TAXATION LAWS

MODULE 1: INTRODUCTION TO TAXATION IN INDIA

TAXES - AN INTRODUCTION
The word tax is based on the latin word taxo which means to estimate. To tax means to impose a financial
charge or other levy upon a taxpayer, an individual or legal entity, by a state or the functional equivalent of a
state such that failure to pay is punishable by law.
Taxation has existed since the birth of early civilization. In ancient times taxes were either material or money
like goods or services in the primitive society. The subjects used to pay a share of their income to the Head of a
tribe or to the King who in return provided them with the administration security from foreign aggression and
other civic amenities.
In the medieval centuries feudalism was founded, so the origin of modern tax system also was founded. Feudal
market dues, tolls for protection and use of road, bridges, ferries, land rent, and other payment in goods and
services were gradually transferred into money payment with the rise of money economy, Kings liked to receive
money and the people preferred to pay money instead of goods and services. Step by step the old feudal revenue
system changed into taxation.
Then with the development of economic sciences and with the passage of time, the functions of modern state
appeared and taxation gradually became a tool of usage with more than one goal and became important source
of revenue. During 19th and 20th centuries, there has been both qualitative and quantitative change in the public
expenditures. Taxation has passed through the stages with passage of time, and tax‟s functions and objectives
also have changed from the ancient communities to medieval societies to modern societies also, so the tax
system has evolved with the evolution of the functions of the modern state.
Taxation is a payment from natural persons or legal entity and it is levied by government ,for which no goods or
services is received directly in return, so taxes is that amount of money, the people pay which is not related
directly to the benefit of people obtained from the provision of a particular goods or services.
Until the early 1930s, it was universally accepted in principle that governments should balance their budgets.
Thus, the principle reason for taxation was to pay for government expenditures. Of course, governments had
from time to time resorted to borrowing in order to pay for their expenditures and government borrowing was
relatively quite large during some war periods. Government borrowing may be from the private sector or from
abroad. Alternatively, governments may borrow from the central bank of the Country. A portion of taxes also
goes to pay off the state‟s debt and the interest accumulates.
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 (roads, legal tender, enforcement of contracts, etc.),
• public works,
• social engineering, and
• the operation of government itself.

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Governments also use taxes to fund welfare and public services. These services can include
• education systems,
• health care systems,
• pensions for the elderly,
• unemployment benefits, and
• public transportation, energy, water and waste management systems, common public utilities, etc.
Governments have also financed expenditures in recent years through the sale of publicly owned assets.
Although asset sales were an important source of funds to the government, however, they are necessarily
limited since assets can only be sold once. Thus, governments still have to raise most of the revenue needed to
finance their expenditures through taxation or by charging directly for government services (user charges).
Governments uses different kinds of taxes and vary the tax rates, this is done to distribute the tax burden among
individuals or classes of the population involved in taxable activities, such as business, or to redistribute
resources between individuals or classes in the population.
Modern social security systems are intended to support the poor, the disabled, or the retired person by taxes on
those who are still working. In addition, taxes are applied to fund foreign aid and military ventures, to influence
the macroeconomic performance of the economy or to modify patterns of consumption or employment within
an economy, by making some classes of transaction more or less attractive. Thus, there is no doubt that most
government expenditures must be paid for through the taxation system and it is reasonable to see this as the
principle function of taxation. Yet there have always been a variety of subsidiary objectives of taxation.
In the present time, taxation is not just a means of transferring money to the government to spend it for meeting
the public expenditures or raise revenue to the government, but taxes have become beside that, as a tool for
reduce demand in the private sector, redistribution of income and wealth in the societies in the countries. It is
also a means for economic development and for playing very important role in the case of stabilization of
income, protection industrial home from foreign industrials. Taxation helps to find out solution for some
economic problems that face the state, like unemployment, inflation, and depression. Taxation finds out solution
for some economic problems, but not alone, but there are also a lot of another fiscal instruments. They are
working together for solution of those economic problem. Countries practice sovereignty authority upon its
citizens, through levying of Taxes.
Definitions of Tax
There is no precise and accurate definition for the tax and the concept of tax has been defined differently by
different economists. Some definitions are as follows.
According to Prof Seligman – A tax is compulsory contribution from the person to the government to defray
the expense incurred in the common interest of all without reference to special benefits conferred.
According to Bastable – A tax as a compulsory contribution of the wealth of a person, or body of persons for
the service of public powers.
From the above definitions we may conclude that a tax is compulsory contribution, levied by government
from owner of income without direct benefit but for public benefit, and taxes should be arranged by the
law.
CHARACTERSTICS OF TAXES
1. Tax is compulsory – A tax is imposed by law. So tax is compulsory payment to the governments from its
citizens. Tax is duty from every citizen to bear his share for supporting the government. The tax is
compulsory payment, refusal or objection for paying tax due leads to punishment or is an offence of the court
of law. Government imposes tax when somebody buys commodities, or when uses services or earns income

