Module-1

A) Overview of Taxation System in India

India’s tax system is a three-tier federal structure

which is made up of the following:

Union List (List 1 of the 7th schedule to the

Constitution of India) contains those matters on
which the Central Government has the power to
make laws [Article 246(1)].

The state List has only those matters on which the

State Government has the power to make laws
[Article 246(3)].

The Concurrent List has those matters on which

both the Central and State Governments have the
power to make laws [Article 246(2)].
Law made by Union Government prevails whenever
there is a conflict between the Centre and state
concerning entries in the concurrent list. But if any
provision repugnant to earlier law made by
parliament is part of law made by the state, if the
law made by the state government gets the assent
of the President of India, it prevails.

Broadly taxes are divided into two categories:

1. Direct Taxes

A direct tax can be defined as a tax that is paid

directly by an individual or organization to the
imposing entity (generally government). A direct tax
cannot be shifted to another individual or entity.
The individual or organization upon which the tax is
levied is responsible for the fulfillment of the tax
payment.

The Central Board of Direct Taxes deals with

matters related to levying and collecting Direct
Taxes and formulation of various policies related to
direct taxes.

A taxpayer pays a direct tax to a government for

different purposes, including real property tax,
personal property tax, income tax or taxes on
assets, FBT, Gift Tax, Capital Gains Tax, etc.

2. Indirect Taxes

Indirect taxes in India can be broadly classified into:

• Production of goods: Excise or CenVAT

• Distribution of goods: Sales Tax
• Production and Distribution of services
(because they can’t be separated): Service Tax

In India, generally, taxes on production or

manufacturing (Excise) is levied by the centre, and
taxes on sales (Sales Tax) is levied by the states.
 • Excise duties

Excise duty (Central VAT) is a tax on the

manufacture of goods within the country. Excise
duties are levied under the Central Excise and Salt
Act, 1944, the Excise Tariff Act, 1985, and the
Modified Value Added Tax (MODVAT) scheme or
CENVAT.

The rates of excise duty levied vary depending inter

alia on the nature of the item manufactured, the
nature of the manufacturing concern, and the place
of ultimate sale.

The duty rates are either ad valorem (i.e. a fixed

percentage of the cost of production), specified (a
fixed rate depending on the nature of the
manufactured item, for example, length of product
or count of product), or a combination of both.
 • Sales tax

Sales tax is levied on the sale of a commodity that is

produced or imported and sold for the first time.

If the product is sold subsequently without being

processed further, it is exempt from sales tax. Sales
tax is levied by either the Central or the State
Government, Central Sales tax, or 4% is generally
levied on all inter-State sales.

State sales taxes that apply to sales made within a

State have rates that range from 4 to 15%.
However, exports and services are exempt from
sales tax.

• Service tax

Service tax is a part of Central Excise in India. It is a

tax levied on services provided in India, except the
State of Jammu and Kashmir.
The responsibility of collecting the tax lies with the
Central Board of Excise and Customs (CBEC).

B) Fundamental Principles relating to Tax Laws

(1) Adequacy: taxes should be just-enough

to generate revenue required for provision
of essential public services.

(2) Broad Basing: taxes should be spread

over as wide as possible section of the
population, or sectors of economy, to
minimize the individual tax burden.

(3) Compatibility: taxes should be

coordinated to ensure tax neutrality and
overall objectives of good governance.

(4) Convenience: taxes should be enforced

in a manner that facilitates voluntary
 compliance to the maximum extent
possible.

(5) Earmarking: tax revenue from a specific

source should be dedicated to a specific
purpose only when there is a direct cost-
and-benefit link between the tax source
and the expenditure, such as use of motor
fuel tax for road maintenance.

(6) Efficiency: tax collection efforts should

not cost an inordinately high percentage of
tax revenues.

(7) Equity: taxes should equally burden all

individuals or entities in similar economic
circumstances.

(8) Neutrality: taxes should not favor any

one group or sector over another, and
should not be designed to interfere-with or
influence individual decisions-making.
 (9) Predictability: collection of taxes should
reinforce their inevitability and regularity.

(10) Restricted exemptions: tax exemptions

must only be for specific purposes (such as
to encourage investment) and for a limited
period.

(11) Simplicity: tax assessment and

determination should be easy to
understand by an average taxpayer.

C) Taxation Power & Constitutional Limitations

The authority to levy a tax is derived from the

Constitution of India which allocates the power to
levy various taxes between the Centre and the
States. An important restriction on this power is
Article 265 of the Constitution which states that
“No tax shall be levied or collected except by the
authority of law”. Therefore, each tax levied or
collected has to be backed by an accompanying law,
passed either by the Parliament or the State
Legislature.

