UNIT I: HISTORY OF TAXATION – Elements of Tax – Objectives of Taxation –

Cannons of Taxation – Tax System in India - Classification of Taxes.

I. History of Taxation (Brief Overview)

The history of taxation is as old as organized human societies. Its evolution reflects changes
in economic, social, and political structures.

 Ancient Civilizations: Early forms included levies on agricultural produce (tithes),

labor service, or tributes for rulers and public works (e.g., pyramids, roads).
Examples: Ancient Egypt, Mesopotamia, Roman Empire (tributum, portoria).
 Feudal Era: Taxes often took the form of feudal dues, rents, and customs duties.
Land ownership was central.
 Mercantilism (16th-18th Century): Emphasis on customs duties (tariffs) to protect
domestic industries and generate revenue for the state. Indirect taxes were prevalent.
 Industrial Revolution: Shift towards direct taxation (income tax) as income became
a more significant measure of wealth. The first modern income tax was introduced in
Britain in 1799 to finance wars.
 20th Century Onwards: Expansion of direct and indirect taxes to fund welfare
states, public services, and infrastructure. Globalization led to complexities like
international tax agreements and transfer pricing. Modern tax systems aim for
progressive taxation, efficiency, and social equity.
 India's Context:
o Ancient India: References to taxes (Bali, Bhaga, Kara, etc.) in texts like the
Manusmriti and Arthashastra, primarily on land, trade, and professions.
o Mughal Era: Land revenue (Jizya, Zakat, Octroi) was a major source.
o British India: Introduction of modern income tax (1860), customs, and excise
duties.
o Post-Independence: Evolution of a complex tax structure, including various
direct and indirect taxes. Significant reforms include the introduction of VAT,
then GST, and ongoing direct tax reforms.

II. Elements of Tax

A tax typically possesses the following characteristics:

1. Compulsory Exaction: It is a mandatory payment by the taxpayer to the government,

enforced by law, without any direct quid pro quo (specific return of service) to the
payer.
2. Public Purpose: The revenue collected is for the common good and public welfare,
financing government expenditure on infrastructure, defense, social services, etc.
3. No Direct Benefit: The taxpayer does not receive a direct, specific, and measurable
benefit equivalent to the tax paid.
4. Imposed by Authority of Law: Taxes can only be levied or collected under the
explicit authority of a valid law passed by the competent legislative body. (Article 265
of the Indian Constitution).
5. Non-Punitive: Taxes are not penalties for any offense; they are a regular contribution
based on income, consumption, or wealth.
III. Objectives of Taxation

Taxation serves multiple objectives beyond just revenue generation:

1. Revenue Generation: The primary objective is to finance government expenditure

(public goods and services).
2. Reduction of Inequalities (Redistribution of Wealth): Progressive tax systems
(higher income, higher tax rate) aim to reduce income and wealth disparities.
3. Economic Stability and Growth:
o Fiscal Policy: Taxes are tools to manage demand. Lower taxes can stimulate
demand during recession; higher taxes can curb inflation.
o Investment and Savings: Tax incentives can encourage specific investments
or savings.
o Resource Allocation: Discouraging harmful activities (e.g., sin taxes on
tobacco) or encouraging beneficial ones (e.g., tax breaks for green energy).
4. Social Welfare: Funding social programs, education, healthcare, and poverty
alleviation.
5. Control Inflation/Deflation: By adjusting tax rates, the government can influence
aggregate demand.
6. Regulation and Control: Discouraging certain activities (e.g., high import duties on
luxury goods to curb imports, sin taxes).
7. Employment Generation: Tax holidays or incentives for new industries can promote
employment.
8. Balance of Payments: Customs duties can influence imports and exports.