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 or any other condition for compulsion is found. The government practices its sovereign when levying the tax
from its citizens.
2. Tax is contribution – Contribution means in order to help or provide something. Tax is contribution from
members of community to the Government. A tax is the duty of every citizen to bear their due share for
support to government to help it to face its expenditures. Some wants are common to everybody in the
society like defence and security, so these wants cannot be satisfied by individuals. These social wants are
satisfied by governments, hence the people support government for these social wants. Contribution involves
loss or sacrifice from the side of contributor. These sacrifices affect his income.
3. Tax is for public benefit – Tax is levied for the common good of society without regard to benefit to special
individual. Government proceeds are spent to extend common benefits to all the people such as natural
disaster - like floods, famine - defence of the country, maintenance of law and establish infrastructure and
order. Such benefits are given to all people.
4. No direct benefit – Government is compulsorily collecting all types of taxes and does not give any direct
benefits to the tax payer for taxes paid. The essence of tax as distinguished from other charges by
governments is the absence of a direct quid-pro-que between the taxpayer and the public authority. Tax is
different from another government charges which may give direct benefits to payers such as prices, fees,
fines etc where the direct benefits are available. Taxes are for common benefits to all the members of the
society.
5. Tax is paid out of income of the tax payer – Income means money received, especially on regular basis, for
work or through investment. Tax is paid out of income as long as the income becomes realized, here the tax
is imposed. Income owner has profit from any business, so he should pay his share for support to the
government.
6. Government has the power to levy tax – Governments are practicing sovereign authority upon its citizens
through levying of taxes. Only Govt. can collect tax from the people. Tax is transferring resources from the
private sector to the public sector. Government is levying the tax to cover its expenditures. The government
use these taxes for increasing social welfare & economy development.
7. Tax is not the cost of the benefit – Tax is not the cost of benefit conferred by the government on the public.
Benefit and taxpayer are independent of each other, and payment of taxation is of course designed for
conferring of benefits on general public.
8. Tax is for the economic growth and public welfare – Major objectives of the government are to maximize
economic growth and social welfare. Developmental activities of the nations generally involve two
operations, the raising of revenue and the spending of revenue, so the government spent taxes for economic
benefit, for entire community and for aggregate welfare of the society.
OBJECTIVES OF TAXATION
Objectives of taxes have been developed when the functions of the Government are developed. In the primitive
communities a member was to pay his share to the Head of the tribe, who in return provided them with
administration, security from foreign aggression and other civic amenities. But today taxation besides being the
main resource for supporting government has became a tool for economic growth, social welfare; attract
foreigner investment, economic stability, and income distribution. The Objectives of taxation in brief are as
under:-
• Revenue -This objective is the oldest, uppermost and primary objective. Taxes are imposed so as to produce
the necessary amount of revenue to meet the requirement of the government, as the public expenditures is
increasing in scope and size day by day. Therefore, the main objective of taxes is to raise revenue to meet the
Govt. expenditures adequately.

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• Social objectives – Taxes became a main goal for some of social objectives.
a) Redistribution of income and wealth: Income is differ from one person to another in the society, inequity in
income leads to many evils, and the government aims to reduction of inequalities between members of the
society to secure social justice. Tax is a means of ensuring the redistribution of income and wealth in order to
reduce poverty and promote social welfare. For achieving these goals government adopts following:
i. Imposition of high rate tax upon luxury commodities.
ii. Applying progressive tax system when levying taxes from taxpayers.
iii. Imposition of tax exemption to basic goods.
b) Social welfare: Social welfare is the basic need of the society in the modern age. The government functions
have become very important to the society, because the society needs saving, protection, education, health,
and so on. All these functions are necessary to make social welfare, so the government receives revenue from
tax, and expends it for those function. Therefore revenue from taxes is fuel to the government for social
welfare. Social welfare is indicator for development of the countries, so almost all the countries have
competition to introduce these services in the societies.
c) Safety of society from bad and injurious customs: Fighting the bad customs in the society is the primary task
of the government, so tax is a tool for fighting some of those customs. From this angle tax imposition of very
high percentage on the goods like tobacco and alcohol is an effort to reduce these habits.
• Economic significance of taxes- Taxes are used from economic point of view, so taxation helps to encourage
some economic activities, and as a tool to solve some economics problems. Tax is also a means for directing
of scarce economic activities. Taxation helps to accelerate economic growth, and taxation plays very
important role in case of economic stability.
• Economic growth: Taxes are considered as a tool for economic growth and it helps to accelerate growth of
economic development. Economic development has placed considerable emphasis on objectives of taxation
policy. Economic development is the main objective in all the countries of the world. Economic development
depends on mobilization of resources and efficient use of such resources between different sectors of the
economy activities. Tax policy must be designed so as to mobilize the internal resources and use these
resources in productive manner. Taxation policy helps to increase production through raising the rate of
capital formation, so it helps improve the economic welfare through better distribution of income and it
becomes an important instrument for removing regional inequalities. Tax policy may serve directly to
mobilize resources for capital formation in the public sector and indirectly to promote private saving and
investment.
• Enforcing government policy: Government policy can be easily enforced by adoption of suitable tax policy.
The Government can encourage investment, saving, consumption, export, protection of home industry,
employment, production, protection of society from harmful customs, and economic stability through suitable
tax policy. Therefore, the government gives tax exemption to the investment and saving.
• Directing limited scarce resources into effective and essential channels: Tax policy plays crucial role for
directing scarce resources into essential commodities. This is achieved by giving tax exemption to certain
industries and imposition of heavy duties on other industries, so with the adoption of suitable tax policy,
economic resources may be diverted to the production of necessary articles and investors will go to the
exemption industries.
• Economic stability: Maintaining economic stability is one of the tax objectives. Economic stability is a very
important factor for the sustained economic growth. Government can effectively use taxes in the case of
inflation and depression. These may be increased in inflationary situations. Increase in the rates of existing
taxes and the imposition of new taxes would check consumption, decrease the level of effective demand and
therefore help in bringing up stability in prices. Heavy taxation transfer purchasing power from the hand of

