Unit 4

Taxation: Meaning of Tax — Differences between Direct Tax and Indirect Tax —Difference between
Customs and Excise Duties - Definitions of Person – Assessee — Previous year - Assessment year.

In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as in
matters of health care, education, employment, infrastructure, social security and other
development needs. To facilitate these, Government needs revenue.
In order to provide the common and essential facilities to the needy people, the Government
obtains funds from various sources, out of which one main source is taxation. Tax revenue is the
main source of income for the government to meet its expenditure. Taxation has been used as one
of the main instruments to achieve the various socio-economic objectives by successive
governments.
The term "Tax" was derived from the Latin word "Taxore". "Taxo" means to estimate, appreciate or
value. Tax is the amount paid by persons staying within a territorial limit of a sovereign state and is
levied on individuals, goods, property, business activities and services etc. The term "Tax" refers
the compulsory exaction of money by public authorities for public purposes enforceable by law
Tax is a compulsory charge or payment levied or imposed by a public-authority on an individual.
The tax is levied by the government to meet public spending incurred in the general interest of the
nation.

TAXATION OBJECTIVES
The basic features of tax can be identified as follows:
a) Tax is payable by the citizens who are liable to pay the tax. It was made as compulsory
payment. If any body is refused to pay tax it is punishable offence.
b) The Tax payer cannot expect or claim reciprocal benefits against the taxes paid. But, the
government has to do something for the community as a whole for what the tax payers
have contributed in the form of taxes.
c) Revenue from Tax is mainly to meet public spending incurred by the government in the
general interest of the nation. It is a payment for an indirect service to be made by the
government to the community as a whole.
d) Tax is payable regularly and periodically as determined by assessing officer or taxing
authority.
e) The taxation is an exercise or legal process in the collective solution of individual problems.

Tax revenue is the main source of income for the government to meet its expenditure.
Taxation has been used as one of the main instruments to achieve the various socio-economic
objectives by successive governments. Broadly, the taxation objectives can be identified as follows:
Main objectives
 Generation of revenue.
 Maintenance of welfare state.
 Prevention of concentration of economic power.
 Re-distribution of wealth for the common goal.
 Balanced regional development.
Subsidiary objectives
 Accelerate savings and thereby investment.
 Rapid economic development.
 Generation of employment avenues.
 Protecting domestic industries against foreign competition.
 Controlling consumption of particular commodities and consumption pattern
TYPES OF TAXES
There are two types of taxes - direct taxes and indirect taxes.
A. Direct Taxes: The direct tax is paid by the person on whom it is legally imposed and is paid
by him directly on the basis of his income or wealth or estate etc. The burden of direct tax
cannot be shifted to others. If tax is levied directly on the income or wealth of a person,
then, it is a direct tax. The person who pays the tax to the Government cannot recover it
from somebody else i.e. the burden of a direct tax cannot be shifted. e.g. Income- tax, gift
tax, wealth tax etc
B. Indirect Taxes: Indirect tax is imposed on one person but it is paid partly or wholly by
another. Thus, indirect taxes are shifted and the incidence of these taxes falls on persons
other than the original payers. If tax is levied on the price of a good or service, then, it is an
indirect tax e.g. Goods and Services Tax (GST) or Custom Duty. In the case of indirect taxes,
the person paying the tax passes on the incidence to another person

DIFFERENCES BETWEEN DIRECT TAX AND INDIRECT TAX

Context Direct Tax Indirect Tax
Meaning Paid directly to the government Paid to the government via intermediary
Levied on Profits and income Goods and services
End-consumers of products, goods and
Taxpayer Individuals, HUFs and businesses services.
Tax Rate Directly depends on income and profits Same for everyone
Rate of tax is flat so tax burden is
Tax Burden Progressive regressive
Transferability Not transferable Can be transferable
Tax Collection Complex Quite convenient
Types Income Tax, Wealth Tax, Gift Tax Goods and Services Tax (GST)
Evasion Possible Not possible

