Introduction
In India, the system of direct taxation as it is known today, has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject. He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.
DIRECT AND INDIRECT TAXES
Direct Taxes: A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed in India are as under: Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other tan companies) and trusts (identified as bodies of individuals associations of persons) or every artificial juridical person. The inclusion of a particular income in the total incomes of a person for income-tax in India is based on his residential status. There are three residential status, viz., (i) Resident & Ordinarily Residents (Residents) (ii) Resident but not Ordinarily Residents and (iii) Non 72 Residents. There are several steps involved in determining the residential status of a person. All residents are taxable for all their income, including income outside India. Non residents are taxable only for the income received in India or Income accrued in India. Not ordinarily residents are taxable in relation to income received in India or income accrued in India and income from business or profession controlled from India. Corporation Tax: The companies and business organizations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961. A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and management is situated entirely in India. In case of non resident corporations, tax is levied on the income which is earned from their business transactions in India or any other Indian sources depending on bilateral agreement of that country. Property Tax: Property tax or ‘house tax’ is a local tax on buildings, along with appurtenant land, and imposed on owners.
The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or area based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempted from the assessment. The properties lying under control of Central are exempted from the taxation. Instead a ‘service charge’ is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity. Inheritance (Estate) Tax: An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of an individual. It is a tax on the estate, or total value of the money and property, of a person who has died. India enforced estate duty from 1953 to 1985. Estate Duty Act, 1953 came into existence w.e.f. 15th October, 1953. Estate Duty on agricultural land was discontinued under the Estate Duty (Amendment) Act, 1984. The levy of Estate Duty in respect of property (other than agricultural land) passing on death occurring on or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment) Act, 1985.
Gift Tax: Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April, 1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received from one who doesn’t have blood relations with the recipient, were taxable. However, with effect from 1st October, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, the act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable. Indirect Tax: An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can be shifted by the taxpayer to someone else.
An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. The some important indirect taxes imposed in India are as under: Customs Duty: The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. Under the custom laws, the various types of duties are leviable. (1) Basic Duty: This duty is levied on imported goods under the Customs Act, 1962. (2) Additional Duty (Countervailing Duty) (CVD): This is levied under section 3 (1) of the Custom Tariff Act and is equal to excise duty levied on a like product manufactured or produced in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product had it been manufactured or produced in India is the duty payable. If the product is leviable at different rates, the highest rate among those rates is the rate applicable.
Such duty is leviable on the value of goods plus basic custom duty payable. (3) Additional Duty to compensate duty on inputs used by Indian manufacturers: This is levied under section 3(3) of the Customs Act. (4) Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at prices below the amounts charged by them in their domestic markets in order to capture Indian markets to the detriment of Indian industry. This is known as dumping. In order to prevent dumping, the Central Government may levy additional duty equal to the margin of dumping on such articles. There are however certain restrictions on imposing dumping duties in case of countries which are signatories to the GATT or on countries given “Most Favoured Nation Status” under agreement. (5) Protective Duty: If the Tariff Commission set up by law recommends that in order to protect the interests of Indian industry, the Central Government may levy protective anti-dumping duties at the rate recommended on specified goods. (6) Duty on 73 Bounty Fed Articles: In case a foreign country subsidises its exporters for exporting goods to India, the Central Government may impose additional import duty equal to the amount of such subsidy or bounty.
If the amount of subsidy or bounty cannot be clearly deter mined immediately, additional duty may be collected on a provisional basis and after final determination, difference may be collected or refunded, as the case may be. (7) Export Duty: Such duty is levied on export of goods. At present very few articles such as skins and leather are subject to export duty. The main purpose of this duty is to restrict exports of certain goods. (8) Cess on Export: Under sub-section (1) of section 3 of the Agricultural & Processed Food Products Export Cess Act, 1985 (3 of 1986), 0.5% ad valorem as the rate of duty of customs be levied and collected as cess on export of all scheduled products. (9) National Calamity Contingent Duty: This duty was imposed under Section 134 of the Finance Act, 2003 on imported petroleum crude oil. This tax was also leviable on motor cars, imported multi-utility vehicles, two wheelers and mobile phones. (10) Education Cess: Education Cess is leviable @ 2% on the aggregate of duties of Customs (except safeguard duty under Section 8B and 8C, CVD under Section 9 and anti-dumping duty under Section 9A of the Customs Tariff Act, 1985). Items attracting Customs Duty at bound rates under international commitments are exempted from this Cess. (11) Secondary and Higher Education Cess: Leviable @1% on the aggregate of duties of Customs. (12) Road Cess: Additional Duty of Customs on Motor Spirit is leviable and Additional Duty of Customs on High Speed Diesel Oil is leviable by the Finance Act (No.2), 1998. and the Finance Act, 1999 respectively. (13) Surcharge on Motor Spirit: Special Additional Duty of Customs (Surcharge) on Motor Spirit is leviable by the Finance Act, 2002. Central Excise Duty: The Central Government levies excise duty under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which is charged on such excisable goods that are manufactured in India and are meant for domestic consumption. The term “excisable goods” means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985.
