UNIT 1 Introduction to Taxation in India
Objectives: To Understand
✓ How Taxation system has evolved in India
✓ Taxes under state list and central list
✓ Understand Basic concepts, provisions of Income Tax
✓ Income Tax Act 1961
✓ How different assessee’s are taxed in India
✓ What are the different Heads of Income
✓ How a particular Income is taxed under a specified head
Outcomes:
✓ Identify Basic principles of taxation laws in India
✓ Analyze cases and apply the provisions to compute taxable income
✓ Gain Knowledge of basic income tax provisions
✓ Gain knowledge on the interpretation based on the case laws
✓ ONLY NORMAL CALCULATORS ARE ALLOWED SCIENTIFIC CALCULATORS NOT
ALLOWED (Make a habit of using calculators for Numerical Qs)
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Before delving into the concept of tax, it's important to recognize that taxation is not a recent development. Throughout history,
taxes have been an integral part of human societies, with evidence showing that rulers and monarchs have imposed taxes for
centuries.
The origin of the word "Tax" is from "Taxation" which means an estimate.[Taxare or Taxo derived from a latin word which
means to asses the worth of something]
Similar to how the Sun draws moisture from the Earth to return it manifold, governments collect taxes and reinvest them in the
form of infrastructure such as roads and bridges for the benefit of the people.
According to Manu Smriti, the king should arrange the collection of taxes in such a manner that the tax payer did not feel the
pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the
agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.
Kautilya (Chankya) has also described in great detail the system of tax administration in the Mauryan Empire. It is
remarkable that the present day tax system is in many ways similar to the system of taxation in vogue about 2300 years
ago.
❖WHAT IS TAX ?
• Taxes are considered to be the “cost of living in a society”.
• Taxes are levied by the Governments to meet the common welfare expenditure of the society
• Article 366(28) of the Constitution of India defines the term "Taxation" as follows -"Taxation includes the
imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly."
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❖ Why are taxes Levied?
• The reason for levy of taxes is that they constitute the basic source of revenue to the Government.
• Revenue so raised is utilized for meeting the expenses of Government like defence, provision of education, health-
care, infrastructure facilities like roads, dams etc.
**The above is basically for understanding**
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❖HISTORY OF TAX LAW IN INDIA:
➢ In India, the system of direct taxation as it is known today has been in force in one form or another even from
ancient times.
➢ 1860- The Tax was introduced for the first time by Sir James Wilson. India’s First “Union Budget” Introduced
by Pre-independence finance minister, James Wilson on 7 April, 1860.
➢ Income was divided into four schedules taxed separately:
(1) Income from landed property;
(2) Income from professions and trades;
(3) Income from Securities;
(4) Income from Salaries and pensions.
➢ Time to time this act was replaced by several license taxes.
➢ 1886- Separate Income tax act was passed. This act remained in force up to, with various amendments from
time to time. Under the Indian Income Tax Act of 1886, income was divided into four schedules taxed
separately: (1) Salaries, pensions or gratuities;
(2) Net profits of companies;
(3) Interests on the securities of the Government of India;
(4) Other sources of income. CA Rajalakshmi B
➢ 1918- A new income tax was passed. The Indian Income Tax Act of 1918 repealed the Indian Income Tax Act
of 1886 and introduced several important changes.
➢ 1922- Again it was replaced by another new act which was passed in 1922. The Income Tax Act of
1922 remained in force until the year 1961.
➢ The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The
Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent
the evasion of tax
➢ 1961– In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. The Income Tax
Act 1961 has been brought into force with 1st April 1962.It applies to the whole of India (including Jammu
and Kashmir).
➢ Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Union
Budget every year which also contains Finance Bill.
➢ After it is passed by both the houses of Parliament and receives the assent of the President of India, it
becomes the Finance act.
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➢ At present, there are five heads of Income:
(1) Income from Salary;
(2) Income from House Property;
(3) Income from Profits and Gains of Business or Profession;
(4) Income from Capital Gains;
(5) Income from Other Sources.
