Unit 1 Taxation Notes

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Unit 1 - taxation notes
law (University of Mysore)
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TAXATION LAW
UNIT I
CONCEPT OF TAX
NATURE AND CHARECTERISTICS OF DIFFERENT TYPES OF
TAXES –
DIRECT AND INDIRECT TAX
DISTINCTION BETWEEN TAX AND FEE, TAX AND CESS
TAX EVASION
TAX AVOIDANCE
TAX PLANNING
RETROSPECTIVE TAXATION
FEDERAL BASE OF TAXING POWER
POWER OF TAXATION UNDER CONSTITUTION
IMMUNITY OF STATE AGENCIES / INSTRUMENTALITIES
FUNDAMENTAL RIGHTS AND POWER OF TAXATION
COMMERCE CLAUSE – INTER STATE COMMERCE AND

TAXATION
SCOPE OF TAXING POWER OF PARLIAMENT
DELEGATION OF TAXING POWER TO STATE LEGISLATURE AND

LOCAL BODIES

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INTRODUCTION AND BASIC CONCEPTS OF INCOME TAX
INTRODUCTION:
Under the Constitution of India, Central Government is empowered to levy tax on the
income. Accordingly, the Central Government has enacted the Income Tax Act, 1961. The
Act provides for the scope and machinery for levy of Income Tax in India. The Act is
supported by Income Tax Rules, 1961 and several other subordinate and regulations. Besides,
circulars and notifications are issued by the Central Board of Direct Taxes (CBDT) and
sometimes by the Ministry of Finance, Government of India dealing with various aspects of
the levy of Income tax. Unless otherwise stated, references to the sections will be the
reference to the sections of the Income Tax Act, 1961.
DEFINITION OF TAX
A tax may be defined as a monetary burden rested upon individuals or people with property
to help add to the government’s revenue. Tax is, therefore, a mandatory contribution and not a
voluntary payment or donation which one decides on one’s own. It is a payment exacted by
the legislative authority. It may be direct tax or indirect tax. Revenue growth which may be a
little faster than GDP (Gross Domestic Product) can result from revenue mobilization with an
effective tax system and measures.
The government uses this tax to carry out functions such as:
 Social welfare projects like schools, hospitals, housing projects for the poor, etc.
 Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
 Security infrastructure of the country such as military equipment
 Enforcement of law and order
 Pensions for the elderly and benefits schemes to the unemployed or the ones below
the poverty line.
Tax is the compulsory financial charge levy by the government on income, commodity,
services, activities or transaction. The word ‘tax’ derived from the Latin word ‘Taxo’.
D alton defin es thus : "A tax is a compuls ory contribut ion impos ed by a
public authority, irrespective of the exact amount of service rendered t o
the tax-payer in return and not imposed as a penalty for any legal
offence."

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Bastable defines a tax as "a compulsory contribution of the wealth of a

person or a body of persons for the service of public power."
HISTORY
In India, Income Tax was first time introduced in the year 1860 by Sir James Wilson in order to
meet the loss caused on account of ‘military mutiny’ in 1857.
In the year 1886, a separate Income Tax Act was passed, this act was in force for a long time,
subject to the various amendments from time to time. In the year 1918, a new Income Tax Act
was passed, but again, it was replaced by another new act of 1992. The Act of 1922 became very
complicated due to various amendments. This act remains in force to the assessment year 1961-
62. In the year 1956, the Government of India referred to the Law Commission in order to
simplify the law and also to prevent the evasion of Tax.
The Law Commission submitted its report in September 1958 in consultation with the Ministry of
Law. At present, this law is governed by the Act of 1961 which is commonly known as Income
Tax Act, 1961 which came into force on and from 1st April 1962. It applies to the whole of India,
including the state of Jammu & Kashmir.
Any law is in itself is not complete unless the gaps are being filled. The law of Income Tax in
India governed by the Income Tax Act of 1961 and the gaps are being filled by the Income Tax
Rules, Notifications, Circulars and judicial pronouncement including rulings by the Tribunal.
IMPORATANCE
The Taxation Structure of the country can play a very important role in the working of our
economy. Some time back the emphasis was on higher rates of Tax and more incentives. But
recently, the emphasis has shifted to Decrease in rates of taxes and withdrawal of incentives.
While designing the Taxation structure it has to be seen that it is in conformity with our
economic and social objectives. It should not impair the incentives to personal savings and
investment flow and on the other hand it should not result into decrease in revenue for the
State.
DEFINITIONS
Some of the important definitions under Income Tax Act, 1961 are as follows:
ASSESSMENT YEAR – S. 2(9)
Section 2(9) defines an “Assessment year” as “the period of twelve months starting from the
first day of April every year.” An assessment year begins on 1st April every year and ends on
31st March of the next year.
PREVIOUS YEAR- S. 2(34) & S. 3

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Section 3 defines “Previous year” as “the financial year immediately preceding the
assessment year”. Income earned in one financial year is taxed in the next financial year. The
year in which income is earned is called the “previous year” and the year in which it is taxed
is called the “assessment year” Common previous year for all source of income:
PERSON [ Section 2(31) ]
The word “Person” is a very wide term and embraces in itself the following :
 Individual :
 Hindu Undivided Family (HUF)
 Company
 Firm
 Association of Persons (AOP) or Body of Individuals (BOI)
 Local Authority
 Artificial Judicial Person
These are seven categories of person chargeable to tax under the Act. The aforesaid definition
is inclusive and not exhaustive . Therefore, any person, not falling in the above-mentioned
seven categories, may still fall in the four corners of the term “Person” and accordingly may
be liable to tax under Sec.4.
ASSESSEE–S. 2(7)
U/s 2(7) “Assessee” means a person by whom income tax or any other sum of money is
payable under the Act and it includes:
a. every person in respect of whom any proceeding under the Act has been taken for the
assessment of his income or loss or the amount of refund due to him
b. a person who is assessable in respect of income or loss of another person or who is deemed
to be an assessee, or
c. an assessee in default under any provision of the Act
A minor child is treated as a separate assessee in respect of any income generated out of
activities performed by him like singing in radio jingles, acting in films, tuition income,
delivering newspapers, etc. However, income from investments, capital gains on securities
held by minor child, etc. would be taxable in the hands of the parent having the higher
income (mostly the father), unless if such assets have been acquired from the minor’s sources
of income.
ASSESSMENT - S 2(8)

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An assessment is the procedure to determine the taxable income of an assessee and the tax
payable by him. S. 2(8) of the Income Tax Act, 1961 gives an inclusive definition of
assessment “an assessment includes reassessment “ U/s 139 of the Act, every assessee is
required to file a self declaration of his income and tax payable by him called “return of
income”.
INCOME- S 2(24)
Although, income tax is a tax on income, the Act does not provide any exhaustive definition
of the term “Income”. Instead, the term ‘income’ has been defined in its widest sense by
giving an inclusive definition. It includes not only the income in its natural and general sense
but also incomes specified in section 2 (24).
Broadly the term “Income includes the following:
i. profits and gains ;

ii. dividend;
iii. voluntary contributions received by certain institutions
iv. Receipts by employees the value of any benefit or perquisite, whether convertible
into money or not.
v. Incomes from business – s-28
vi. any capital gains chargeable under section 45;
vii. any sum earlier allowed as deduction and chargeable to income-tax under Section 59
viii. any winnings from lotteries, crossword puzzles, races including horse races, card
games and other games of any sort or from gambling or betting of any form or nature
whatsoever
ix. any contribution received from employees towards any provident fund or
superannuation fund or Employees State Insurance Act, 1948 , or any other fund for
the welfare of such employees ;
x. any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy.
xi. any sum of money or value of property received as gift –S 56(2) and Shares of
closely held companies transferred to another company or firm are covered in the
definition of gift except in the case of transfer of such shares for reorganization of
business by amalgamation or demerger etc
SCHEME OF CHARGING INCOME TAX

Income tax is a tax on the total income of an assessee for a particular assessment year. This
implies that;
 Income-tax is an annual tax on income
 Income of previous year is chargeable to tax in the next following assessment year at the
tax rates applicable for the assessment year.

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 Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For instance,
the Finance Act, 2012 fixes tax rates for the assessment year 2013-14
 Tax is charged on every person if the gross total income exceeds the minimum income
chargeable to tax
OBJECTIVES OF TAXATION
Initially, governments impose taxes for three basic purposes: to cover the cost of
administration, maintaining law and order in the country and for defense. But now
government’s expenditure pattern changed and gives service to the public more than these
three basic purpose and it restore social justice in the society by providing social services
such as public health, employment, pension, housing, sanitation and other public services.
Therefore, governments need much amount of revenue than before. To generate more
revenue a government imposes taxes on various types. In general objective of taxations are:
CHARACTERISTICS OF A GOOD TAX SYSTEM

(1) Tax is a Compulsory Contribution
(2) The Assesses will be required to pay Tax if is due from him
(3) Taxes are levied by the Government
(4) Common Benefits to All
(5) No Direct Benefit
(6) Certain Taxes Levied for Specific Objectives
(7) Attitude of the Tax-Payers
(8) Good tax system should be in harmony with national objectives
(9) Tax-system recognizes basic rights of tax-payers
NATURE AND CHARACTERISTICS OF DIFFERENT

TYPES OF TAXES
TYPES OF TAXES:
There are four ways to classify different types of taxes in India:
1. Taxes Levied by the Central Government and State Governments
2. On the Basis of Relationship between Tax Base and Tax Rates
3. On the Basis of Method of Assessment
4. On the Basis of Incidence and Impact of Taxes

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1. TAXES LEVIED BY THE CENTRAL GOVERNMENT AND

STATE GOVERNMENTS
By the Central Government: These include Income taxes, GST, Customs duties,
Corporation taxes, Excise duties, Estate duty and more
By the State Government: These include State GST, Excise on Liquor, VAT(value Added
Tax) on Petrol & Diesel, Tax on Agricultural Income, land revenues, tolls and more.
By the Local Civic Bodies: Municipal corporations and other local governing bodies collect
taxes like property taxes, Water Taxes, etc.
2. ON THE BASIS OF RELATIONSHIP BETWEEN TAX BASE AND TAX

RATES:
On this basis the Taxes are classified into Four types, such as;
Proportional Tax: A proportional tax, also referred to as a flat tax, impacts low-, middle-,
and high-income earners relatively equally. They all pay the same tax rate, regardless of
income. Taxes which very in direct proportion to the change in Tax Bases. The Tax base
could be income, Value of Goods and Value of Wealth or Property.
Example: Wealth Tax and Sales Tax.
Progressive Taxes: A progressive tax has more of a financial impact on higher-income

individuals and businesses than on low-income earners. That means a progressive tax
imposes a greater percentage of taxation on higher income levels, operating on the theory that
high-income earners can afford to pay more.
Example: Income Tax
Regressive Taxes: Low-income individuals pay a higher amount of their incomes in taxes
compared to high-income earners under a regressive tax system because the government
assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. This
type of tax has no correlation with an individual’s earnings or income level.
Example: Taxes on Goods & Services, Such as GST, Excise Duty, etc.
Digressive Taxes: A tax is called Digressive when the rate of progression in taxation does not
increase in the same proportion as the income increases. In this case, the rate of tax increases
up to certain limit, after that a uniform rate is charged and become constant.

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3. ON THE BASIS OF METHOD OF ASSESSMENT
On this basis, taxes are classified into two types, Such as;
Specific Duty: Taxes levied according to some unit of a product is called as Specific Duty.
For example, Excise Duty on cigarettes are levied on the basis of length of the cigarettes.
Ad-Valorem Tax: Taxes levied on the basis of value of the goods is called as Ad-Valorem
Duty. It is generally expressed in percentage form.
4. ON THE BASIS OF INCIDENCE AND IMPACT OF TAXES:
Before discussion on the types of taxes in this basis, you have to understand the meaning of
two important terms, i.e. ‘Incidence’ and ‘Impact’ of Tax are as follows;
Incidence of Tax: Incidence of Tax means the first burden of tax. Incidence of tax falls on a
person on whom the tax levied for the first time. Incidence of tax can be shifted to another
person.
Impact of Tax: Impact of tax means the ultimate/final burden of tax. Impact of tax falls on
the person who ultimately bears the burden of tax, i.e. the Consumer.
On the basis of incidence and impact of tax, a tax can be either, ‘Direct Tax’ or ‘Indirect
Tax’
DIRECT TAXES:
The individuals directly pay these taxes to the respective governments. In this case the both
Incidence and Impact will fall in a single person, i.e. an assesse.
The most notable examples include Income tax, Capital gains tax, Corporate tax, Wealth
Tax and Securities transaction tax.
INDIRECT TAXES:
These taxes are not directly paid to the governments but are collected by the intermediaries
who sell or arrange products and services. In this case, the Incidence and impact of taxes will
fall on two different persons.
GST (Goods and Service Tax), Service tax, sales tax, octroi, customs duty, value-added tax,
and excise duty, customs duty, are some of the top examples
DIRECT TAX VS. INDIRECT TAX

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Particulars Direct Tax Indirect Tax
1. Meaning Direct Taxes are the taxes Indirect Taxes are such type
in which the incidence of taxes where incidence
and impact falls on the and impact fall on two
same person/assesse different persons.
2. Nature of tax Direct Tax is progressive in Indirect Taxes are regressive in

nature. nature.
3. Taxable Event Taxable Income / Taxable Purchase / Sale / Manufacture of

Wealth of the Assessees. goods and /or rendering of
services.
4. Levy & Collection Levied and collected from the Levied & collected from the
Assessee. consumer but paid / deposited to
the Exchequer by the Assessee /
Dealer.
5. Shifting of Burden Tax Burden is directly borne Tax burden is shifted to the
by the Assessee. Hence, the subsequent / ultimate user.
burden cannot be shifted.
6. Tax Collection Tax is collected after the At the time of sale or purchases
income for a year is earned or or rendering of services.
valuation of assets is
determined on the valuation
date.
7. Tax Evasion Comparatively more because Comparatively less because of

of presence of Unorganised presence of organised sector.
sector.
8. Administered by Direct Tax is administered by Indirect Tax is administered by

Central Board of Direct Taxes Central Board of Indirect Tax &
(CBDT) Customs (CBIC). It is formerly
known as Central Board of
Excise & Customs (CBEC).
DIRECT AND INDIRECT TAX
DIRECT TAX
MEANING
Direct taxes are one type of taxes an individual pays that are paid straight or directly to the
government, such as income tax, poll tax, land tax, and personal property tax. Such direct

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taxes are computed based on the ability of the taxpayer to pay, which means that the higher
their capability of paying is, the higher their taxes are.
For example, in the case of income taxation, an individual who earns more pays higher taxes.
It is computed as a percentage of the total income. Additionally, direct taxes are the
responsibility of the individual and should be fulfilled by no one else but him.
As mentioned above, one good example of direct taxes is a person’s income tax. Usually,
income tax is filed annually, although deductions from one’s salary can be done on a monthly
basis. If, for example, an individual incurs tax amounting to $30,000 a year for his annual
salary of $120,000, the $30,000 is his direct tax.
TYPES OF DIRECT TAXES
1. Income tax
It is based on one’s income. A certain percentage is taken from a worker’s salary, depending
on how much he or she earns. The good thing is that the government is also keen on listing
credits and deductions that help lower one’s tax liabilities.
2. Transfer taxes
The most common form of transfer taxes is the estate tax. Such a tax is levied on the taxable
portion of the property of a deceased individual, including trusts and financial accounts. A
gift tax is also another form wherein a certain amount is collected from people who are
transferring properties to another individual.
3. Entitlement tax
This type of direct tax is the reason why people enjoy social programs like Medicare,
Medicaid, and Social Security. The entitlement tax is collected through payroll deductions
and is collectively grouped as the Federal Insurance Contributions Act.
4. Property tax
Property tax is charged on properties such as land and buildings and is used for maintaining
public services such as the police and fire departments, schools and libraries, as well as roads.
5. Capital gains tax
This tax is charged when an individual sells assets such as stocks, real estate, or a business.
The tax is computed by determining the difference between the acquisition amount and the
selling amount.

