WELCOME

TAX LAWS
RAJESH KUMAR K
 BASIC CONCEPTS

• Why Tax

Developmental schemes for all round progress of the society rests on the revenue,
generated through the medium of taxation.

The tax proceeds go to the general revenues of the state and the taxpayer gets no
return for his contribution.

• What is Tax- definition

Tax is the extraction of money from the public by the sovereign for providing
essential public services.

A tax is a compulsory charge or fees imposed by government on individuals or

corporations.

The power to levy taxes is vested with the sovereign.

The persons who are taxed have to pay the taxes irrespective of any corresponding
return from the goods or services by the government.
 PURPOSES OF TAXATION

• (i) To raise revenue for the government

• (ii) To redistribute income and wealth from the rich to the poor people
• (iii) To protect domestic industries from foreign competition
• (iv) To promote social welfare.
 CHARACTERISTICS OF TAX

• Compulsion

• No quid pro quo

• Payable in money

• Public purpose
 CANONS OF TAXATION

• The characteristics or qualities which a good tax system should possess.

• Adam Smith first devised the principles or canons of taxation in 1776.
• (i) Canon of equality and ability
• (ii) Canon of certainty
• (iii) Canon of economy
• (iv) Canon of convenience
• (v) Canon of productivity
• (vi) Canon of elasticity
• (vii) Canon of simplicity
• (viii) Canon of diversity
 CANONS OF TAXATION- contd…

• I. Canon of Equality
• Canon of equality states that the burden of taxation must be distributed equally or
equitably among the taxpayers.
• Rich people are capable of paying more taxes than poor people. Thus, justice
demands that a person having greater ability to pay must pay large tax
• If everyone is asked to pay taxes according to his ability, then sacrifices of all
taxpayers become equal. This is the essence of canon of equality.
• To establish equality in sacrifice, taxes are to be imposed in accordance with the
principle of ability to pay.
• In view of this, canon of equality and canon of ability are the two sides of the same
coin.
 CANONS OF TAXATION- contd…

• II. Canon of certainty

• The tax which an individual has to pay should be certain and not arbitrary.
• According to A. Smith, the time of payment, the manner of payment, the quantity to
be paid, i.e., tax liability, ought all to be clear and plain to the contributor and to
everyone.
• It must be certain to the taxpayer as well as to the tax-levying authority.
• The certainty of liability must be known beforehand.
• Similarly, there must also be certainty of revenue that the government intends to
collect over the given time period.
 CANONS OF TAXATION- contd…

• III. Canon of economy

• This canon implies that the cost of collecting a tax should be as minimum as possible.
• Any tax that involves high administrative cost and unusual delay in assessment and high
collection of taxes should be avoided altogether.
• IV. Canon of Convenience
• Taxes should be levied and collected in such a manner that it provides the greatest
convenience
• Not only to the taxpayer but also to the government.
• Thus, it should be painless and trouble-free as far as practicable.
• “Every tax” “ought to be levied at time or the manner in which it is most likely to be
convenient for the contributor to pay it.”- A Smith.
 CANONS OF TAXATION- contd…

• V. Canon of Productivity
• Taxes must be productive or cost-effective.
• This implies that the revenue yield from any tax must be a sizable one.
• Further, this canon states that only those taxes should be imposed that
do not hamper productive effort of the community.
• A tax is said to be a productive one only when it acts as an incentive to
production.
 CANONS OF TAXATION- contd…

• VI. Canon of Elasticity

• Modern economists attach great importance to the canon of elasticity.
• This canon implies that a tax should be flexible or elastic in yield.
• It should be levied in such a way that the rate of taxes can be changed
according to exigencies of the situation.
• Whenever the government needs money, it must be able to extract as much
income as possible without generating any harmful consequences through
raising tax rates.
• Income tax satisfies this canon.
 CANONS OF TAXATION- contd…

• VII. Canon of Simplicity

• Every tax must be simple and intelligible to the people so that the taxpayer is
able to calculate it without taking the help of tax consultants.
• A complex as well as a complicated tax is bound to yield undesirable side-effects.
• It may encourage taxpayers to evade taxes if the tax system is found to be
complicated.
• A complicated tax system is expensive in the sense that even the most honest
educated taxpayers will have to seek advice of the tax consultants.
• Ultimately, such a tax system has the potentiality of breeding corruption in the
society.
 CANONS OF TAXATION- contd…

• VIII. Canon of Diversity

• Taxation must be dynamic.
• This means that a country’s tax structure ought to be dynamic or diverse in nature rather
than having a single or two taxes.
• Diversification in a tax structure will demand involvement of the majority of the sectors of
the population.
• If a single tax system is introduced, only a particular sector will be asked to pay to the
national exchequer leaving a large number of population untouched.
• Obviously, incidence of such a tax system will be greatest on certain taxpayers.
• A dynamic or a diversified tax structure will result in the allocation of burden of taxes
among the vast population resulting in a low degree of incidence of a tax in the aggregate.
 TAX AND FEE-DIFFERENCE