IV. Cannons of Taxation (Adam Smith's Principles)

Adam Smith, in "The Wealth of Nations," laid down four widely accepted canons of taxation:

1. Canon of Equality (or Equity/Justice):

o Horizontal Equity: Individuals with similar taxable capacity should pay the
same amount of tax.
o Vertical Equity: Individuals with greater taxable capacity should pay more
tax, often implying progressive taxation. This aims to distribute the burden
fairly.
2. Canon of Certainty:
o The tax to be paid by an individual should be clear, certain, and not arbitrary.
o It should specify the time of payment, the manner of payment, the quantity to
be paid. This provides predictability for both taxpayers and the government.
3. Canon of Convenience:
o The tax should be levied and collected at a time and in a manner most
convenient for the taxpayer.
o Examples: TDS (Tax Deducted at Source) from salaries, GST paid at the point
of sale.
4. Canon of Economy:
o The cost of collecting the tax should be minimal compared to the revenue it
generates.
o The administrative expenses of the tax department should not be
disproportionately high.
Modern Additions to Canons:

 Canon of Productivity: A tax should yield substantial revenue for the government.
 Canon of Elasticity: The tax system should be able to automatically generate more
revenue with an increase in national income without requiring frequent changes in tax
rates.
 Canon of Simplicity: The tax system should be easy to understand and comply with
for taxpayers, and easy to administer for tax authorities.
 Canon of Diversity: A well-balanced tax system should have a variety of taxes to
ensure stability of revenue and spread the burden across different sectors.

V. Tax System in India (Updated for FY 2025-26 / AY 2026-27)

India's tax system is a multi-layered structure with taxes levied by the Central Government,
State Governments, and Local Bodies. It comprises both direct and indirect taxes. The
Finance Bill 2025, recently passed by Parliament, introduces several key changes for the
upcoming financial year.

A. Direct Taxes: Levied directly on the income or wealth of individuals and corporations.

1. Income Tax: Governed by the Income Tax Act, 1961.

o Applicability: Levied on the total income of individuals, Hindu Undivided
Families (HUFs), firms, companies, associations of persons (AOPs), body of
individuals (BOIs), etc.
o Heads of Income: Salaries, House Property, Profits and Gains of Business or
Profession, Capital Gains, Income from Other Sources.
o Current Regimes (FY 2025-26 / AY 2026-27):
 New Tax Regime (Default Regime - Section 115BAC): This has
been significantly reformed to be more attractive.
 Slabs for Individuals (FY 2025-26 / AY 2026-27):
 Up to ₹4,00,000: Nil
 ₹4,00,001 to ₹8,00,000: 5%
 ₹8,00,001 to ₹12,00,000: 10%
 ₹12,00,001 to ₹16,00,000: 15%
 ₹16,00,001 to ₹20,00,000: 20%
 ₹20,00,001 to ₹24,00,000: 25%
 Above ₹24,00,000: 30%
 Rebate u/s 87A: Increased from ₹25,000 to ₹60,000. This
effectively makes income up to ₹12,00,000 tax-free under the
new regime. For salaried individuals, with the standard
deduction, the effective tax-free income can go up to
₹12,75,000 (₹12,00,000 + ₹75,000 standard deduction).
 Standard Deduction: Introduced for salaried individuals and
pensioners at ₹75,000.
 Other Deductions/Exemptions: Most traditional deductions
(e.g., Section 80C, HRA, LTA) are not available.
 Old Tax Regime (Optional): Continues to be available. Taxpayers
can opt for this regime if they wish to claim various deductions and
exemptions.
 Slabs for Individuals below 60 (FY 2025-26 / AY 2026-27):
  Up to ₹2,50,000: Nil
 ₹2,50,001 to ₹5,00,000: 5%
 ₹5,00,001 to ₹10,00,000: 20%
 Above ₹10,00,000: 30%
 Senior Citizens (60-80 years): Basic exemption limit up to
₹3,00,000.
 Super Senior Citizens (80+ years): Basic exemption limit up
to ₹5,00,000.
 Standard Deduction: ₹50,000 for salaried individuals and
pensioners.
 Rebate u/s 87A: For resident individuals with taxable income
up to ₹5,00,000, a rebate of ₹12,500 makes their tax liability
nil.
o Surcharge: Additional levy on income tax for high-income earners.
o Health and Education Cess: 4% on the income tax plus surcharge.
o TDS (Tax Deducted at Source) & TCS (Tax Collected at Source) Changes
(Effective from April 1, 2025):
 Increased TDS thresholds for various payments (e.g., interest for senior
citizens increased to ₹1,00,000, rent to ₹6,00,000).
 Omission of Sections 206AB and 206CCA (higher TDS/TCS for non-
filers).
 TCS on sale of goods (Section 206C(1H)) has been removed.
 Increased LRS (Liberalised Remittance Scheme) threshold for TCS on
overseas remittances to ₹10 lakhs (from ₹7 lakhs), with no TCS on
educational loans from financial institutions.
o Updated Tax Return: Time limit extended from 2 years to 4 years from the
end of the relevant assessment year.
2. Corporate Tax:
o Domestic Companies:
 Generally taxed at 22% (if foregoing deductions/incentives under
Section 115BAA) or 15% (for new manufacturing companies under
Section 115BAB), plus surcharge and cess.
 Other domestic companies (not opting for concessional regimes) are
taxed at 25% (if turnover up to ₹400 crore in FY 2022-23) or 30%.
o Foreign Companies: Generally taxed at 40%, plus surcharge and cess.
o Minimum Alternate Tax (MAT): Applicable to companies opting for certain
deductions and exemptions, ensures they pay a minimum tax. Not applicable
to companies opting for Section 115BAA/BAB.
o Dividend Distribution Tax (DDT): Abolished. Dividends are now taxable in
the hands of shareholders.
3. Wealth Tax: Abolished in India in 2015. It was replaced by an increased surcharge
on high-net-worth individuals' income.
4. Other Direct Taxes:
o Securities Transaction Tax (STT): On transactions involving listed equity
shares, derivatives, and units of equity-oriented mutual funds.
o Commodities Transaction Tax (CTT): On certain commodity derivatives
transactions.
o Equalisation Levy: On digital services and e-commerce supply or services
provided by non-residents without a permanent establishment in India.
 o Agricultural Income Tax: Levied by some state governments, as agricultural
income is generally exempt from central income tax.