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 people to the government which if used for productive purpose will increase the level of economic activity and
employment.
In the case of depression taxes play a different role. Purchasing power in the hand of people is reduced and
they are able to spend less and the demand for commodities and services is reduced. All these lead to a
shrinkage of business activity and employment. In this case government should increase the purchasing power
in the hand of public through reducing the burden of taxation on the people and impose tax upon saving and
hoarding so that people may be encouraged to spend more and thus help to create more demand for goods and
more business activity and employment.

STAGES OF LAW MAKING

1. Formulation of Legislative Policy
- CBDT
- CBIC/ CBEC
2. Creation of legislative scheme
- Legislative department of the Ministry of Law and Justice
3. Composition of sentences
- Constitutional validity of each proposal is to be seen
4. Then, the bill needs to be passed in both the Houses of Parliament.
5. Once passed in both the houses, bill needs to get the assent of the President of India to become an Act.
6. Once it is a law, it gets entered into the statute book and is published in the Official Gazette.

MONEY BILL
Article 107 & 196: (1) Subject to the provisions of articles 109 and 117 (or articles 198 and 207)with
respect to Money Bills and other financial Bills, a Bill may originate in either House of Parliament.
Article 109 & 198: Special procedure in respect of Money Bills:
(1) A Money Bill shall not be introduced in the Council of States.
(2) After a Money Bill has been passed by the House of the People it shall be transmitted to the Council of
States for its recommendations and the House of the People may either accept or reject all or any of the
recommendations of the Council of State.
Article 110 & 199: Definition of Money Bill
A Bill shall be deemed to be a Money Bill if it contains provisions dealing with
a) the imposition, abolition, remission, alteration or regulation of any tax;
b) the regulation of the borrowing of money or the giving of any guarantee by the Government of India, or the
amendment of the law with respect to any financial obligations undertaken or to be undertaken by the
Government of India;
c) the custody of the Consolidated Fund or the Contingency Fund of India, the payment of moneys into or the
withdrawal of moneys from any such Fund;
d) Public Accounts of India
Definition of Finance Bill:
The Finance Bill is a Money Bill as defined in Article 110 of the Constitution of India. It is presented in view of
Article 110(1)(a) of the Constitution which provides for the imposition, abolition, remission, alteration or
regulation of taxes proposed in the Budget. The Finance Bill is supplemented by a Memorandum which
contains explanations of the provisions included in it.

CONSTITUTIONAL PROVISIONS RELATING TO TAXES

The roots of every law in India lies in the Constitution, therefore understanding the provisions of Constitution is
foremost to have clear understanding of any law. Let us first understand what it talks about tax:
• Article 265– No tax shall be levied or collected except by the Authority of Law.

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• Article 246- Distributes legislative powers including taxation, between the Parliament of India and the State
Legislature.
• Schedule VII- Enumerates powers under three lists:
 Union List – Powers of Central Government
 Legislative List- Powers of State Government
 Concurrent List- Both Central and state Government have powers, in case of conflict; law made by
Union Government prevails.

ROLE OF THE CENTRAL AND STATE GOVERNMENT

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.
The powers of taxation exclusively conferred on the Union legislature are in respect of the following subjects:
(1) Taxes on income other than agriculture income; (2) Duties of customs including export duties; (3) Duties of
excise on tobacco and other goods manufactured or produced in India except alcoholic liquors and narcotic
drugs and narcotics, but including medicinal and toilet preparations containing alcohols etc., (4) Corporation
tax; (5) Taxes on the capital value of assets exclusive of agriculture land, of individuals and companies; taxes
on the capital of companies; (6) Estate duty in respect of property other than agricultural land; (7) Duties in
respect of succession to property other than agricultural land; (8) Terminal taxes on goods or passengers carried
by railway, sea or air: Taxes on railway fares and freights; (9) Taxes other than stamp duties on transaction in
stock exchanges and futures markets; (10) Rates of stamp duty in respect of bills of exchange, cheques,
promissory notes, bills of lading, letter of credit, policies of insurance, transfer of shares, debentures, proxies
and receipts; (11) Taxes on the sale or purchase of newspapers and on advertisements published therein; (12)
Taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the
course of inter-state trade or commerce. (13) Taxes on the consignment of goods (whether consignment is to the
person making it to any other person), where such consignment
takes places in the course of inter state trade or commerce.

