PART B – 12 Mark

1. Define Taxation. Explain the Scope and Characteristic of the taxation.

Definition of Taxation Taxation is the process by which a government imposes financial

charges or levies on individuals, businesses, or other entities to fund public expenditures and
services. It serves as a primary source of revenue for governments to fulfill their social,
economic, and administrative responsibilities. Justice Oliver Wendell Holmes aptly remarked,
“Taxes are what we pay for civilized society.”

Scope of Taxation

1. Revenue Generation: The primary purpose of taxation is to generate funds for the
government to finance public services, including education, healthcare, infrastructure,
and defense.
2. Redistribution of Wealth: Taxation helps in reducing income inequalities by levying
progressive taxes, where higher income groups contribute more, enabling the
redistribution of resources to the economically weaker sections.
3. Regulation of Economic Activities: Taxes are used to influence economic behavior,
such as discouraging harmful activities (e.g., imposing higher taxes on tobacco) or
encouraging beneficial ones (e.g., tax incentives for renewable energy).
4. Macro-Economic Stability: Taxation aids in controlling inflation and deflation. During
inflation, increased taxes reduce disposable income, while during deflation, tax
reductions can boost spending.
5. Encouragement of Growth: By offering tax exemptions or reductions, governments can
stimulate investment and economic development in specific sectors or regions.

Characteristics of Taxation

1. Compulsory Nature: Taxes are mandatory payments imposed by the government.

Individuals or entities cannot refuse to pay taxes without legal consequences.
2. No Direct Quid Pro Quo: Taxes are collected without the payer receiving a direct or
proportional benefit. For instance, paying income tax does not guarantee specific
government services to the taxpayer.
3. Legality: Taxation is governed by legal frameworks and statutory provisions. It must be
authorized by the legislature, ensuring that taxes are imposed and collected lawfully.
4. Imposition by Government: Only the government, whether central, state, or local, has
the authority to levy taxes.
5. Purpose-Oriented: Taxes are imposed for collective welfare and public expenditure,
ensuring equitable distribution of resources and social justice.
 6. Diversity: Taxes can be direct (e.g., income tax, corporate tax) or indirect (e.g., GST,
excise duty), each with its own structure and purpose.

Related Provisions

1. Indian Constitution:
o Article 265: “No tax shall be levied or collected except by the authority of law.”
This ensures that taxation is legally sanctioned.
o Seventh Schedule: Provides for the division of taxation powers between the
Union and the State governments. The Union List includes taxes like customs
duties and income tax, while the State List includes land revenue and excise on
alcoholic liquors. The Concurrent List includes provisions for stamp duties and
other shared responsibilities.
2. Income Tax Act, 1961: Governs the levy, administration, and collection of income tax in
India.
3. Goods and Services Tax (GST) Act, 2017: A landmark legislation that introduced a
unified tax system, replacing multiple indirect taxes.
4. Central Excise Act, 1944: Governs the levy of excise duty on the manufacture of goods.
5. Wealth Tax Act, 1957 (repealed): Previously imposed tax on the wealth owned by
individuals.

Relevant Case Laws

1. Chhotabhai Jethabhai Patel & Co. v. Union of India (1962): The Supreme Court
upheld the validity of taxation laws, emphasizing the principle of no taxation without
legal authority.
2. Kunnathat Thathunni Moopil Nair v. State of Kerala (1961): Declared that arbitrary
taxation violates Article 14 of the Constitution.
3. Gannon Dunkerley & Co. v. State of Rajasthan (1993): Discussed the scope of
taxation powers under the Constitution, particularly regarding works contracts.

2. Explain the concept of Cannons of taxation. Discuss both traditional and modern

cannons of taxation.

Concept of Cannons of Taxation Cannons of taxation refer to the principles and guidelines for
designing an efficient and equitable tax system. These principles were first articulated by Adam
Smith in his seminal work, "The Wealth of Nations," and are considered the foundation for
evaluating tax systems. Over time, additional modern principles have been added to adapt to
evolving economic and social conditions.
Traditional Cannons of Taxation

1. Cannon of Equity: Taxes should be levied in proportion to an individual’s ability to pay.

Those with higher income or wealth should contribute more to public revenue.
2. Cannon of Certainty: The tax obligations of individuals should be clear and certain,
preventing arbitrary enforcement by tax authorities.
3. Cannon of Convenience: Taxes should be collected at a time and in a manner that is
most convenient for taxpayers, such as withholding taxes at the source of income.
4. Cannon of Economy: The cost of collecting taxes should be minimal, ensuring that a
significant portion of the revenue reaches the government.

Modern Cannons of Taxation

1. Cannon of Productivity: A good tax system should generate sufficient revenue to meet
government expenditures without excessive reliance on borrowing.
2. Cannon of Elasticity: Tax revenue should increase or decrease in tandem with the
growth or contraction of the economy.
3. Cannon of Simplicity: The tax structure should be simple and easy to understand to
reduce compliance costs and administrative burdens.
4. Cannon of Neutrality: Taxes should not distort economic decision-making or hinder the
efficient allocation of resources.
5. Cannon of Diversity: A diversified tax system reduces reliance on a single source of
revenue and ensures financial stability during economic fluctuations.
6. Cannon of Social Justice: Taxes should promote social equity by reducing income
disparities and contributing to social welfare.

Related Provisions and Examples

1. Income Tax Act, 1961: Reflects the cannon of equity by imposing progressive tax rates.
2. GST Act, 2017: Embodies the cannon of simplicity and convenience by unifying
multiple indirect taxes.
3. Fiscal Responsibility and Budget Management (FRBM) Act, 2003: Promotes the
cannon of productivity by encouraging fiscal discipline.
4. Tax Deducted at Source (TDS): Implements the cannon of convenience by collecting
taxes directly at the source of income.

Relevant Case Laws

1. R. K. Garg v. Union of India (1981): Upheld the introduction of tax reforms,

emphasizing that taxation policies must align with economic objectives.
2. McDowell & Co. v. Commercial Tax Officer (1985): Highlighted the importance of
certainty and economy in tax administration.
3.What are the different kind of taxing system, explain in detail?

Different Kinds of Taxing Systems

1. Progressive Taxation

 Definition: In a progressive tax system, the tax rate increases as the taxable income or
wealth of an individual or entity rises.
 Examples: Income tax in India follows a progressive structure, with higher income
brackets subject to higher tax rates.
 Merits: Promotes social equity by reducing income inequality.
 Demerits: May discourage high earnings and investments due to higher tax burdens.

2. Regressive Taxation

 Definition: A regressive tax imposes a higher burden on lower-income groups as a

percentage of their income.
 Examples: Indirect taxes like GST on basic commodities, where the tax constitutes a
larger portion of the income of poorer individuals.
 Merits: Simple to administer and collect.
 Demerits: Exacerbates income inequality and affects the purchasing power of low-
income groups.

3. Proportional Taxation

 Definition: Under a proportional tax system, the tax rate remains constant, regardless of
income level.
 Examples: Corporate tax rates often follow a proportional structure.
 Merits: Easy to compute and administer.
 Demerits: Does not account for differences in the taxpayer’s ability to pay.

4. Direct Taxation

 Definition: Direct taxes are levied directly on the income or wealth of individuals or
organizations.
 Examples: Income tax, corporate tax, wealth tax.
 Merits: Promotes equity and is linked to the taxpayer’s ability to pay.
 Demerits: High compliance costs and potential evasion risks.

5. Indirect Taxation

 Definition: Indirect taxes are levied on goods and services and are collected by
intermediaries (e.g., retailers) on behalf of the government.
 Examples: GST, customs duty, excise duty.
 Merits: Easy to collect and broad-based.
 Demerits: Regressive in nature and can increase the cost of living.
6. Single Tax System

 Definition: A single tax system involves the imposition of only one tax, typically on
income, sales, or property.
 Examples: Land tax systems in certain economies.
 Merits: Simplifies tax compliance and reduces administrative burdens.
 Demerits: Limited scope for revenue diversification.

7. Multiple Tax System

 Definition: A multiple tax system involves various taxes levied on income, goods,
services, and wealth.
 Examples: India’s tax regime includes income tax, GST, and excise duties.
 Merits: Diversifies revenue sources and reduces dependency on a single tax.
 Demerits: Increases complexity and compliance costs.

8. Environmental Taxation

 Definition: Taxes aimed at reducing environmental harm by penalizing polluters or

incentivizing sustainable practices.
 Examples: Carbon taxes, green taxes.
 Merits: Encourages environmentally friendly behavior.
 Demerits: May increase production costs and affect economic competitiveness.

Related Provisions and Case Laws

1. Income Tax Act, 1961: Governs direct taxation in India.

2. GST Act, 2017: Represents an indirect and multiple tax system.
3. Vallabh Das v. Union of India (1971): Discussed the scope and application of wealth
taxation.
4. M.C. Mehta v. Union of India (2001): Highlighted the role of environmental taxes in
combating pollution.
4. Discuss the concept of Double taxation. Explain Double Taxation Avoidance Agreement

and write the relevant provision under Income Tax Act 1961.

Double Taxation and Double Taxation Avoidance Agreement (DTAA)

Concept of Double Taxation Double taxation refers to the imposition of taxes on the same
income, asset, or financial transaction in two or more jurisdictions. This typically arises in
international transactions where income earned by an individual or a corporation is taxed both in
the country of origin and the country of residence. For instance, an Indian resident earning
income in the United States may be subject to taxes in both countries.

Types of Double Taxation

1. Jurisdictional Double Taxation: Occurs when two or more countries claim taxing rights
over the same income.
2. Economic Double Taxation: Happens when the same income or transaction is taxed
multiple times within the same country.

Double Taxation Avoidance Agreement (DTAA) To mitigate the adverse effects of double
taxation, countries enter into bilateral agreements known as Double Taxation Avoidance
Agreements (DTAAs). These agreements allocate taxing rights and provide relief mechanisms to
avoid or reduce double taxation.