It is mandatory to pay Central Excise duty payable on the goods manufactured, unless exempted eg; duty is not payable on the goods exported out of India. Further various other exemptions are also notified by the Government from the payment of duty by the manufacturers. Various Central Excise are: (1) Basis Excise Duty: Excise Duty, imposed under section 3 of the ‘Central Excises and Salt Act’ of 1944 on all excisable goods other than salt produced or manufactured in India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls under the category of Basic Excise Duty In India. (2) Special Excise Duty: According to Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable goods that come under taxation, in line with the Basic Excise Duty under the Central Excises and Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the Special Excise Duty shall or shall not be charged, and eventually collected during the relevant financial year. (2) Additional Duty of Excise: Section 3 of the ‘Additional Duties of Excise Act’ of 1957 permits the charge and collection of excise duty in respect of the goods as listed in the Schedule of this Act. (4) Road Cess: (a) Additional Duty of Excise on Motor Spirit: This is leviable by the Finance Act (No.2), 1998. (b) Additional Duty of Excise on High Speed Diesel Oil: This is leviable by the Finance Act, 1999. (5) Surcharge: (a) Special Additional Duty of Excise on Motor Spirit: This is leviable by the Finance Act, 2002. (b) Surcharge on Pan Masala and Tobacco Products: This Additional Duty of Excise has been imposed on cigarettes, pan masala and certain specified tobacco products, at specified rates in the Budget 2005-06. Biris are not subjected to this levy. (6) National Calamity Contingent Duty (NCCD): NCCD was levied on pan masala and certain specified tobacco products vide the Finance Act, 2001.
The Finance Act, 2003 extended this levy to polyester filament yarn, motor car, two wheeler and multi-utility vehicle and crude petroleum oil. (7) Education Cess: Education Cess is leviable @2% on the aggregate of duties of Excise and Secondary and Higher Education Cess is Leviable @1% on the aggregate of duties of Excise. (8) Cess – A cess has been imposed on certain products. Service Tax: The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions related to Service Tax came into effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid on the value received. The interesting thing about Service Tax in India is that the Government depends heavily on the voluntary compliance of the service providers for collecting Service Tax in India. Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each State follows its own Sales Tax Act and levies tax at various rates. Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover tax and purchaser tax.
Thus, Sales Tax Acts as a major revenue-generator for the various State Governments. From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT). 74 Value Added Tax (VAT): The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and 12.5% on other items. Variable rates (State-dependent) are applicable for petroleum products, tobacco, liquor, etc. VAT levy will be administered by the Value Added Tax Act and the rules made there-under and similar to a sales tax. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain.
The value addition in the hands of each of the entities is subject to tax. VAT can be computed by using any of the three methods: (a) Subtraction method: The tax rate is applied to the difference between the value of output and the cost of input. (b) The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). (c) Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales. Securities Transaction Tax (STT): STT is a tax being levied on all transactions done on the stock exchanges. STT is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented Mutual Funds. Current STT on purchase or sell of an equity share is 0.075%. A person becomes investor after payment of STT at the time of selling securities (shares). Selling the shares after 12 months comes under long term capital gains and one need not have to pay any tax on that gain. In the case of selling the shares before 12 months, one has to pay short term capital gains @10% flat on the gain. However, for a trader, all his gains will be treated as trading (Business) and he has to pay tax as per tax sables. In this case the transaction tax paid by him can be claimed back/adjusted in tax to be paid.
Article 265
According to this article, taxes cannot be collected without the “authority of law.” In this context, “law” only refers to a statute or other legislative act. The administration of the legislation should not violate any other constitutional provision. This article is a secret instrument for arbitrary tax collecting.
In the Tangkhul v. Simirei Shailei case, instead of using a tradition that would provide free labor for a day, all of the villagers were paying the head man Rs 50 per day. This was a yearly ritual that had been carried out for many years. In this instance, the court determined that the sum of Rs. 50 violated Art. 265 since it amounted to a tax collection and no statute had permitted it. Every time the law forbids the imposition of a tax, Article 265 is violated.