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1. Short-term capital asset An asset held for a period of 36 months or less is a short-term
capital asset. The criteria of 36 months have been reduced to 24 months for immovable
properties such as land, building and house property from FY 2017-18. For instance, if you
sell house property after holding it for a period of 24 months, any income arising will be
treated as long-term capital gain provided that property is sold after 31st March 2017.
2. Long-term capital asset An asset that is held for more than 36 months is a long-term
capital asset. The reduced period of the aforementioned 24 months is not applicable to
movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as
a long-term capital asset if held for more than 36 months as earlier. Some assets are
considered short-term capital assets when these are held for 12 months or less. This rule is
applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of
purchase is).
6. Wealth tax
This liability arises from the ownership of properties and is paid every year based on the
market value of the property. Property owners must pay this tax irrespective of whether the
property earns them any income or not. Depending on the residential status of the taxpayers,
wealth tax is payable by individuals, Hindu Undivided Family (HUF), and corporate
taxpayers. Working assets like stock holdings, gold deposit bonds, commercial complex
properties, house property rented for more than 300 days in a year, and house property owned
for professional or business use are exempt from paying wealth tax.
7. Securities Transaction Tax
Share trading on the stock market is subject to this tax. For every share purchase or sale, you
pay the Securities Transaction Tax.
8. Corporate Tax
Another type of Income Tax, the Corporate Tax is levied on the earning of businesses. An
Indian firm whose turnover is less than Rs. 1 crore is not subject to this tax. There is a
corporate tax slab according to which companies pay tax. Moreover, the tax structure for
international firms is different from domestic firms.
THE SALIENT FEATURES ARE LIKELY TO BE PRONOUNCED UNDER THE

NEW DIRECT TAX LAW.
1. Single Destination for all Direct Tax laws

2. Digitalization in legal prosecution.
3. Easy to Amend.
4. No dividend distribution Tax
5. Simplified language
6. Stable Tax rates

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INDIRECT TAX
Indirect taxes are basically taxes that can be passed on to another entity or individual. They
are usually imposed on a manufacturer or supplier who then passes on the tax to the
consumer. The most common example of an indirect tax is the excise tax on cigarettes and
alcohol. Value Added Taxes (VAT) are also an example of an indirect tax.
TYPES OF INDIRECT TAXES
What many people are not aware of is that practically everyone pays taxes, especially indirect
taxes. This is because taxes are imposed on almost all the products that we consume. Here are
some of the types of indirect taxes.
1. Goods and Services Tax:
The law on GST was brought to action in July 2017, with 17 indirect taxes under its purview.
All major services and service tax has been subsumed under the GST-
On the state level:
 State excise duty
 Additional excise duty
 Service tax
 Countervailing duty
 Special additional custom duties
At the central level, it covers:
 Sales Tax
 Entertainment Tax
 Central sales Tax
 Octroi and entry Tax
 Purchase Tax
 Luxury Tax
 Taxes on lottery gambling and betting
 Levies on products outside GST purview:
Taxes on products that use alcohol and petroleum products.
2. Sales Tax:

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The tax levied on the sales of goods. The Union Government imposes this sales tax on the
Inter-State sale, while the sale tax on Intra-state sale is levied by the State Government. This
tax has a three-segment bifurcation along
 Inter-State Sale
 Sale during import/export
 Intra-State Sale
3. Service Tax:
Service tax are indirect indices which taxpayers pay on various paid services. These paid
services include-
 Telephone
 Tour operator
 Architect
 Interior decorator
 Advertising
 Health centre
 Banking and financial service
 Event management
 Maintenance service
 Consultancy service
 Service tax interest is 15%
4. Value Added Tax:
The state governments collect this category of taxes. For instance, when a person buys a
product that it is important, we pay an additional tax known as Value Added Tax. Paid to the
government, the VAT has a rate that is composed along nature of item and respective state of
sale.
5. Custom Duty and Octroi Tax:
Levied upon goods imported into the country from abroad. The tax of custom duty is paid at
the entry port of a country such as the airport. The rate of taxation is variable as per product’s
nature. Octroi is charged upon the goods entering a municipal zone.
6. Excise Duty:
Excise duty is an indirect tax form that is charged on the goods produced inside a country.
This duty is different from the custom duty. This is also known as CVAT, or Central Value
Added Tax.

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7. Anti-Dumping Duty:
This is levied upon goods that are exported at a rate less than the standard rate by the nation
to some other nation. This tax is levied upon by the Central government.
8. Newly Implemented Indirect Tax (GST)
GST is a highly regarded tax system for the country. It is amongst the latest indirect tax
systems operating under the constitution of India. The importance of this taxation regime lies
in the fact that it covers under itself various other indirect taxes operating inside the country.
This tax regime has been brought in mark a change in the economy of the country and to
lessen the cascading effects from tax duties that deliver overall market inflation.
9. Toll Tax
It is imposed by the authorities for making travel on a specific stretch of highway. The rate of
toll tax is different for different toll Plaza. As a specific Toll Plaza maintains a certain part of
Highway only. Every year, toll rates for toll plazas get revised according to policies
mentioned in the National Highway fee under Determination of Rates and Collection rules,
2008. VIPs and dignitaries being exempted from the Toll Tax.
EXAMPLE OF INDIRECT TAXES
Let us use the example of VAT to illustrate how an indirect tax is imposed. Say, for
example, John goes to the outlet store to buy a refrigerator that’s priced at $500. When he
asks the sales representative, he or she will declare the sale price, which is $500, and that
is the right answer.
The refrigerator’s real value is actually less than that, but because a VAT has been added
(usually 10% to 20%), the sale price is now $500. If John looks at his receipt, he will see the
actual price of the refrigerator before the tax was added. It is the manufacturer of the unit or
item who collects the tax from the sale price and pays it to the government.
DISTINGUISH BETWEEN TAX AND FEE, TAX AND CESS
- DISTINGUISH BETWEEN TAX AND FEE:

a. tax
The Constitution of India does not define the word tax. However, Art. 366(28)
of the Constitution of India says, "taxation includes the imposition of any tax

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or impost, whether general or local or special and `tax' shall be construed

accordingly."
(b) Fees.
Fee is another source of revenue of the State and it differs from tax. Fee
is defined by Prof. S e l i g m a n a s ' a p a y m e n t t o defray the cost of each
recurring service undertaken by the Government, primarily in the public.
interest, but conferring a measurable special advantage on the fee-
payer'.

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Tax Fee
Tax is the compulsory payment to the Fee is the voluntary payment for getting
government without getting any direct service.
benefits.
If the element of revenue for general purpose While a fee is for payment of a specific
of the State predominates, the levy becomes a benefit or privilege although the special to
tax. the primary purpose of regulation in public
interest.
In regard to tax, there is not and must not In regard to fee, there is and must always be,
always be, direct correlation between the tax correlation between the fee collected and the
and the service intended to be rendered. service intended to be rendered.
Tax is compulsory payment. Fee is the voluntary payment.
If tax is imposed on a person he has to pay it. On the other hand, fee is not paid if the
Otherwise he has to be panelized. person does not want to get the service.
In this case, tax payer does not expect any Fee payer can get direct benefit for paying
direct benefit. fee.
Examples: income tax, gift tax, wealth tax, Examples: Stamp fee, driving license fee,
VAT etc. Govt. registration fee etc.
After the above discussion we can say that, though there are some differences between tax
and fee but both of them play a vital role for collecting government revenue.
- DISTINGUISH BETWEEN TAX AND CESS

A tax is a fee that is levied on a product, income, or activity. Cess is basically just another
word for tax. Depending on the country and the tax in question, there can be no difference
between a tax and a cess, or there might be just some technical differences.
Cess is a form of tax charged/levied over and above the base tax liability of a taxpayer. A cess
is usually imposed additionally when the state or the central government looks to raise funds
for specific purposes. For example, the government levies an education cess to generate
additional revenue for funding primary, secondary, and higher education. Cess is not a
permanent source of revenue for the government, and it is discontinued when the purpose
levying it is fulfilled. It can be levied on both indirect and direct taxes.

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The government can impose cess for purposes such as disaster relief, generating funds for
cleaning rivers, etc. For example, after Kerala floods in the year 2018, the state government
imposed a 1% calamity cess on GST and became the first state to do it. In other instances, the
central government may levy an education cess, or a health cess, or a sanitation cess. All
these levies are usually imposed as a percentage of the taxpayer’s basic tax liability. Under
the GST (Goods and Services Tax) regime, certain sin goods and luxury items also attract a
cess.
The procedure for introducing cess is comparatively simpler than getting the provisions done
for introducing taxes, which usually means a change in the law. Cess is also easier to modify
and abolish.
Types of cess in India
 Education Cess: Education cess was introduced to finance and provide standard
quality education to poor people.
 Health and education cess: Proposed in Budget 2018 by Finance Minister Arun
Jaitley to meet the education and health needs of rural and rural and Below Poverty Line
(BPL) families.
 Swachh Bharat Cess: Introduced in 2015, a 0.5% Swachh Bharat cess was imposed to
fund national campaign for clearing the roads, streets and the infrastructure of India.
 Krishi Kalyan Cess: This cess was aimed at developing the agricultural economy, and
was collected at the rate of 0.5%.
 Infrastructure Cess: Announced in Union Budget 2016, this cess was charged on the
production of vehicles.
Who pays cess? What is meant by cess in GST?
In the case of the cess levied on direct taxes, it is added to the basic tax liability of the
taxpayer and is paid as a part of the total tax paid by the taxpayers themselves. In the case of
the cess levied on indirect taxes, such as service tax or sales tax, or GST in India’s case, it is
paid by the producer of the goods and services. This usually adds to the cost of making goods
and services, and eventually, the consumer might end up bearing the higher cost.
Comparison between Tax and Cess:

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Tax Cess
Type of Fee Tax
A mandatory fee
charged by a Technically, is just another word
Definition government on a for tax. The term might be used in
product, income, or regard to a specific type of tax.
activity.
To generate revenue To generate revenue for the

Purpose
for the government government
Direct Tax – tax

levied directly on
personal or corporate
income
Usually used in regard to Local
Types
tax and/or Land and Property tax.
Indirect Tax – tax

levied on the price of
a good or service
The term is still frequently used

in a few countries including
The word is used all
Britain, Ireland, to indicate a local
over the world and in
Usage tax, Scotland, to indicate a land
all manners to refer to
tax, and India, applied as a suffix
any type of tax.
to a indicate a category of tax
such as ‘property-cess'.
TAX EVASION, TAX PLANNING, TAX AVOIDANCE
Taxes are the compulsory contribution by the citizens of a country for meeting different
government expenditures. There are three stages in the imposition of tax by the government.

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First step is the declaration of the liability by the Government i.e. what are all the incomes
chargeable to tax, second one is the assessment and tax payment by persons and the last one
is the method of recovery of tax if tax was not paid on time. Tax planning and management
focuses efficient administration of tax procedures and minimization of tax liability through
eligible schemes.
Through this chapter we can discuss about the basic concepts of Tax Planning, Tax
Management, Tax Evasion and Tax Avoidance.
TAX PLANNING
INTRODUCTION:
Tax planning is the analysis of one's financial situation from a tax efficiency point of view so
as to plan one's finances in the most optimized manner. Tax planning allows a taxpayer to
make the best use of the various tax exemptions, deductions and benefits to minimize their
tax liability over a financial year. This process varies from person to person and depends,
among many factors, taxable income, time schedule for investments, risk bearing inclination,
existing investment pattern, expected returns etc. Over the years, tax planning scenario has
become more dynamic and complicated, due to constant changes in the tax laws and falling
interest rates. Further tax planning cannot be done in isolation; it should be a part of overall
Financial Planning.
MEANING
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. If more two methods are possible to
achieve an objective, select one which results in lower tax liability.
SIGNIFICANCE AND NEED OF TAX PLANNING
 Reduction of Tax Liability

 Minimization of Litigation
 Productive Investment
 Healthy Growth of Economy
 Economic Stability
Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by
applying the script and moral of law. Therefore the objectives do not in any way contradict the
concept of tax laws.

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TYPES OF TAX PLANNING
The tax planning exercise ranges from
devising a model for specific transaction as well as for systematic corporate planning.
These are: (a) Short-range and long-range tax planning. (b) Permissive tax planning. (c)
Purposive tax planning.
a)Short-range planning & Long-range planning: Short-range planning refers to year to

year planning to achieve some specific or limited objective. For example, an individual
assessee whose income is likely to register unusual growth in particular year as compared to
the preceding year, may plan to subscribe to the PPF/NSC’s within the prescribed limits in
order to enjoy substantive relief. By investing in such a way, he is not making permanent
commitment but is substantially saving in the tax. It is one of the examples of short-range
planning.
Long-range planning on the other hand, involves entering into activities, which may not pay-
off immediately. For example, when an assessee transfers his equity shares to his minor son
he knows that the Income from the shares will be clubbed with his own income. But clubbing
would also cease after minor attains majority
(b) Permissive tax planning: Permissive tax planning is tax planning under the expressed
provisions of tax laws. Tax laws of our country offer many exemptions and incentives.
(c) Purposive tax planning: Purposive tax planning is based on the measures which
circumvent the law. The permissive tax planning has the express sanction of the Statute while
the purposive tax planning does not carry such sanction. For example, under Sections 60 to
65 of the Income-tax Act, 1961 the income of the other persons is clubbed in the income of
the assessee. If the assessee is in a position to plan in such a way that these provisions do not
get attracted, such a plan would work in favour of the tax payer because it would increase his
disposable resources. Such a tax plan could be termed as ‘Purposive Tax Planning’
INDIVIDUAL VS. CORPORATE TAX PLANNING
Income Tax is paid by individuals for earning an income in a financial year and the tax is
calculated as per the total income earned during the applicable financial year based on the
various income tax slabs set by the government.
TAX PLANNING FOR INDIVIDUALS USING 80C, 80D AND SECTION 24

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TAX PLANNING BY CORPORATE
Corporate Tax is paid by companies registered under company law in India on the net profit it
makes in a financial year. Therefore, individual and corporate tax planning are quite different
and need completely different approaches even though the goal is the same in both cases.
CASE LAWS ON TAX PLANNING
McDowell & Co. v. CTO (1985) 154 ITR 148
The Hon’ble Supreme Court in McDowell & Co. v. CTO (1985) 154 ITR 148 has observed
that “tax planning may be legitimate provided it is within the framework of the law.
Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain
the belief that it is honourable to avoid payment of tax by resorting to dubious methods.”
Latilla v. IRC. (1943) AC 377 stated as follows: "Tax planning may be legitimate provided it
is within the framework of law. Colourable devices cannot be part of tax planning and it is
wrong to encourage or entertain the belief that is honourable to avoid the payment of tax by
resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly
without resorting to subterfuges."