Key Provisions in a DTAA

1. Tax Credit Method: The taxpayer is allowed to deduct the tax paid in one country from
the tax liability in the other country.
2. Exemption Method: Income taxed in one country is exempted from taxation in the
other.
3. Reduced Tax Rates: Certain types of income, such as dividends, interest, or royalties,
are taxed at reduced rates as specified in the DTAA.
4. Permanent Establishment (PE): Income is taxed in a country only if the entity has a
substantial presence or operations there.
5. Exchange of Information: Provides a mechanism for countries to share information to
prevent tax evasion and ensure compliance.

Relevant Provisions under the Income Tax Act, 1961

1. Section 90: Allows the Indian government to enter into DTAAs with other countries to
grant relief from double taxation.
2. Section 91: Provides unilateral relief to Indian residents if no DTAA exists, allowing
them to claim tax credit for foreign taxes paid.
3. Section 195: Governs the taxation of foreign payments and ensures compliance with
DTAA provisions.
Relevant Case Laws

1. Azadi Bachao Andolan v. Union of India (2003): Upheld the validity of DTAAs,
emphasizing their role in promoting international trade and investment.
2. Vodafone International Holdings v. Union of India (2012): Highlighted the
significance of DTAA provisions in determining tax liability.
3. Engineering Analysis Centre of Excellence v. CIT (2021): Clarified the applicability of
DTAA provisions in software royalty cases.

UNIT II

5. “No tax shall be levied or collected except by Authority of Law” – Explain.

Introduction

The principle that "No tax shall be levied or collected except by authority of law" is a
fundamental feature of constitutional governance, emphasizing the rule of law in matters of
taxation. Derived from Article 265 of the Indian Constitution, this provision ensures that the
imposition and collection of taxes adhere strictly to laws enacted by a competent legislative
body. This doctrine is crucial for safeguarding citizens from arbitrary taxation and upholding
their economic freedoms.

1. Meaning and Scope

 Authority of Law: Taxes can only be levied or collected under a valid law passed by the
legislature, which means mere executive orders or administrative directions cannot
impose taxes.
 Competent Authority: The law must be enacted by a body authorized under the
Constitution, such as Parliament or State Legislatures, as per their respective jurisdictions
under Schedule VII (Union, State, and Concurrent Lists).
 Judicial Oversight: Any tax levied without proper legal authority can be challenged in a
court of law as unconstitutional.

2. Constitutional Provisions

 Article 265: Clearly states, “No tax shall be levied or collected except by authority of
law.”
 Article 246: Specifies the distribution of legislative powers between the Union and States
regarding taxation.
 Article 14: Ensures equality before the law, preventing discriminatory or arbitrary
taxation.
 Article 300A: Protects the right to property, implying that taxation must not result in
unlawful deprivation of property.
3. Judicial Interpretation

 Chhotabhai Jethabhai Patel & Co. v. Union of India (1962): The Supreme Court ruled
that a tax imposed without legislative sanction is invalid.
 Kerala v. NV Rajendran (2003): Reaffirmed that taxes cannot be collected by
administrative fiat or executive instructions without statutory backing.

4. Examples of Authorized Taxes

 Income Tax Act, 1961: Tax on income under the Union List.
 Goods and Services Tax (GST): Unified tax system introduced under the 101st
Constitutional Amendment, with legislative backing.

5. Implications of Article 265

 Accountability: Ensures transparency and legal scrutiny in taxation policies.

 Protection of Citizens: Prevents undue financial burden through illegal taxation.
 Federal Balance: Preserves the division of powers between the Union and States.

Conclusion

The principle enshrined in Article 265 acts as a bulwark against arbitrary taxation and ensures
adherence to the constitutional framework. By mandating legislative authority for taxation, it
upholds the rule of law and protects the economic rights of individuals. Judicial interpretations
have consistently reinforced this provision, ensuring that taxation remains a tool of public
finance governed by legality, accountability, and fairness. This principle reflects the core
democratic value that taxation without representation is illegitimate.

6. Discuss in detail, the Fundamental rights and Taxing statutes - along with provisions.

Introduction

Taxing statutes are laws enacted by the legislature to impose, collect, or regulate taxes. These
statutes ensure that taxation is implemented systematically, following the legal and constitutional
framework. However, taxing statutes must comply with the Fundamental Rights guaranteed
under the Indian Constitution to safeguard citizens against arbitrary or discriminatory tax
policies. This interplay between Fundamental Rights and taxing statutes reflects the balance
between the state's power to tax and individual rights.

What Are Taxing Statutes?

Taxing statutes are legal provisions that establish the framework for the imposition, collection,
and regulation of taxes by the government. They include laws such as:

 Income Tax Act, 1961 – Governing direct taxes.

 Goods and Services Tax (GST) Act, 2017 – Unified indirect tax legislation.
  Customs Act, 1962 – Regulating taxes on imports and exports.
Taxing statutes must be enacted by a competent authority (Union or State legislature) as
per Article 246 and the Seventh Schedule of the Indian Constitution.

What Are Fundamental Rights?

Fundamental Rights, enumerated in Part III of the Constitution, protect the civil liberties of
individuals and ensure equality, freedom, and justice. They include provisions directly impacting
taxing statutes:

Relevant Fundamental Rights Related to Taxing Statutes

1. Article 14 – Right to Equality

o Ensures equality before the law and prohibits arbitrary or discriminatory taxation.
o Tax laws must satisfy the test of reasonable classification, meaning the
classification must be:
 Based on intelligible differentia.
 Have a rational nexus with the objective of the law.
o Case Law: In Haji K. Kutty v. State of Kerala (1969), a discriminatory tax
imposed on traders was struck down as it violated Article 14.
2. Article 19(1)(g) – Right to Practice Any Profession or Trade
o Prohibits excessive or unreasonable taxation that hampers an individual's right to
trade or practice a profession.
o Reasonable Restrictions: Under Article 19(6), taxation may be justified in the
public interest, provided it is not confiscatory.
o Case Law: In Central India Spinning v. Municipal Committee (1958), a tax
that acted as a restriction on business operations was invalidated.
3. Article 21 – Right to Life and Personal Liberty
o Tax laws should follow due process and not lead to deprivation of property or
liberty arbitrarily.
o Confiscatory taxes or penalties without fair procedures may be deemed
unconstitutional.
4. Article 300A – Right to Property
o Ensures no person is deprived of their property (including money through taxes)
without authority of law.
o Arbitrary imposition or collection of taxes without legislative backing breaches
this right.

Judicial Interpretation of Taxing Statutes and Fundamental Rights

 Kunnathat Thathunni Moopil Nair v. State of Kerala (1961): The Supreme Court
struck down a property tax that imposed a disproportionate burden on certain
landholders, violating Articles 14 and 19.
 A.V. Fernandez v. State of Kerala (1957): Tax laws must clearly define the scope of
taxation; vague or ambiguous provisions can lead to constitutional challenges.
  Federation of Hotel & Restaurant v. Union of India (1989): The levy of luxury tax on
hotels was upheld as it did not violate Article 14 due to the reasonable classification of
luxury services.

Provisions Ensuring Tax Compliance with Fundamental Rights

1. Article 265 – No Tax Without Authority of Law: Mandates that taxes must be imposed
only under valid laws.
2. Article 246 and the Seventh Schedule: Delineates the powers of Union and State
legislatures to enact tax laws.
3. Judicial Review: Taxing statutes are subject to judicial review under Articles 13, 32, and
226 to ensure compliance with Fundamental Rights.

Conclusion

Taxing statutes are essential tools for resource mobilization and economic governance. However,
their enactment and implementation must adhere to the Fundamental Rights guaranteed by the
Constitution to ensure equity, fairness, and legality. Judicial oversight has played a pivotal role
in striking down arbitrary or discriminatory taxation, reinforcing the supremacy of constitutional
principles. This balance between state power and individual rights ensures a just and equitable
taxation system in India.

7. Taxing statute is usually interpreted according to the rules of strict interpretation -

Explain.

Introduction

Taxing statutes, which empower the state to impose and collect taxes, play a vital role in
ensuring financial stability. However, these laws significantly impact individuals and businesses,
often creating financial liabilities. To safeguard against misuse or arbitrary interpretation, courts
adopt the rule of strict interpretation for taxing statutes. This principle ensures that such laws
are interpreted strictly within their textual boundaries, providing clarity and preventing unjust
taxation.

Meaning of Strict Interpretation

Strict interpretation means that the language of a statute is given its plain, ordinary meaning
without stretching its scope or reading into it beyond what the law explicitly states. This rule is
particularly significant for taxing statutes because they:

1. Create financial obligations.

2. Impose penalties in cases of non-compliance.
3. Affect individuals’ fundamental rights, such as property and trade freedoms.
Under this principle:

 If the law is ambiguous or unclear, the benefit goes to the taxpayer, not the tax
authority.
 Tax exemptions or benefits are also interpreted strictly, requiring clear and explicit
statutory provisions.

Why Taxing Statutes Require Strict Interpretation

1. Impact on Rights: Taxes can affect property rights (Article 300A) and economic
freedoms (Article 19(1)(g)). Strict interpretation ensures these rights are not infringed
arbitrarily.
2. No Presumption of Taxation: Courts assume that taxation is only valid if explicitly
stated in the statute.
3. Preventing Administrative Overreach: Strict interpretation limits the scope of
administrative authorities, preventing misuse of taxing powers.
4. Ensuring Certainty and Predictability: Taxpayers and businesses require clarity in
their liabilities for financial planning.