The State list has the following entries relating to taxation; (1) Land revenue, including the assessment and
collection of revenue, the maintenance of land records etc.; (2) Taxes on agricultural income; (3) Duties in
respect of succession to agricultural land; (4) Estate duty in respect of agricultural land; (5) Taxes on lands and
buildings; (5A) Taxes on unusual rights subject to any legislations imposed by Parliament by law relating to
mineral development (6) Duties of excise and countervailing duties on alcoholic liquor; narcotic drugs and
narcotics excluding medicinal and toilet preparations; (7) Taxes on entry of goods into a local area for
consumption, use or sale there; (8) Taxes on the consumption or sale of electricity; (9) Taxes on the sale or
purchase of goods other than newspapers subject to the provisions of entry 92 A of list I; (10) Taxes on
advertisements other than advertisements published in the newspapers; (11) Taxes on goods and passengers
carried by road or on inland waterways; (12) Taxes on vehicles whether mechanically propelled or not
suitable for use of roads, including tramears, subject to the provisions of entry 35 in list III; (13) Taxes on
animal and boats (14) Tolls; (15) Taxes on professions, trades, callings and employments; (16) Capitation taxes;
(17) Taxes on luxuries including taxes on entertainments, amusements, betting and gambling; (18) Rates of
stamp duties in respect of documents other than those specified in the provision of list I with regard to the rates
of stamp duty.

In the Concurrent list the two entries relating to taxation are entry 35 and entry 44. The former relates to the
principles on which taxes on mechanically propelled vehicles are to be levied. Entry 44 reads 'Stamp duties
other than duties on fees collected by means of judicial stamps but not including rates of stamp duty. This
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means that the Union government and the states have concurrent power to legislate as to stamp duties on non-
judicial documents except in regard to the rates of such duties which are to be levied according to entry 91 of
list I or entry 63 of list II depending on the nature of the document.

The residuary power of legislation as to the subjects not covered by any of the legislating lists vests by virtue of
entry 97 of list I with the central legislature. The Supreme Court has held that wealth tax is not covered by
any of the entries in the lists and, therefore, under entry 97 of list I the central legislature can levy wealth tax on
all wealth including agriculture land.

To enable the Parliament to formulate by law principles for determining the modalities of levying the Service
Tax by the Central Government and collection of the proceeds thereof by the Central Government and the
States, the 95th Constitution Amendment Act was enacted in 2003. Consequently, new article 268 A has been
inserted for levy of Service Tax by Union Government, collected and appropriated by the Union.

Article 285 (1) provides that the property of the Union shall, save in so far as Parliament may by law otherwise
provide, be exempt from all taxes imposed by a State or by any authority within a state. Under sub-clause (2)
of the article, property of the Union which was taxable immediately before the commencement of the
Constitution would continue to be liable to taxation until Parliament by law otherwise provides.

Under article 289 the property and income of a state shall be exempt from Union taxation. The Union can,
however, tax any trade or business carried on by the state government and the income thereof unless the trade
or business is declared by Parliament to be incidental to the ordinary functions of government.

Article 301 of the Constitution provides that trade, commerce and intercourse throughout the territory of India
shall be free. It has been held by the Supreme Court in Nataraja Mudaliar's case that a tax on trade transactions
does not per se affect freedom of trade. Restrictions on interstate trade in public interest may, however, be
imposed by Parliament. Preference to one state or discrimination between one state and another by either
Parliament or the state legislatures is not permitted except in a situation where in order to deal with scarcity
conditions in India Parliament so provides. A state may impose on goods imported from other states any
tax to which similarly goods manufactured or produced in that state are subject, so however, as not to
discriminate between the imported and the local goods. The state may also impose reasonable restrictions on the
freedom of trade, commerce or intercourse with or within that state as may be required in the public interest.9
For the exercise of powers under article 304 (a) and (b), the previous sanction of the President is required.
It can be noticed that the Constitution does not expressly confer powers of taxation on local bodies like
municipalities, district boards and panchayats. These bodies enjoy such powers of taxation as may be delegated
to them by the state government for their needs.