• In the first place, a tax is a compulsory contribution made by a taxpayer. A fee, by

definition, is a voluntary payment made for a service availed.
• Secondly, as far as tax is concerned, there is no direct give-and-take relationship
between the taxpayer and the tax-levying authority.
• A taxpayer cannot demand any special favour from the authority in return for taxes
paid by him. A fee is a direct payment by those who receives some special advantages
or the government guarantees the services who pays fees. Fees are, therefore,
deemed to be the by-products of the administrative activities of the government.
• Thirdly, fees are mostly imposed to regulate or control various types of activities. But
the objectives of taxation are many. It has no separate objective. Taxes are levied in
the greater interests of the country.
 DIFFERENT KINDS OF TAXES

• Direct Taxes
Burden is borne by the same person on whom it is levied.
The ultimate burden on the person on whom it is levied.
It is based on income and property of person.
• Indirect Taxes
Initially paid by one but ultimately paid by another.
It is levied on expenditure of a person.
EXAMPLES -KINDS OF TAXES

Direct Indirect
Taxes Taxes
Custo
Income
ms
Tax
Duty
Wealth
GST
Tax
 METHODS OF TAXATION

• Progressive Taxes

• Taxes assessed under a progressive system are based on the taxable amount of an
individual's income. They follow an accelerating schedule, so high-income earners pay
more than low-income earners.

• Regressive Taxes

• Low-income individuals pay a higher amount of taxes compared to high-income earners

under a regressive tax system. That's because the government assesses tax as a
percentage of the value of the asset that a taxpayer purchases or owns. This type of tax
has no correlation with an individual's earnings or income level.

• Proportional Taxes

• A proportional or flat tax system assesses the same tax rate on everyone regardless of
income or wealth. This system is meant to create equality between marginal tax rates
and average tax rates paid.
 HISTORY OF TAX LAWS IN INDIA

• Sea Customs Act, 1878 and the Tariff Act, 1934 were passed by British.

• These enactments were consolidated into a single legislation — the Customs Act, 1962.

• Excise taxation in its modern form dates back to 1894 when a duty was imposed on
cotton yarn.

• Income tax introduced in India by the British in 1860 to overcome the financial difficulties
created by the events of 1857.

• The Act of 1886 levied tax on the income of both residents and non residents in India.

• The Act remained in force for 32 years till the new Act was passed in 1918.

• This Act was replaced by the Income Tax Act of 1922.

• The present law of income tax in India is governed by the Income Tax Act, 1961 which
replaced the Act of 1922.
 CONSTITUTIONAL SCHEME

• Article 265
“No tax shall be levied or collected except by the authority of law".
No tax can be imposed by an executive order.
• Article 268 - duties levied by union but collected and appropriated by states.
Example :stamp duties mentioned in union list shall be levied by central government but collected by the state.
• Article 269- taxes levied and collected by the union and assigned to the states- money collected will not go to
the consolidated fund but used and distributed among state in accordance with principle formulated by the
parliament.
• Article 269(A)- gives the power of collection of GST on inter-state trade or commerce to the Government of
India.

.
 CONSTITUTIONAL SCHEME – contd….

• Article 270- tax levied and collected by the state

Example: taxes and duties referred in the union list shall be distributed
• Article 271 –Surcharge- proceeds from them form a part of the Consolidated Fund of India- The
collection of the surcharge is also done by the Union and the State has no role to play in it.
• Article 276- empowers the state to impose taxes on profession, trades, callings and employment
for the benefit of state or municipality, district board etc.
• Article 279 - deals with the calculation of net proceeds.
• Article 286- Restrictions on imposition of tax by States-

Sale Or Purchase of Goods Which Take Place Outside The State [Article 286 (1)]
Sale Or Purchase of Goods In The Course of Import And Export [Article 286 (1) (b) ]
 CONSTITUTIONAL SCHEME – contd….

• VII Schedule

Three lists- Subjects on which Union/State or both can levy taxes.

List 1 in the 7th schedule to the constitution has the powers of the Central
Government listed in Entries 82-92B.
List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
List 3 doesn’t deal with taxation and hence both centre and state do not have any
concurrent powers of taxation.
• Part IX and IX-A

Limited financial powers to the local self governments.

 SYLLABUS

• Income Tax Act, 1961

• Wealth Tax Act, 1957

• Kerala Agricultural Income Tax Act, 1991

• Kerala General Sales Tax Act, 1963