Judicial Pronouncements on Strict Interpretation

1. A.V. Fernandez v. State of Kerala (1957):

o The Supreme Court held that a taxing statute must clearly define the scope and
extent of taxation. In cases of ambiguity, interpretation favoring the taxpayer must
prevail.
2. Commissioner of Income Tax v. Motors & General Stores (1967):
o Taxing statutes should not be extended to cases not explicitly covered by the
language of the law.
3. Cape Brandy Syndicate v. Inland Revenue Commissioners (1921):
o It was stated, "In a taxing Act, one has to look merely at what is clearly stated.
There is no room for any intendment."
4. State of Bombay v. Automobile and Agricultural Industries Corporation (1961):
o Taxing provisions must be interpreted strictly, even if the result is a lack of
taxation where the statute does not explicitly provide for it.

Rules of Strict Interpretation Applied to Taxing Statutes

1. Express Authorization:
o Taxes cannot be imposed unless explicitly authorized by statute (Article 265 of
the Constitution).
2. Ambiguity Resolves in Favor of the Taxpayer:
o If there is doubt regarding the imposition of a tax or the extent of liability, it is
interpreted in favor of the taxpayer.
3. Exemptions and Benefits:
o Tax exemptions or deductions are interpreted narrowly. Taxpayers must meet the
exact conditions prescribed by the statute to claim exemptions.
 4. Penal Provisions:
o Provisions imposing penalties for tax violations are also strictly construed to
prevent undue hardship.

Conclusion

The principle of strict interpretation for taxing statutes ensures fairness, transparency, and legal
certainty. By adhering to the clear and explicit language of the law, courts protect taxpayers from
arbitrary or excessive impositions. This approach also maintains the integrity of the taxation
system, emphasizing the need for legislative precision in drafting tax laws. Ultimately, strict
interpretation strikes a balance between the state’s revenue needs and the taxpayers’ rights,
fostering trust in the legal framework.

8. Applicability of Doctrines under constitution to taxation laws. Discuss with case laws.

Introduction

Taxation laws, as instruments of fiscal policy, must conform to the constitutional principles
enshrined in the Indian Constitution. Various doctrines derived from constitutional law guide the
interpretation and application of taxation laws to ensure they adhere to the principles of equity,
justice, and the rule of law. These doctrines also ensure that taxing statutes do not violate
fundamental rights or exceed the legislative competence defined by the Constitution.

Doctrines Applicable to Taxation Laws

1. Doctrine of Severability

 Principle: If a part of a statute is found unconstitutional, only the invalid portion is

severed, and the rest of the statute remains operational, provided it can function
independently.
 Applicability in Taxation: This doctrine is applied when specific provisions of a taxing
statute are challenged for being unconstitutional.
 Case Law:
o R.M.D. Chamarbaugwala v. Union of India (1957): The Supreme Court held
that unconstitutional provisions in a tax law could be severed, leaving the valid
portions intact.

2. Doctrine of Eclipse

 Principle: An unconstitutional law does not become void but remains dormant. It can
revive if the constitutional obstacle is removed.
 Applicability in Taxation: Applied to pre-constitutional tax laws that conflict with post-
constitutional fundamental rights.
 Case Law:
 o Bhartiya Auto Co. v. State of Assam (1969): Tax laws inconsistent with
fundamental rights at the time of their enactment were held to be inoperative but
could be revived by constitutional amendments.

3. Doctrine of Pith and Substance

 Principle: A law is examined in its true essence and substance to determine its validity,
even if it incidentally encroaches upon the jurisdiction of another legislative body.
 Applicability in Taxation: Used to resolve conflicts between Union and State taxing
powers.
 Case Law:
o State of West Bengal v. Kesoram Industries Ltd. (2004): The Supreme Court
upheld a cess imposed by the state government, determining its validity based on
its pith and substance as a fee, not a tax.

4. Doctrine of Harmonious Construction

 Principle: When two laws conflict, they must be interpreted in a way that allows both to
coexist without invalidating each other.
 Applicability in Taxation: Applied to resolve conflicts between central and state tax
laws or different provisions within a tax statute.
 Case Law:
o CIT v. Hindustan Bulk Carriers (2003): The Supreme Court applied
harmonious construction to resolve conflicting provisions in the Income Tax Act.

5. Doctrine of Colourable Legislation

 Principle: A legislature cannot do indirectly what it is prohibited from doing directly.

 Applicability in Taxation: Used to strike down tax laws disguised to achieve an
unconstitutional objective.
 Case Law:
o K.C. Gajapati Narayan Deo v. State of Orissa (1954): A land revenue tax law
was struck down as a colorable legislation to confiscate zamindari estates.

6. Doctrine of Territorial Nexus

 Principle: A tax law is valid if there is a sufficient connection or nexus between the
subject of taxation and the taxing authority's jurisdiction.
 Applicability in Taxation: Determines the validity of taxing non-residents or entities
outside the territorial jurisdiction.
 Case Law:
o Wallace Brothers v. CIT (1948): The court upheld income tax on a non-resident
company with substantial business operations in India.
7. Doctrine of Prospective Overruling

 Principle: Judicial decisions invalidating laws apply prospectively to avoid disrupting

past transactions.
 Applicability in Taxation: Applied to mitigate the retrospective effects of a judicial
declaration invalidating a tax law.
 Case Law:
o Golaknath v. State of Punjab (1967): The doctrine was used to limit the
retrospective effect of judgments in constitutional matters, including taxation.

Conclusion

Constitutional doctrines play a pivotal role in maintaining the legality and equity of taxation laws
in India. By applying these doctrines, courts ensure that taxing statutes comply with
constitutional principles and protect individual rights. This approach not only upholds the rule of
law but also fosters trust in the taxation system, ensuring its legitimacy and acceptance among
citizens

UNIT III

9. Explain the residential rule in the income tax and determine the residential status of all
categories under section 6 of Income Tax Act,1961.

Introduction

The Income Tax Act, 1961 determines the tax liability of an individual or entity based on their
residential status. Section 6 of the Act provides the criteria for determining whether a person is
a resident, non-resident, or resident but not ordinarily resident (RNOR) in India. The
residential status is crucial because it governs the scope of income subject to tax in India.

Residential Rule in Income Tax

Under the Act, an individual’s residential status affects the income liable to taxation:

1. Residents: Taxable on their global income, including income earned outside India.
2. Non-Residents (NR): Taxable only on income received in India, accrued in India, or
deemed to accrue/arise in India.
3. Resident but Not Ordinarily Resident (RNOR): Taxable on:
o Income received or accrued in India.
o Income derived from a business controlled in or a profession set up in India.
Determining Residential Status Under Section 6

A. For Individuals

Section 6(1) specifies two main conditions:

1. Basic Condition:
An individual is a resident in India if they satisfy any one of the following:
o Stayed in India for 182 days or more during the relevant financial year.
o Stayed in India for 60 days or more during the relevant financial year and for
365 days or more in the four preceding years.

Exceptions (Relaxation for Indian Citizens):

o For Indian citizens leaving India for employment or as crew of an Indian ship,
the second condition is replaced by a 182-day rule.
o For Indian citizens or persons of Indian origin visiting India, the 60 days
condition is extended to 120 or 182 days, depending on their total income in
India.
2. Additional Condition (for RNOR Status):
To qualify as RNOR, a resident must satisfy any one of these:
o Non-resident in India in 9 out of 10 previous years preceding the current year.
o Stayed in India for 729 days or less in the seven preceding years.

B. For Hindu Undivided Families (HUF), Firms, and Other Entities

Section 6(2) states that a HUF, firm, or other entity is considered a resident in India if its
control and management is situated wholly or partly in India during the relevant financial
year. If the control and management is entirely outside India, the entity is a non-resident.

C. For Companies

Section 6(3) lays down the conditions for companies:

 Indian Companies: Always treated as residents.

 Foreign Companies: Considered residents if the place of effective management
(POEM) is situated wholly or partly in India during the financial year.

D. For Other Persons

Section 6(4) specifies that for every other person, the criteria are based on the location of control
and management of their affairs.
llustration of Residential Status Determination for Individuals

Scenario Residency Status

Stayed in India for 200 days in FY Resident
Stayed in India for 90 days in FY and 400 days in the last 4 Resident (meets the second
years condition)
Stayed in India for 50 days in FY and 300 days in the last 4
Non-Resident
years
Non-Resident (182-day rule
Indian citizen working abroad, visited India for 120 days
applies)

Important Judicial Interpretations

1. Commissioner of Income Tax v. A. K. Lakshmi (1991):

o The court clarified that even temporary absences do not break the continuity of
stay if the intent is to reside in India.
2. Union of India v. Azadi Bachao Andolan (2003):
o Emphasized the importance of adhering to the statutory conditions in determining
residential status.

Conclusion

The residential status under Section 6 of the Income Tax Act, 1961, is a cornerstone in
determining the scope of taxable income. The clear and precise conditions ensure that tax
liability is fairly imposed, respecting individual circumstances and international considerations.
Proper determination of residential status not only avoids disputes but also ensures compliance
with tax laws.

10. Discuss the provisions related to Agriculture income. Whether the agricultural income

is applicable for tax exemption?

1. Taxability and Exemption of Agricultural Income (Section 10(1))

 Agricultural income is exempt from tax under Section 10(1) of the Income Tax Act,
1961.
 Income derived from agricultural operations, whether the person is an individual, Hindu
Undivided Family (HUF), or a trust, is not included in the total taxable income.
 Agricultural income includes not just the income from the land and produce but also any
associated income, like rent from agricultural land, sale of livestock used for agricultural
purposes, and income from agricultural operations.

2. Limitations and Conditions for Exemption

While agricultural income is exempt from tax, certain conditions and limitations apply:

 The income must be genuinely agricultural, meaning the land must be used for
cultivation of crops or other agricultural activities.
 Income from land not used for agriculture (e.g., a building or non-agricultural activity
on agricultural land) is not exempt.
 Exemption is only at the national level; state governments have the power to tax
agricultural income, so there can be variability in state tax laws.
 In the case of a combined income (i.e., both agricultural and non-agricultural), the
agricultural income is considered for determining the tax bracket but does not attract tax.
It is relevant primarily for the purpose of applying progressive tax rates on non-
agricultural income.