TYPES OF TAXES: DIRECT AND INDIRECT TAXES

There are two types of taxes levied in India, i.e.,

Direct Taxes: Taxes which are directly levied on Income or wealth of the person and its burden cannot be
shifted; for example Income Tax.
Indirect Taxes: Indirect taxes are imposed on price of goods or services. Person paying the indirect tax can
shift the incidence to another person; for example GST or Customs Duty.
To have a better understanding of the Direct and Indirect Taxes, let us understand the differences between the
two:

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Distinction between Direct and Indirect Taxes
Point of difference Direct Tax Indirect Tax
Incidence & Impact A tax is said to be direct when impact and If impact of tax is on one person and
incidence of a tax are on one and same incidence on the another, the tax is
person. called „indirect‟
Burden Direct tax is imposed on the individual Indirect tax is imposed on
organisation and burden of tax cannot be commodities and allows the tax
shifted to others. burden to shift.
Viability of payment Direct taxes are lesser burden then Indirect Indirect taxes are borne by the
taxes to people as direct taxes are based on consumers of commodities and
Income earning ability of people. services Irrespective of financial
ability as the MRP Includes all taxes.
Administrative viability The administrative cost of collecting direct Cost of collecting Indirect taxes is
taxes is more and Improper administration very less as indirect taxes are wrapped
may result in tax evasion. up in prices of goods and services and
cannot be evaded.
Penalty It is levied on the assessee. It is levied on supplier of Goods &
Services.

Direct Taxes: The principal direct taxes include income tax and wealth-tax. The scheme of direct taxes is
designed to lay a wide net so as to catch the tax-evader at some point or the other. If income tax is evaded the
income will accumulate and show up as wealth liable to be taxed under the Wealth Tax Act.
Merits of Direct Tax
1. Equity : - Direct taxes have equity of sacrifice, depend upon the volume of income. They are based on the
principle of progressive, so rates of tax increase as the level of income of a person rises.
2. Elasticity and productivity : - Direct taxes have elasticity because when the government faces some
emergency, like earthquake, floods and famine the government can collect money for facing those problems
by direct tax.
3. Certainty :- Direct taxes have certainty on both sides„ tax-payer and government. The tax- payers are aware
of the quantity of tax. They have to pay and rate, time of payment, manner of payment, and punishment from
the side of government is also certain about the total amount they are getting.
4. Reduce inequality: - Direct taxes follow progressive principles so it is taxing the rich people with higher of
taxation and the poor people with a lower level of taxation.
5. Good instrument in the case of inflation.:-Tax policy as fiscal instrument plays important role in the case of
the inflation, so government can absorb the excess money by arising in the rate of existing taxes or
imposition of new taxes.
6. Simplicity: - Direct taxes are simplicity, while levy the rules, procedures, regulations of income tax are very
clear and simple.
Demerits of Direct Taxes
1. Evasion: - Direct tax is lump sum therefore tax payers try evasion.
2. Uneconomically.:-Expenses of collection are larger in the case of direct taxes, because they require widely-
spread staff for collection