B. Indirect Taxes: Levied on goods and services, ultimately borne by the end consumer.

1. Goods and Services Tax (GST): Implemented from July 1, 2017. A comprehensive,
multi-stage, destination-based tax levied on every value addition.
o Components:
 CGST (Central GST): Levied by the Central Government.
 SGST (State GST): Levied by the State Government (or UTGST for
Union Territories).
 IGST (Integrated GST): Levied by the Central Government on inter-
state supplies and imports. It is a sum of CGST and SGST/UTGST.
 GST Compensation Cess: Levied on certain specified luxury and sin
goods to compensate states for revenue loss due to GST
implementation (initially for 5 years, extended till March 2026).
o GST Slabs (Standard): 0%, 5%, 12%, 18%, 28%. There are also special rates
for certain items (e.g., precious stones, gold).
o Recent Discussions/Potential Changes (from 56th GST Council Meeting,
June 2025):
 Removal of 12% GST Slab: Strong discussions and "near consensus"
to potentially merge items in the 12% slab into the 5% or 18% slab,
aiming for rate rationalization and simplification. This would reduce
the number of major slabs from four to three.
 Clarity on Intermediary Services: Hopes for clarification on GST
treatment of intermediary services, especially those dealing with
foreign clients, potentially treating them as zero-rated exports.
 GST Appellate Tribunal (GSTAT): Progress on setting up the
GSTAT to expedite appeals and reduce litigation in High Courts.
 Rate Review: Potential review of GST rates on various goods and
services (e.g., drones, life/health insurance premiums, FSI approval
fees).
 GST Registration Norms: Discussions to align state-level GST
registration processes with CBIC's streamlined system for ease of
doing business.
 Restriction on GSTR-3B Filing: Hard-locking of auto-populated
sales liability values in GSTR-3B from July 2025 onwards, and
restriction on filing GSTR-3B after 3 years from the due date.
2. Customs Duty: Governed by the Customs Act, 1962, and Customs Tariff Act, 1975.
o Applicability: Levied on goods imported into India. Export duties are levied
on a few specified goods.
o Types:
 Basic Customs Duty (BCD): Standard duty rate.
 Integrated Goods and Services Tax (IGST): Levied on imports,
equivalent to domestic GST.
 Social Welfare Surcharge (SWS): A percentage of BCD.
 Anti-Dumping Duty (ADD): To protect domestic industries from
unfairly priced imports.
 Countervailing Duty (CVD): To offset subsidies provided by
exporting countries.
 o Recent Amendments (Finance Bill 2025 and earlier):
 Time Limit for Provisional Assessments: Introduction of a definite
time limit (2 years, extendable by 1 year) for finalizing provisional
assessments (Section 18(1B)).
 Voluntary Revision of Bill of Entry: Section 18A introduced,
allowing importers/exporters to revise entries in the bill of entry post-
clearance, simplifying error correction.
 Refund Claims: New explanations in Section 27 may impact the
limitation period for refund claims, potentially from the date of duty
payment for Section 149 amendments.
 Electronic Duty Credit Ledger: Section 51B for electronic credit of
duties/duty remission for exports.
 Preferential Tariff Treatment: New Chapter VAA (Section 28DA)
for administering preferential tariff treatment under trade agreements,
including obligations on importers and time-bound verification.
 Changes in Duty Rates: Continued adjustments in BCD rates on
various items to promote domestic manufacturing, manage imports,
and align with trade policies (e.g., changes for certain electronics,
agricultural products, gems & jewellery, electric vehicles as per recent
budgets).
 Abolition of Settlement Commission: Proposed abolition of the
Customs, Central Excise and Service Tax Settlement Commission
from April 1, 2025.