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CIT Vs Walford Share & Stock Brokers P. Ltd. 2010(192)
Hon. Supreme Court observed that a citizen is free to carry on its business within four
corners of law. Thus mere tax planning without any motive to evade taxes through colorable
devices is not frowned upon even by the judgment of this court in McDowell & Co. Ltd case.
In this case, it was held that mere use of provision of the Act cannot be called as ‘abuse of
law’. Even assuming that the transaction was pre-planned, there is nothing to impeach the
genuineness of the transaction
CCE Chandigarh Vs Pyara Rexine Pvt. Ltd. 2010(259)ELT 692 (HP HC)3 .
In the said decision, it was held that Avoidance of tax by Tax Planning is not illegal.
Union of India Vs Playworld Electronics Pvt. Ltd. 1989(41)ELT368(SC)3
Hon. Supreme Court held that “It is true that tax planning may not be legitimate provided it is
within the framework of the law. Colourable devices cannot be part of tax planning and it is
wrong to encourage to avoid the payment of tax by dubious methods. It is also true that in
order to create the atmosphere of tax compliance taxes must be reasonably collected, should
be utilize in proper expenditure and not wasted.
TAX EVASION
MEANING
Tax Evasion refers to various actions and/or activities in which an individual or business
entity avoids paying their tax due in part or in full. Non-payment, underpayment of taxes,
concealing of assets to reduce tax liability, etc. are some common forms of tax evasion. Tax
Evasion is a criminal offence and those who are caught evading taxes are liable to face
criminal charges and penalties as per the Chapter XXII of the Income Tax Act, 1961.
ACTIVITIES ARE CONSIDERED AS TAX EVASION ACCORDING TO

THE INCOME TAX ACT, 1961
The punishment and penalties applicable to people guilty of indulging in tax evasion depends
on the type of offence. The following are key activities that are considered to be tax evasion
according to the Income Tax Act, 1961:
 Not Filing Income Tax Returns:

 Not providing or misquoting PAN:
 Concealing Income to Evade Tax:
 Not Complying with Income Tax Notice:
 Not maintaining compliant Books and accounts:

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CASE LAWS
In case of CIT v Sati Oil Udyog Limited and anr , the question in relation to constitutional
validity of the retrospective amendment to Section 143(1-A) of Income Tax Act 1961 was
raised.
In the instant case Supreme Court held that, the object of section 143(1-A) of the Act 1961 is
the prevention of evasion of tax. This provision provides that “persons who have filed returns
in which they have sought to evade the tax properly payable by them is meant to have
deterrent effect and a hefty amount of 20% as additional tax is payable on difference between
what is declared in the return and what is assessed to tax.
R.K Garg vs. UOI :
In the present case the question upon the measure taken by government i.e disclosure of
having possession of black money, was challenged. In this case the contention was raised that
this measure is taken only to avoid the crime related to tax evasion which are becoming the
white collar crimes and this is not to encourage such kind of activities because this will help
only to get back all the money which has been taken over and hide by the people.
This was just an initiative to disclose all that money which has been taken wrongfully by the
criminals through tax evasion. This was later considered as a helpful measure because it
ultimately helps in stopping such kind of things as the Indian govt. does not have complete
set of effective rules that is why it is to be considered a good method.
PENAL PROVISIONS UNDER INCOME TAX ACT, 1961
Since, tax evasion is a criminal offence in India and attract penal provisions given under
Chapter XXII of the Income Tax Act, 1961. Following are few penal provisions attracted for
evasion of tax
 Section 276C is imposed in case of wilful attempt to evade tax. Thus if underreported
income is ₹ 25,00,000, there will be rigorous imprisonment for a term not less than 6 months
extendable to 7 years with fine. In other cases, the imprisonment is not less than 3 months
which is extendable to 2 years .
 Section 278B: Where an offence committed by a company, every person, at the time of
offence committed, was responsible for the conduct of the business of company, shall be
deemed to be guilty of the offence and shall be punished accordingly.
Provided that such company shall be punished with fine and every person including director,
manager, secretary or any other officer referred under this section .
The use of Information technology has been growing in tax administration. Tax e-payment
and e-filing is a prominent facility provided to the taxpayers to make income tax through

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banking or by use of debit/credit cards. Assessee are required to get their accounts audited
under section 44AB and all companies are required to mandatorily make e-tax payment.
TAX AVOIDANCE
INTRODUCTION
Tax is a source of revenue for a government of a country, through which it endeavours to

provide better infrastructure, standard of living and security to its inhabitants. However, these
taxes can at times come in the way of subjective development of individuals or a company
and further push these individuals and large business houses to contemplate a way to avoid
the same by using loopholes in the laws and guidelines that govern the taxes.
According to a paper by Alex Cobham & Petr Janský, each year globally, around INR 50,000
crores worth of government revenue is lost due to tax avoidance by big business houses.
Reliance India Limited, Tata Industries, Vodafone, Google, etc. are some of the examples of
large business houses that function in India and who have successfully mastered the art of tax
avoidance.
MEANING
Tax avoidance is the use of legal methods to minimize the amount of income tax owed by an
individual or a business. This is generally accomplished by claiming as many deductions and
credits as are allowable. It may also be achieved by prioritizing investments that have tax
advantages.
CHARACTERISTICS OF TAX AVOIDANCE:

Tax Avoidance is a way of reducing the taxes through the medium provided by government
but before moving towards those ways, it is important to analyze tax avoidance from depth.
Here are the following features for tax avoidance:
1. Tax Avoidance involves the legal exploitation of tax laws to one’s own advantages.
2. Every attempt by legal means to prevent or reduce tax liability which would otherwise be
incurred, by taking advantage of some provisions or lack of provisions in the statutes of the
country.

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3. An arrangement entered into solely by or primarily for the purpose of obtaining a tax
advantages.
CASE LAWS:
Role of judiciary on the concept of Tax Avoidance can be traced back on the judgment which
was pronounced by Justice Chinnapa Reddy’s in the Mcdowell’s Case. it defines Tax
Avoidance as “the art of dodging tax without breaking the law”.
The inception of Tax Avoidance can be traced back from England as in the case of
IRC v. Duke of Westminster. Lord Tomlin said “Every Man is entitled, if he can, to order
his affairs, so that the tax attaching under the appropriate Acts, is less than it otherwise would
be. If he succeeds in ordering them so as to secure this result, then, however unappreciative
the commissioners of Inland Revenue or his fellow tax gatherers may be of his ingenuity, He
cannot be compelled to pay an increased amount of tax.”
Facts of M/s McDowell and Company Limited v. Commercial Tax office

Judgement
Justice Ranganath Mishra writing a majority judgement (on behalf of three other judges),
after examining the provisions of law, had clearly ruled that, ‘duty to pay excise duty was on
manufacturer’. He further goes on to say that it was the ‘exclusive duty’ of a manufacturer to
pay the excise duty. Even if payment had been made by the buyer in reference to an
arrangement, it does not lose its character as an excise duty because it was nothing more than
meeting the obligation of manufacturer. Therefore the excise duty was to be added to the
revenue of the manufacturer in determining his sales tax liability.
He further went on to say that it was not desirable for the legislature to take care of each and
every dubious method of tax avoidance. Therefore it is for the judiciary to determine the
nature of each device adopted. It should refuse approval to such transactions if they were
done solely for the purpose of tax avoidance.
W.T. Ramsay v. IRC

Case that even the British courts were moving away from the Westminster principle.
Therefore, it is not feasible for a country like India, which is a welfare state, to follow the
principle laid out in Westminster case because of its manifold consequences. Evil effects of
honouring tax avoidance are as follows
[1] Substantial loss to the economy, especially in welfare state like ours that demands
substantial public revenue to accommodate financial needs a large population
[2] Non-Payment of taxes will pile up/aggregate an amount of black-money which will
eventually disturb the economy by causing inflation

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[3]”Perpetual war” between some smart brains of country together with their expert team of
lawyers on one side and tax authorities with less skilful advisers on the other which
eventually would mean ‘large hidden loss to the community at large.’
[4] Sense of injustice & inequality among sections of the society that are unable to profit
from such transactions. Most importantly there would be a problem of increasing tax liability
on good-citizens of country.
This all brings me to the words of J. Oliver Wendell Holmes that “Taxes are what we pay for
civilised society, I like to pay taxes and with them I buy civilization.” Therefore, I agree with
the opinion of Chinnapa Reddy and the author believe that judgement rendered by this court
holds good in law.
Then comes the Vodafone International Holdings Ltd v. Union of India & Ors,
In 2007, Vodafone International Holdings B.V. based in Netherlands, purchased Hutch Essar
in India through a complex tax avoidance strategy. The idea of this strategy was to avoid
paying capital gains tax in India through non-resident companies in the deal. The non-
resident companies were their own subsidiaries operating outside India. Vodafone
International Holding B.V. purchased 67% controlling shares of CGP International based in
Cayman Islands, which was a subsidiary company of Hutchison Telecommunication
International Limited (HTIL). CGP already had a controlling share in Hutch Essar in India
before the deal and by the transfer of 67% controlling share of CGP, Vodafone International
Holdings B.V., acquired the controlling stake in Hutch Essar India.
Following this deal, Income tax authorities issued show cause notice to Vodafone
International Holdings B.V. and in turn VIH filed a writ in High court challenging the same,
which was dismissed by high court with a view that Vodafone International Holdings B.V.
must pay capital gains tax, as the sale of shares from CGP to VIH B.V. qualifies as capital
transfer and attracts capital gains tax of nearly Rs.12000 crores. Pursuant to High Court’s
dismissal, VIH filed a Special Leave Petition in Supreme Court of India challenging the High
Court’s order. In 2012, Supreme Court of India held that the High Court’s view lacked
authority of law and was quashed, as the transaction took place between two non-resident
Companies of India. Hence, Vodafone acquired Hutch Essar India without paying capital
gains tax.
RETROSPECTIVE TAXATION

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Before every financial year begins, Ministry of Finance presents its finance budget which
covers aspects such as how the previous year has gone and what are the proposals/plans for
the next financial year in terms of revenue allocation to various sectors, changes relating to
tax law provisions (both direct and indirect tax) etc. Such tax law changes generally termed
as ‘amendments’ are proposed keeping in mind on-going developments, welfare of taxpayers,
loopholes which could not be plugged in earlier and also representations received by various
stakeholders.
For eg: extension of profit linked deduction to few more years, introduction of new
exemption, introduction of new tax levy such as equalisation levy etc. Once these proposals
are accepted by both houses of parliament and receives the assent of Hon’ble President, it
becomes an enacted law.
These amendments can be of two kinds based on the specified date of its application;
a) Prospective amendment and
b) Retrospective amendment.
While prospective amendments are comparatively easy to handle and accepted atleast based
on its nature of application, retrospective amendments create lot of confusion and complexity
and are not easily acceptable. Therefore, date of application of law plays a major role to
determine its impact on taxpayers and be prepared and plan their next move. Hence, in this
article we have discussed retrospective amendment and covered the following topics:
PROSPECTIVE AMENDMENT IN BRIEF

Dictionary meaning of the word ‘prospective’ is something that is ‘likely to happen
in future’ or ‘likely to be or become something specified in the future’. Therefore,
prospective amendment would mean any changes to law that takes effect in the future either
from date of enactment of new law or any specified future date. For eg: Introduction of new
Section 80TTB by Finance Act 2018 which provides for higher deduction to senior citizens
w.r.t interest income and it is made applicable from financial year 2018-19.
RETROSPECTIVE AMENDMENT
Dictionary meaning of the word ‘retrospective’ is ‘looking back over the past’, ‘relating to or
thinking about the past’, ‘looking backwards’ etc. In a similar fashion, with respect to law or
statute, it simply means ‘taking effect from a date in the past’.
Therefore, if there is an amendment to the law and it is applicable from a specified date in the
past but not future, it is termed as a retrospective amendment.
For example, Extension of exemption under Section 10(23C) to an income received by any
person on behalf of the Chief Minister’s Relief Fund, was made retrospectively from 1 April
1998 by Finance Act 2017.
RETROSPECTIVE TAX
Retrospective tax is nothing but a combination of two words “retrospective” and “tax” where
“retrospective” means taking effect from a date in the past and “tax” refers to a new or

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additional levy of tax on a specified transaction. Hence, retrospective tax means creating an
additional charge or levy of tax by way of an amendment from specified date in the past.
For eg:
Levy of tax on indirect transfers by Finance Act 2012 retrospectively from 1961; Introduction
of Section 14A for disallowance of expenditure related to exempt income in the year 2001
with retrospective effect from April 1962.
RETROSPECTIVE EFFECT AND CONSTITUTION OF INDIA
The Constitution of India imposes two limitations on the legislative power of Parliament or
the State legislatures. The first is by way of legislative competence – in that the subjects of
legislation are divided into three lists, with Parliament having the exclusive power to legislate
on List I and the States having the exclusive power to legislate with respect to List II, and the
two having concurrent power in relation to List III.
The second limitation is by way of Part III of the Constitution – the equivalent of a bill of
rights. Tax laws are amenable to a challenge on the ground that they are discriminatory
[violative of equality before the law] or that they are unduly burdensome and harsh and thus
an unreasonable restriction on the right to carry on business.
The first important challenge to retrospective changes being made was a by way of challenge
to amendment in 1951 imposing a duty on manufactured tobacco which was brought into
force retrospectively i.e. from the date of the introduction of the Bill and not from the date in
which the law came into force.
This legislation was challenged in Court on two bases. The first was that the State legislature
lacked the legislative competence to enact a sales tax law with retrospective effect. The
argument was that sales tax was primarily an indirect tax, the essential feature of which was
that its’ burden could be passed on to the consumer. Where it was imposed retrospectively,
the burden of the past could not be so passed on to the consumer and therefore it ceased to be
an indirect tax and for that reason was unconstitutional. This argument was tersely
dispatched, following decisions of the Privy Council holding that the method of collecting the
tax was an accident of its administration, and the fact that it could not be passed on did not
affect its essential characteristic. The Court also followed and cited with approval the
decision of the privy Council in Colonial's sugar refining Co Ltd versus Irving which had
stated the proposition with clarity-if there was a power to impose taxation conferred by a
constitution, the legislature could equally make the law retroactive and impose the duties
from a date earlier than that from which it was imposed (Chhotabhai v Union 1962 Supp 2
SCR 1)
The Supreme Court accepted that tax laws were subject to the discipline of Part III of the
Constitution. However the Indian Supreme Court chose to follow the American decisions that
had rejected the suggestion that mere retrospectivity would render a tax laws arbitrary and
capricious.

