.
Restrictions on Taxation Powers
Article 286 – Restrictions on State Taxation of Trade
● Provision: States cannot impose taxes on the sale or purchase of goods that take place
outside the State, during imports or exports, or in the course of inter-State trade.
● Significance: Protects the freedom of trade and commerce across the country.
● Landmark Case: K. Gopinath v. State of Kerala – Highlighted the limitations of State
taxation powers in the context of inter-State trade.
Article 289 – Exemption of State Property from Union Taxation
● Provision: State property and income are exempt from Union taxation unless explicitly
provided by Parliament.
● Significance: Safeguards the financial autonomy of States while preserving the federal
structure.
Grants-in-Aid and Financial Assistance
Articles 273 to 275 – Grants for Specific Needs
● Article 273: Compensates certain States for losses arising from the abolition of export duties
on jute and jute products.
● Article 275: Provides for statutory grants-in-aid to assist States with additional resources
for development and welfare programs.
Article 282 – Discretionary Grants for Public Purposes
● Provision: Allows the Union or States to provide financial grants for any public purpose,
ensuring flexibility in addressing unforeseen needs or special projects.
Conclusion
The constitutional provisions on taxation in India establish a robust framework to manage the
country’s fiscal system effectively. By clearly delineating powers and responsibilities between the
Union and States, these provisions ensure efficient revenue generation, equitable resource
distribution, and financial accountability. They also protect the interests of taxpayers, promote
economic cooperation among States, and uphold the principles of federalism.
Taxation remains a critical tool for achieving national development goals, and the constitutional
framework provides the necessary foundation for a balanced and sustainable fiscal policy.
2. Discuss the principles relating to determination of residential status under
income tax act 1961. (7m)
Introduction
Section 6 of the Income Tax Act 1961 talks about the Residential Status. Residential status of a person
means that whether the particular person is entitled to pay the income tax in India or not?
Residential status of a person plays a vital role in the purpose of the levy of income tax because the
Income Tax department takes the tax based on the residential status of the person. If a person is a citizen
of India but at the end of the day, he can be a non-resident for a financial year.
Classification
Residential Status
of
As per the depending stay of the individual in India, Income Tax Law has classified the residential status
into three categories.
Residential status of an individual will cover the financial year of an individual and as well as his/her
previous years of stay.
There are the following categories which classified the residential
status of anindividual.
1. Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non Resident (NR)
1. Resident and Ordinarily
Resident (ROR)
Under Section 6(1) of the Income Tax Act an Individual is said to be resident in India if he fulfils the
condition:
If he/she stay in India for a period of 182 days or more in a financial year, or He/ She is in India for a
period of 60 days or more in a financial year and If he/she stays in India for a period of 365 days or more
during the 4 years immediately preceding the previous
year.
As per section 6(6) of Income Tax Act, 1961 there are following two conditions when an individual will
be treated as the "Resident and Ordinarily Resident" (ROR in India.
1. If He/ She stays in India for a period of 730 days or more during the 7 years of preceding
previous year.
2. If He/ She stays in India for at least 2 out of 10 previous financial years which is preceding the
previous years.
If the individual doesn't satisfy either of the condition, then he is no eligible to qualify as Resident and
Ordinarily Resident (ROR).
Points which are essential while calculating ROR
• It is not mandatory that assessed should stay at the same place and it is not mandatory that
stay should be a continuous period of time which means it shouldn't be on a regular basis.
• Territorial of India includes territorial water, continental shelf, and airspace which is up to
twelve nautical miles.
• When any person visits India then their calculation of resident in India will be counted through
their physical presence in India. And these physical presences will be counted on an hourly basis. If any
dispute arises while calculating their physical presence, then the day on which he comes to India and the
day on which he leaves India shall be taken into consideration while calculating the Residential status.
Let's understand the ROR with an example:
Suppose Mr. Nayar who is a resident of India who went to another country in October 2018 while he had
stayed in India during the financial year (2018-19) is for a period of 250 days which is exceeding the 182
days and his stay in previous 7 financial years is more than 730 days then he is eligible for paying the tax
in India. That's why the income of Mr. Nayar will be taxable in nature because he is fulfilling the
condition of ROR.