3. Agrarian Income and Wealth Tax

Income derived from agricultural land may also be subject to wealth tax under the Wealth Tax
Act, if the land is classified as capital assets.

Taxability of Agricultural Income for an Individual’s Total Income

Agricultural income is not taxable under the Income Tax Act itself, but its inclusion becomes
important when computing an individual's total income for determining the applicable income
tax rate. This is particularly relevant in the following cases:

1. When the Individual’s Total Income Exceeds Rs. 2.5 Lakhs (Basic Exemption
Limit):
o If an individual has non-agricultural income above the threshold for income tax
(Rs. 2.5 lakh for individuals below 60 years), agricultural income will be
considered for calculating the applicable tax rate.
o While agricultural income remains exempt, it will influence the progressive tax
rate applicable to non-agricultural income.
2. Rate of Tax Based on Agricultural Income:
o When agricultural income exceeds Rs. 5,000 and combined income exceeds the
taxable limit, the progressive tax rates on non-agricultural income apply, and an
individual may qualify for tax benefits or exemptions based on total income.

Case Law on Agricultural Income and Tax Exemption

1. CIT v. Raja Benoy Kumar Sahas Roy (1957):

o The Supreme Court held that income from agricultural operations includes not
just income derived directly from the land but also income from agricultural
operations like the sale of seeds or fertilisers if the activity is part of the farming
process.

Conclusion
Agricultural income is broadly exempt from income tax under Section 10(1) of the Income Tax
Act, 1961, with a few conditions. The aim of the exemption is to encourage agriculture and
protect the interests of the farming community. However, while agricultural income itself is not
taxable, its influence on the calculation of tax rates for non-agricultural income is significant,
especially for high-income earners. Additionally, some states may impose taxes on agricultural
income under their local laws, which can vary from one state to another.

11. Income House Property from– Explain. What are the conditions to be satisfied?
Introduction

Income from House Property is one of the heads of income under the Income Tax Act, 1961.
It refers to income earned from owning a property, whether residential or commercial, that is
used for the purpose of earning rental income or is considered as a source of income due to its
ownership. The Act provides specific rules for the taxation of income derived from house
property, with particular conditions for determining the taxable amount and the exemptions
available.

What Constitutes Income from House Property?

Income from house property refers to the income derived by an individual or entity from owning
a property that is either let out or used for self-occupation. The essential factors that are
considered when computing income under this head are:

1. Ownership of Property:
o The person receiving income must be the owner of the property.
o Income is taxed only if the person owns the property, irrespective of whether the
property is used for residential or commercial purposes.
2. Use of Property:
o The property may be used for the purpose of business, renting out (i.e., leasing),
or may be self-occupied.
o For taxation purposes, renting out a property generates income under this head.

Conditions to be Satisfied for Taxing Income from House Property

Section 22 of the Income Tax Act, 1961, outlines the conditions under which income from
house property is taxed. Below are the primary conditions that must be satisfied:

1. Ownership of the Property

 The taxpayer must be the owner of the house property, i.e., the property must be
registered in their name.
 If the property is jointly owned, the income is apportioned between the co-owners based
on their share in the property.
 The ownership of the property is the key factor in determining the taxability of income
under this head.
2. Property Must Be Used for the Purpose of Earning Income

 Self-Occupied Property: If the property is not rented out and is used for personal
purposes (self-occupied), the taxpayer will be allowed certain exemptions, like a
deduction for interest on housing loans.
 Let-Out Property: If the property is rented out, the income from the rent received is
taxable under this head, and the taxpayer can claim deductions such as municipal taxes
paid and interest on housing loans.

3. Property Must Be Used for Non-Business Purposes

 The property must not be used for the purpose of business or profession. If a person uses
their house property as part of their business or profession (for example, using a house as
a shop or office), the income from such property would be considered under the head
Profits and Gains of Business or Profession, not under House Property.

4. Property Must Be Let-Out or Available for Let-Out

 If the property is rented out, the income generated will be considered as income from
house property. The actual rental income received is taxed.
 Annual Value: For a house property that is let out, the annual value of the property is
determined by the higher of the actual rent received or the fair rental value of the
property.

5. Deductions Under Section 24

 The income from house property is computed after allowing certain deductions under
Section 24 of the Income Tax Act.
 The following deductions are available:
o Standard Deduction: A standard deduction of 30% of the annual value of the
property is allowed, irrespective of the actual expenses incurred.
o Interest on Loan: Interest paid on loans taken for the purchase, construction,
repair, or renovation of the property is deductible. The maximum deduction for
interest on loans for self-occupied property is ₹2,00,000 per year. For let-out
properties, there is no limit on the interest deduction, but it can only be offset
against rental income.

6. Calculation of Annual Value

The annual value of the property is calculated based on the following principles:

1. Gross Annual Value (GAV):

o The actual rent received or the fair rental value is taken as the gross annual value
of the property.
2. Net Annual Value (NAV):
 o From the gross annual value, municipal taxes paid are deducted to arrive at the
net annual value.

Formula:

Annual Value=GAV−Municipal Taxes Paid\text{Annual Value} = \text{GAV} - \

text{Municipal Taxes Paid}Annual Value=GAV−Municipal Taxes Paid

7. Self-Occupied Property

For self-occupied property, the annual value is considered to be nil (i.e., zero) if the property is
not rented out and is used for personal purposes.

 In the case of a self-occupied house property, if a loan is taken to buy, construct, or

renovate the property, the taxpayer can claim a deduction of up to ₹2,00,000 for interest
paid on such loans.

Case Laws on Income from House Property

1. CIT v. S.G. Mercantile Corporation Ltd. (1972):

o The Supreme Court held that income from property is taxed under the head of
House Property, even if the property is used for business purposes, as long as it
is not used in an active business or profession.
2. K.K. Verma v. CIT (1995):
o The court clarified that rental income is taxable under the head House Property
and that the standard deduction of 30% applies to the gross annual value, not just
the income received.

Conclusion

Income from house property is a significant head of income under the Income Tax Act, 1961.
The key factor in determining the taxable amount is the ownership and usage of the property.
Taxpayers must be aware of the various deductions available under Section 24, such as the
standard deduction and interest on home loans, which can help reduce taxable income.
Additionally, the provisions for self-occupied and let-out properties are distinct and have
different implications for taxation.

12. Income from salary - explain

Introduction
Income from Salary is one of the five heads of income under the Income Tax Act, 1961, and it
refers to the income received by an individual from an employer in return for services rendered.
This is one of the most common and significant sources of income for individuals and includes
various components such as basic salary, allowances, bonuses, and benefits. The provisions
under this head deal with the taxation of all income earned by an employee during the course of
employment.

What Constitutes Salary Income?

According to Section 15 of the Income Tax Act, 1961, income from salary includes the
following:

1. Basic Salary:
o This is the fixed salary paid to an employee before any allowances or deductions.
It forms the core part of the salary and is fully taxable.
2. Allowances:
o These are payments made to employees for specific purposes and are usually
added to the basic salary. Some common types of allowances include:
 House Rent Allowance (HRA)
 Special Allowance
 Dearness Allowance (DA)
 Transport Allowance
 Children Education Allowance, etc.
 Taxability: Some allowances are fully taxable, while others, like HRA,
may be partially exempt depending on the conditions met.
3. Bonus:
o Bonus is a payment made to employees typically at the end of the year or during
festivals. It is generally taxable as part of salary income.
4. Commissions:
o Any commission or incentive paid to the employee for meeting specific targets or
achievements is considered income from salary.
5. Perquisites/Benefits:
o These are non-monetary benefits or perks provided by the employer, such as:
 Rent-free accommodation
 Company car
 Stock options
 Medical benefits
o Some perquisites may be taxable, depending on their nature, and the employee’s
taxability will depend on how the employer provides these benefits.

6. Gratuity and Pension:

o Gratuity: A sum of money paid by an employer to an employee when they retire
or leave the job, which is partially exempt from tax under certain conditions.
 o Pension: Any pension received by an employee after retirement is also taxable as
income under this head.
7. Retirement Benefits:
o Amounts received as Provident Fund (PF), Superannuation Fund, or
Commutation of Pension are treated as salary income in some cases, although
certain portions are exempt.
8. Leave Encashment:
o Leave encashment received by employees upon retirement or while in service is
partly exempt, depending on the amount and the circumstances.

Taxability of Salary Income

The salary income of an employee is fully taxable under the head Income from Salary, with
certain deductions available under the provisions of the Act. The general procedure for
calculating taxable salary income is as follows:

1. Gross Salary
The total of all salary components, such as:
o Basic Salary
o Allowances
o Bonus
o Commissions
o Perquisites (as per prescribed valuation)
2. Exemptions/Allowances
Some allowances, like HRA (House Rent Allowance), Leave Travel Allowance
(LTA), etc., may be eligible for partial or full exemption, subject to certain conditions:
o HRA Exemption: To qualify for HRA exemption, the employee must meet
specific criteria such as paying rent, staying in a rented house, and the rent paid
should exceed 10% of the basic salary.
3. Deductions
o Professional Tax: If applicable, any professional tax deducted from the salary is
allowed as a deduction.
o Employee’s Contribution to Provident Fund (EPF): Contributions to PF made
by the employee are eligible for a deduction under Section 80C.
o Taxable Salary After Deductions: The final taxable salary is the gross salary
minus the applicable exemptions and deductions.

Key Provisions for Salary Income

1. Section 10(13A) - House Rent Allowance (HRA):

o Exemption is available for HRA, subject to certain conditions such as rent
payment and salary.
2. Section 17 - Definition of Salary:
o Section 17 of the Income Tax Act defines salary and includes all the payments
like salary, wages, annuity, pension, and other components (allowances, bonuses,
etc.) received by an employee.
 3. Section 10(10) - Gratuity:
o The taxability of gratuity depends on the tenure of service and the nature of the
employer. Gratuity received from a government employer is fully exempt, while
for private employees, there are certain limits on exemption.
4. Section 80C - Deduction for Employee’s Contribution to Provident Fund (PF):
o Employees can claim a deduction under Section 80C for contributions to the
Provident Fund, up to a maximum of ₹1.5 lakh per year.