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These principles laid down in 1962 were followed consistently in a host of cases. The
defining feature of these cases was that the amendments which are made retrospectively
related invariably to either correcting some drafting flaw which clearly defeated legislative
intent, or correcting some feature on account of which the Court found the law
unconstitutional. As the Court explained in 1963, while they could not be any dispute that the
legislature in India had the power to make retrospective legislation, it would be open to a
party affected by such laws to contend that the retrospective operation creates a situation
which could be described as an unreasonable restriction which violates the right to carry on
business or the right to hold and dispose property
While in theory the Court did subject tax laws to the fundamental rights to carry on business,
and the right to hold and dispose of property, in practice the only few occasions on which the
Court did strike down laws were situations where the tax was brazenly discriminatory. There
is no reported decision in which on account of the retrospectivity itself the Court found the
law imposing a tax retrospectively falling foul of constitutional limitations.
The bar was set rather high- the reasonableness of each retroactive tax depends on the
circumstances in which it comes to be made, and the test of the length of time covered by the
retrospective operation could not by itself be a decisive test. For e.g. where a statute may
have continued to be in operation for years and was then found to be constitutionally flawed
on account of a feature which was amenable to correction by an amendment, , if after the
final judicial verdict the law was amended and brought into place retrospectively, the length
of time would be irrelevant.
In a later case (Buckingham and Carnatic Mills case) decided by the Supreme Court cited
article that had appeared in the Harvard Law Review which suggested that "it is necessary
that the legislature should be able to cure inadvertent defects in statutes on their
administration by making what has been aptly called small repairs".
Clearly what the Court had in mind were cases where on account of bad drafting or
introducing some feature in the tax law which made it unconstitutional, the State stood to
suffer loss of revenue and there was a corresponding windfall upon a taxpayer. In such a
situation the legislature could legitimately make a retrospective amendment and also
introduce a validating clause.
The Permanent Court of Arbitration at The Hague ruled that India’s retrospective demand of
Rs 22,100 crore as capital gains and withholding tax imposed on the Vodafone Group, for a
2007 deal was “in breach of the guarantee of fair and equitable treatment”. The court has also
asked India not to pursue the tax demand any more against Vodafone Group.
MAJOR RETROSPECTIVE AMENDMENTS/TAX IN INDIAN INCOME TAX

Till date one of the major and most controversial retrospective amendment carried out was
bringing indirect transfer under tax bracket by Finance Act 2012.
Supreme Court in the case of Vodafone held that Section 9 does not authorize tax authorities
to tax capital gains derived from indirect transfer of shares of Indian company while the main

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transaction was between two foreign companies to acquire a foreign company which had
majority shares in Indian company. It may be noted that quantum of transaction and tax
foregone by tax department due to this Supreme Court ruling was huge.
Therefore, Government of India (Ministry of Finance) amended Section 9 of Income-tax Act,
1961 vide Finance Act 2012 and provided that shares or interest in any foreign
company/entity shall be deemed to be situated in India if such shares or interest derives its
substantial value from assets located in India. Any capital gain from transfer of such shares or
interest in foreign company deriving its substantial value from assets located in India was
brought under tax levy. Government did not stop at this amendment of new levy but made it
effective retrospective from 1962. This would mean Vodafone case where entire transactions
were already carried out and ruling was also pronounced by Supreme Court could be brought
to tax with this retrospective amendment.
FEDERAL BASE OF TAXING POWER
INTRODUCTION
Indian constitution has divided the taxing powers as well as the spending powers (and
responsibilities) between the Union and the state governments. The subjects on which Union
or State or both can levy taxes are defined in the 7th schedule of the constitution. Further,
limited financial powers have been given to the local governments also as per 73rd and 74th
amendments of the constitution and enshrined in Part IX and IX-A of the constitution.
Since the taxing abilities of the states are not necessarily commensurate with their spending
responsibilities, some of the centre’s revenues need to be assigned to the state governments.
On what basis this assignment should be made and on what guidelines the government
should act – the Constitution provides for the formation of a Finance Commission (FC) by
President of India, every five years, or any such earlier period which the President deems
necessary via Article 280. Based on the report of the Finance Commission, the central taxes
are devolved to the state governments.

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India’s tax system is a three-tier federal structure which is made up of the following:
1. Union List (List 1 of the 7th schedule to the Constitution of India) contains those
matters on which the Central Government has the power to make laws [Article
246(1)].
2. The State List has only those matters on which the State Government has the
power to make laws [Article 246(3)].
3. The Concurrent List has those matters on which both the Central and State
Governments have the power to make laws [Article 246(2)].
Law made by Union Government prevails whenever there is a conflict between the Centre
and state concerning entries in the concurrent list. But if any provision repugnant to earlier
law made by parliament is part of law made by the state, if the law made by the state
government gets the assent of the President of India, it prevails.

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Distribution of powers of taxation
 List 1 in the 7th schedule to the constitution has the powers of the Central
Government listed in Entries 82-92B.
 List 2 in the schedule has the powers of the State Government listed in Entries 45-
63.
 As regards list 3, it doesn’t deal with taxation and hence both centre and state do
not have any concurrent powers of taxation.
 Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation
belonging only to the centre.
- SEPARATION OF POWERS
The taxing powers of the central government encompass taxes on income (except agricultural
income), excise on goods produced (other than alcohol), customs duties, and inter-state sale
of goods. The state governments are vested with the power to tax agricultural income, land
and buildings, sale of goods (other than inter-state), and excise on alcohol. Local authorities
such as Panchayat and Municipality also have power to levy some minor taxes.
The authority to levy a tax is comes from the Constitution which allocates the power to levy
various taxes between the Centre and the State. An important restriction on this power is
Article 265 of the Constitution which states that “No tax shall be levied or collected except
by the authority of law.” This means that no tax can be levied if it is not backed by a
legislation passed by either Parliament or the State Legislature.
- SOURCES OF REVENUE FOR UNION GOVERNMENT
The sources of Revenue of the Union Government are as follows:
 Income (except tax on agricultural income), Corporation Tax & Service Tax
 Currency, Coinage, legal tender, Foreign Exchange
 Custom duties (except export duties)
 Excise on tobacco and other goods.
 Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the
constitution but Estate duty was abolished in India in 1985 by Rajiv Gandhi Government)
 Fees related to any matter in Union list except Court Fee
 Foreign Loans

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 Lotteries by Union as well as State Governments.

 Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting,
other forms of communication
 Property of the Union
 Public Debt of the Union
 Railways
 Stamp duty on negotiable instruments such as Bills of Exchange, Cheques,
Promissory notes etc.
 Reserve Bank of India
 Capital gains taxes, Taxes on capital value of assets except farm land
 Taxes other than stamp duties on transactions in stock exchanges and future markets
 Taxes on the sale and purchase of newspapers and advertisements published therein.
 Terminal Taxes on Goods and passengers, carried by Railways and sea or air.
- SOURCES OF REVENUE FOR STATE GOVERNMENTS
The following are sources of revenue for State Governments.
 Taxes and duties related to agricultural lands

 Capitation Taxes
 Excise on liquors, opium etc.
 Fees on matters related to state list except court fee
 Land Revenue, Land and buildings related taxes
 Rates of Stamp duties in respect of documents other than those specified in the Union
List
 Taxes on mineral rights subject to limitations imposed by the parliament related to
mineral development
 Taxes on the consumption or sale of electricity
 Sales tax on goods (other than newspapers) for consumption and use within state.
 Taxes on advertisements except newspaper ads.
 Taxes on goods and passengers carried by road or on inland waterways
 Taxes on vehicles, animals and boats, professions, trades, callings, employments,
luxuries, including the taxes on entertainments, amusements, betting and gambling.
 Toll Taxes.
- CERTAIN TAXES LEVIED AS CONCURRENT POWERS

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Please note that the Union and the State Governments have the concurrent powers to fix the
principles on which taxes on motor vehicles shall be levied and to impose stamp duties on
non-judicial stamps. The property of the Union is exempted from State Taxation; and the
property of the states is exempted from the Union Taxation. But the parliament of India can
pass legislation for taxation by Union Government of any business activities / trade of the
state which are not the ordinary functions of the state.
Residuary Power of Taxation
Union Government has exclusive powers to impose taxes which are not specifically
mentioned in the state or concurrent lists. Some taxes imposed using these powers include
Gift tax, wealth tax and expenditure tax.
- STATE’S POWER REGARDING SALES TAX
The sales tax on consumer goods such as toothpastes, soaps, daily use items, electronic items
etc. are imposed, collected and appropriated by state governments. However, newspapers and
newspaper ads are exception to this. Further, there are four restrictions to this power of the
state. These include:
 A state cannot impose sales tax if a good is produced there but is sold outside the
state.
 A state cannot impose sales tax if the sale and purchase is taking place for items due
for export.
 A state cannot impose tax on interstate trade and commerce of goods
 State cannot impose a tax on a good that has been declared of special importance by
parliament.
- OTHER FACTS ABOUT LEVYING AND APPROPRIATION OF

TAXES
 Sales tax is imposed, levied, collected, appropriated by states as mentioned above

 Income tax, Corporation Tax, Service tax are levied and collected by Centre but are
appropriated by both states and centres as per distribution formula recommended by Finance
Commission. This formula is NOT binding upon the parliament.
 However states have no share in surcharges, cesses on these taxes.
 Stamp duties on negotiable instruments and excise duties on medicinal and toilet
preparations that have use of alcohol and narcotics are levied by Centre. But these taxes don’t
make a part of consolidated fund of India. They are assigned to respective states only, which
appropriate these taxes.
 Sales tax in case of Inter-state trade of goods (except newspapers) is levied and
collected by the centre but such proceeds are assigned to states. (This is known as Central
Sales Tax

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POWER OF TAXATION UNDER THE CONSTITUTION

 Constitutional Provisions Regarding Taxation in India
o Article 265
o Article 266
o Article 268
o Article 269(A)
o Article 270
o Article 271
 Cess and surcharge
o Grants-in-aid
 Article 273
 Article 275
 Article 276
 Article 277
 Article 279
 Article 282
 Article 286
 Article 289
o Some other tax-related provisions
 Article 366
The roots of every law in India lie in the Constitution, therefore understanding the provisions
of the Constitution is foremost to have a clear understanding of any law. The Constitutional
provisions regarding taxation in India can be divided into the following categories:
 Only by the authority of law can taxes be levied. (Article 265)

 Levy of duty on tax and its distribution between centre and states (Article
268, Article 269, and Article 270)
 Restriction on power of the states to levy taxes (Article 286)
 Sale/purchase of goods which take place outside the respective state

 Sale/purchase of goods which take place during the import and export of the goods
 Taxes imposed by the state or purpose of the state (Article 276, and Article 277)
 Taxes imposed by the state or purpose of the union (Article 271, Article 279,
and Article 284)

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 Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)
Article 265

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Article 266
This article has provisions for the Consolidated Funds and Public Accounts of India and the
States. In this matter, the law is that subject to the provisions of Article 267 and provisions
of Chapter 1 (part XII), the whole or part of the net proceeds of certain taxes and duties to
States, all loans raised by the Government by the issue of treasury bills, all money received
by the Government in repayment of loans, all revenues received by the Government of India,
and loans or ways and means of advances shall form one consolidated fund to be entitled the
Consolidated Fund of India. The same holds for the revenues received by the Government of
a State where it is called the Consolidated Fund of the State. Money out of the Consolidated
Fund of India or a State can be taken only in agreement with the law and for the purposes and
as per the Constitution.
Article 268
This gives the duties levied by the Union government but are collected and claimed by the
State governments such as stamp duties, excise on medicinal and toilet preparations which
although are mentioned in the Union List and levied by the Government of India but
collected by the state (these duties collected by states do not form a part of the Consolidated
Fund of India but are with the state only) within which these duties are eligible for levy
except in union territories which are collected by the Government of India.
Article 269 provides the list of various taxes that are levied and collected by the Union and
the manner of distribution and assignment of Tax to States. In the case of M/S. Kalpana
Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others, placing faith in a
judgement of the Apex Court in the case of Gannon Dunkerley & Co. and others v. State of
Rajasthan and others, the advocate from the appellant side submitted that to arrive at a
Taxable Turnover, turnover relating to inter-State transactions, export, import under the CST
Act are to be excluded. Thus, the provision of the State Sales Tax Act is always subject to the
provisions of Sections 3 and 5 of the CST Act. Sale or purchase in the course of interstate
trade or commerce and levy and collection of tax thereon is prohibited by Article 269 of the
Constitution of India.

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Article 269(A)
This article is newly inserted which gives the power of collection of GST on inter-state trade
or commerce to the Government of India i.e. the Centre and is named IGST by the Model
Draft Law. But out of all the collecting by Centre, there are two ways within which states get
their share out of such collection
1. Direct Apportionment (let say out of total net proceeds 42% is directly apportioned
to states).
2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI a
selected prescribed percentage goes to the States.
Article 270
This Article gives provision for the taxes levied and distributed between the Union and the
States:
 All taxes and duties named within the Union List, except the duties and taxes
named in articles 268, 269 and 269A, separately.
 Taxes and surcharges on taxes, duties, and cess on particular functions which are
specified in Article 271 under any law created by Parliament are extracted by the
Union Government.
 It is distributed between the Union and the States as mentioned in clause (2).
 The proceeds from any tax/duty levied in any financial year, is assigned to the
states where this tax/duty is extractable in that year but it doesn’t form a part of the
Consolidated Fund of India.
 Any tax collected by the centre should also be divided among the centre and states
as provided in clause (2).
 With the introduction of GST 2 sub-clauses having been added to this
Article- Article 270(1A) and Article 20(1B7).
The Supreme Court of India has set a famous judicial precedent under Article 270 of the
Constitution of India in the case T.M. Kanniyan v. I.T.O. The SC, in this case, propounded

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that the Income-tax collected forms a part of the Consolidated Fund of India. The Income-tax
thus extracted cannot be distributed between the centre, union territories, and states which are
under Presidential rule.
Supreme Court’s [‘SC’] verdict in Union of India v. Mohit Minerals. To give a brief
overview, Section 18 of the Constitution (One Hundred and First Amendment) Act,
2016 [‘GST Amendment Act’] enables Parliament to enact a ‘law’ compensating States for
loss in revenue due to the implementation of Goods and Services Tax [‘GST’]. In order to
effectuate this goal, GST (Compensation to States) Act, 2017 [‘CSA’] was passed by the
Parliament, levying a cess on intra-State and inter-State supply of goods or services. (Section
8 of the Act levies the cess)
The SC in Mohit Minerals upheld the legislative competence of the CSA Act sourcing its
validity through Article 270. The court pointed out that Article 270, post the GST
Amendment Act specifically empowers Parliament to levy any cess by law. Although the SC
emphasized that Section 18 of the Amendment Act also grants power to Parliament for
compensating States, this factor did not form the basis of court’s decision.
In previous post, it was contended

firstly, that Section 18 forms a part of the Constitution despite not being reflected in its bare
text;
and secondly, that the SC could have sourced the validity of GST (Compensation to States)
Act, 2017 through Section 18 of 101st Amendment Act without going into Article 270 insofar
as the ‘law’ framed is for compensating the States.
It has been argued here that Article 270 does not grant any power to levy ‘cess’ and merely
provides a distribution mechanism for taxes levied and collected by the Union. Thus, the
reliance by the SC on Article 270 for validating CSA Act is erroneous. Furthermore, the
proposition whether a ‘law’ framed under Section 18 can contemplate levy of cess has also
been explored.
Article 271
At times the Parliament for the Union Government (only when such a requirement arises),
decides to increase any of the taxes /duties mentioned in article 269 and Article 270 by
levying an additional surcharge on them and the proceeds from them form a part of the
Consolidated Fund of India. Article 271 is an exception to Article 269 and Article 270. The
collection of the surcharge is also done by the Union and the State has no role to play in it.