2. Resident but Not Ordinarily
Resident (RNOR)
An individual will be treated as RNOR when an assessee fulfill the following basic conditions: In a
financial year if an individual stays in India for a period of 182 days or more; Or He/ she stays in India
for a period of 60 days in a financial year and 365 days or more during the 4 previous financial years.
However, an Assesse will be treated as a Resident but Not Ordinarily Resident (RNOR) if they satisfy one
of the basic condition which is as follows:
1. If He/ She stays in India for a period of 730 days or more during the 7 preceding financial
year or;
2. If He/ She was a resident of India for at least 2 out of 10 in the previous financial year.
Let's understand Resident but Not Ordinarily Resident
with an example:
Suppose Mr. Nayar who is in the Financial year 2017-18 stayed in India for a period pf 192 days so he
was fulfilling the condition No 1 but He didn't stay in India for more than 730 days during the period of
1st April 2010 to 31st March 2011 which was immediately preceding the Financial Year 2017-18. So in
this situation, Mr. Nayar will be qualified for a Resident but Not Ordinarily Resident (RNOR).
3. Non - Resident (NR)
An individual will be qualified for Non Resident
(NR) if He/ She satisfies the following conditions which are as follows:
1. In a financial year if an Individual stay in India for less than 181 days and
2. In a financial year If an Individual stay in India for not more than 60 days
3. If an Individual stay in India which exceed
60 days in a financial year but doesn't exceed the 365 days or more during the 4 previous financial years.
What are the steps required to Calculate the Residential Status of an Individual?
• First, we check whether the Individual is falling under the category of exceptions for the basic
conditions or not?
• After that, we check that whether they are satisfying the basic condition of 182 days of more or
not? if they are satisfying then he will be treated as a resident otherwise he will be non-resident. If an
Individual is not fulfilling the above condition, then we apply both the condition and if he satisfies any of
the basic condition takes then he is said to be a Resident.
Conclusion
Origin, Nationality, place of birth, domicile doesn't play a vital role in the calculation of Income Tax. If a
person who is an Indian citizen can be non- resident and the person who is not a citizen of India and if
they are residing in India, and if they are fulfilling the criteria of Resident then as an eye of Income Tax
they can be resident of India and they will be taxable in nature.
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.
While calculating the residential status of an individual we check the physical stay in India and the
physical stay of an individual is checked by their physical stay of the previous years.
However, the residential status of an individual is change year to year.
3. Format determining the taxable income under the head income from house
property. (3m)
Yes, the format for determining taxable income from house property is based on the provisions of the
Income Tax Act, 1961 (IT Act), specifically under Section 22 to Section 27. The steps I outlined are in
line with the general provisions as prescribed by the Act. Let’s break it down further to ensure alignment
with the IT Act:
1. Section 22 - Income from House Property
● Income from house property is charged to tax under Section 22 of the IT Act, which states
that the annual value of property, which is owned by the taxpayer and used for residential or
commercial purposes, will be taxed.
2. Determining Gross Annual Value (GAV)
● Gross Annual Value (GAV) is defined under Section 23(1). It is the higher of:
○ Actual Rent Received or Receivable (Section 23(1)(b)), or
○ Fair Rent (the reasonable rent that the property can fetch in the open market), or
○ Municipal Value (the value determined by the municipal authorities).
● If the property is vacant and not generating rent, Section 23(1)(c) applies, where the GAV is
considered to be the rent that the property can potentially generate in the open market, subject
to certain conditions.
3. Net Annual Value (NAV)
● After determining the Gross Annual Value (GAV), you need to deduct any municipal taxes
paid (if applicable) by the owner in order to compute the Net Annual Value (NAV).
● Section 23(1) allows this deduction for municipal taxes, excluding taxes paid on water supply
or maintenance.
4. Standard Deduction (30%)
● Section 24(a) allows for a standard deduction of 30% of the Net Annual Value (NAV). This
deduction is allowed irrespective of the actual expenses incurred on repairs and maintenance.
5. Interest on Borrowed Capital (Section 24(b))
● If the property has been acquired, constructed, repaired, or renewed with borrowed funds,
Section 24(b) provides a deduction for interest on loan.