There are XXIII Chapters, 298 Sections and Fourteen Schedules in the Income Tax Act.
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Indian Tax Structure
Tax structure in India is a three-tier federal structure. The central government, state governments,
and local municipal bodies make up this structure.
Direct Taxes
Indirect Taxes
If tax is levied directly on the income or
If tax is levied on the price of a good or
wealth of a person, then, it is a direct tax.
service, then, it is an indirect tax e.g. Goods
The person who pays the tax to the
and Services Tax (GST) or Custom Duty. In the
Government cannot recover it from
case of indirect taxes, the person paying the
somebody else i.e. the burden of a direct tax
tax passes on the incidence to another person.
cannot be shifted. e.g. Income- tax.
TAX ON
UNDISCLOSED GOODS AND
CUSTOMS DUTY
INCOME TAX FOREIGN INCOME SERVICES TAX (GST)
AND ASSETS
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Sr No Direct Tax Indirect tax
1 It is levied on Income & profits It is levied on product and services
2 It is paid directly by person concerned It is paid by one person but is recovered from another
person – Person who actually bears the tax is the
ultimate consumer
3 It is progressive in nature It is regressive in nature
4 Tax collection is difficult Tax collection is relatively easier
5 Tax burden cannot be shifted Tax burden can be shifted
6 Example Income Tax, Wealth Tax, etc. Example: GST, octroi, excise duty, customs duty,
(Wealth Tax was abolished on 28th Feb 2016 sales tax, etc.
(2016-2017)
The reason for levy of taxes is that they constitute the basic source of revenue to the
Why are taxes Government. Revenue so raised is utilized for meeting the expenses of Government like
Levied defence, provision of education, health-care, infrastructure facilities like roads, dams etc.
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*Just for your reference*
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***Only for reference***
The corporate tax collections increased by approximately 7.1%, which indicates an increase in the profitability of the
companies which has a positive impact on the economy.
The personal income tax has seen a growth rate of 17.47%, which indicates increase income levels or increased
employment.
The securities transaction tax has an impressive growth of 55.56%, which indicates increased trading activity in the stock
market and possibly higher investor participation. Total Net collection has increased by 13.13% (ie approx. 13/14% growth)
In FY 2023-24, the percentage of population that files Income Tax Return is 6.68 per cent. (In FY 2023-24, the total number
of persons filling income tax return is 8,09,03,315) CA Rajalakshmi B
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The taxes collected have been used by the government to carry out many functions: Some of these
include:
✓ Expenditures on war,
✓ The enforcement of law and public order,
✓ Protection of property,
✓ Economic infrastructure (such as roads, legal tender, enforcement of contracts, etc.),
✓ Public works,
✓ Social Engineering,
✓ The operation of Government itself, and
✓ To fund welfare and public services such as education systems, health care systems, pensions for the elderly,
unemployment benefits, and public transportation, energy, water and waste management systems, common
public utilities, etc.
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Nature and Characteristics of Tax:
✓ Taxation reflects the principle of equity—individuals/persons contribute based on their financial capacity
✓ Tax is Compulsory and not Voluntary: As one earns income, they are legally bound to pay tax. It is a
compulsory payment enforced by law, and refusal to pay is a punishable offence. Every citizen(ideally a
person earning revenue income from India or because of India has to pay tax will be covered in Residential
status) has a duty to contribute their fair share to support the government.
✓ Taxes are paid from the income earned by individuals or entities: ie by Persons
(I/HUF/AOP/BOI/AJP/LA/Company/Fim/Co-op Society)
✓ The power to tax is an exclusive right of the government under the law
✓ Tax is not a payment made in exchange for a specific benefit (There is no direct link between the tax paid
and benefits received)
✓ Tax is for the economic growth and public welfare
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❖Tax and Fee:
➢ Tax is the compulsory payment to the government without getting any direct benefits.