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- Cess and surcharge
There seems to be a lot of confusion between cess and surcharge. Cess is described in Article
270 of the Constitution of India. Cess is like a fee imposed for a particular purpose that the
legislation charging it decides. Article 271 deals with a surcharge which is nothing but an
additional tax on the existing tax collected by the union for a particular purpose. Proceeds
from both the cess and surcharge form part of the Consolidated Fund of India In the case
of m/s SRD Nutrients Private Limited v. Commissioner of Central Excise, Guwahati, the
Supreme Court was presented with the question: If on excisable goods an education cess can
be levied before the imposition of cess on goods manufactured but cleared after imposition of
such cess. The judgement given in this case was in favour of the manufacturer but the judges,
Justice A K Sikri and Justice Ashok Bhushan observed that education and higher education
cess are surcharges.
GRANTS-IN-AID
The constitution has provisions for sanctioning grants to the states or other federating units. It
is Central Government financial assistance to the states to balance/correct/adjust the financial
requirements of the units when the revenue proceeds go to the centre but the welfare
measures and functions are entrusted to the states. These are charged to the Consolidated
Fund of India and the authority to grant is with the Parliament.
- Article 273
This grant is charged to the Consolidated Fund of India every year in place of any share of
the net proceeds, export duty on products of jute to the states of Assam, Bihar, Orissa, and
West Bengal. This grant will continue and will be charged to the Consolidated Fund of India
as long as the Union government continues to levy export duty on jute, or products of jute or
the time of expiration which is 10 years from its commencement.

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- Article 275
These grants are sanctioned as the parliament by law decides to give to those states which are
in dire need of funds and assistance in procuring these funds. These funds /grants are mainly
used for the development of the state and for the widening of the welfare measures/schemes
undertaken by the state government. It is also used for social welfare work for the Scheduled
tribes in their areas.
- Article 276
This article talks about the taxes that are levied by the state government, governed by the
state government and the taxes are collected also by the state government. But the taxes
levied are not uniform across the different states and may vary. These are sales tax and VAT,
professional tax and stamp duty to name a few.
- Article 277
Except for cesses, fees, duties or taxes which were levied immediately before the
commencement of the constitution by any municipality or other local body for the purposes
of the State, despite being mentioned in the Union List can continue to be levied and applied
for the same purposes until a new law contradicting it has been passed by the parliament.
In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra
Pradesh, the appellant was manufacturing medicines for making which they had to use
alcohol, the licenses for which were procured under the Hyderabad Abkari Act and had to pay
some fees to the State Government for the supervision. But the parliament passed the
Medicinal and Toilet Preparations Act, 1955 under which no fee had to be paid but the
petitioner challenged the levy of taxes by the state after the passing of the Medicinal and
Toilet Preparations Act, 1955 because according to Article 277, entry 84 of list 1 in the
7th schedule, the state could not levy any fee. The difference between tax and fee was
explained. Proceeds from tax collection are used for the benefit of all the taxpayers but a fee
collected is used only for a specific purpose.
- Article 279

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This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means the
proceeds which are left after deducting the cost of collection of the tax, ascertained and
certified by the Comptroller and Auditor-General of India.
- Article 282
It is normally meant for special, temporary or ad hoc schemes and the power to grant
sanctions under it is not restricted. In the case Bhim Singh v. Union of India & Ors the
Supreme Court said that from the time of the applicability of the Constitution of India,
welfare schemes have been there intending to advance public welfare and for public purposes
by grants which have been disbursed by the Union Government. In this case, the Scheme
was MPLAD (Member of Parliament Local Area Development Scheme) and it falls within
the meaning of ‘public purpose’ to fulfil the development and welfare projects undertaken by
the state as reflected in the Directive Principles of State Policy but subject to fulfilling the
constitutional requirements. Articles 275 and 282 are sources of granting funds under the
Constitution. Article 282 is normally meant for special, temporary or ad hoc schemes and the
power to grant sanctions under it is not restricted. In the case Cf. Narayanan Nambudripad,
Kidangazhi Manakkal v. State of Madras, the Supreme Court held that the practice of
religion is a private purpose. And donations and endowments made are therefore not a state
affair unless the state takes the responsibility of the management of such religious
endowment for a public purpose and uses the funds for public welfare measures. So it can be
seen that Article 282 can be used for a public purpose but at times in the name of public
purpose it can even be misused.
- Article 286
This article restricts the power of the State to tax
1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside the
territory of the state.
2) Only parliament can lay down principles to ascertain when a sale/purchase takes place
during export or import or outside the state. (Sections 3, 4, 5 of the Central Sales Tax Act,
1956 have been constituted with these powers)

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3) Taxes on sale/purchase of goods that are of special importance can be restricted by the
parliament and the State Government can levy taxes on these goods of special importance
subject to these restrictions (Section 14 and Section 15 of Central Sales Act, 1956 have been
constituted to impose restrictions on the state Government to levy taxes on these goods of
special importance). In the case of K. Gopinath v. the State of Kerala, Cashew nuts were
purchased and imported by the Cashew Corporation of India from African suppliers and sold
by it to local users after processing it. The apex court held that this sale was not in the course
of import and did not come under an exemption of the Central Sales Tax Act, 1956. The issue
before the court was to decide whether the purchases of raw cashew nuts from African
suppliers made by the appellants from the cashew corporation of India) fall under the nature
of import and, therefore protected from liability to tax under Kerala General Sales Tax Act,
1963. The judgement here went against the appellants.
- Article 289
State Governments are exempted from Union taxation as regards their property and income
but if there is any law made by the parliament in this regard then the Union can impose the
tax to such extent.
SOME OTHER TAX-RELATED PROVISIONS
1. Article 301 which states that trade, commerce and inter-course are exempted from
any taxation throughout India except for the provisions mentioned in Article 302,
303, and 304 of the Indian Constitution, 1949.
2. Article 302 empowers the parliament to impose restrictions on trade and
commerce in view of public interest.
3. Article 303– Whenever there is the scarcity of goods this article comes in play.
Discrimination against the different State Governments is not permitted under the
law except when there is a scarcity of goods in a particular state and this
preference to that state can be made only by the Parliament and in keeping with the
law.
4. Article 304– permits a State Government to impose taxes on goods imported from
other States and Union Territories but it cannot discriminate between goods from
within the State and goods from outside the State. The State can also exercise the

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power to impose some restrictions on freedom of trade and commerce within its
territory.
Article 366
Apart from all these provisions, there are other provisions also that require mention such
as Article 366 which gives the definition of:
 Goods;
 Services;
 Taxation;
 State;
 Taxes that are levied on the sale/purchase of goods;
 Goods and service tax etc.
CONCEPT OF DOCTRINE OF IMMUNITY OF INSTRUMENTALITIES
Intergovernmental tax immunity is a legal principle that ensures the sovereignty of the
federal and state governments. This principle represents a constitutional check on the
powers of both the federal and state governments to levy taxes on each other. For
example, state governments may not tax land that the federal government owns, such as
post offices and national parks. On the other hand, the federal government may not
enact a special tax on the incomes of state employees.
The concept of Doctrine of Immunity of Instrumentalities originated in the USA as a judicial

interpretation; however there exist no specific provision present in the United States
Constitution, prescribing immunity from mutual taxation.
The doctrine was propounded in the case of McCulloch v. Maryland, where State of
Maryland was not allowed to tax a federally chartered bank. In this case it was held that not
only the property but also the functions and instrumentalities of the Federal Government are
exempted from State taxation. The purpose behind the doctrine was to protect the centre
against the onslaught on it by the States, that the States might impose taxation to an extent
that might cripple the operation of national authorities within their proper sphere of action.

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In the beginning, the judicial tendency was to carry the doctrine of exemption to rather
extreme length so much so not only government instrumentalities as such, but even private
persons in their dealings with Government in various capacities as such, suppliers,
contractors or creditors were held immune from being taxed by the other government. For
instance, a manufacturer of motorcycle would not be subjected to Federal excise tax on sales
thereof with respect to sales to a municipality.
POSITION IN INDIA
The scope of the Inter-governmental tax immunities in India is very restricted. Such
immunities are dealt with mainly in Articles 285, 287, 288 and 289. The Indian Constitution
does not import the broad and general doctrine of immunity of instrumentalities as
understood in the United States beyond what can be derived from these constitutional
provisions.
- ARTICLE 285
EXEMPTION OF PROPERTY OF THE UNION FROM STATE TAXATION IN

INDIA
Article 285 of the Indian Constitution deals with the immunity granted to the Union
property from State taxation in India. Clause 1 of the Article says that the property of the
Union shall be exempted from all taxes imposed by a State or by any authority within a
State so long the Parliament does not make any law otherwise.
Related case-
Union of India v. City Municipal Council, AIR 2000 Kant 104.
In this case validity of Section 94 of the Karnataka Municipalities Act was questioned which
authorised municipal authorities to levy tax in respect of land and buildings situated within its
area. A circular was issued to levy tax on property belonging to Central Government if the
same was used for residential purposes. It was discussed in the case that Article 285 of the
Constitution of India provides the circumstances under which the tax could be levied and it is
the power which the Parliament may confer on the State Government to levy the tax then

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only the power of legislation for levy of tax could be exercised. Unless there is enactment by
the Parliament, conferring such a power on the State Government or the Municipal Authority,
the power to levy the tax cannot be exercised. Since no such enactment had been made here,
therefore the levy of tax was declared as ultra vires of the Article 285 of the Constitution.
Also, the concept of use is not provided under Article 285 and hence it was held that no
property belonging to the Union of India irrespective of its use could be subjected to tax.
Union of India v. State of U.P, (2007) 11 SCC 324.
In this case, U.P. Water Supply and Sewerage Act, 1975 was brought in question through
which a tax/ fee was levied on Union of India, i.e. Railways. Section 52 of the act said that
JalSansthan could levy tax, fee or charge for water supply and for sewerage services
rendered by it. Though charge was termed as “tax”, but nomenclature is not important and
what is actually been charged from Railway is the fee for supply of water and maintenance
of sewerage system. What is exempted by Article 285 is tax on property of Union of India
and not a charge for services rendered in nature of water supply and maintenance of
sewerage system.
It was held in this case that, where the local authority is not charging the tax on the property
of the Union, but seeking to recover a fee for services rendered to the Union through
Railways, the same is not violative of Article 285.
Hence, the immunity depends not on the nature or purpose of the use but upon the
ownership of the property. Following are the modes in which a property may become a
‘Union Property’-
a. Property acquired by succession from Dominion of India.
b. Property acquired by succession from Indian States, subject to the condition
mentioned in Article 295(1).
c. Property accruing to the Union by escheat, lapse or bona vacantia.
d. Things underlying the ocean within territorial waters of India.
e. Purchase or acquisition of property for any purpose.

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LIABILITY OF RAILWAY PROPERTY TO LOCAL TAXATION
In the Constituent Assembly, when this provision was under consideration, a strong opinion
was expressed that the Union property especially the Railway property should be subject to
taxation by the local government, for the local government renders such service to property
as sanitation, hygiene, conservancy, road, lighting, fire brigade etc. It was emphasised that
financial position of the local bodies was none too happy and their obligation would increase
with time.
Parliament has enacted the Railway (Local Authorities Taxation) Act, 1941, under which the
Central Government may by notification make railway property liable to pay tax in aid of the
funds of any local authority. This act has been enacted in pursuance of Article 285(1). Unless
a notification is issued in due compliance with this section, a Railway property cannot,
accordingly be held liable to pay a tax imposed by a local or municipal authority ( Kanpur
Municipality v. Dominion of India).
It should also be noted that when one tax is notified under the above section but thereafter the
local authority makes a change in the incidence or mode of assessment of the tax, the
Railway property cannot be made liable unless there is a fresh notification issued under
section 3 of the act. If, however, no change in the incidence or mode of assessment is made,
no fresh notification is necessary if the taxing law is repealed but replaced by another
enactment imposing the identical tax (G.G. in Council v. Murtizapur Municipality).
EXCEPTION TO THE DOCTRINE section 285(1),(2)
The words “Save in so far as Parliament may by law otherwise provide” suggest that
Parliament may by law permit a State or any authority within a State to impose a tax on
Union property. The object of Clause (1), thus is not to prevent State or Local taxation of
Union Property altogether, but to bring it under the control of Parliament.
Similarly under Clause 2 of the Article, local bodies are empowered to tax Union properties
which were liable or treated as liable to tax before the commencement of the Constitution,
until Parliament legislates to the contrary. In this way, these provisions create an exception
to the Doctrine of Immunities that under certain conditions so mentioned in Clause 1 (if
Parliament creates a law entitling State Government to collect tax, however, no such law has

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been enacted so far.) and Clause 2, where authority within the State, such as municipal body
is empowered to tax the properties of Union until Parliament by law provides otherwise.
The authority can reap benefit of Clause 2 in the presence of two conditions- 1) that it is
“that tax” which is being continued to be levied and no other. 2) that the local authority in
“that State” is claiming to continue the levy of tax.
The Clause 2 of the Article can be understood better by analysing a decided case law under
which the condition necessary for allowing State Government to continue taxing Union
Property has been laid down.
Governor-General of India in Council v. Corporation of Calcutta, 52CWN173
In this case the Calcutta Corporation under Section 141 of Calcutta Municipal Act valued
the premises including land and buildings for the purpose of assessment. The main question
in the case was whether the additional buildings raised on the premises after 1 st April
1937(when part III was brought into operation) were exempted from payment of taxation or
not.
It was held in the present case that for purposes of assessment, valuation could be made of
the said property in question only on the basis of what the premises consisted of, on 1st
March 1937, and all buildings erected since that date should be excluded altogether. The
proviso attached to Section 154 of GOI Act, 1935 makes it clear that properties which were
treated as so liable immediately before April 1937, would not enjoy the exemption given by
the main provision of the section. But the proviso to Section 154 cannot affect new
buildings that were not in existence on 31-3-1937 and consequently were not liable or
treated as liable to pay taxes on that date. Hence,any additional building is to be excluded in
the next valuation and is to be treated as non-existent, and the valuation be made on the
basis of the land and building as they existed prior to April 1937.