CUSTOMS DUTY
The Custom duty derived its value from the word “custom” under which whenever a
merchant entered a Kingdom with his merchandise, he had to give some gift to the king.
Subsequently, this custom formalized into the levy of custom duty or tax on goods imported into
and exported from the country was organized through various laws during the British period. After
Independence the Sea Customs Act 1878, the Land Customs Act, 1924 and other allied enactments
were repealed by a consolidating and amending legislation entitled the Customs Act, 1962.
Similarly, the Indian Customs Act, 1934 was repealed by the Customs Tariff Act, 1975(CTA).
Customs Duty’ refers to the tax imposed on the goods when they are transported across the
international borders. The objective behind levying customs duty is to safeguard each nation’s
economy, jobs, environment, residents, etc., by regulating the movement of goods, especially
prohibited and restrictive goods, in and out of any country.
Every good has a predefined rate of duty that is determined based on various factors, including
where such good was acquired, where such goods were made, and what these goods is made of.
Also, anything that you bring into India for the first time should be declared as per the customs
rules. For instance, you need to declare the items purchased in a foreign country and any gifts
which you acquire outside India.
Custom Duty is an indirect tax, imposed under the Customs Act formulated in 1962. The power to
enact the law is provided under the Constitution of India under the Article 265, which states that
―no tax shall be levied or collected except by authority of law. Entry No. 83 of List I to Schedule
VII of the Constitution empowers the Union Government to legislate and collect duties on import
and exports. The Customs Act, 1962 is the basic statute which governs entry or exit of different
categories of vessels, aircrafts, goods, passengers etc., into or outside the country. The Act extends
to the whole of the India.
Customs Act, 1962 just like any other tax law is primarily for the levy and collection of duties but at
the same time it has the other and equally important purposes such as:
a) regulation of imports and exports;
b) protection of domestic industry;
c) prevention of smuggling;
d) conservation and augmentation of foreign exchange and so on.

Customs duties are charged almost universally on every good which are imported into a country.
These are divided into:
1. Basic Customs Duty (BCD)
2. Countervailing Duty (CVD)
3. Additional Customs Duty or Special CVD
4. Protective Duty,
5. Anti-dumping Duty
6. Education Cess on Custom Duty

EXCISE DUTY
Excise duty is an indirect tax and levied on all excisable goods which are produced or manufactured
in India. It is the opposite of Customs duty in sense that it applies to goods manufactured
domestically in the country, while Customs is levied on those coming from outside of the country.
At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise
Duty, etc. Excise duty was levied on manufactured goods and levied at the time of removal of
goods, while GST is levied on the supply of goods and services.
 The GST introduction in July 2017 subsumed many types of excise duty.
 Today, excise duty applies only on petroleum and liquor.
 Alcohol does not come under the purview of GST as exclusion mandated by constitutional
provision.
 States levy taxes on alcohol according to the same practice as was prevalent before the
rollout of GST.
 After GST was introduced, excise duty was replaced by central GST because excise was
levied by the central government. The revenue generated from CGST goes to the central
government.
Types of excise duty in India
Before GST kicked in, there were three kinds of excise duties in India.
 1. Basic Excise Duty : Basic excise duty is also known as the Central Value Added Tax (CENVAT).
This category of excise duty was levied on goods that were classified under the first
schedule of the Central Excise Tariff Act, 1985. This duty was levied under Section 3 (1) (a)
of the Central Excise Act, 1944. This duty applied on all goods except salt.
2. Additional Excise Duty : Additional excise duty was levied on goods of high importance,
under the Additional Excise under Additional Duties of Excise (Goods of Special Importance)
Act, 1957. This duty was levied on some special category of goods.
3. Special Excise Duty : This type of excise duty was levied on special goods classified under
the Second Schedule to the Central Excise Tariff Act, 1985.
DIFFERENCES BETWEEN EXCISE DUTY AND CUSTOMS DUTY
Aspect Excise Duty Customs Duty
Tax on the manufacture or sale of
Definition goods Tax on the import of goods into a country
Domestic production and sale of
Scope goods Imported goods entering the country
At the manufacturing or production
Point of Levy stage At the point of entry (customs checkpoints)
Revenue generation and regulatory
Purpose control Revenue generation and protectionism
By government agencies during
Collection production By customs authorities at the point of entry
It may be ad valorem, specific, or
Calculation compound Based on customs valuation and duty rates
Goods
Affected Domestic goods and services Imported goods
Rates Varies by type of goods and services Varies by HSN code, origin, and agreements
Additional May include anti-dumping, countervailing
Charges May include excise cess or other fees duties, or other charges
Compliance Manufacturers and service providers Importers and customs declarations
Exemptions/ Certain goods or services may be
Rebates exempt Certain goods may qualify for exemptions
Impact on Affects the pricing of domestic goods
Pricing and services Affects the pricing of imported goods
International Typically, it does not affect May influence trade through tariff rates and
Trade international trade directly protectionist measures