Article 266 states that all the government revenue

generated from taxes, asset sale, earnings from
state-run companies, etc. goes into the
Consolidated Fund of India. The fund gets money
from:

(i) Revenue earned indirect taxes such as

income tax, corporate tax, etc.

(ii) Revenue earned in indirect taxes such as GST

(iii) Dividends and profits from PSUs

(iv) Money earned through the government’s

general services

(v) Disinvestment receipts

 (vi) Debt repayments

(vii) Loan recoveries

(viii) Provided that no money can be withdrawn

from the Consolidated Fund of India, without
the government securing the approval of the
Parliament.

Article 268 of the Constitution of India states that

stamp duties covered in Union List shall be levied
by the Government of India but collected by States.

Article 269 of the Constitution of India enumerates

taxes and duties which are levied and collected by
the Government of India but assigned to States.
This cover:

(a) Tax on sale or purchase of goods in inter-

state trade or commerce
(b) Tax on consignment of goods in inter-state
trade or commerce.

D)Distinction b/w Tax, Cess & Fee

• Tax: Taxes are levied by government authorities

(such as federal, state, or local governments) to
generate revenue for public expenditures.
Taxes fund various government services and
programs, including healthcare, education,
infrastructure, and public services. Taxes are
mandatory payments that individuals and
businesses are required to pay based on their
income, property, consumption, or other
criteria. Taxes are not directly linked to a
specific service or benefit received in return.

• Cess: A cess is a specific type of tax or levy that

is imposed for a particular purpose. Cesses are
often earmarked for a specific fund or project,
such as an education cess or a healthcare cess.
 The revenue generated from a cess is intended
to fund a particular service or initiative. Cesses
are similar to taxes in that they are mandatory
payments, but they are earmarked for a
particular purpose. They may be temporary or
permanent, depending on the objective they
are designed to support.

• Fee: Fees are charges imposed by a

government, agency, or service provider for the
provision of a specific service, benefit, or
permission. Unlike taxes, fees are often linked
directly to the cost of providing the service or
regulating an activity. Fees are typically paid
voluntarily when individuals or businesses
choose to use a particular service or engage in a
regulated activity. Common examples include
license fees, permit fees, and service fees. Fees
are usually tied to a specific service or benefit,
and the payer receives something in return for
the payment.

E) Tax Evasion & Tax Avoidance

The primary difference between tax evasion and tax
avoidance is that tax evasion is considered a crime
globally, whereas tax avoidance is not. Tax
avoidance is the use of legal approaches to avoid
paying taxes and making the most out of loopholes
in the tax system. Meanwhile, tax evasion is using
deceitful and fraudulent methods to evade tax
payments. Tax evasion happens after a tax liability
arises and tax avoidance is done before such
liability has arised.

• What Is Tax Evasion?

Tax evasion is a fraudulent approach to avoid

paying the taxes that you are required to. It is an act
of deceit when you understate your income or
overstate the sum of your expenditures.

The definition of tax evasion Is the intentional

manipulation of your income to avoid paying taxes
or to have your tax liability reduced. Here are the
following actions considered as an attempt to tax
evasion:
 1. Falsifying information regarding your
revenue or expenses

2. Hiding or concealing related documents and

hiding income

3. Having an excessively high tax credit

4. Claiming personal expenses as

commercial/corporate expenses

In every nation, evading taxes is a criminal offence

with legal repercussions.

• What is Tax Avoidance?

Tax avoidance is a legal approach used to
circumvent the intended purpose of the law by
unfairly exploiting loopholes in the tax code. It
alludes to developing creative approaches or
instruments to evade paying taxes while remaining
within the boundaries of the law.

This can be accomplished by modifying the financial

records in a way that will not conflict with any tax
regulations and will also reduce the tax incurred.
Tax avoidance was once considered legal, but it is
now classified as criminal behaviour in some
specific situations.

Tax avoidance only reduces, delays, or sometimes

eradicates the tax burden. This can be
accomplished through participating in government
programmes and incentives like exemptions,
deductions, tax privileges, tax credits and other
offers that reduce tax obligations without breaking
the law or committing any infractions.

F) Tax Planning (TP) & Tax Management (TM)

 1) Definition:

TP: The process of identifying tax-saving

opportunities

TM: The process of implementing tax-saving

strategies

2) Goal:

TP: To minimize tax liability by legally reducing

taxes

TM: To optimize tax burden and ensure compliance

3) Focus:
TP: Future tax liabilities

TM: Past and present tax liabilities

4) Timeframe:

TP: Long-term

TM: Short-term

5) Scope:

TP: Comprehensive

TM: Limited to specific tax issues or situations