Example Calculation of Taxable Salary

Let’s consider an example where an employee has the following details:

 Basic Salary: ₹60,000 per month

 House Rent Allowance (HRA): ₹20,000 per month
 Special Allowance: ₹10,000 per month
 Bonus: ₹50,000 per year
 Professional Tax: ₹2,500 per year
 Employee’s Contribution to Provident Fund (PF): ₹1,00,000 per year

Step 1: Calculate Gross Salary (Annual)

 Basic Salary = ₹60,000 × 12 = ₹7,20,000

 HRA = ₹20,000 × 12 = ₹2,40,000
 Special Allowance = ₹10,000 × 12 = ₹1,20,000
 Bonus = ₹50,000

Gross Salary = ₹7,20,000 + ₹2,40,000 + ₹1,20,000 + ₹50,000 = ₹11,30,000

Final Taxable Salary = ₹11,30,000 - (Exemptions and Deductions)

Exemptions and Deductions Under Salary Income

1. Standard Deduction:
o A standard deduction of ₹50,000 is available to salaried employees for the
assessment year 2023-24 onward, which reduces the taxable income.
2. Tax Rebate Under Section 87A:
o Individuals earning income below a specified threshold (₹5 lakh) may be eligible
for a rebate of up to ₹12,500 under Section 87A, further reducing their tax
liability.

UNIT IV
13. Explain Capital gain along with Charging sections. List out the Long term capital

assert and Short term capital assert.

Introduction

Capital Gains refer to the profit earned from the sale or transfer of capital assets, such as
property, sto\cks, bonds, or mutual funds. The profit or gain is calculated by subtracting the cost
of acquisition and the cost of improvement of the asset from the sale price. The income from
capital gains is taxable under the Income Tax Act, 1961, and is classified into two categories:

1. Long-Term Capital Gains (LTCG)

2. Short-Term Capital Gains (STCG)

Capital gains are taxed differently based on whether the asset is held for the long term or the
short term.

Charging Sections for Capital Gains

1. Section 45 of the Income Tax Act, 1961:

This section provides the general provisions regarding the taxation of capital gains. It
states that the profit or gain arising from the transfer of a capital asset or a stock-in-trade
is taxable under the head Capital Gains.
2. Section 48:
This section provides the method for computing capital gains, i.e., how to calculate the
taxable capital gain from the transfer of a capital asset. The formula is as follows:
3. Section 54, 54F, 54EC, and 54B:
These sections provide for various exemptions and deductions available for capital gains
arising from the sale of residential property, agricultural land, investments in bonds,
and others.
4. Section 112:
This section provides for the taxation of long-term capital gains on the sale of listed
securities and certain assets, offering concessional rates of tax.

Categories of Capital Assets

A capital asset is defined under Section 2(14) of the Income Tax Act and includes any property
held by a taxpayer, whether or not connected with their business or profession, except:

 Stock-in-trade (business inventory)

 Raw material or consumable stores used in the business
 Personal items, like clothes, furniture, etc.

The capital assets can be divided into two broad categories:

 1. Long-Term Capital Assets (LTCG)
2. Short-Term Capital Assets (STCG)

Long-Term Capital Assets (LTCG)

A long-term capital asset is one that has been held for more than a specified period before it is
sold or transferred. The holding period for determining whether an asset is long-term or short-
term depends on the nature of the asset:

 For immovable property (e.g., land, building): The asset must be held for more than 2
years.
 For listed securities (stocks, mutual funds, etc.): The asset must be held for more than
1 year.
 For unlisted shares and bonds: The asset must be held for more than 2 years.
 For debt mutual funds: The asset must be held for more than 3 years.

Tax Treatment of LTCG

 Exemption:
In certain cases, LTCG may be exempt under provisions like Section 54 (for residential
property) or Section 54EC (for bonds).
 Tax Rate:
The rate of tax for LTCG depends on the type of asset. For example:
o Listed equity shares or equity-oriented mutual funds: Taxed at 10% (without
indexation) if the gain exceeds ₹1 lakh in a financial year.
o Other assets (real estate, etc.): Taxed at 20% (with indexation) or 10% (without
indexation), as applicable.

Short-Term Capital Assets (STCG)

A short-term capital asset is one that is held for a period equal to or less than the specified
holding period. The holding period for determining short-term assets is as follows:

 For immovable property (land, building): The asset is considered short-term if held for
2 years or less.
 For listed securities: The asset is considered short-term if held for 1 year or less.
 For unlisted shares and bonds: The asset is considered short-term if held for 2 years or
less.
 For debt mutual funds: The asset is considered short-term if held for 3 years or less.

Tax Treatment of STCG

 Tax Rate:
STCG is taxed at higher rates compared to LTCG. For instance:
o Listed equity shares or mutual funds: Taxed at 15% if the asset is held for 1
year or less.
 o Other assets (real estate, etc.): Taxed at normal income tax rates based on the
individual's income slab.

Examples of Long-Term and Short-Term Capital Assets

Long-Term Capital Assets

1. Immovable Property:
A piece of land bought in 2015 and sold in 2025 will be classified as a long-term capital
asset, as it has been held for more than 2 years.
2. Listed Securities:
A stock purchased in 2019 and sold in 2023 will be a long-term capital asset, as it has
been held for more than 1 year.
3. Unlisted Shares:
Shares bought in a private company in 2016 and sold in 2023 will be long-term, as the
holding period exceeds 2 years.

Short-Term Capital Assets

1. Immovable Property:
A house bought in 2020 and sold in 2021 will be classified as a short-term capital asset,
as it has been held for less than 2 years.
2. Mutual Funds:
Units of a debt mutual fund purchased in 2022 and sold in 2023 will be short-term, as
they were held for less than 3 years.

Capital Gains Tax Calculation Example

Example 1: Long-Term Capital Gain

 Sale Price: ₹12,00,000

 Cost of Acquisition: ₹8,00,000
 Cost of Improvement: ₹50,000
 Expenses on Transfer: ₹20,000

The capital gain would be calculated as:

Capital Gain=₹12,00,000−(₹8,00,000+₹50,000+₹20,000)=₹3,30,000\text{Capital Gain} =

₹12,00,000 - (₹8,00,000 + ₹50,000 + ₹20,000) = ₹3,30,000Capital Gain=₹12,00,000−
(₹8,00,000+₹50,000+₹20,000)=₹3,30,000

If this is a long-term capital gain on listed securities, it will be taxed at 10% (if it exceeds ₹1
lakh).

14. Income from Other sources - Explain

Introduction

Income from Other Sources is one of the five heads of income under the Income Tax Act,
1961. This head serves as a residual category, meaning that any income that does not fall under
the other four specific heads—Salary, Income from House Property, Profits and Gains of
Business or Profession, or Capital Gains—is taxable under this head. It includes various types
of income that do not have specific provisions under the other heads.

Section 56 of the Income Tax Act, 1961 governs the taxation of Income from Other Sources.

Components of Income from Other Sources

Income from Other Sources covers a wide range of income, such as:

1. Interest Income
o Interest earned on savings accounts, fixed deposits, recurring deposits, and bonds
is taxable under this head.
o Example: Interest on fixed deposit, savings account, or bonds.
2. Dividend Income
o Dividends received from domestic companies and foreign companies are taxable
under this head.
o However, dividends up to ₹10 lakh per year are exempt for individuals and
HUFs under Section 10(34).
3. Income from Lottery or Gambling
o Prizes won from lotteries, gambling, betting, or horse races are taxable under this
head.
o This income is taxed at a flat rate of 30% (without any exemptions or
deductions).
4. Gifts and Prizes
o Gifts exceeding ₹50,000 received by an individual or HUF are taxable as income
from other sources, unless they are received from close relatives or on special
occasions.
o Example: A cash gift of ₹60,000 from a friend would be taxable under this head.
5. Rental Income from Non-Residential Property
o Income earned from renting or leasing property that does not qualify as house
property (e.g., commercial property) may be taxable under this head.
6. Income from Subletting Property
o If a person sublets a property and earns rent, the income is taxable under "Income
from Other Sources," not under "Income from House Property."
7. Income from Agricultural Land
o Income from agricultural land situated in India is typically not taxable, but if the
income is generated from sources other than agriculture (e.g., renting out land), it
may fall under this head.
8. Income from Partnerships or Companies (if not falling under other heads)
o In certain cases, income earned from partnerships, joint ventures, or companies
(such as interest or royalties) may be classified as income from other sources.
 9. Income from Sale of Scrap
o Income from the sale of scrap (e.g., metals, machinery) may be taxable under this
head if it does not qualify as business income.
10. Income from Subletting of Property
o Rent earned from subletting a property is considered income from other sources.

Key Provisions under Income from Other Sources

1. Section 56(1):
o This section prescribes that income not falling under the other heads shall be
charged to tax under the head "Income from Other Sources."
2. Section 56(2):
o This section specifies that certain incomes, such as gifts exceeding ₹50,000, shall
be treated as Income from Other Sources and taxed accordingly.
3. Section 10(34):
o Dividend Income: Any dividend income up to ₹10 lakh is exempt from tax for
individuals, Hindu Undivided Families (HUF), and certain other entities.
4. Section 115BB:
o Lottery, Gambling, and Betting: If the income comes from lotteries, gambling,
or betting, it is taxable under this head at a flat rate of 30%.
5. Section 57:
o Deductions: This section allows for deductions related to income from other
sources, such as:
 Expenses incurred for earning the income (e.g., interest on loans taken to
invest in interest-bearing assets).
 Deduction of expenses related to the maintenance of properties generating
income, such as repairs or depreciation on machinery (in some cases).