● For a self-occupied property, the maximum allowable deduction is Rs. 2 lakh per annum
on interest paid (Section 24(b)).
● For a let-out property, there is no upper limit for the deduction on interest, subject to the
condition that the property is rented out.
6. Taxable Income Calculation
● After applying the deductions, the taxable income from house property is calculated as:
\text{Taxable Income from House Property} = \text{Net Annual Value (NAV)} -
\text{Standard Deduction (30% of NAV)} - \text{Interest on Loan}
Example as per IT Act:
● Gross Annual Value (GAV): Rs. 1,20,000 (Actual Rent Received)
● Municipal Taxes Paid: Rs. 10,000
● Net Annual Value (NAV): Rs. 1,20,000 - Rs. 10,000 = Rs. 1,10,000
● Standard Deduction (30% of Rs. 1,10,000): Rs. 33,000
● Interest on Loan: Rs. 50,000
Taxable Income from House Property:
Taxable Income=Rs.1,10,000−Rs.33,000−Rs.50,000=Rs.27,000Taxable
Income=Rs.1,10,000−Rs.33,000−Rs.50,000=Rs.27,000
Thus, the calculation and the format I provided are in full accordance with the Income Tax Act, 1961,
specifically the provisions under Section 22 to Section 27.
4. Distinguish between tax and fees. (3m)
Under the Income Tax Act, 1961 (IT Act), the distinction between taxes and fees is clarified in the
context of tax administration, though the terms are not always explicitly defined within the Act itself.
However, the key points can be inferred from the provisions and principles laid out in the Act:
1. Taxes (Income Tax) under the IT Act, 1961:
● Definition: Taxes, specifically income tax, are mandatory contributions imposed on
individuals, firms, and companies based on their income or profits.
● Purpose: The primary objective is to generate revenue for the government to fund its various
functions and public welfare schemes.
● Nature:
○ Imposed on Income: The tax is levied on the income of individuals, businesses, or other
entities. This can be based on annual income, capital gains, etc.
○ Progressive: In the case of income tax, the rate is progressive (i.e., higher income
attracts a higher tax rate).
○ Compulsory: Payment of income tax is compulsory for those whose income
exceeds the taxable limit defined by the Act.
○ Penalty for Non-payment: Non-compliance with the income tax obligations may result
in penalties, interest, and legal actions under the provisions of the IT Act.
Example: If an individual earns ₹10 lakh in a year, they are liable to pay tax based on the applicable
income tax slabs under the IT Act.
2. Fees under the IT Act, 1961:
● Definition: Fees refer to amounts charged for specific services or functions carried out by the
Income Tax Department under the IT Act.
● Purpose: These fees are generally collected for specific administrative services, such as filing
returns, processing documents, and issuance of certificates or assessments.
● Nature:
○ Service-based: Fees are charged in exchange for specific services rendered by the tax
authorities.
○ Non-progressive: Unlike taxes, fees are usually not progressive and are based on the
service provided, not the income of the individual.
○ Mandatory for Service: While taxes are mandatory for eligible individuals based on
income, fees are required for availing specific services provided by the Income Tax
Department.
Examples of fees under the IT Act:
● Fee for late filing of income tax returns: Section 234F of the IT Act prescribes a fee for
individuals who file their tax returns after the due date.
● Fees for processing of tax-related documents: Fees may also be prescribed for services like
processing application for PAN (Permanent Account Number), issuance of tax clearance
certificates, or other related services.
Key Differences in the Context of the Income Tax Act, 1961:
● Taxes are levied for general revenue purposes and are based on income, while fees are charges
for specific services provided by the Income Tax Department (e.g., filing returns, processing
requests).
● Taxes are compulsory contributions with penalties for non-payment, whereas fees are typically
tied to the receipt of a specific service, and the individual may choose whether or not to avail
that service (though if they choose to, the fee must be paid).
Thus, in the context of the Income Tax Act, 1961, taxes generally refer to the amounts payable by
individuals based on their income or profits, while fees are charged for administrative or procedural
services related to the tax system.
