This is for tax

1. Principles of Taxation - 1
CA Rajalakshmi B

3. ❖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
❖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.

4. ❖ 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.

5. ➢ 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 The Indian Income Tax Act of 1918 repealed the Indian Income Tax Act of 1886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 1 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.

6. ➢ 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.

7. Direct Taxes
If tax is levied directly on the income or
wealth of a person, then, it is a direct tax.
The person who pays the tax to the
Government cannot recover it from
somebody else i.e. the burden of a direct tax
cannot be shifted. e.g. Income- tax.
Indirect Taxes
If tax is levied on the price of a good or
service, then, it is an indirect tax e.g. Goods
and Services Tax (GST) or Custom Duty. In the
case of indirect taxes, the person paying the
tax passes on the incidence to another person.
INCOME TAX
TAX ON
UNDISCLOSED
FOREIGN INCOME
AND ASSETS
GOODS AND
SERVICES TAX (GST)
CUSTOMS DUTY
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.

8. 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.
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, sales tax, etc.

10. ❖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.

11. Tax Fee
A tax represents money – that a government charges an
individual or business when they perform a particular action
or complete a specific transaction. Taxes are levied in the
greater interests of the country.
A fee is related to a tax in that it is also a charge paid to the
government by individuals or by a business. Fees are mostly
imposed to regulate or control various types of activities.
This tax is often assessed as a percentage of the amount of
money involved in the transaction.
The fee rate is directly tied to the cost of maintaining the
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
way to generate revenue by Govt.
A fee is a levy collected to provide a service that benefits the
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.
They may help pave a road or build a school. They may finance
the running of the local sewage-treatment plant.
A fee is assessed for an exact service, and the money collected
is usually earmarked for that service. The fee that you pay for
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
year. In addition, a tax is often pieced on the sale of goods.
income tax, gift tax, wealth tax, VAT, etc. are examples of tax.
However, a fee is specifically applied for the use of a service.
For example, a government may charge a fee to visit a park.
Stamp duty fee, driving license fee, Govt. registration fee, etc.
are examples of Fee.

12. TAX VS CESS

13. ❖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.

14. • 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

15. Power To Levy Taxes

16. ▪ The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by
authority of law.” Accordingly for levy of any tax, a law needs to be framed by the government.
▪ Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central
and State Government. The Parliament and State Legislatures are empowered to make laws on the
matters enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of India.
▪ Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the
Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes.
Union List:
Central Government has the
exclusive power to make laws on
the matters contained in Union
List.
State List:
The Legislatures of any State
has the exclusive power to
make laws on the matters
contained in the State List.
Concurrent List:
Both Central Government and
State Legislatures have the
power to make laws on the
matters contained in the
Concurrent list.
The following are the lists
Power To Levy Taxes

17. • Income-tax is the most significant direct tax. The Constitution of India has given the power to the
Parliament to make laws on taxes on income other than agricultural income.
COMPONENTS OF INCOME TAX LAW
Income Tax Act Annual Finance Act Income Tax Rules
Circulars/
Notifications
Legal Decisions Of
Courts

18. The Finance Act
Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget
Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President,
it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and other tax laws by
the Finance Act.
The First Schedule to the Finance Act contains four parts which specify the rates of tax –
➢ Part I of the First Schedule :Background ie Last year’s tax rates AY 22-23/PY 21-22
➢ Part II of the First Schedule: TDS rates for PY 22-23/AY 23-24 ie for Current year
➢ Part III of the First Schedule: TDS rates for salary PY 22-23/AY 23-24 and computing advance tax ie Tax rates for PY 22-
23/AY 23-24
➢ Part IV of the First Schedule: Giving rules for computing Agriculture Income
Circulars – issued by CBDT to clarify the meaning and scope of certain provisions of the Act.
Notifications – issued by CG to give effect to the provisions of the Act/ make or amend Rules
Court decisions – interprets the various provisions of income-tax law.
Income-tax Rules, 1962
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
The CBDT is empowered to make rules for carrying out the purposes of the Act.