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3. Unpopular:-Direct tax is required to be paid in lump sum for the whole year, so the tax payers feel the
painful payment, these taxes are therefore unpopular.
4. Little incentive to work and save:-In direct taxes, rates are of progressive nature. A person with higher
earning is taxed more, in turn he is left little with amount. So the tax payer feels disincentive to work hard
and save money after reaching a certain level of income.
5. Not suitable to a poor country:- Direct taxes are not enough to meet its expenditure.
6. Arbitrary:-Due to absence of logical or scientific principle to determine the degree of progression in the
taxation, the direct taxes are arbitrary.
Indirect Taxes: Indirect taxes are the taxes levied on goods and services on the basis of production, sale or
purchase of goods or provision of services, in the form of import and export duty, excise, sales tax, Value
Added Tax (VAT), service tax, entertainment tax, electricity duty, tax on passenger fares and freights etc.
They are called indirect taxes as the burden on tax is passed on to the consumer unlike direct taxes which are
supposed to be borne by the persons on whom these taxes are levied.
Broadly, the existing indirect tax regime can be looked at from the point of view of Central and State laws.
For the Central Government, Central Excise, Customs and Service tax were the three main components of
indirect taxes. Similarly, for the State Governments, Value Added Tax and Central Sales Tax were major
taxes along with Octroi , Entertainment Tax etc.
The taxation reforms in India go back right from liberalization and globalization in the early 1990s to the recent
Goods and Services Tax (GST). Goods and Services Tax is one of the most comprehensive single tax reforms
of independent India. GST is a comprehensive indirect tax levied on goods as well as services at the national
level. It consolidated multiple indirect tax levies into a single tax thus subsuming an array of tax levies.
However, Basic Customs Duty continues to be levied on imports. Goods and Services Tax (GST) was rolled out
in India with effect from 1st July, 2017. GST is one of the greatest tax reforms in India. It transforms the system
of taxation and tax administration into a digital world by adopting the latest information technology. With the
introduction of GST, India has joined the club of developed and progressing Nations which are already having a
common tax on goods and services.
Merits of Indirect Taxes
1. High revenue production :-Nature of indirect taxes is imposition on the commodities and services. Here
indirect taxes cover a large number of essential goods and luxurious goods which are consumed by the mass
both rich and poor people, these help in collecting a large revenue.
2. No evasion. Nature of indirect tax is that, it is included in the price of commodity, so tax evasion or tax avoid
is difficult.
3. Convenient:-Indirect taxes are small amount and indirect taxes are hidden in the price of goods and service,
hence the burden of these taxes is not felt very much by the tax-payers, and not lump sum like direct taxes.
4. Economy - Indirect taxes are economical in collection and the administrations costs of collection are very
low, also the procedure of collection of these taxes is very simply.
5. Wide coverage:-Indirect taxes cover almost all commodities like essential commodities, luxuries, and
harmful ones.
6. Elasticity:-Since a large number of commodities and services are covered by indirect taxation there is great
scope for modification of taxes, goods and tax rate, much depends on nature of goods and on its demands.
Demerits of Indirect Taxes
1. Regressive in effect:-Essential commodities are used from all members of community. When taxing these
commodities the burden would be equal, and no distinction is made between the rich and poor people.
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2. Uncertainty in collection- Discourage savings and Increase inflation:-Indirect taxes are payable when people
spent their income or when people buy goods and services, so tax authorities cannot accurately estimate the
total yield from different indirect taxes.
3. Discourage savings- Increase inflation:-Indirect taxes are included in the price of commodity, so people have
to spend more money on essential commodities, when levied indirectly. In this case that means the customers
cannot save some of their money.
4. Increase inflation:-Indirect taxes increase the cost of input and output, increase in production cost, push the
price of goods. These reflect in increase in the wages of the workers.
REVENUE AUTHORITIES
The Central Board of Revenue or Department of Revenue is the apex body charged with the administration of
taxes. It is a part of Ministry Of Finance which came into existence as a result of the Central Board of Revenue
Act, 1924.
Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes
became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of
Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) with effect from 1 January 1964. This
bifurcation was brought about by constitution of the two Boards under Section 3 of the Central Boards of
Revenue Act, 1963.
Central Board of Direct Taxes
The Central Board of Direct Taxes (CBDT) provides essential inputs for policy and planning of direct taxes in
India and is also responsible for administration of the direct tax laws through Income Tax Department. The
CBDT is a statutory authority functioning under the Central Board of Revenue Act, 1963. It is India‟s official
Financial Action Task Force (FATF) unit.
Organisational Structure
The CBDT is headed by CBDT Chairman and also comprises six members. The Chairperson holds the rank of
Special Secretary to Government of India while the members rank of Additional Secretary to Government of
India.
• Member (Income Tax)
• Member (Legislation and Computerisation)
• Member (Revenue)
• Member (Personnel & Vigilance)
• Member (Investigation)
• Member (Audit & Judicial)
The CBDT Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a premier civil
service of India, whose members constitute the top management of Income Tax Department.
Income Tax Department
Income Tax Department functions under the Department of Revenue in Ministry of Finance. It is responsible
for administering following direct taxation acts passed by Parliament.
• Income Tax Act, 1961
• Various Finance Acts (Passed Every Year in Budget Session)

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Income Tax Department is also responsible for enforcing Double Taxation Avoidance Agreements and deals
with various aspects of international taxation such as Transfer Pricing. Income Tax Department has powers to
combat aggressive Tax avoidance by enforcing General Anti Avoidance Rules.
Central Board of Indirect Taxes and Customs
Central Board of Indirect Taxes and Customs (CBIC) is a part of the Department of Revenue under the Ministry
of Finance, Government of India. It deals with the tasks of formulation of policy concerning levy and collection
of Customs and GST, prevention of smuggling and administration of matters relating to Customs, GST and
Narcotics to the extent under CBIC‟s purview.
STRUCTURE OF TAX ADMINISTRATION IN INDIA
Direct Tax Administration
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.

Various Authorities
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 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

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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.

Indirect Tax Administration

AUTHORITY HEADED BY
MINISTRY OF FINANCE Union Finance Minister
REVENUE DEPARTMENT Revenue Secretary
CBIC (Central Board of Indirect Taxes and Customs) Chairman and Members
REGIONS Principal Chief Commissioners
ZONES Chief Commissioners
COMMISSIONERATES Commissioners/ Principal Commissioners
DIVISIONS Divisional officers/ deputy commissioner
etc.

GST Council
A GST Council consisting of representatives from the Centre as well as State has been formulated under the
GST Law of indirect taxes. The Council will make recommendations to the Union and the States on Goods and
Service Tax laws, on any other matter relating to GST.
GST Council is the apex body for making recommendations on various issues relating to policy making,
formulation of principles, implementation of policies under Goods and Services Tax regime.
Administration and Procedural Aspects of Goods and Services tax are administered by the Central Board of
Indirect Taxes (CBIT) which is under the control of the Department of Revenue, Ministry of Finance.