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- ARTICLE 287 AND 288
EXEMPTION FROM STATE TAXES ON WATER AND ELECTRICITY

CONSUMED BY GOVERNMENT OF INDIA
Articles 287 and 288 constitute a partial importation of the doctrine of immunity of
instrumentalities in relation to the Union. They ensure immunity of certain functions carried
on by the Union, as distinguished from property.
Article 287 lays down that except in so far as Parliament may by law otherwise provide, a
State cannot impose a tax on the consumption by or sale of electricity (whether produced by
government or any other person) to, the Government of India; or electricity consumed in the
construction, maintenance or operation of a railway by the government of India or a railway
company.
Entry 53 and 54 empowers the State government to impose “tax on consumption or sale of
electricity” and “tax on the sale and purchase of goods other than newspapers.” Entry 53 and
54 are to be read together to treat electricity as a good and for the sale of electricity for
consumption in outside State, for Entry 53 is limited to consumption of electricity within the
State and not beyond its territory. Railways and Inter-state River and river valleys are Union
subject under Entries 22 and 56 of List I respectively.
Article 287 further provides that even when Parliament authorises the imposition of such a
tax, the law imposing or authorising it should ensure that the price of electricity sold to the
Government of India for consumption by it or to Railway Company, is less by the “amount of
the tax” than the price charged by the other consumers of a substantial quantity of electricity.
This means that the incidence of tax is to be on the producer of electricity and not on the
Government of India or the Railway Company.
Article 288 provides that a State may by certain law impose a tax in respect of any water or
electricity stored, generated, consumed or distributed or sold by any authority established by
law of Parliament for regulating or developing any inter-state river or river valley. However,
to make such law be effective the law should receive Presidential assent and consideration.
The presidential assent ensures that the State legislation does not injure interstate interests by
imposing unduly high taxation on generation, storage etc. of electricity. Presidential assent is
a condition precedent for the validity of the State legislation imposing tax under Article 288
which serves a beneficial interest by way of protection of inter-governmental interests.

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This provision is in respect of water or electricity generated, consumed, distributed or sold by

any authority established for regulating or developing any inter-state river or river valley. The
purpose of these provisions is to protect the public utility services like railways and river
valley projects from indiscriminate State taxation as these services have a national
importance.
Damodar Valley Corpn.v. State of Bihar
It was in the case of Damodar Valley Corpn.v. State of Bihar in which the appellant was a
corporation established under the Damodar Valley Corporation Act, 1948 for the development
of the Damodar Valley in the States of Bihar and West Bengal. Under Section 3 of Bihar
Electricity Duty Act, 1948 and Section 3 of Bihar Electricity Duty (Amendment) Act, 1963 -
under Section 3 (1) (v) mines and industrial undertakings were exempt from levy of duty.
Then the principal Act was amended by Bihar Electricity Duty (Amendment) Act, 1963
(Bihar Act 20 of 1963) and it received the assent of the President on December 4, 1963. The
exemption which was granted to mines and industrial undertakings from payment of
electricity duty under the principal Act was withdrawn under the amending Act. It prescribed
the rates of duty for mines and industrial undertakings, and it was provided that the rate of
duty shall be such rate or rates not exceeding 2 nayepaise per unit of energy as may, from
time to time, be fixed by the State Government with the previous consent of the President. It
was held that the provision containing express reference to appellant, clearly warrants
inference that in respect of units of energy not covered by the Section, exemption cannot be
available to appellant and that the State Legislature can impose a levy on an undertaking by
amending the relevant law which previously granted exemption to such undertaking provided
the amendment has received the assent of the President, which in the present case was
received.
- ARTICLE 289
EXEMPTION OF PROPERTY AND INCOME OF A STATE FROM UNION

TAXATION
State property and income under Article 289(1) is exempted from Union taxation, whether the
income derived by a State is from governmental, non-governmental or commercial activities.
Then Article 289(2) creates an exception to 289(1), by providing that Centre is authorised to
impose a tax in respect of the income derived from trade or business carried on by it, or on its

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behalf which can be done by Parliament making a law. This is where Article 289 differs
mainly from Article 285, where in Art.285 there is no distinction made between properties
used for governmental or commercial functions, but in the present Article, property used for
commercial function and income derived out of it is not immune to Union taxation.
Parliament can specify the trading activities of the State Government making them liable to
Union taxation in order to avoid difficulty as to distinguish between governmental and
commercial functions of the State.
WHAT KIND OF PROPERTY AND INCOME FALLS OUTSIDE ARTICLE 289?
1. Property or income of the local authorities or statutory corporations, unless owned by

the State, shall have no immunity from the Union taxation whether they are used for
commercial or non-commercial purposes. This could be derived from the plain
reading of the text of the Article in which there is no specific mention of “authority
within State” unlike in Article 285(1).
2. It is to be noted that only where a trade or business is carried with a profit motive or
any property used or occupied for the purpose of carrying on such trade or business,
Clause 2 would be attracted. Hence where there is no profit motive involved in the
activity of the State Government, it cannot be said to be carrying on trade or business
within the meaning of Article 289(2) merely because some profit results from the
activity.
3. The income derived by the Corporation in which the State is a shareholder does not
mean that it is the income of the State under Article 289(1) because a corporation has
a distinct personality of its own.
4. There can be no exemption on levying of custom and excise dutiesby the Union on
goods imported or manufactured by a State. The reason behind this is that these are
taxes not on goods as such but on the happening of certain event in relation to the
goods, namely the import or export or production or manufacture of the goods. It was
reasoned that the exemption of export or imports of State form custom duty would
seriously impair the power of Parliament to regulate foreign trade by using its taxing
powers. Hence irrespective of whether or not they were used for the purposes of trade

lOMoARcPSD|19691536
or business, the Union is empowered to tax under the 1962 amendment of Custom and
Excise Acts.
In Re Customs Act, AIR 1963 SC 1760
In this case the scope of the exemption from the State property and income from the Union
taxation was considered by the Supreme Court in its advisory opinion. Here a bill was
proposed according to which the existing immunity from Union import and Excise duties
enjoyed by the states in respect of goods not used for purposes for trade and business was to
be withdrawn by suitable amendments in the Sea Customs Act, 1878. States contended that it
would be against the provisions of the Article 289. The majority opinion delivered by Sinha
C.J. held that the words “property and income” exempt from Union taxation in Clause 1 of
Article 289 referred only to direct taxes as on property or on income, and not to indirect taxes
such as import or excise duty. This is because the import and excise duty is used by the
government for the purpose of regulating foreign commerce and interstate trade and
commerce. If these powers be denied to the government in the name of State immunity, it
might seriously interfere with the regulatory power of the Union Government.
GOVERNMENTAL FUNCTIONS V. TRADE OR BUSINESS CARRIED OR BY THE

GOVERNMENT
Article 289(2) warrants a distinction to be made between governmental activity and trade or
business carried on by the Government. Every activity carried on by the Government are not
governmental activity, some instances of which are,- administration of justice, maintenance
of order, repression of crime, health, education, development of natural resources.
It says that the ban imposed by Clause (1) shall not prevent the Union from imposing or
authorising the imposition of any tax to such extent, if any, as the Parliament may by law
provide, in respect of-
(a) Trade or business of any kind carried on by or on behalf of the Government of the State or
(b) Any operations connected with such trade or business or
(c) Any property used or occupied for the purposes of such trade or business or

lOMoARcPSD|19691536
(d) Any income accruing or arising in connection with such trade or business.
New Delhi Municipal Corporation v. State of Punjab, AIR 1997 SC 2847
The question in the case was whether the properties of the States situated in the Union
Territory of Delhi are exempt from property taxes levied under the municipal enactments in
force in the Union Territory of Delhi. The Delhi High Court had taken the view that they are.
That view was challenged in these appeals preferred by the New Delhi Municipal
Corporation and the Delhi Municipal Corporation.
It was held that the term “Union taxation” in Art.289(1) include taxation by New Delhi
Municipality. It was observed that so far as Union Territory is concerned, Parliament is the
only law making body or a Legislature created by it. There is distribution of legislative
powers between Parliament and State Legislature, but there is no such distribution with
respect to Union Territories. Therefore, it was held that, the phrase “Union Taxation” in Art.
289(1) encompasses municipal taxes levied by municipalities in the Union Territories.
It was further held in this case that the decision whether the properties of State governments
occupied for the commercial purposes should be subject to levy of Union taxes, is to be made
by a legislation which specifies the activities that are liable to tax in view of Article 289(2)
and this decision could not be entrusted to Municipal Corporation.
F U N D A M E N TA L R I G H T S A N D P O W E R O F
TA X AT I O N
TA X AT I O N A N D F U N D A M E N TA L R I G H T S
(CONSTITUTIONAL REMEDIES AGAINST ILLEGAL
TA X AT I O N ) , - [ A R T I C L E S 1 3 , 1 4 , 1 9 ( 1 ) ( G ) A N D 2 7 ] .
A RT I C L E S 1 3 A N D 1 4 O F T H E C O N S T I T U T I O N O F I N D I A .

lOMoARcPSD|19691536
A tax ing s tatu te mus t pass the tes t of fundamenta l rights and the charge
of discrimination. In order that the law (imposing tax) to be valid, the
tax must be within the legislature competence (Art. 265) and secondly,
the tax must be subject to the conditions laid down in Art. 13 of the
Constitution of India. One such condition envisaged by Art. 13(2) of the
Constitution of India is that "The State shall not make any law which
takes away or abridges the rights conferred by this Part and any law
made in contravention of this clause shall, to the extent of the
c o n t r a v e n t i o n , b e v o i d . " T h us , t h e l e g i s l a t u r e s h a l l n o t m a k e a n y l a w
which takes away or abridge the equality clause of Art. 14, i.e., "The
S tate shall not deny to any pers on equality before the law or the equal
p ro te c t io n o f th e l aw s w i th in th e te rr i to ry of I nd ia ." Th e g ua ra n te e of
e qu a l p ro te c t io n o f th e l aw s mu s t b e e xt e nd ed to ta x in g s ta tu t es .
Article 14 of the Constitution of India, does not mean that every

p e r s o n s h o u l d b e t a x e d e q u a l l y. B u t i t d o e s n o t m e a n t h a t i f p r o p e r t y
of the same character has to be taxed, the taxation must be of the
s a m e standard, so that the burden of taxation may fall equally on all
persons holding that kind and extent of property. It is common ground
that the t ax ha s no r ef er e nc e to i nc o m e, ei th e r a c tu a l o r po te n ti a l, fr om
t he property sought to be taxed. Hence, it may be rightly remarked that the
Act obliges every person who holds land to pay the tax at the flat rate
prescribed whether or not he makes any income out of the property or
whether or not the property is capable of yielding any income. It is clear,
therefore, that inequity is inherent in the very provision of the taxation. It
is one of those cases where lack of classification creates inequality.
What the court has to see is the time and actual effect of the law, as a law
appearing to be discriminatory may not be so in operation. In the case of
State of Andhra Pradesh v. Raja Reddi , land revenue was imposed at a
flat rate on land without taking into account the productivity o f t h e s o i l .
I n t h e c a s e o f M o o p i l N a i r , t h e r e w a s n o p r o p e r p r o c e d u r e laid dow n
for as s ess m ent and colle ction. The S upreme Court held that Art icl e 14
of the Cons titut ion of India is viola ted in both the cas es when a
statutory provision finds differences where there are none or makes no
differen ce w here there is one.
T he S ta t e ha s w id e p ow er in s el ec t i ng p er s o ns o r o bj e ct s it w il l ta x a n d a
s t a t u t e i s n o t o p e n t o a t t a c k o n t h e g r o u n d t h a t i t t a x e s s o m e p er s o ns
a nd s ub je c ts an d no t o th er s . B ut it do es n ot me an th a t a ta xa t i on l a w c a n
claim immunity from the equality clause in Art. 14 of the
Constitution of India. It has to pass like any other law the equality test
laid down in Art. 14 of the Constitution of India. But it must be
remembered that the State, has in view of the intrinsic complexity of
fiscal adjustment of diverse elements, a considerable wide discretion in
the matter of clas sification for taxing purpos es . The legislature has ample
freedo m to s ele ct and clas s ify pers ons , dis tric ts , goods , proper ties , income
and objects which it would tax, and which it would not tax. So long as

lOMoARcPSD|19691536
the class ification, made w ithin the wide and flexible range by a taxing
s tatute does not transgress the fundamental principles underlying the
doctrine of equality, it is not objectionable on the ground of discrimination m er e ly
b ec a us e i t t ax es o r e xe mp t s f ro m ta x s o me i nc o me o r o bj e ct s an d n ot
o th er s . N o r t he m er e f ac t th a t a ta x fa l ls mo re h ea v i ly o n s o me i n the same
category, is by itself a ground to render the law invalid. It is only when
within the range of its selection, the law operates unequally and cannot be
justified on the basis of a valid classification that there would be violation
of Art. 14 of the Constitution of India.
A taxation will be struck down as violation of Art. 14 of the

Constitution of India if there is no reasonable basis behind the
c l a s s i f i c a t i o n m a d e b y i t o r i f t h e s a m e c l a s s o f p r o p e r t y, s i m i l a r l y
situated, is subject to unequal taxation. This requirement does not
preclude the classification of property, trades, profession, and events for
taxation subjecting one kind to one rate of taxation, and another to
a different rate. P erfect equality in taxation is imposs ible and
unattainable.
In E.I. Tobacco Co. v. State of A.P ., sales tax on Virginia tobacco but n o t
o n c o u n t r y t o b a c c o h a s b e e n h e l d t o b e v a l i d . I n We s t e r n I n d i a n
Th eatr e v. Can ton m en t Boar d, a higher tax on cin ema- hous e conta ining
large— seating accommodation and situated in fashionable and busy
localities where the number of visitors are more numerous, than the tax
i mp os ed o n s ma l l er c in e ma - ho us e c on t a in in g le s s ac c om m od a t io n an d
situated in a locality where visitors are poor and less numerous was held
not to be violative of the equal protection clause of Art. 14 of the
Constitution of India. The classification was based on income of
cinema-houses.
In. Indian Express Newspaper v. Union of India , it has been held t h a t t h e

c l a s s i f i c a t i o n o f n e w s p a p e r s i n t o s m a l l , m e d i u m a n d b i g newspapers on
the basis of their circulation for the purpose of levying customs duty on
newsprint is not violative of Art. 14 of the Constitution of India. The object of
exempting all small newspapers from payment of customs duty while levying
full customs duty on big newspapers is to Assist the small and medium
newspaper in bringing down their cost of production. Such papers do not
command large advertisement revenue.