Authority of Law – The expression basically refers to the statute law i.e. the act of the legislature. It essentially means that there must be an existence of expressive legislative provision for the imposition of a tax. Therefore, the important thing to note here is that a tax cannot be levied merely by executive order, as it will not fall within the meaning of this expression. Further, it can also be stated that the passing of a mere resolution by the house will also not be sufficient in the present case. So in order to obtain any tax under the law, the Article requires the legislature to enact a law authorizing the same. Levy or Collect – The use of the expression mentioned herein is not only limited that the imposition of a tax must be authorised by the law but rather it is comprehensive and wide Page 4 of 21 enough to include that even the collection of the tax must be sanctioned by the law. Therefore, it basically means that every stage in this entire process must comply with the requirement. Moreover, a taxing statute must also not be in violation of Article 13 i.e. it should not lead to any infringement of fundamental rights enshrined in Part-III. It should not transgress the equal protection clause of Article 14, reasonable restrictions clause of Article 19 or the freedom of trade and commerce guaranteed under Article 301. Pratibha R.C.C. Spun, pipe and cement products v. State of Karnataka (1990) the imposition of a certain tax was rejected in the light of Article 265. In the instant case, a tax was charged in the pretext of a fee. Since there was no legislative enactment behind the same, the imposition of the tax was considered illegal. So, to summarise it can be stated that merely an executive order is not sufficient for the levying and collection of a tax and it is mandatory that there must be legislative enactment behind the same. Additionally, apart from the imposition of the tax, even the recovery of the same must also be authorised by the legislature through a statue or ACT.
Article 246A
Authority of Law – The expression basically refers to the statute law i.e. the act of the legislature. It essentially means that there must be an existence of expressive legislative provision for the imposition of a tax. Therefore, the important thing to note here is that a tax cannot be levied merely by executive order, as it will not fall within the meaning of this expression. Further, it can also be stated that the passing of a mere resolution by the house will also not be sufficient in the present case. So in order to obtain any tax under the law, the Article requires the legislature to enact a law authorizing the same. Levy or Collect – The use of the expression mentioned herein is not only limited that the imposition of a tax must be authorised by the law but rather it is comprehensive and wide Page 4 of 21 enough to include that even the collection of the tax must be sanctioned by the law. Therefore, it basically means that every stage in this entire process must comply with the requirement. Moreover, a taxing statute must also not be in violation of Article 13 i.e. it should not lead to any infringement of fundamental rights enshrined in Part-III. It should not transgress the equal protection clause of Article 14, reasonable restrictions clause of Article 19 or the freedom of trade and commerce guaranteed under Article 301. Pratibha R.C.C. Spun, pipe and cement products v. State of Karnataka (1990) the imposition of a certain tax was rejected in the light of Article 265. In the instant case, a tax was charged in the pretext of a fee. Since there was no legislative enactment behind the same, the imposition of the tax was considered illegal. So, to summarise it can be stated that merely an executive order is not sufficient for the levying and collection of a tax and it is mandatory that there must be legislative enactment behind the same. Additionally, apart from the imposition of the tax, even the recovery of the same must also be authorised by the legislature through a statue or ACT.
Conclusion
Over the years, Indian tax system has experienced substantial changes with the goal of establishing a more open and effective structure. The ability of the government to alter tax laws retroactively is one of the most urgent issues that still exist, though. These changes erode trust in the nation’s tax system by causing uncertainty for investors and companies. Long-running legal issues, more compliance requirements, and reluctance from international investors might result from this uncertainty.
In conclusion, even though India has improved its tax system, obstacles still exist due to things like complicated legislation, retroactive taxes, and ineffective bureaucracy. Establishing a more stable and taxpayer-friendly environment is essential to promoting economic growth and drawing in investment. Strengthening India’s tax system and increasing investor trust would need the implementation of stable policies, the reduction of ambiguity in tax legislation, and the provision of a fair dispute settlement procedure.
About Author
Mankirat Singh Chawla is a law student at Amity Law School, pursuing a three-year LL.B. (Honours) programme and is currently in his first year. His areas of academic interest include constitutional law and environmental law, with a growing inclination towards understanding the intersection of law, governance, and sustainable development. He actively engages in legal research and writing to explore contemporary legal issues and judicial developments.
References
- Complete Guide to Tax Laws and Rules in India (latest edn, Commercial Law Publishers, New Delhi).
- Sericulture (Government of India publication, Ministry of Textiles, New Delhi).
- History of Direct Taxation in India (Central Board of Direct Taxes, Government of India, New Delhi).
- Article 265 of the Indian Constitution: Taxes Not to Be Imposed Save by Authority of Law