Taxability of Specific Incomes under Other Sources

1. Interest on Fixed Deposits and Savings Accounts

o Taxable: Interest earned on fixed deposits, recurring deposits, savings accounts,
etc., is taxable under this head.
o Exemption: Interest on savings account up to ₹10,000 is exempt under Section
80TTA (for individuals and HUFs).
2. Lottery Winnings and Betting Income
o Taxable: Income from lotteries, crossword puzzles, betting, and gambling is
taxed at 30%, and no exemptions or deductions are allowed.
3. Gifts
o Taxable: Gifts exceeding ₹50,000 are taxable under this head unless they are
received from close relatives or during certain occasions (e.g., marriage, birthday,
etc.).
o Exemption: Gifts received from relatives or on certain occasions like marriage
are exempt.
4. Dividend Income
 o Taxable: Dividend income from domestic companies is taxable under this head,
though it is exempt if the total amount of dividend received does not exceed ₹10
lakh in a year.
o Exemption: Under Section 10(34), any dividend income received by an
individual or HUF up to ₹10 lakh is exempt from tax.

Example of Income from Other Sources Calculation

Let’s assume an individual has the following sources of income under Income from Other
Sources:

 Interest on Fixed Deposit: ₹30,000

 Dividend from Mutual Fund: ₹12,000
 Lottery Prize: ₹1,00,000
 Gift Received from a Friend: ₹60,000 (non-relative)

Step 1: Calculate Total Income from Other Sources

 Interest on FD = ₹30,000
 Dividend from Mutual Fund = ₹12,000
 Lottery Prize = ₹1,00,000
 Gift from Friend (Taxable) = ₹60,000

Total Income from Other Sources = ₹30,000 + ₹12,000 + ₹1,00,000 + ₹60,000 = ₹2,02,000

Step 2: Apply Tax Provisions

 Lottery Prize of ₹1,00,000: Taxed at 30%.

Tax on Lottery Prize = ₹1,00,000 × 30% = ₹30,000
 Interest and Dividend: Taxable as per normal tax slabs.

Deductions under Income from Other Sources

Under Section 57, certain deductions are available for income from other sources:

 For interest income: Deduction for the interest paid on loans taken for investment in
interest-bearing assets.
 For property-related income: Expenses related to the property, such as repairs,
depreciation, or rent.
 For income from royalties: Royalties received for intellectual property can also be
deducted for expenses directly related to earning that income.

15. Explain the Concept of Set off and Carry forward under income tax act.
 Introduction

The concept of Set Off and Carry Forward allows taxpayers to offset or adjust their losses
against their income to reduce their overall tax liability. These provisions ensure that taxpayers
are not taxed on income that is offset by losses incurred in the same or previous years.

These concepts are governed by the Income Tax Act, 1961, under various provisions, primarily
Sections 70 to 80. These provisions apply to various types of losses under different heads of
income and provide flexibility in how taxpayers report and reduce their taxable income.

Set Off of Losses

Set Off refers to the adjustment of losses against the income earned in the same assessment year,
within the same head of income or between different heads of income. The main objective is to
reduce the tax liability by setting off the losses against the income.

Types of Set Off:

1. Intra-Head Set Off (Within the Same Head of Income)

o A loss from one source of income under a particular head can be set off against the income from
other sources within the same head.
o Example: If a taxpayer has a loss from a house property of ₹2,00,000, and a profit from
another house property of ₹3,00,000, the loss from one property can be set off against the
profit from the other, resulting in a net taxable income of ₹1,00,000 under the head "Income
from House Property."
2. Inter-Head Set Off (Across Different Heads of Income)
o A loss from one head of income can be set off against the income from another head, subject to
specific conditions and restrictions.
o Example: A loss from Business or Profession can be set off against income from Salary,
Income from Other Sources, etc. However, some losses (e.g., capital losses) can only be set off
against specific types of income, such as capital gains.

Set Off Provisions:

1. Section 70 – Losses under the same head

o Losses under one head can be set off against income under the same head.
 Example: Loss from Business or Profession can be set off against income from business or
profession.
2. Section 71 – Losses under one head can be set off against income under other heads
o Business Loss can be set off against Salary income or Income from Other Sources.
o Loss from House Property can be set off against income from any other head, except Capital
Gains.
 Example: Loss from house property can be set off against salary income.
3. Section 71B – Set off of Carry Forward Losses of Business or Profession
o Losses under the head "Profits and Gains of Business or Profession" can be carried forward to
subsequent years if they cannot be set off in the same year.
 Carry Forward of Losses

Carry Forward refers to the provision that allows a taxpayer to carry forward a loss that has not
been fully set off in the current year to future years. The taxpayer can then set off these losses
against income in those subsequent years.

Types of Losses That Can Be Carried Forward:

1. Business Losses (Other Than Speculation Loss)

o Losses under Profit and Gains of Business or Profession (except for speculative business
losses) can be carried forward for 8 consecutive assessment years and set off against future
profits from business.
o Example: If a taxpayer incurs a business loss of ₹5,00,000 in the year 2022, this loss can be
carried forward and set off against business profits in subsequent years up to 2029.
2. Capital Losses
o Short-Term Capital Loss can be carried forward for 8 years and set off only against short-
term capital gains.
o Long-Term Capital Loss can be carried forward for 8 years and set off only against long-term
capital gains.
o Example: If a taxpayer has a short-term capital loss in the year 2022, it can be carried forward to
the next year and set off against short-term capital gains.
3. Losses from House Property
o Losses from house property (except the loss from business of owning a house property) can be
carried forward for 8 years and set off only against income from house property in the future
years.
4. Speculation Losses
o Speculative business loss can be carried forward for 4 years and set off only against income
from speculative business.
o Example: Losses incurred in a business involving the trading of shares or commodities can be
carried forward and adjusted against profits from the same type of business in subsequent years.
5. Losses from Other Sources
o Losses from other sources (such as unabsorbed interest income or losses in gambling) are
generally not allowed to be carried forward. However, certain specified losses like those from a
business, house property, or capital losses can be carried forward.

Limitations and Restrictions on Carry Forward and Set Off

1. Losses Can Only Be Set Off Against Income of the Same Type
o Certain types of losses can only be set off against specific types of income.
 Example: A long-term capital loss can only be set off against long-term capital gains, and a
short-term capital loss can only be set off against short-term capital gains.
2. Loss from House Property
o Loss from house property can be set off against any income (except capital gains) in the same
year. If the loss is not fully set off, it can be carried forward to subsequent years and adjusted
against future income from house property.
3. Unabsorbed Depreciation
o Unabsorbed depreciation is not treated as a loss for the purposes of carry forward and set off
under the business head but can be carried forward indefinitely to subsequent years and set off
against future profits.
4. Return Filing Requirement for Carrying Forward Losses
o To carry forward a loss, the taxpayer must file their income tax return (ITR) within the due date
(i.e., before the end of the assessment year). If the return is filed after the due date, the loss
cannot be carried forward.

Example of Set Off and Carry Forward

Scenario 1: Set Off within the Same Year

 Income from Salary: ₹5,00,000

 Business Loss: ₹2,00,000
 Income from Other Sources: ₹1,00,000

In this case, the business loss of ₹2,00,000 can be set off against the income from salary and
income from other sources:

 Net Taxable Income = ₹5,00,000 (Salary) + ₹1,00,000 (Other Sources) - ₹2,00,000

(Business Loss) = ₹4,00,000

Thus, the taxpayer's taxable income is ₹4,00,000, after setting off the loss.

Scenario 2: Carry Forward of Losses

 Business Loss: ₹4,00,000 (In Year 1)

 Profit in Future Year (Year 2): ₹6,00,000

In Year 2, the taxpayer can carry forward the business loss of ₹4,00,000 from Year 1 and set it
off against the profit in Year 2:

 Net Taxable Income for Year 2 = ₹6,00,000 - ₹4,00,000 (Business Loss) = ₹2,00,000

Thus, the business loss is carried forward from Year 1 to Year 2 and adjusted against the profit
in Year 2.

16. Write a brief note on Deduction. Explain in detail any 6 of Chapter VI A deductions
available under the Income Tax Act.
Deductions under the Income Tax Act, 1961 are provisions that allow taxpayers to reduce their
total taxable income, thereby lowering their overall tax liability. These deductions are provided
under Chapter VI-A of the Act and are available to individuals, Hindu Undivided Families
(HUFs), and other taxpayers depending on the nature of the deduction.

Deductions under Chapter VI-A are available for various types of expenses, investments, and
contributions that promote savings, health insurance, education, etc. These deductions are subject
to certain conditions and limits, and they are broadly classified under different sections (e.g.,
Section 80C, Section 80D, Section 80E, etc.).

Key Sections of Chapter VI-A

 Section 80C: Deductions for investments in specified financial products.

 Section 80D: Deductions for premiums paid on health insurance policies.
 Section 80E: Deduction for interest on loans taken for higher education.
 Section 80G: Deductions for donations made to charitable institutions.
 Section 80TTA: Deduction on interest income from savings accounts.
 Section 80GGC: Deduction for contributions made to political parties.

Six Important Deductions under Chapter VI-A

1. Section 80C - Deductions for Investments in Specified Instruments

Overview:
This section allows deductions for investments made in specified financial instruments.
The total deduction under Section 80C is ₹1.5 lakh per annum.

Eligible Investments/Expenditures:

o Employee Provident Fund (EPF), Public Provident Fund (PPF), National

Savings Certificates (NSC), Tax-Saving Fixed Deposits.
o Life Insurance Premiums.
o Tuition Fees paid for the education of children.
o Principal Repayment of a home loan.

Example:
If a taxpayer invests ₹1.5 lakh in eligible instruments under Section 80C (e.g., ₹1 lakh in
PPF and ₹50,000 in EPF), they can claim the full ₹1.5 lakh as a deduction from their
total taxable income.