lOMoARcPSD|19691536
In Kerala Hotel.Res taur an t Ass oc iation . V. S tate of Ker ala , Court decided
the constitutional validity of provisions of States of Kerala. a n d Ta m i l
Nadu which imposed sale s. tax in two States on cooked food sold to the
a ff l u e n t i n t h e l u x u r y h o t e l s w h i l e e x e m p t e d f r o m s a l e s t a x t h e m o d e s t
eating houses. It was held that classification made between the two
types of hotels for the purpose of imposing tax was neither
dis criminatory nor arbitrary and was bas ed on intelligible differential and
had a rational nexus with the object sought to be achieved by the Acts. The
tax was imposed on the basis of their annual income. The object was to raise
revenue by taking sale of costlier food in luxury hotel to affluents who could
afford costly food.
ARTICLE 19(1)(G) OF THE CONS TI TUTI ON OF INDIA . A tax, if not

levied through a valid law, would be an illegal impost and would constitute
an unreasonable restriction on a citizen's right. Sales imposed mposed under an
unconstitutional law is without the authority of law a nd a th re a t to t ra d e th us
i nf ri ng i ng Ar t i c le 1 9( 1) (g ) o f t he C on s t i tu t io n of India (i.e., "All citizens
shall have the right to practice any profession, or to c ar ry o n a ny
o cc up a t io n, t ra d e or bus in es s ) . T he c ou rt , how ev er, w o u l d n o t i n t e r v e n e
and strike down a taxing statute merely on the ground that the taxes
w o u l d c o m e l a rg e s c a l e e r o s i n g o f t h e p r o f i t s . P a r t i c u l a r l y w h e r e a t a x
i s c o m p e n s a t o r y, i t c a n n o t o p e r a t e a s a n u n r e a s o n a b l e r e s t r i c t i o n o n
t h e r i g h t t o c a r r y o n b u s i n e s s . E v e n w h e r e t he ta x i s no t c om p en s a to ry, a
t ax i ng s ta tu t e ca nn o t be s t ru ck d ow n as offending Article 19(1)(g) of the
Constitution of India unless there is an i m m i n e n t t h r e a t t o o r i m m e d i a t e
b u r d e n o n t h e t a r r y i n g o n o f t h e business or a trade which becomes
unreasonable in the circumstances.
A RT I C L E 2 7 O F T H E C O N S T I T U T I O N O F I N D I A . T o m a i n t a i n
t h e s e c u l a r c h a r a c t e r o f t h e I n d i a n n a t i o n , t h e Constitution, no
d o u b t , g u a r a n t e e s f r e e d o m o f r e l i g i o n , t o g r o u p s o f i nd iv i du a ls .
H o w e ve r, an y t ax w hi ch ha s go ne in to th e p ub li c fu nd c an no t be ut i li s e d
f or p ro mo t in g o r ma i n ta i ni ng an y p ar t ic u la r r e li g io n. A r ti c l e 2 7 o f t h e
Constitution of India lays down that "No person shall be compelled
t o p a y a n y t a x e s , t h e p r o c e e d s o f w h i c h a r e s p e c i f i c a l l y appropriated
in payment of expenses for the promotion or maintenance of any particular

lOMoARcPSD|19691536
religion or religious denomination." A fee can be levied to m e et t h e

e xp en s e s o f G ov er nm en t a l s up er v is io n ov er th e ad m in i s t ra t i on o f
religious endowments but the State cannot levy a tax as there is no such
entry in List II and List III. Only Parliament can levy such a tax and
t h e S t a t e s c a n l e v y o n l y a f e e . A r t . 2 7 o f t h e C o ns t i t u t i o n o f I n d i a will
not invalidate the levy of a fee by a State because the object of such a levy is
not to support or preserve any particular religion but to provide a secular
administration to religious institutions.
DELEGATION OF TAXING POWER
The power to levy tax is and essential legislative function The constitution u/A 265 says
"No tax shall be livied or collected except by authority of law"
The legislature has to decide that How much to tax and whom to tax .
The legislature cannot legislate on all aspect of taxation, some delegation in unavoidable
Object for Taxing
Not only to raise revenues for the state but also for regulating the socio, economic or
political structure of the country.
In the case of Avinder Singh v. Stare of Punjab (AIR 1979 SC 321)
Krishna Iyear – J laid down the test for valid delegation. The test goes as:
1- The legislature cannot efface itself.
2- It cannot delegable the plenary or the essential legislative functions.
3- Even if there be delegation, Parliamentary control over delegations should be a living

activity as a constitutional necessity.
He also stated that "While what constitute and essential legislative feature cannot be
delineated in detail, it certainly cannot include a change of policy. The legislature is the
master of legislative policy and if delegation is free to switch policy it may be usurpation of
legislative power itself"
In this case Sec 90 (4) of the Punjab Municipal Corporation Act 1976 was under question as
it required various municipalities to impose a tax of Re 1 per bottle of foreign liquor.

lOMoARcPSD|19691536
On the failure of the municipality to take action the govt. of Punjab imposed the same tax, the
power to impose tax was challenged on the ground of excessive delegation.
"For the purpose of the Act" :- lay down sufficient guideline for the imposition of tax.
Sub - sec (3) of S .90 :- rate of levy to be determined by the state Govt.
- S. Sec (5) :- State Govt. to notify the tax which the corporation shall levy.
These provisions show that the levy of tax shall be only for the purpose of the
Act"
- An expression which sets a ceiling on the total guideline that may be collected
- And also comanlser the objects for which levies can be spent & :- It provides a
sufficient guidelines.
In Darshan Lal Mehra v. UOI AIR 1992 SC 714 I the U.P. Nagar Mahapalika Adhniyam,
1959, S.2 was in question under taxing power was delegated to the Majapalika and it was
contended that it is abdication of legislative function.
The court rejected this contention that since the act under which this power is given is having
a statutory force as the state government has framed rules and the said rules are paid before
the house and the legislature has the power to modify the rules and therefore it is not an
abdication of legislative power.
In the case of Western Indian theatre, Ltd. v. Cantonment Board PoonaCantonment AIR
1959 SC 582 the different rates of entertainment tax imposed on two different Cinemas was
challenged. The court rejected it saying that keeping in mind the Large accommodation, the
locality, the no of visitors and overall circumstances the imposition of different rate of tax is
justified and is not discriminatory.
In the case of Delhi Municipal Corporation v. Birla Cotton Spinning Weaving. Mills AIR
1968 SC 1232 the power delegated to the corporation to impose electricity tax without
prescribing any maximum limit was upheld on the ground that the corporation is also s
representative and responsive body which stands a guarantee against the misuse of the
power. It also held that "The court is generally willing to upheld delegation of fiscal power in
favour of elected bodies such as panchayats or municipalities"
The underlying factors were:
i) Delegation was to a local body which was popularly elected.
ii) The upper limit of the tax was deducible from the nature of its functions

lOMoARcPSD|19691536
iii) The body was subject to Govt. control
In J.R.G. Manufactory Association v. UOI AIR 1970 SC 1589 S.12 (2) of the Rubber Act
empowered the Rubber Board to levy an excise duty either on the producers of rubber or the
infectors of rubber goods. Which was challenged as excessive delegation of power. It was
held that there is no excessive delegation. There are inherent checks on the exercise of such
power, namely, the representative character of the Board and the control of the control Govt.
The Act Provided that tax can be levied only according to the rules made by the Govt. subject
to the laying procedure executive may be empowered to fix the rates of fixation :-
Devi Das v. State of Punjab (Air 1967 SC 1895) wher the court held it valid that the
Executive can levy tax at a rate between 1% and 2% but if the Govt. levys sales tax at such
rates an it “deem fit' it is invalid.
In S.B. Dayal V/s State of up (Air 1972 SC 1168) the apex court meted out the philosophy as
“In a modern society taxation is an instrument of planning. It can be used to achieve the
economic and social goals of the state for that reason the power to tax must be a flexible
power”
Therefore we can conclude that
- Taxing power is an essential legislative power.
- It can be delegated once the legislature lags down the policy- sufficient guideline for
the imposition of tax.
- it is sufficient guideline if the power is "for the purpose of the Act"
- Wide expression like above are sufficient policy when power is delegation to a
representative authority.
Legislative power can be validity delegated to exempt any item, bring certain item in the
ambit of tax, determine the rate within the minimum & the maximum limit, even when limits
are not prescribed it should be delegated to a representative body & should be subject to any
control and if different rate of tax is imposed for different commodities then it must satisfy
the test of reasonable classify.

lOMoARcPSD|19691536
Therefore we can see the phrase "No taxation without representation" being obliterated as
now vide taxing powers are given to the administrative. authorities.
INTER STATE COMMERCE AND TAXATION
INTRODUCTION
In the Indian Constitution, the provisions regarding the freedom of trade, commerce and
intercourse were adopted from the Constitution of Australia. According to Section 92 of the
Australian Constitution, there should be freedom of trade, commerce and intercourse which
may be carried out by ocean navigation or internal carriage.
While India had borrowed this provision, it also made sure to include the provision that the
free flow of goods is allowed not only between different States but also within a State as well.
Thus, in the Indian Constitution Inter-State trade as well as Intra-State trade is allowed in the
country.
The freedom of trade, commerce, and intercourse is provided under Part XIII of the Indian
Constitution in Articles 301 to 307. Article 301 lays down the general principles of trade and
commerce whereas Article 302 to 305 enunciates the restrictions which trade is subjected to.
The source for adopting these provisions was the Australian Constitution.
FREEDOM OF TRADE, COMMERCE, AND INTERCOURSE
Article 301 talks about the freedom of trade, commerce, and intercourse throughout the
country. It states that subject to other provisions under Part XIII, the freedom to carry on
these activities shall be free. Freedom here means the right to freedom of movement of
persons, property, things that may be tangible or intangible, unobstructed by barriers within
the state (intra-scale) or across the states (inter-scale).
The three main words used in this article are:
Trade

lOMoARcPSD|19691536
Trade means buying and selling of goods for profit-making purposes. Under Article 301, the
word trade means an actual, organized & structured activity with a definite motive or
purpose. For the motive of Article 301, the word trade is interchangeably used with business.
Commerce
Commerce means transmission or movement by air, water, telephone, telegraph or any other
medium; what is essential for commerce under Article 301 is transportation or transmission
and not gain or profit.
Intercourse
It means the movement of goods from one place to another. It includes both commercial and
non-commercial movements and dealings. It would include travel and all forms of dealing
with others.
The use of the word ‘free’ in Article 301 does not mean freedom from laws and rules
governing the country. There is a clear distinction between the laws obstructing freedom and
laws containing rules and regulations for the proper conduction of trade activities in a smooth
and easy manner.
RESTRICTIONS TO TRADE AND COMMERCE
Parliament’s power to regulate trade and commerce in the public interest
Article 302 gives power to the Parliament to impose restrictions on the freedom of trade,
commerce or intercourse carried on within a state or across states anywhere in the territory of
India. These restrictions can solely be imposed taking into due consideration the interests of
the public. The power to decide whether something is in the interest of the public or not is
solely given to the Parliament. It can be seen as in the case of Surajmal Roopchand and Co
v/s the State of Rajasthan (1967) were under the Defence of India Rules, in the interest of the
general public, restrictions were imposed on the movement of grain.

lOMoARcPSD|19691536
States power to regulate trade and commerce
The power of the Parliament in Article 302 is kept in check by Article 303. Article 303(1)
states that the Parliament does not have the power to make any law which will keep one State
at a more preferable position than the other State, by virtue of any entry in trade and
commerce in any one of the lists in 7th Schedule. However, Clause (2) states that the
Parliament can do so if it is proclaimed by law that it is essential to make such provisions or
regulations, as there is indeed a scarcity of goods in some parts of the country. The power to
decide whether there is a scarcity of goods in some parts of the territory or not is vested in the
hands of the Parliament.
Article 304(a) further says that the State should impose taxes on any goods
transported/imported from other States if alike goods are taxed in the State too. It is done so
that there is no discrimination between goods produced within the State and goods imported
from some other states. In the case of State of Madhya Pradesh v/s Bhailal Bhai,(1964) the
State of Madhya Pradesh imposed taxes on imported tobacco which was not even subject to
tax in the very own State i.e State of Madhya Pradesh. The Court disapproved of the tax
statement that it was discriminatory in nature.
Restrictions on trade, commerce, and intercourse among States
Clause (2) of Article 304 guides the States to impose certain reasonable restrictions on the
freedom of trade, commerce, and intercourse as may suit the public interest. But no Bill or
Amendment for such shall be put forward in the State Legislature without the prior approval
of the President. A law passed by the State to regulate interstate trade must thus fulfill the
following conditions-
 An approval from the President must be taken beforehand,

 The restriction must be sensible and rational,
 It must be in the interests of the public.

lOMoARcPSD|19691536
These conditions make it clear that the Parliament’s power to regulate trade and commerce is
superior to the State’s power.
Saving of Existing Laws
Article 305 of the Indian constitution saves already formed laws and laws providing for State
monopolies. Article 305 can only do so until the President is not ordering something opposite
to it or otherwise to the law already formed. In Saghir Ahmad v/s The State of UP,(1954), the
Supreme Court raised the query that whether an Act that provides for State monopoly in a
specific trade or commerce would be held violative of the Constitution of India under Article
301.
Article 19(1)(g) was amended by the First Constitutional Amendment taking out such
activities from the purview of Article 19(1)(g). And now after the Constitution’s 4th
Amendment, already formed laws and laws made hereafter for State monopoly in trade, are
immune from attack on the ground of violation of Articles 301 & 304.
Appointment of authority for carrying out the purposes of Articles 301 to 304
Article 307 under Part XIII permits the Parliament to designate such authority as it deems fit
for carrying out the provisions laid down in Articles 301, 302, 303 and 304. The Parliament
can also bestow such authorities with functions and powers as it feels are required.
LANDMARK JUDGMENTS
Atiabari Tea Co. vs the State of Assam (1961)
Facts
In this case of Atiabari Tea Co.Ltd. v/s the State of Assam, Assam Taxation Act levies a tax
on goods transmitted through Inland Waterways and road. The petitioner in the present case
carried on the business of transporting tea to Calcutta (now Kolkata) via Assam. Now while

lOMoARcPSD|19691536
passing through Assam for the purpose of transportation to Calcutta, the tea was liable to tax
under the said Act.
Judgment
The Supreme Court said that the disputed law undeniably levied a tax that directly and
immediately infringed the movement of goods and therefore it comes under the purview of
Article 301.
Automobile Transport Ltd. vs State of Rajasthan (1963)
Facts
In The Automobile Transport Ltd. v/s State of Rajasthan, case, State of Rajasthan imposed an
annual tax on motor vehicles (Rs 60 on a motor vehicle and Rs 2000 on a goods vehicle).
Judgment
It was held by the court that in the present case the tax imposed is valid as it is only a
regulatory measure or a compensatory tax for the facilitation of the smooth running of trade,
commerce, and intercourse.
The state of Mysore vs Sanjeeviah (1967)
Facts
In the case of the State of Mysore v/s Sanjeeviah, the government under the Mysore Forest
Act, 1900, made a law banning the movement of forest produce between sunrise and sunset.
Judgment

lOMoARcPSD|19691536
The Supreme Court held the law void. It remarked that such a law was restrictive and not
regulatory thus violative of the freedom provided under Article 301.
G.K.Krishna vs State of Tamil Nadu (1975)
Facts
In the case of G.K Krishna v/s State of Tamil Nadu , a govt notification under Madras Motor
Vehicles Act was issued, increasing the motor vehicle tax on omnibuses from Rs 30 to Rs
100. The government’s argument while imposing this tax was that this was done to stop the
unhealthy competition between omnibuses and regular stage carriage buses and to reduce the
misuse of omnibuses.
Judgment
The Supreme Court held that the tax on carriage charges was of compensatory or regulatory
nature and was not therefore violative of the freedom guaranteed under Article 301.

lOMoARcPSD|19691536
INCOME TAX SLABS & RATES FOR DIFFERENT FINANCIAL YEARS
On Saturday, 1st February 2020, India’s Finance Minister, Ms Nirmala Sitharaman, presented
India’s Union Budget in the parliament. Among other things, the Finance Minister made a
few changes to the income tax slabs for the upcoming financial year, 2020-2021. The Budget
proposals will be effective once it receives the assent of the President of India. If you’re
wondering how proposed change in the income tax slabs impacts you and how much tax you
will have to pay under the new regime, here’s everything you need to know.
What Is an Income Tax Slab?