TAX ADMINISTRATION REFORM COMMISSION

The Tax Administration Reform Commission or TARC is committee appointed by the Government of India
for giving recommendations for reviewing the public Tax Administration system of India. The Union Finance
Minister had made an announcement in his Budget Speech 2013-14 for setting up of Tax Administration
Reform Commission (TARC) to review the application of tax policies and tax laws in India in the context of
global best practices, and to recommend measures for reforms required in tax administration. Accordingly,
TARC was established vide the Government of India Notification dated 21 August 2013. The term of the
Commission is 18 months and works as an advisory body to the Ministry of Finance.

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Objectives of TARC

1. To review the existing organizational structure and recommend appropriate enhancements with special
reference to deployment of workforce commensurate with functional requirements, capacity building,
vigilance administration, responsibility and accountability of human resources, key performance
indicators, staff assessment, grading and promotion systems, and structures to promote quality decision-
making at high policy levels.
2. To review the existing business processes of tax administration including the use of information and
communication technology and recommend measures best suited to the Indian context.
3. To review the existing mechanism of dispute resolution, time involved for resolution, and compliance
cost and recommend measures for strengthening the process. This includes domestic and international
taxation.
4. To review the existing mechanism and recommend capacity building measures for preparing impact
assessment statements on taxpayers compliance cost of new policy and administrative measures of the
tax Departments.
5. To review the existing mechanism and recommend measures for deepening and widening of tax base
and taxpayer base.
6. To review the existing mechanism and recommend a system to enforce better tax compliance – by size,
segment and nature of taxes and taxpayers, that should cover methods to encourage voluntary tax
compliance.
7. To review existing mechanism and recommend measures for improved taxpayer services and taxpayers
education programme. This includes mechanism for grievance redressal, simplified and timely disbursal
of duty drawback, export incentives, rectification procedures and refunds etc.
8. To review the existing mechanism and recommend measures for “Capacity building” in emerging areas
of Customs administration relating to Border Control, National Security, International Data Exchange
and securing of supply chains.
9. To review the existing mechanism and recommend measures for strengthening of Database and inter-
agency information sharing, not only between Central Board of Direct Taxes (CBDT) and Central
Board of Excise and Customs (CBEC) but also with the banking and financial sector, Central Economic
Intelligence Bureau (CEIB), Financial Intelligence Unit (FIU), Enforcement Directorate etc. and use of
tools for utilization of such information to ensure compliance.
10. To review the existing mechanism and recommend appropriate means including staff resources for
forecasting, analyzing and monitoring of revenue targets.
11. To review the existing policy and recommend measures for research inputs to tax governance.
12. To review the existing mechanism and recommend measures to enhance predictive analysis to detect
and prevent tax/economic offences.
13. Any other issue which the government may specify during the tenure of the Commission.

INTERPRETATION AND CONSTRUCTION OF TAXING STATUTE

Foundational principle for a charge under Tax Statutes is as follows:

“No tax can be imposed on the subject without words in the Act clearly showing an intention to lay a
burden upon him”
 CIT v. Mr. P. Firm, Muar (1965) 56 ITR 67 (SC) – If a particular income is not taxable under the
Income-tax Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine.

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Principles of Interpretation or Construction of taxing statute
• Principle of Literal construction – Intention of the legislation must be found in the words used by the
legislature itself. Adopt the rule of liberal construction so as to give meaning to all parts of the statute and to
make the whole of it effective and operative if the literal construction make any part of the statute ineffective
and meaningless. “The cardinal rule of interpretation is that the statute must be construed according to its plain
language and neither should anything be added nor subtracted therefrom unless there are adequate grounds to
justify the inference that the Legislature clearly so intended. It is also well-settled that in a taxing statute one has
to look merely at what is clearly stated. The meaning and extent of the statute must be collected from the plain
and unambiguous expression used therein, rather than from any notions which may be entertained by the court
as to what is just or expedient.”
 CWT v. Hashmatunnisa Begum (1989) 176 ITR 98 (SC)
 CIT v. Sundaram Iyengar & Sons Pvt Ltd. (TV) (1975) 101 ITR 764 (SC)
 CIT v. Ajax Products Ltd. (1965) 55 ITR 741 (SC)
 Keshavji Ravji & Co v. CIT (1990) 183 ITR 1 (SC)
 Baldeep Singh v UOI (1993) 199 ITR 628 (P&H)
 CIT v Budharaj & Co (NC) (1993) 204 ITR 412 (SC)
 CIT v Madan Parnami Family Trust (2004) 269 ITR 16 (Raj)
 Great Eastern Exports v. CIT (2011) 332 ITR 14 (Del.)
Liberal Construction vs Literal Construction
 The Legislature speaks its mind by use of the correct expression and unless there is any ambiguity in the
language of the provision, the court should adopt literal construction if it does not lead to absurdity.
 Therefore, the first question to be posed is whether there is any ambiguity in the language used. If there
is none, it would mean the language used, speaks the mind of Parliament and there is no need to look
somewhere else to discover the intention or meaning.