2. Section 80D - Deduction for Health Insurance Premiums

Overview:
This section provides a deduction for premiums paid for health insurance policies for
self, family, and parents. The maximum deduction available is based on the age of the
insured.
 Eligible Deductions:

o Self and Family: Up to ₹25,000 for individuals below 60 years.

o For senior citizens (above 60 years), the deduction increases to ₹50,000.
o Parents: If the taxpayer's parents are senior citizens, an additional deduction of
₹50,000 is available.

Example:
If an individual pays ₹25,000 for their own health insurance and ₹50,000 for their senior
citizen parents, they can claim a total deduction of ₹75,000.

3. Section 80E - Deduction for Interest on Education Loans

Overview:
This section provides a deduction on the interest paid on loans taken for pursuing higher
education. The deduction is available for 8 years from the year the loan is taken or until
the interest is fully paid, whichever is earlier.

Eligible Expenses:

o Interest paid on loans for higher education (e.g., undergraduate, postgraduate,

and professional courses).
o The deduction is only available for the interest component of the loan, not the
principal repayment.

Example:
If a taxpayer pays ₹40,000 as interest on an education loan in a financial year, they can
claim the full ₹40,000 as a deduction under Section 80E.

4. Section 80G - Deduction for Donations to Charitable Institutions

Overview:
This section provides deductions for donations made to charitable institutions and
funds approved by the government. The deduction can be 100% or 50% of the amount
donated, depending on the organization.

Eligible Donations:

o Donations to Prime Minister's National Relief Fund.

o Donations to National Defence Fund, Charitable Institutions, and Research
Organizations.
o Donations are either fully deductible or deductible at 50%, depending on the
institution's eligibility.
 Example:
If a taxpayer donates ₹10,000 to a charity eligible under Section 80G, they can claim the
full ₹10,000 as a deduction (assuming it qualifies for 100% deduction).

5. Section 80TTA - Deduction on Interest Income from Savings Accounts

Overview:
This section provides a deduction of up to ₹10,000 on the interest income earned from
savings accounts held in banks, post offices, or cooperative banks.

Eligibility:

o The deduction is available only for interest income earned on savings accounts.
o It is applicable to individuals and Hindu Undivided Families (HUFs), but not
applicable to interest from fixed deposits.

Example:
If an individual earns ₹8,000 as interest on their savings account during the year, they
can claim a deduction of ₹8,000 under Section 80TTA. If the interest is ₹12,000, the
maximum deduction will be limited to ₹10,000.

6. Section 80U - Deduction for Persons with Disabilities

Overview:
This section provides a deduction for individuals with disabilities (as defined under the
Persons with Disabilities Act). The deduction is available for a person who is certified
as having a disability by a medical authority.

Eligible Deduction:

o ₹75,000 for individuals with a disability (degree of disability not less than 40%).
o ₹1,25,000 for individuals with a severe disability (degree of disability 80% or
more).

Example:
If an individual with a severe disability (80% or more) claims a deduction under Section
80U, they can avail of a ₹1,25,000 deduction from their taxable income.

UNIT V
17. Explain the meaning and Scope of Good and Service Tax
Introduction to GST

Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based tax that is
levied on thesupply of goods and services. It is one of the most significant tax reforms
introduced in India, aiming to create a single unified market by subsuming various indirect taxes
into one system. GST was introduced in India on July 1, 2017, with the objective of simplifying
the taxation structure, eliminating the cascading effect of taxes, and boosting economic growth.

GST is governed by the Goods and Services Tax Act, 2017 and is administered by the GST
Council, which is responsible for making recommendations on important issues related to GST.

Meaning of Goods and Services Tax (GST)

GST is a single tax on the supply of goods and services, which means it replaces a host of
indirect taxes that were previously levied by the Central and State Governments, such as:

 Central Excise Duty

 Service Tax
 Value Added Tax (VAT)
 Central Sales Tax (CST)
 Luxury Tax
 Entry Tax
 Octroi
 Entertainment Tax (excluding tax on cinema)

GST is divided into three main taxes:

1. Central Goods and Services Tax (CGST): Levied by the Central Government on
intra-state supply of goods and services.
2. State Goods and Services Tax (SGST): Levied by the State Government on intra-state
supply of goods and services.
3. Integrated Goods and Services Tax (IGST): Levied by the Central Government on
inter-state supply of goods and services.

Scope of GST

The scope of GST is vast and applies to various sectors of the economy, including
manufacturing, services, and trade. Below are the key elements that define its scope:

1. Goods and Services Covered by GST

 Goods: All goods (except those specifically exempted) are subject to GST. This includes
physical products such as electronics, clothing, food, machinery, etc.
  Services: All services (except those specifically exempted or outside the GST law) are
also taxed under GST. Services include professional services, education, healthcare,
transportation, etc.

2. Supplies Covered under GST

GST applies to all types of supply, including:

 Sale: The transfer of goods and services from one person to another.
 Transfer: The movement of goods or services from one location to another.
 Barter or Exchange: The exchange of goods or services between two or more parties.
 Lease: Renting out goods or services.
 Import and Export: Both import and export of goods and services are subject to GST,
but exports are usually zero-rated.

3. Threshold Limits for GST Registration

Under GST, businesses with a turnover above a certain threshold are required to register for
GST. The threshold limit varies based on the nature of the business and the location:

 For goods: The threshold limit is ₹40 lakhs for most states (₹20 lakhs for special
category states).
 For services: The threshold limit is ₹20 lakhs (₹10 lakhs for special category states).

However, even if the business turnover is below the threshold limit, the business can voluntarily
register for GST.

4. GST on Exports

 Export of Goods and Services is generally treated as zero-rated, meaning no tax is

levied on exports, and the exporter can claim a refund for any taxes paid on inputs used in
the export process.

5. GST on Intra-State and Inter-State Transactions

 Intra-state supply: Goods and services sold within the same state or union territory are
subject to CGST and SGST.
 Inter-state supply: Goods and services sold from one state to another are subject to
IGST, which is collected by the central government and subsequently shared with the
states.

6. GST on Imports

 Imports of goods and services are subject to IGST, which is levied at the time of
customs clearance. Importers can claim a credit for the IGST paid on imports against
their output GST liability.
7. Exemptions and Special Provisions

 Certain goods and services are exempted from GST, such as:
o Agricultural products.
o Healthcare services.
o Educational services.
o Services by government or local authorities.
 Special provisions apply to specific sectors such as:
o E-commerce: Special provisions for e-commerce operators and their suppliers.
o Small businesses: Composition scheme for small taxpayers with turnover up to a
certain limit.

8. Input Tax Credit (ITC)

A key feature of GST is the Input Tax Credit (ITC), which allows businesses to set off the tax
paid on inputs (goods and services purchased) against the tax collected on their output (sales).
This ensures that tax is paid only on the value added at each stage of the supply chain, effectively
reducing the cascading tax effect.

For example:

 A manufacturer buys raw materials (tax paid) and then produces finished goods, which
are sold (output tax). The manufacturer can claim a credit for the tax paid on raw
materials against the output tax liability, thereby reducing the tax burden.

18. Explain briefly about the Time of Supply under GST

Time of Supply under GST

The Time of Supply is a crucial concept under the Goods and Services Tax (GST) system,
determining the point at which the liability to pay tax arises. It is essentially the time when the
taxable event occurs, which signifies when GST becomes payable on the transaction.

Under GST, the time of supply is important for both goods and services as it dictates when the
goods or services are considered to be "supplied," and thus, when the tax is due.

Key Aspects of Time of Supply

The provisions for determining the time of supply are laid down under Section 12 for goods and
Section 13 for services of the Central Goods and Services Tax Act, 2017. The general rule is
to determine the point at which the supply is considered to have taken place.

The time of supply of goods or services will depend on several factors, such as the type of
supply, the date of invoice, the date of payment, and other specific conditions outlined under
the Act.
Time of Supply of Goods (Section 12)

For goods, the time of supply is determined by the earliest of the following events:

1. Date of Issue of Invoice:

The time of supply is the date when the invoice for the goods is issued.
2. Date of Receipt of Payment:
If the payment is made before the invoice, the time of supply will be the date when the
payment is received.
3. Date of Delivery of Goods:
If the goods are supplied without an invoice (e.g., in case of transfer of goods between
businesses), the time of supply is the date when the goods are delivered to the buyer.
4. Completion of the Agreement:
In cases where the contract does not mention a fixed date for supply, the time of supply is
the date when the terms of the contract are fulfilled.

Example:

 If an invoice is issued on March 5, but the payment is received on March 8, the time of
supply will be March 5, as it is the earlier event.

Time of Supply of Services (Section 13)

For services, the time of supply is determined by the earliest of the following:

1. Date of Issue of Invoice:

The time of supply is the date on which the invoice is issued. If the service provider is
required to issue the invoice before providing the service, the date of issue will determine
the time of supply.
2. Date of Receipt of Payment:
If the payment for the service is received before the invoice, the time of supply is the date
of receipt of payment.
3. Date of Completion of Service:
If the invoice is not issued at the time of providing the service, the time of supply will be
the date of completion of the service.
4. Date of Acceptance:
If the payment is made after the completion of the service but before the invoice is
issued, the date of acceptance of the service by the recipient will determine the time of
supply.

Example:

 If the service is completed on March 1, but the invoice is issued on March 5, the time of
supply will be March 1.
Special Situations and Exceptions

In some special cases, such as continuous supply of goods or services, reverse charge
mechanisms, and advance payments, specific rules apply for determining the time of supply:

1. Continuous Supply of Goods or Services:

o In case of a continuous supply (e.g., subscriptions, regular service contracts), the
time of supply is determined based on the contract or regular payment cycle.
2. Reverse Charge Mechanism:
o For certain goods or services, the tax liability is shifted from the supplier to the
recipient (reverse charge). The time of supply in such cases is determined based
on the date of receipt of goods or services, rather than the invoice date.
3. Advance Payments:
o If an advance payment is received before the supply of goods or services, the time
of supply is the date of receipt of the advance payment.