PERSON : [Section 2(31)]: The word person is a very wide term and the following are included in
the term person as per the income tax act:
1. Individual: It refers to a natural living human being whether male or female, minor or
major.
2. Hindu Undivided Family: It is a relationship created due to operation of Hindu law. The
manager of H.U.F. is called 'KARTA' and its members are called 'COPARCENERS'.
3. Company: It is an artificial person registered under Indian Companies Act 1956 or any other
law.
4. Firm: It is an entity which comes into existence as a result of partnership agreement. The
Income-tax Act accepts only these entities as firms u/s 184 of the Act.
5. Association of Persons or Body of Individuals: Co-operative societies, Markfed, Nafed etc.
are the examples of such persons.
6. Local authorities: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called
local authorities.
 7. Artificial Juridical Persons: Statutory Corporations like Life Insurance Corporation, University
etc. are called artificial juridical persons.

Assessee [Sec. 2(7)]. It means a person by whom any tax or any other sum of money is payable
under this Act and includes—
 Every person in respect of whom any proceedings under this Act have been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable or loss sustained by him or by such other person or of the amount of refund due
to him or to such other person.
 Every person who is deemed to be an assessee under any provision of this Act.
 Every person who is deemed to be an assessee-in-default under any provision of this Act.
From the above definition we find that an assessee can be divided into following categories :—
A. Ordinary Assessee :
 Any person against whom some proceedings under this Act are going on.
 If any notice has been issued under any provision of this Act or some proceedings have
been initiated under such provisions the person is called assessee.
 Any person by whom some amount of tax, interest or penalty is payable under this Act is
called assessee.
 Any person who has deposited tax under advance tax or tax has been deducted at source
and amount of tax deposited exceeds the tax determined at the time of regular assessment
the person is entitled to claim refund. He is also called an assessee.
 In case a person is carrying on business and has incurred loss. He can carry forward such
loss to succeeding previous years only if he has filed return of loss. He becomes assessee as
soon as he files such return of loss.
B. Deemed Assessee : Any person who is responsible on behalf of a minor, lunatic or a non-
resident is deemed as assessee. He is also known as representative assessee.
C. Assessee-in-default : Some times a person deducts tax at source but does not deposit it in
government treasury, the income tax authorities shall hold such person responsible and he
will be called as assessee-in-default

ASSESSMENT YEAR
 The term has been defined under section 2(9). This means a period of 12 months
commencing on 1st April every year. The assessment year is the financial year of the Govt. of India
during which income of a person relating to the relevant previous year is assessed to tax. Every
person who is liable to pay tax under this Act, files return of income by prescribed dates. The
officers of the income tax department process the returns. This processing is called ASSESSMENT.
Under this, income earned by the assessee is checked and verified. The year in which income is
earned is the previous year and such income is taxable in the immediately following year which is
the assessment year. Income earned in the previous year 2022-23 is taxable in the assessment year
2023-24. Assessment year always starts from 1st April and it is always a period of 12 months.
PREVIOUS YEAR
The term has been defined under section 3. It means the financial year immediately preceding the
assessment year. As mentioned earlier, the income earned during the previous year is taxable in
the assessment year.
The term previous year is very important because it is the income earned during previous year
which is to be assessed to tax in the assessment year. As the word 'Previous' means 'coming
before', hence it can be simply said that the previous year is the financial year proceeding the
assessment year.