VI. Classification of Taxes

Taxes can be classified based on various criteria:

A. Based on Incidence and Impact:

1. Direct Taxes:
o Incidence = Impact. The burden of the tax falls directly on the person who is
legally liable to pay it.
o Examples: Income Tax, Corporate Tax.
2. Indirect Taxes:
o Incidence ≠ Impact. The burden of the tax can be shifted by the person
legally liable to pay it to another person (usually the end consumer).
o Examples: Goods and Services Tax (GST), Customs Duty.

B. Based on Nature of Tax Rate:

1. Progressive Tax:
o The tax rate increases as the tax base (income/wealth) increases.
o Aims to achieve equity and reduce inequalities.
o Example: India's Income Tax slabs.
2. Proportional Tax:
o The tax rate remains constant regardless of the tax base.
o Example: Corporate tax in some cases, or a flat cess.
3. Regressive Tax:
o The tax rate decreases as the tax base increases.
 o It places a relatively heavier burden on lower-income groups.
o Example: While no tax is designed to be regressive, some indirect taxes can
have a regressive impact (e.g., a fixed tax on a necessity will consume a larger
percentage of a poor person's income).

C. Based on Tax Authority:

1. Central Taxes: Taxes levied and collected by the Central Government.

o Examples: Income Tax, Corporate Tax, Central GST (CGST), Integrated GST
(IGST), Customs Duty.
2. State Taxes: Taxes levied and collected by State Governments.
o Examples: State GST (SGST), Stamp Duty, State Excise Duty (on alcohol and
narcotics), Motor Vehicle Tax, Land Revenue.
3. Local Taxes: Taxes levied and collected by local bodies (Municipal Corporations,
Panchayats).
o Examples: Property Tax, Octroi (now largely subsumed under GST),
Professional Tax (in some states), Entertainment Tax (largely subsumed under
GST).

D. Based on Specificity:

1. Specific Duties: Levied per unit of quantity (e.g., per kg, per meter).
o Example: Excise duty on certain goods in the past, or specific customs duties.
2. Ad Valorem Duties: Levied as a percentage of the value of the goods or services.
o Example: Most GST rates, customs duties based on value.

E. Based on Tax Base:

1. Income Taxes: On income earned.

2. Property Taxes: On the value of property.
3. Consumption/Expenditure Taxes: On goods and services consumed.
4. Wealth Taxes: On accumulated wealth/assets (no longer applicable in India at the
central level).