The amount of income tax an individual is required to pay will depend on how much they
earn. Essentially, taxpayers are broken down into groups based on how much annual income
they earn. Based on this, the different income groups are taxed at different rates. This is done
keeping in mind the fact that those who earn a lower income will find it more difficult to pay
their taxes.
Up until the financial year 2019-2020, there were 4 basic tax groups or slabs:
1. Individuals earning up to Rs. 2,50,000
2. Individuals earning between Rs. 2,50,001 and Rs. 5,00,000
3. Individuals earning between Rs. 5,00,001 and Rs. 10,00,000
4. Individuals earning over Rs. 10,00,0001
The four income tax slabs were then applied to 3 different age groups – individuals below the
age of 60, senior citizens between the ages of 60 and 79, and super senior citizens above of
the age 80 or more.
Income Tax Slab Rates for Individuals as per Budget 2020-21

In the new budget, the Finance Minister outlined the fact that income tax rates would be
lowered and the tax slabs broken down further. The new income tax rates are as follows:
Income Tax Slab Tax Rate for Individuals and HUF’s
Up to Rs. 2,50,000 Nil

From Rs. 2,50,001 to Rs. 5,00,000 5%
From Rs. 5,00,001 to Rs. 7,50,000 10%
From Rs. 7,50,001 to Rs. 10,00,000 15%
From Rs. 10,00,001 to Rs. 12,50,000 20%
From Rs. 12,50,001 to Rs. 15,00,000 25%
Above Rs. 15,00,000 30%
It’s important to note that these new tax rates are only applicable to those individuals who do
not wish to avail specified exemptions or deductions. It means that these lower tax rates will

lOMoARcPSD|19691536
be applied to their total income directly without allowing any benefit of deductions and
exemptions. The deductions and exemptions that will not be allowed under this regime
include:
1.) Standard deduction from salary and profession tax
2.) House Rent Allowance
3.) Housing Loan Interest
4.) Leave Travel Allowance
5.) Deductions under Chapter VIA of the Income tax Act, 1961 such section 80C (life
insurance premium), section 80CCC (pension premium), 80D (health insurance premium),
80TTA (bank interest), etc.
However, individuals who would like to continue to claim applicable exclusions and
deductions may do so, but they will have to follow the existing tax rates, which are as
follows:
Income Tax Slab Tax Rate for Individuals Below the Age of 60
Up to Rs. 2,50,000 No tax

From Rs. 2,50,001 to Rs. 5,00,000 5%
From Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
As per the current income tax slabs, taxation of income of resident individuals below 60
years is as follows:
Income up to Rs 2.5 lakh is exempt from tax
5 per cent tax on income between Rs 250,001 to Rs 5 lakh
20 per cent tax on income between Rs 500,001 and Rs 10 lakh
30 per cent tax on income above Rs 10 lakh.
As per the Budget proposals, under the existing regime, tax rates for senior citizens and super
senior citizens remain unchanged. Here’s a look at what the current tax rates are for these two
age groups:
Income Tax Slab Tax Rate for Individuals Above the Age of 60

Rs. 3,00,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
As per the current income tax slabs, taxation of income of resident individuals above 60
years is as follows:
Income up to Rs 3 lakh is exempt from tax
5 per cent tax on income between Rs 300,001 to Rs 5 lakh

lOMoARcPSD|19691536
20 per cent tax on income between Rs 500,001 and Rs 10 lakh

30 per cent tax on income above Rs 10 lakh.
Income Tax Slab Tax Rate for Individuals Above the Age of 80

Rs. 5,00,001 to Rs.
20%
10,00,000
Above Rs. 10,00,000 30%
Tax Rates for Senior Tax Payers between the age of 60 years to 80 years old
Income Tax Slab Senior Citizens (between 60 years – 80 years)
Up to 3,00,000 Nil
3,00,001 to 5,00,000 5% of income exceeding 3,00,000
5,00,001 to Tax Amount of 10,000 for the income up to 5,00,000
10,00,000 + 20% of total income exceeding 5,00,000
Tax Amount of 1,10,000for the income up to 10,00,000
Above 10,00,000
+ 30% of total income exceeding 10,00,000
Surcharges to be levied for FY 2020-21

While calculating the tax payable, it’s important to remember the following points:
Surcharge and Cess
The income tax rates mentioned above are for the total income earned in a year. Following
this, surcharge and cess are added to the total tax payable. The surcharge is applicable on the
basis of income thresholds as follows:
For income above Rs. 50 lakh and up to Rs. 1 crore 10% surcharge
For income above Rs. 1 crore and up to Rs. 2 crore 15% surcharge
For income above Rs. 2 crore and up to Rs. 5 crore 25% surcharge
For income above Rs. 5 crore 37% surcharge
Additionally, a health and education cess of 4% is applicable on the income tax payable,
including surcharge.
In light of the new tax regime being introduced, it’s important for individuals to calculate
their income, their deductions and the amount of tax they’re currently paying. Then, they
should calculate their tax payable under the new regime, which excludes deductions and

lOMoARcPSD|19691536
exclusions, in order to better understand which regime suits them and their personal finances
better.
While the budget proposals provide for a new regime of taxation for Individuals and HUFs to
opt for lower tax brackets without claiming any exemptions/deductions, it would certainly be
imperative for the working age group to continue to focus on savings for their future needs,
namely children’s future and maintaining standards of living post retirement, among others.
Also, they will need to ensure they protect their families against any health or life
eventualities, especially as our household borrowings increase and the shield of joint family
system is no longer available. Such savings can be achieved along with tax benefits which are
available under various sections of the Income-tax law under the existing tax regime.
Frequently Asked Questions (FAQ)
✅ What is the meaning of Income Tax Slab?

Governments need money to fund education, welfare systems, and keep infrastructure
projects like airports, railways, etc running. Governments do this by earning revenue from tax
imposed on the income of its citizens.
Not everyone pays the same rate of tax on the income they earn, which is why there are
different IT slabs. An income tax slab is simply a rate of tax individuals pay depending on the
amount of income they earn. These tax slabs can change according to government budgets.
According India’s Budget for FY 2020-21, the new tax regime has the following slabs
irrespective of age-
Upto Rs 2.5 lakh income You pay no tax
Rs 2.5 lakh to 5 lakh income You pay 5% tax ( Less Rs 12,500 under Section 87 A)
Rs 5 lakh to 7 .5 lakh income You pay 10% tax
Rs 7.5 lakh to 10 lakh income You pay 15% tax
Rs 10 lakh to 12.5 lakh income You pay 20% tax
Rs 12.5 lakh to 15 lakh income You pay 25% tax
Rs 15 lakh and above You pay 30% tax
There may be additional surcharges you need to pay, depending on the central government
budget provisions. These new income tax slabs which forego the taxpayers’ right to any
deductions coexist with the old income tax rates with deductions and the individual has the
right to choose between the two.
✅ How much income tax do I need to pay on Rs 10 lakh income as per the tax slab 2020-
21?

lOMoARcPSD|19691536
Income tax is imposed not only on income from salary but also from other sources like
business profits, capital gains, house rents etc. Tax slabs vary according to the income and
age of the taxpayer.
From this year, taxpayers have the option to pay income tax under the old regime by availing
the requisite deductions or going for the new tax regime by waiving any applicable
deductions. Accordingly, the new tax slabs (FY 2020-21) for those aged below 60 are-
Income Earned Tax Rate You Pay
Upto Rs 2, 50,000 NIL
Above Rs 2,50,000 to 500,000 5% (Less Rs 12,500 u/s 87A)
Above Rs 500,000 to 750,000 10%
Above Rs 750,000 to 10,00,000 15%
Above Rs 10,00,000 to 12,50,000 20%
Above Rs 12,50,000 to 15,00,000 25%
More than Rs 15,00,000 30%
The old tax regime had the following slabs for those aged below 60:
Above Rs 2,50,000 to 500,000 5% (Less Rs 12,500 u/s 87A)
Above Rs 500,000 to 750,000 20%
Above Rs 750,000 to 10,00,000 20%
Above Rs 10,00,000 to 12,50,000 30%
Above Rs 12,50,000 to 15,00,000 30%
More than Rs 15,00,000 30%
The new tax regime is more simplified. However, you have to give up exemptions such as
80C, leave, conveyance and travel allowances, standard deduction, etc. The total tax payable
on taxable income of Rs 10 lakh, not factoring deductions in both cases, is Rs 78,000 in the
new regime and about Rs 1,06,000 under the old slab rates. Rebate u/s 87 is available only if
your net taxable income is less than 5 lakhs.
✅ What are the different slab rates 2020-21 for different age group?
The government of India imposes tax on essentially three broad categories of individuals. The
first being those aged below 60 years of age, the second group including those aged above 60
but below 80 years known as senior citizens and the third category comprising those above
80 years of age, known as super senior citizens. Tax slab rates for the three categories of
individuals as per Financial Year 2019-20 are tabulated below.
For those aged below 60:

lOMoARcPSD|19691536

Above Rs 2,50,000 to 500,000 5% of total income more than Rs 2,50,000
Above Rs 500,000 to
Rs 12,500 + 20% of total income more than Rs 500,000
10,00,000
More than Rs 10,00,000 1,12,500 + 30% of total income more than 10,00,000
For those aged between 60 to 80:

Upto Rs 300,000 NIL
Above Rs 300,000 to 500,000 5%
Above Rs 500,000 to
20%
10,00,000
More than Rs 10,00,000 30%
For those aged above 80

Upto Rs 500,000 NIL
Above Rs 500,000 to
20%
10,00,000
More than Rs 10,00,000 30%
To all taxable incomes calculated in any of the categories mentioned above, a 4 per cent
health and education cess has to be added. Further, if the taxable income crosses Rs 50 lakh
but is within Rs 1 crore, there is a surcharge of 10 per cent on it. However, if it is more than
Rs 1 crore, the surcharge is 15 per cent. Both surcharges are applicable irrespective of which
age group one belongs to.
✅ Is TDS mandatory for salary as per the Income Tax Slab 2020-21?
Yes, if it exceeds a certain threshold. Section 192 requires that every employer who pays his
workers their salaries is required to deduct tax at source (TDS) if their salaries cross the basic
exemption limit.
There is no fixed way in which employers deduct tax at source from their employees’
salaries. The tax liability will depend on which tax slab the employee falls under and also
what the average rate of income tax is. Average income tax rate is the total tax liability
divided by the total income of the employee. If the employee has invested in tax saving
instruments, his total tax liability will reduce. Therefore, there is no uniform TDS applicable
for all employees.

lOMoARcPSD|19691536
What the employee receives after deducting the TDS from his / her salary is the net salary.
The average income tax rate can remain constant if the salary as well as the tax saving
instruments he invests in remain the same. The rate at which TDS is deducted can also be
revised from time to time and is also dependent on such factors as the employee receiving an
increment or bonus or the employee showing tax-saving investments not disclosed earlier. In
case of lower deduction, the additional TDS can be deducted in the future months. Likewise,
if a higher than required TDS has been deducted, he can lower the TDS deducted and thus
average out the TDS he/she is paying.
✅ Where can I calculate my income tax?

You can calculate your income tax manually if you are a numbers buff and know the
prevailing tax slabs and rates and how they work. The manual offline method can be a bit
tricky. Alternatively, if you are not comfortable with this method, there are a number of
online calculators that do the number crunching for you and let you know how much your tax
liability is.
You can also skip the manual hassle of estimating your income tax by calculating your
taxable income in a jiffy by using the HDFC Life tax calculator . All you need to is enter your
details like age and annual income, fill in details of investments in insurance plans, insurance
premia paid during the year, interest paid on loans etc, in clearly defined columns. Once you
have entered these details, your income tax summary along with your taxable income is
generated for you. It shows you the next tax payable, as also the amounts you can save under
section 80 D and 80 C.
✅ How is income tax calculated on new slabs for FY 2020-21?
Income Tax Slab Tax Rate for Individuals and HUF’s

From Rs. 2,50,001 to Rs. 5,00,000 5%
From Rs. 5,00,001 to Rs. 7,50,000 10%
From Rs. 7,50,001 to Rs. 10,00,000 15%
From Rs. 10,00,001 to Rs.
20%
12,50,000
From Rs. 12,50,001 to Rs.
25%
15,00,000
Above Rs. 15,00,000 30%
Disclaimer: The above-mentioned tax rates and tax benefits are subject to changes in tax
laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

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Unit 1 - taxation notes

law (University of Mysore)

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DIRECT AND INDIRECT TAX

DISTINCTION BETWEEN TAX AND FEE, TAX AND CESS

FEDERAL BASE OF TAXING POWER

POWER OF TAXATION UNDER CONSTITUTION

IMMUNITY OF STATE AGENCIES / INSTRUMENTALITIES

FUNDAMENTAL RIGHTS AND POWER OF TAXATION

COMMERCE CLAUSE – INTER STATE COMMERCE AND

SCOPE OF TAXING POWER OF PARLIAMENT

DELEGATION OF TAXING POWER TO STATE LEGISLATURE AND

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INTRODUCTION AND BASIC CONCEPTS OF INCOME TAX

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Bastable defines a tax as "a compulsory contribution of the wealth of a

ASSESSMENT YEAR – S. 2(9)

PREVIOUS YEAR- S. 2(34) & S. 3

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PERSON [ Section 2(31) ]

c. an assessee in default under any provision of the Act

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Broadly the term “Income includes the following:

i. profits and gains ;

SCHEME OF CHARGING INCOME TAX

 Income-tax is an annual tax on income

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CHARACTERISTICS OF A GOOD TAX SYSTEM

NATURE AND CHARACTERISTICS OF DIFFERENT

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1. TAXES LEVIED BY THE CENTRAL GOVERNMENT AND

2. ON THE BASIS OF RELATIONSHIP BETWEEN TAX BASE AND TAX

Progressive Taxes: A progressive tax has more of a financial impact on higher-income

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3. ON THE BASIS OF METHOD OF ASSESSMENT

4. ON THE BASIS OF INCIDENCE AND IMPACT OF TAXES:

DIRECT TAX VS. INDIRECT TAX

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Particulars Direct Tax Indirect Tax

2. Nature of tax Direct Tax is progressive in Indirect Taxes are regressive in

3. Taxable Event Taxable Income / Taxable Purchase / Sale / Manufacture of

7. Tax Evasion Comparatively more because Comparatively less because of

8. Administered by Direct Tax is administered by Indirect Tax is administered by

DIRECT AND INDIRECT TAX

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TYPES OF DIRECT TAXES

5. Capital gains tax

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THE SALIENT FEATURES ARE LIKELY TO BE PRONOUNCED UNDER THE

1. Single Destination for all Direct Tax laws

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TYPES OF INDIRECT TAXES

1. Goods and Services Tax:

On the state level:

 State excise duty

 Additional excise duty

 Special additional custom duties

At the central level, it covers:

 Levies on products outside GST purview: