ASSIGNMENT SUBMISSION:

Submitted By:
Mohammad Faaiz Irfan

PRN: 16010324236

BBA.LLB, Division – C

Symbiosis Law School, Hyderabad

Symbiosis International (Deemed University), Pune

In the month of

AUGUST 2019

Taxation Law

Under the guidance of

Prof. Chandrasekhar
NEED AND SIGNIFICANCE OF TAX

Public services cover everything from social security and welfare, including pensions
and medical care, to social infrastructure development, such as waterworks and roads,
as well as to education, policing, firefighting and national defense. These services are
essential to our daily lives yet cost money.
Taxes are used to fund these public services. In order for everyone to help each other
in an effort to form a better society, it is necessary that the tax burden is shared
broadly and fairly among the members of society. This is why it is best to say that
taxes are membership dues to society.

ADEQUETE AND STABLE TAXES ARE REQUIRED TO FUND PUBLIC

SERVICES

In order to fund public services, tax revenue needs to be secured in a stable manner
and in sufficient quantity. The basic principle is that the total amount of money
required for public services such as social security benefits is balanced with the
burden of taxation and social insurance premiums. It is our responsibility to ensure
that these burdens will not be passed on to future generations.

TAX IN BUSINESS

The thing with business is, filing taxes is really important. Every business must file
their respective taxes to government at both central and state level of all the places a
particular business is thriving.

The taxes payables are different for different businesses, it depends upon the locality,
niche and size of the business, nationality and other details. Since most of the people
are really busy with their business activity, taxes can sometimes be an ignored
subject, which is really harmful for a business. Failure in tax payment on time can
lead to penalties and fees. Since the government and its rules are different for
different localities, it is important to learn the taxation rules and regulations. This is
applicable for even small business, home-based workers or online businessmen.
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. Article 256 of the
constitution states that “No tax shall be levied or collected except by the authority of
law”. Hence, each and every tax that is collected needs to backed by an
accompanying law.

Interestingly, the tax system in India traces its origin to the prehistoric texts such as
Arthashastra and Manusmriti. As proposed by these manuscripts, the taxes paid by
farmers and artisans in that era would be in the form of agricultural produce, silver or
gold. Based on these texts, the foundation of the modern tax system in India was
conceptualised by the Sir James Wilson during the British rule in India in the year,
1860. However, post-independence the newly-established Indian Government then
soldered the system to propel the economic development of the country. After this
period, the Indian tax structure has been subject to a host of changes.

The tax system in India for long was a complex one considering the length and
breadth of India. Post GST implementation, which is one of the biggest tax reforms in
India, the process has become smoother. It serves as an all-inclusive indirect tax
which has helped in eradicating the cascading effect of tax as a whole. It is simpler in
nature and has led to upgraded the productivity of logistics.

Direct Tax:

Direct Tax is levied directly on individuals and corporate entities. This tax cannot be
transferred or borne by anybody else. Examples of direct tax include income tax,
wealth tax, gift tax, capital gains tax.

Income tax is the most popular tax within this section. Levied on individuals on the
income earned with different tax slabs for income levels. The term ‘individuals’
includes individuals, Hindu Undivided Family (HUF), Company, firm, Co-operative
Societies, Trusts.
Indirect Tax:

Indirect taxes are taxes which are indirectly levied on the public through goods and
services. The sellers of the goods and services collect the tax which is then collected
by the government bodies.

Value Added Tax (VAT)– A sales tax levied on goods sold in the state. The rate
depends on the government.

Octroi Tax– Levied on goods which move from one state to another. The rates
depend on the state governments.

Service Tax– Government levies the tax on service providers.

Customs Duty– It is a tax levied on anything which is imported into India from a
foreign nation.

Tax Collection Bodies:

The three bodies, which collect the taxes in India, have clearly defined the rules on
what type of taxes they are permitted to collect.

The Central Government:income tax, custom duties, central excise duty.

The State Governments:tax on agricultural income, professional tax, value- added tax,
state excise duty, stamp duty.

Local Bodies: property tax, water tax, other taxes on drainage and small services.

GST:

In India, the three government bodies collected direct and indirect taxes until 1 July
2017 when the Goods and Services Act (GST) was implemented. GST incorporates
many of the indirect taxes levied by states and the central government. What does
the GST mean for your money?
It is a multi-stage destination-based tax. Multi-stage because it is levied on each stage
of the supply chain right from purchase of raw material to the sale of the finished
product to the end consumer whenever there is value addition and each transfer of
ownership.

Destination-based because the final purchase is the place whose government can
collect GST. If a fridge is manufactured in Delhi but sold in Mumbai, the Maharashtra
government collects GST.

A major benefit is the simplification of taxation in India for government bodies.

GST has three components:

CGST-Stands for Central Goods and Services Act. The central government collects
this tax on an intrastate supply of goods or services.
(Within Maharashtra)

SGST:Stands for State Goods and Services Tax. The state government collects this
tax on an intrastate supply of goods or services.
(Within Maharashtra)

IGST:Stands for Integrated Goods and Services Tax. The central government collects
this for inter-state sale of goods or services.
Other Government Bodies:

For a smooth implementation of the Indian tax system, there are bodies dedicated to
it. Popularly known as the revenue authorities.

CBDT:The Central Board of Direct Taxes is a part of the revenue department under
the Ministry of Finance. It has a two-fold role. One, it provides important ideas and
inputs for planning and policy with regard to direct tax in India. Second, it assists the
Income Tax department in the administration of direct taxes.

CBEC:The Central Board of Excise and Customs deals with policy formulation with
regard to levy and collection of customs and central excise duties and service tax.

CBIC: Post GST implementation, the CBEC has been renamed as the Central Board
of Indirect Taxes & Customs (CBIC). The main role of CBIC is assisting the
government in policy-making matters related to GST.

Benefits of Taxes:

While paying taxes may not be a pleasant feeling, however, it is prudent to understand
that tax paid by every single individual contributes towards the country’s
administration and resources required for its economic progress.

It promotes savings as well as investments. If an individual makes certain set of

investments, a part amount of the same would be tax exempted, thereby enabling him
or her to pay reduced amount of taxes.

Paying tax also works as a proof that you are not only disciplined in filing your tax
returns but also helps at the time of loan application. This is because at the time of
purchasing a home loan, the bank requires proof of whether the applicant has filed his
or her taxes regularly.
TAX PRINCIPLE BY ADAM SMITH

Adam smith, the father of modem political economy, has laid down four principles
or cannons of taxation in his famous book "Wealth of Nations". These principles are
still considered to be the starting point of sound public finance. Adam Smith's
celebrated cannons of taxation are:

(1) Cannon of equality or ability, (2) Cannon of certainty, (3) Cannon of convenience,
and (4) Cannon of economy.

(1) Canon of equality or ability: Canon of equality, or ability is considered j to be a

very important canon of taxation. By equality we do not mean that people should pay
equal amount by way of taxes to the government. By equality is meant equality of
sacrifice, that is people should pay taxes in proportion to their incomes. This principle
points to progressive taxation. It states that the rate or percentage of taxation should
increase with the increase in income and decrease with the decrease in income. In the
words of Adam Smith:

"The subject of every state ought to contribute towards the support of the government
as early as possible in proportion to their respective abilities that is in proportion to
the revenue which they respectively enjoy under the protection of the State".

(2) Canon of certainty: The Canon of certainty implies that there should be certainty
with regard to the amount which taxpayer is called upon to pay during the financial
year. If the taxpayer is definite and certain about the amount of the tax and its time of
payment, he can adjust his income to his expenditure.

The state also benefits from this principle, because it will be able to know roughly in
advance the total amount which it is going to obtain and the time when it will be at its
disposal. If there is an element of arbitrariness in a tax, it will then encourage misuse
of power and corruption Adam smith in this connection remarks:

"The tax which each individual is bound to pay ought to be certain and not arbitrary.
The time of payment, the manner of payment, the quantity to be paid all ought to be
clear and plain to the contributor and to every other person".

(3) Canon of convenience: By this canon, Adam smith means that the tax should be
levied at the time and the manner which is most convenient for the contributor to pay
it. For instance, if the tax on agricultural land is collected in installments after the crop
is harvested, it will be very convenient for the agriculturists to pay it. Similarly,
property tax, house tax, income tax, etc., etc., should be realized at a time when the
taxpayer is expected to receive income. The manner of payment of tax should also be
.convenient. If the tax is payable by cheques, the contributor will be saved from much
inconvenience. In the Words of Adam Smith:

"Every tax ought to be levied at the time or in the manner in which it is most likely to
be convenient for the contributor to pay it".

(4) Canon of Economy: The canon of economy implies that the expenses of
collection of taxes should not be excessive. They should be kept as little as possible,
consistent with administration efficiency. If the government appoints highly salaried,
staff and absorbs major portion of the yield, the tax will be considered uneconomical.
Tax will also to regarded as uneconomical if it checks the growth of capital or causes
it to emigrate to other countries, In the words of Adam Smith:

"Every tax is to be so contrived as both to take out and keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of
the state".
Some other Canons/Principles of Taxation Rather Than Adam Smith:

Some writers on Public Finance have formulated four other important

canons/principles of taxation.They, in brief, are as follows:

(1) Canon of productivity: The canon of productivity indicates that a tax when
levied should produce sufficient revenue to the government. If a few taxes imposed
yield a sufficient fund for the state, then they should be preferred over a large number
of small taxes which produce less revenue and are expensive in collection.

(2) Canon of elasticity: Canon of elasticity states that the tax system should be fairly
elastic so that if at any time the government is in need of more funds, it should
increase its financial resources without incurring any additional cost of collection.
Income tax, railway fares, postal rates, etc., are very good examples of elastic tax. The
government by raising these rates a little, can easily meet its rising demand for
revenue.

(3) Canon of simplicity: Canon of simplicity implies that the tax system should be
fairly simple, plain and intelligible to the tax payer. If it is complicated and difficult to
understand, then it wilt lead to oppression and corruption.

(4) Canon of diversity: Canon of diversity says that the system of taxation should
include a large number of taxes whish are economical. The government should collect
revenue from its citizens by levying direct and indirect taxes. Variety in taxation in
desirable from the point of view of equity, yield and stability.
TAX EVASION AND AVOIDANCE:

Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through
fraudulent techniques like deliberate under-statement of taxable income or inflating
expenses. It is an unlawful attempt to reduce one’s tax burden. Tax Evasion is done
with a motive of showing fewer profits in order to avoid tax burden. It involves illegal
practices such as making false statements, hiding relevant documents, not maintaining
complete records of the transactions, concealment of income, overstatement of tax
credit or presenting personal expenses as business expenses. Tax evasion is a crime
for which the assesse could be punished under the law.

Tax Planning: Tax planning is process of analyzing one’s financial situation in the
most efficient manner. Through tax planning one can reduce one’s X liability. It
involves planning one’s income in a legal manner to avail various exemptions and
deductions. Under Section 80C, one can avail tax deduction if specific investments
are made for a specific period up to a limit of Rs 1, 50,000. The most popular ways of
saving tax are investing in PPF accounts, National Saving Certificate, Fixed Deposit,
Mutual Funds and Provident Funds. Tax planning involves applying various
advantageous provisions which are legal and entitles the assesse to avail the benefit of
deductions, credits, concessions, rebates and exemptions. Or we can say that Tax
planning is an art in which there is a logical planning of one’s financial affairs in such
a manner that benefits the assesse with all the eligible provisions of the taxation law.
Tax planning is an honest approach of applying the provisions which comes within
the framework of taxation law.

Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax
liability. In other words, it is an act of using tax regime in a single territory for one’s
personal benefits to decrease one’s tax burden. Although Tax avoidance is a legal
method, it is not advisable as it could be used for one’s own advantage to reduce the
amount of tax that is payable. Tax avoidance is an activity of taking unfair advantage
of the shortcomings in the tax rules by finding new ways to avoid the payment of
taxes that are within the limits of the law. Tax avoidance can be done by adjusting the
accounts in such a manner that there will be no violation of tax rules. Tax avoidance
is lawful but in some cases it could come in the category of crime.

Features and differences between Tax evasion, Tax avoidance and

Tax Planning:

1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal

2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is

illegal and objectionable.

3. Motive: Tax planning is the method of saving tax .However tax avoidance is
dodging of tax. Tax evasion is an act of concealing tax.

4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion
leads to penalty or imprisonment.

5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the
script of law whereas Tax evasion is done to reduce tax liability by exercising unfair
means. Tax planning is done to reduce the liability of tax by applying the provision
and moral of law.

6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax
evasion is not permissible.

TAXATION OF INDIA IN ANCIENT TIMES

The system of direct taxation as it is known today, has been in force in one form or
another even from ancient times. There are references both in Manu Smriti and
Arthasastra to a variety of tax measures. The detailed analysis given by Manu Smriti
and Arthasastra on the subject clearly shows the existence of a well-planned taxation
system, even in ancient times. Not only this, taxes were also levied on various classes
of people like actors, dancers, singers and even dancing girls. Taxes were paid in the
shape of gold-coins, cattle, grains, raw-materials and also by rendering personal
service.
Taxation of India in Ancient Times. 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. There
are references both in Manu Smriti and Arthasastra to a variety of tax measures. The
detailed analysis given by Manu Smriti and Arthasastra on the subject clearly shows
the existence of a well-planned taxation system, even in ancient times. Not only this,
taxes were also levied on various classes of people like actors, dancers, singers and
even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-
materials and also by rendering personal service.

THE ESTABLISHMENT OF INCOME TAX.

The Establishment of Income Tax in Modern India The history of Income-Tax in

modern India dates back to 1860 when the first Income Tax Act was introduced by
James Wilson who became (British) India’s first finance member.

First Income Tax Act came in force on 24th July 1860 with the approval of The
Governor General. It was a tax selectively imposed on the rich royalty and Britishers.
For the first year of tax the government collect Rs 30 Lakhs. The act lapsed in 1865
and was reintroduced in 1867. There was need for more revenue to fight Anglo-
Russian war. So Governor General Lord Dufferin introduced a comprehensive
Income Tax Act in 1886. It was combination of Licence Tax and Income Tax. Taxes
were collected in the same manner as land revenue.
The most comprehensive Income Tax Law was the Income Tax Act of 1922. 1919
Chelmsfod reforms made a distinction between the functions and resources of the
state and the Central Govt. and Income Tax became a primary source of revenue for
the central Government.