19. Explain the concept of Composite Levy under GST.

The Composite Levy is a simplified tax structure under the Goods and Services Tax (GST)
system, specifically designed to reduce the compliance burden on small businesses. It is a part of
the Composition Scheme, which allows eligible taxpayers to pay tax at a lower rate on their
turnover without needing to adhere to the full GST compliance structure.

This scheme is meant for small businesses with a lower turnover and involves simple taxation,
wherein businesses do not need to maintain detailed records of every transaction, invoice, or
input tax credit. Instead, they pay tax at a fixed percentage of their turnover.

Key Features of the Composite Levy

1. Eligibility for the Scheme:

The Composite Levy under GST is available to small businesses whose annual turnover
is below a specified threshold limit. The threshold limit for eligibility depends on the type
of business and the state in which the business operates.
o For goods: The threshold is generally ₹1.5 crore (₹75 lakh for special category
states).
o For service providers: The threshold is ₹50 lakh (for all states).

Businesses that opt for this scheme must fulfill specific conditions and meet the
requirements prescribed under the GST Act.

2. Simplified Compliance:
Under the Composite Levy, businesses are not required to maintain detailed records, file
multiple returns, or comply with the complex GST filing procedures. They can file a
quarterly return in a simpler format (GSTR-4) and are not allowed to claim input tax
credit (ITC).
 3. Tax Rate:
The tax rates under the Composite Levy are lower than the regular GST rates. The rate is
prescribed on the basis of turnover and type of business, typically ranging from 1% to
6% of turnover.
o For manufacturers: The tax rate is usually 1% of turnover.
o For traders (who supply goods): The tax rate is usually 1% of turnover.
o For service providers: The tax rate is usually 5% of turnover (for specific
businesses).
4. No Input Tax Credit (ITC):
Businesses that opt for the Composite Scheme cannot claim input tax credit (ITC) on
their purchases. Since they are paying a fixed rate on turnover, they do not get credit for
the tax paid on inputs.
5. Ineligibility for Inter-State Supply:
Businesses under the Composite Levy are generally not allowed to make inter-state
supplies of goods or services. They can only operate within a single state (intra-state
supply). However, some exceptions apply under certain conditions.
6. Restrictions on Certain Businesses:
Not all businesses are eligible for the Composite Scheme. Businesses that make inter-
state supplies, engage in exporting, or deal in non-taxable goods (e.g., alcohol,
petroleum products) cannot avail of the composite levy.

Conditions for Opting for the Composite Levy

To qualify for the Composite Scheme and avail the benefits of the Composite Levy, businesses
must fulfill the following conditions:

1. Turnover Limit:
The business must not exceed the prescribed turnover limit (₹1.5 crore for goods, ₹50
lakh for services).
2. No Input Tax Credit:
The taxpayer must agree not to claim input tax credit (ITC) on purchases, which is a
major difference between the regular GST system and the composite scheme.
3. Business Type:
o The business should primarily deal in taxable goods or services (not exempted
goods/services).
o The business cannot supply exempt goods (such as alcohol for human
consumption).
o The business cannot make inter-state supplies (unless the specific provisions
allow).
4. No Supply of Goods through E-Commerce:
A person opting for the composite levy cannot supply goods through an e-commerce
platform (such as Amazon, Flipkart) unless the e-commerce operator is liable to collect
tax at source under Section 52.

Advantages of the Composite Levy

 1. Simplicity:
The Composite Levy is designed to reduce the compliance burden on small businesses. It
simplifies the tax payment process, as businesses can pay a fixed percentage of their
turnover without the need for detailed accounting of input tax credits.
2. Lower Tax Rate:
The fixed tax rate under the composite levy is often much lower than the regular GST
rates, making it beneficial for small businesses.
3. Reduced Paperwork:
Businesses under the composite scheme are not required to file extensive tax returns or
maintain complex records. This reduces the administrative burden.
4. Cash Flow Benefits:
Since businesses under the scheme are not required to pay tax on input purchases (due to
the absence of ITC), it simplifies cash flow management, as businesses can focus on their
turnover rather than detailed tax adjustments.

Disadvantages of the Composite Levy

1. No Input Tax Credit (ITC):

One of the major drawbacks of the composite scheme is that businesses cannot claim ITC
on their inputs (goods and services purchased). This can be disadvantageous if a business
has significant input costs, as they will not be able to offset the tax paid on inputs against
their output tax liability.
2. Limited Scope:
The composite levy is not available to businesses engaged in inter-state supply, export of
goods or services, or supply of certain exempt goods. This limits the applicability of the
scheme to local businesses with small turnovers.
3. Ineligibility for E-Commerce Businesses:
E-commerce sellers are generally ineligible for the composite levy unless the operator is
liable to collect tax at source. This restricts the participation of many online retailers in
the scheme.

20. Write a detailed note on 101st Constitutional Amendment in relation to introduction of

GST.

Introduction
The 101st Constitutional Amendment of India, which came into effect on September 16,
2016, marked a transformative change in India’s taxation landscape with the introduction of the
Goods and Services Tax (GST). This amendment was one of the most significant tax reforms in
India, aimed at simplifying the indirect tax system and creating a unified tax regime that would
be applicable across the country.

The amendment laid the groundwork for the GST regime, replacing the existing indirect tax
structure, which included taxes like Central Excise Duty, Service Tax, Value Added Tax
(VAT), Sales Tax, Central Sales Tax (CST), and many others. By consolidating various taxes
into a single tax on the supply of goods and services, GST aimed to make the taxation system
simpler, more transparent, and conducive to economic growth.

Key Features of the 101st Constitutional Amendment

The 101st Amendment Act of 2016 involved a series of changes to the Constitution of India,
primarily amending Articles 245, 246, 268, 269, 270, 271, 286, 366, and 368 of the
Constitution. These amendments enabled the GST framework to be implemented smoothly and
covered various aspects of the structure, power, and operation of the GST system.

The most significant provisions related to the introduction of GST are as follows:

1. Insertion of New Articles

 Article 246A: This provision gave Parliament and State Legislatures the authority to
legislate on matters related to GST. It provided both the Central and State
Governments concurrent powers to make laws concerning the taxation of goods and
services. This was crucial because GST is a dual tax system where both the Centre and
the States have taxing rights over goods and services.

2. Special Provisions for GST

 Article 268A: Introduced to empower Parliament to make laws for the levy of GST on
the supply of goods and services in a uniform manner. This article provided the
constitutional foundation for the introduction of a nationwide GST regime.
 Article 269A: Provided that the GST on inter-state trade and commerce will be levied
and collected by the Central Government and then distributed between the states. This
provision made Integrated Goods and Services Tax (IGST) a reality for inter-state
transactions.

3. Distribution of Tax Revenues

 Article 270: This article ensures that the net proceeds of GST levied and collected by
the Central Government are shared between the Centre and States in a manner
prescribed by Parliament. This was a crucial aspect to ensure that both the Centre and
 States had the necessary fiscal resources to fund their respective expenditures under the
new tax system.

4. Constitutional Definition of GST

 Article 366(12A): This article defines Goods and Services Tax (GST) as a tax on the
supply of goods or services or both, as levied by the Central Government and the State
Governments under the provisions of Article 246A.

5. Exemptions and Exempted Goods

 The 101st Amendment also facilitated provisions for exemptions related to goods and
services that could be excluded from the purview of GST. It also allowed states to
impose taxes on goods that were not covered by GST (such as alcohol for human
consumption).

Objectives of the 101st Constitutional Amendment

The 101st Amendment was aimed at achieving several important objectives to improve India's
economic framework:

1. Creating a Unified Tax System

The key objective was to unify the indirect tax structure and replace multiple taxes with a
single tax. By doing so, it eliminated the cascading effect of taxes (tax on tax), which previously
existed under the earlier tax regime.

2. Removing Barriers Between States

The introduction of GST sought to reduce barriers between states, creating a single national
market. The new tax system ensures the free flow of goods and services across state borders
without the burden of multiple state-specific taxes.

3. Enhancing Compliance and Transparency

The GST system brought in a technology-driven tax administration system, making the
process of tax payment, filing returns, and claiming refunds more efficient and transparent. The
GST system is designed to track the entire supply chain through digital invoices and maintain
audit trails for tax purposes.

4. Promoting Economic Growth

The introduction of GST was aimed at simplifying compliance for businesses, reducing tax
evasion, and encouraging investments. This was expected to lead to increased economic
activity, a higher tax base, and better revenue collection for both the Centre and the States.

Key Amendments Under the 101st Constitutional Amendment in Relation to

GST

1. Article 246A – Power to Tax Goods and Services:

This is one of the most significant provisions introduced by the 101st Amendment. It
gives both Parliament and State Legislatures the concurrent power to legislate on
matters relating to GST. This allows the Central Government to impose CGST and the
State Governments to impose SGST on the same transaction.
2. Article 269A – Levy and Collection of GST on Inter-State Supply:
This article specifies that the GST on inter-state transactions will be levied by the
Central Government, and the revenue will be shared between the Central and State
Governments based on a formula prescribed by the GST Council.
3. Article 366(12A) – Definition of Goods and Services Tax (GST):
The definition of GST under Article 366 provides clarity that the tax applies to both
goods and services in a unified manner. This was critical for providing the legal structure
to the dual GST system (CGST and SGST).
4. Article 270 – Sharing of Revenue between the Centre and States:
The revenue collected under GST is shared between the Centre and the States. The
constitutional amendment ensured the equitable distribution of GST revenues between
the two, ensuring fiscal federalism and maintaining a balance in state and central
finances.
5. Article 286 – Restrictions on State Taxation:
This article was amended to allow States to impose taxes on goods and services only
within their own jurisdiction. For inter-state trade, the tax is collected by the Central
Government and then distributed.