 Rule of „Ejusdem generis’ - As a rule, where in a statute there are general words following particular and
specific words, the general words must be confined to things of the same kind as those specified, although this,
as a rule of construction;, must be applied with caution, and subject to the primary rule that statutes are to be
construed in accordance with the intention of Parliament. For the ejusdem rule to apply, the specific words must
constitute a category , class or genus; if they do constitute such a category, class or genus, then only things
which belong to that category , class or genus fall within the general words
 Commissioner of Central Excise, Meerut Vs M/S. Sundstrand Forms P.Ltd.
 G. Radhakrishna Murthy And ... Vs Commercial Tax Officer

 Rule of ‘Casus Omissus‟ – Matter which should have been but has not been provided by the statute, cannot
be supplied by the court. Courts depart from this principle in case of any construction leading into an absurd
result or to avoid any part of the statute becoming otiose. While interpreting a provision the Court only
interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of the
process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary. The legislative casus
omissus cannot be supplied by judicial interpretative process.
 Padmasundara Rao (Decd.) & Ors. vs. State of Tamil Nadu & Ors. (2002) 255 ITR 147 (SC)

 Rule of ‘expresso unius est exclusion alterius’ – Where there are two mutually exclusive items, the
inclusion of one implicitly means the exclusion of the other
 Reckitt and Coleman of India Ltd vs. Collector of Central Excise
• Rule of Strict interpretation – In a taxing statute, one has to merely look at clearly what is said. There is no
room for any intendment. There is no equity about a tax. There is no presumption to tax. Nothing is to be read
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in, nothing is to be implied. One can only look fairly at the language used. In construing fiscal statutes and in
determining the liability of a subject to tax one must have regard to the strict letter of the law. If the revenue
satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the
other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be
imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by
considering what was the substance of the matter
 V P Theatre v State of Punjab (1990) 185 ITR 429 (P&H)
 CIT v. Vishwanath (1993) 201 ITR 920 (All)
 CIT v. Orissa State Warehousing Corporation (1993) (SC)
 Lakshmi Bai (HH) v CWT (1994) 206 ITR 688 (SC)
• Mischief rule (Heydon‟s case) – “When the material words are capable of bearing two or more constructions
the most firmly established rule for construction of such words of all statutes in general (be they penal or
beneficial, restrictive or enlarging of the common law)” is the rule laid down in Heydon‟s case which has now
attained the status of a „classic‟. The rule which is also known as „mischief rule‟, enables consideration of four
matters in construing an Act :
(i) What was the law before the making of the Act,
(ii) What was the mischief or defect for which the law did not provide,
(iii) What is the remedy that the Act has provided and
(iv) What is the reason of the remedy.
The rule then directs that the courts must adopt that construction which „shall suppress the mischief and
advance the remedy‟.”
 CIT v. Sodra Devi [1957] 32 ITR 615 (SC)
 DCIT v. Geoservices Eastern Inc (Mum Trib) [1995] 55 ITD 227 (BOM.)
• Rule of Harmonious construction – When the different provisions of the Act are harmonised or reconciled
in light of the object and purpose of the enactment in question. The rule of construction is well settled that when
there are in an enactment two provisions which cannot be reconciled with each other, they should be so
interpreted that, if possible, effect should be given to both. This is what is known as the Rule of Harmonious
construction. The expression used in a statute should ordinarily be understood in the sense in which it is best
harmonious with the object of the statute and which effectuates the object of the legislature. In case of conflict
between two sections of the same Act a more logical approach is reconcile the two and if not possible,
determine which is the leading provision, and which is the subordinate provision and which must give way to
other.
 Sarkar (BB) v CIT (1981) 132 ITR 150 (Cal.)
 CIT v Superintending Engineer, Upper Sileru (1985) 152 ITR 753 (AP)
 CIT v Associated Finance Co Ltd. (1992) 195 ITR 742 (Cal.)
 CIT v. Roadmaster Industries [2009] 315 ITR 66 (Punjab & Haryana)
• Principle of Beneficial interpretation – It is a crucial rule of interpretation of statutes that the words of the
statute should be given a sensible meaning so as to make them effective. A construction which would defeat the
very object of the Legislature should be avoided. Construction should be more favourable to the assessee in
case of any doubt.
 CIT v Horkeri (LN) (1986) 162 ITR 513 (Kar.)
 CIT v Shambulal Nathalal & Co (1984) 145 ITR 329 (Kar)
 Sunil Srivastava v UOI (1984) 145 ITR 356 (Pat.)
• The Golden Rule (Doctrine of Purposive construction) – Words should be given their ordinary sense unless
that would lead to some absurdity or inconsistency with the rest of the instrument. To interpret a statute in a

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reasonable manner the court must place itself in the chair of a reasonable legislator/author. So the rules of
purposive construction of the Act interprets it in such a manner as to see that the object of the Act is fulfilled.
 Sashikant Laxman Kale v. UOI [1990] 52 Taxman 352 (SC)
 Vidya Investment & Trading Co. v UOI [2014] 43 taxmann.com 1 (Karnataka)
 PCIT v. IDMC Ltd. [2017] 78 taxmann.com 285 (Gujarat)
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