➢ Fees are generally obligatory to regulate or control various types of activities.
➢ However, a fee is particularly applied for the use of a service.
➢ A tax is a compulsory contribution made by a taxpayer.
➢ A fee is a voluntary payment.
➢ The difference between a tax and a fee generally turns on the use of the revenue.
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Tax Fee
A tax represents money – that a government charges an A fee is related to a tax in that it is also a charge paid to the
individual or business when they perform a particular action government by individuals or by a business. Fees are mostly
or complete a specific transaction. Taxes are levied in the imposed to regulate or control various types of activities.
greater interests of the country.
This tax is often assessed as a percentage of the amount of The fee rate is directly tied to the cost of maintaining the
money involved in the transaction. service. Money from the fee is generally not applied to uses
other than to provide the service for which the fee is applied.
A tax is a levy collected for general government services. It is a A fee is a levy collected to provide a service that benefits the
way to generate revenue by Govt. group of people from which the money is collected. It is
charged for services rendered by an individual
/Company/Professionals
Taxes pay the salary of a teacher, police officer or bureaucrat. A fee is assessed for an exact service, and the money collected
They may help pave a road or build a school. They may finance is usually earmarked for that service. The fee that you pay for
the running of the local sewage-treatment plant. inspecting your assets every other year probably goes directly
to cover the costs.
A tax is applied on the income that a person makes during a However, a fee is specifically applied for the use of a service.
year. In addition, a tax is often pieced on the sale of goods. For example, a government may charge a fee to visit a park.
income tax, gift tax, wealth tax, VAT, etc. are examples of tax. Stamp duty fee, driving license fee, Govt. registration fee, etc.
are examples of Fee.
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TAX VS CESS
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❖Tax planning, Tax Evasion & Tax avoidance:
• TAX PLANNING:
➢ 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 in such a way that reduces tax liability.
➢ Example: Investment in 80C, 80CCD or reinvestment u/s 54,54EC etc.
• Tax Avoidance:
➢ 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.
➢ Example: Sale and leaseback of assets so that the depreciation is diverted but the asset remains with
assessee.
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• Tax Evasion:
➢ 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.
➢ Record bogus expenses, Submitting false tax returns, Using fake documents to claim exemption, Not
reporting income
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Government Financial Policy and Tax Structure:
Fiscal Policy refers to government policy in respect of public expenditure, taxation and public debt. It is the
means by which the government adjusts its spending levels and tax rates to monitor and influence a nation’s
economy.
Whereas Monetary policy, deals with the supply of money in the economy and the interest rate. The Reserve
Bank of India (RBI) is vested with the responsibility of conducting monetary policy.
There are three components to fiscal policy in India. They are:
- Government receipts,
- Government expenditures and
- Public Debt.
Government receipts are:
✓ Tax Receipts/Revenues : Such as Direct Tax and Indirect Tax
✓ Non Tax Receipts/Revenues: Such as Dividends from public sector utilities, Interest receipts,Fines, Penalties,
Fees, License, Permits, etc
✓ Capital Receipts: Such as borrowings from public, Sale of Assets, Loan Recovery etc
Tax remains the major source of government income, although the government has various other sources of
revenue.
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✓ In India, Public Expenditure refers to the spending by the government at various levels (Union, State,
Local) for the provision of public goods and services, economic development, and welfare.
✓ Public Expenditure is mainly classified into the following categories:
- Revenue/Recurring: Salaries and pensions Interest payments on loans Subsidies (like food, fuel, fertilizer)
Defence expenses Grants to states/Uts
✓ Capital Expenditure: Incurred to create assets or reduce liabilities, Promotes long-term economic
growth. Examples:
- Construction of roads, bridges, hospitals
- Loan disbursements to PSUs
- Repayment of public debt
- Investments in equity of government enterprises
✓ When Expenditure exceeds revenue generated by govt it is financed by public debt
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