Meaning of Tax

A tax is a financial charge or levy imposed upon a taxpayer (an individual or legal entity) by a state or its functional equivalents. The authority to levy taxes is a fundamental attribute of sovereignty. In a modern democratic state like India, this power is not arbitrary but is exercised under the authority of a law passed by the legislature. The core principle governing taxation in India is enshrined in Article 265 of the Constitution, which states, "No tax shall be levied or collected except by authority of law."

The defining characteristic of a tax is the absence of a direct quid pro quo, meaning the taxpayer does not receive a direct and specific benefit or service from the government in return for the tax paid. The revenue collected is pooled into a general fund (like the Consolidated Fund of India) to be used for the collective good of the society.

Compulsory contribution to the state

The most fundamental feature of a tax is its compulsory nature. It is not a voluntary payment or a donation. Every person who falls within the scope of a tax law is legally obligated to pay the tax. Refusal to pay is a punishable offense under the law, attracting penalties, interest, and even prosecution.

This compulsory nature is irrespective of a citizen's will or their opinion on the government's policies or expenditure patterns. The obligation to pay tax arises automatically once the conditions specified in the taxing statute are met (e.g., earning income above the exemption limit).

Answer:

Purpose: Public expenditure

The primary purpose of levying taxes is to raise revenue for the state to meet its public expenditure. This expenditure is incurred to perform the various functions of a modern welfare state, which include:

• Sovereign Functions: National defence, maintenance of law and order, and administration of justice.
• Infrastructure Development: Building roads, bridges, railways, ports, and power plants.
• Social Services: Providing public education, healthcare, and sanitation.
• Welfare Schemes: Funding social security programs, subsidies (e.g., for food and fertilisers), and poverty alleviation schemes.
• Administrative Costs: Paying salaries of government employees and meeting other administrative expenses.

Distinction between Tax, Fee, Cess, and Surcharge

It is important to distinguish a tax from other government levies.

Scope of Tax Law

Tax law, also known as revenue law, is a branch of public law that encompasses the rules, policies, and procedures governing the levy, collection, and administration of taxes. Its scope is vast and extends beyond mere revenue collection. It serves as a critical instrument for achieving the state's economic and social objectives.

Regulation of economic activities

Tax law is frequently used to influence and regulate the economic behaviour of individuals and businesses. By creating tax incentives or disincentives, the government can steer economic activity towards desired goals.

• Discouraging Activities: High excise duties and GST rates are imposed on goods considered detrimental to health or society, such as tobacco products and alcohol. These are often called 'sin taxes'.
• Encouraging Activities: The government provides various tax benefits to promote certain activities. For example:
  • Tax holidays and deductions for startups to foster innovation and entrepreneurship.
  • Deductions under Section 80C of the Income Tax Act to encourage savings and investments in specific instruments like PPF and life insurance.
  • Tax incentives for industries set up in backward regions to promote balanced regional development.
  • Accelerated depreciation on assets used for renewable energy generation to promote green energy.

Fiscal policy tool

Taxation is a cornerstone of a country's fiscal policy, which is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. Tax law is used as a tool to achieve macroeconomic objectives:

• Controlling Inflation: During periods of high inflation (too much money chasing too few goods), the government can increase tax rates. This reduces the disposable income of individuals and the profits of corporations, thereby curbing aggregate demand and helping to control prices.
• Stimulating Growth: During a recession or economic slowdown, the government can cut taxes. This leaves more money in the hands of consumers and businesses, encouraging spending and investment, which in turn boosts economic growth and employment.
• Reducing Inequalities: Tax law can be used to redistribute wealth. India follows a progressive tax system for personal income, where higher slabs of income are taxed at higher rates. This ensures that those with a greater ability to pay contribute more to the exchequer, helping to reduce economic disparity.

Sources of Tax Law

The legal framework for taxation in India is derived from a hierarchy of sources. A thorough understanding of tax law requires familiarity with all these sources, as they collectively define the rights and obligations of both the taxpayer and the tax authorities.

Constitution

The Constitution of India is the supreme source of tax law. It grants the power to levy taxes and also places limits on this power.

• Article 265: As mentioned, it provides the fundamental principle that no tax can be levied without the authority of law.
• Article 246 and the Seventh Schedule: This article, read with the Seventh Schedule, distributes the legislative powers, including the power to tax, between the Union and the States.
  • List I (Union List): Parliament has exclusive power to make laws on subjects mentioned here, such as taxes on income (other than agricultural income), customs duties, etc.
  • List II (State List): State Legislatures have exclusive power to make laws on subjects like taxes on agricultural income, state excise duties, etc.
  • List III (Concurrent List): Both Parliament and State Legislatures can make laws. It does not contain any major tax entries.
• Constitutional Amendments: The Constitution (One Hundred and First Amendment) Act, 2016 introduced the Goods and Services Tax (GST) by inserting new articles like 246A (which gives concurrent power to Parliament and States to levy GST) and 279A (for the creation of the GST Council).

Statutes (Income Tax Act, GST Act, Customs Act, etc.)

These are the primary laws (Acts) passed by the Parliament or State Legislatures that contain the detailed provisions for the levy, assessment, collection, and administration of a specific tax.

• The Income Tax Act, 1961: Governs the taxation of income in India.
• The Central Goods and Services Tax (CGST) Act, 2017: Governs the levy of GST on intra-state supplies by the Central Government.
• The Integrated Goods and Services Tax (IGST) Act, 2017: Governs the levy of GST on inter-state supplies.
• The Customs Act, 1962: Governs the levy of duties on the import and export of goods.

Rules and Notifications

These are forms of delegated or subordinate legislation. The main statute gives power to the executive branch (the Government) to make rules and issue notifications to implement the provisions of the Act.

• Rules: These provide the procedural details for carrying out the purpose of the Act. For example, the Income Tax Rules, 1962 prescribe the various forms for filing returns, methods of depreciation, etc.
• Notifications: The government issues notifications to give effect to the provisions of the Act. They are used to, for example, specify tax rates, grant exemptions, or notify due dates. They are published in the Official Gazette and have the force of law.
• Circulars and Clarifications: These are issued by administrative bodies like the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) to clarify ambiguities in the law for the guidance of their officers and taxpayers. While they are binding on the department, they are not binding on the taxpayers or the courts.

Judicial Decisions

The judiciary plays a crucial role in interpreting the complex provisions of tax statutes. The judgments delivered by the courts become precedents and are an important source of law.

• Supreme Court: It is the apex court. Under Article 141 of the Constitution, the law declared by the Supreme Court is binding on all courts, tribunals, and tax authorities in India.
• High Courts: The decisions of a High Court are binding on all subordinate courts and tribunals within its jurisdiction.
• Tribunals: Specialised tribunals have been set up to deal with tax matters, such as the Income Tax Appellate Tribunal (ITAT) and the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). Their decisions are binding on the taxpayer and the tax authorities within their jurisdiction.

Power to Tax

The power to levy and collect taxes in India is a sovereign power that is exclusively derived from the Constitution of India. The Constitution is the supreme law, and any tax law that is inconsistent with its provisions is void. The entire scheme of taxation is meticulously laid out, distributing the power to tax between the Union Government and the State Governments, ensuring a federal balance. This distribution prevents the Union and States from encroaching upon each other's fiscal domains.

Article 246 and Seventh Schedule

Article 246 of the Constitution is the lynchpin of the legislative power distribution in India. It demarcates the subjects on which the Parliament and the State Legislatures can make laws. This article must be read along with the Seventh Schedule of the Constitution, which contains three lists that enumerate these subjects.

• Laws on subjects in List I can be made exclusively by the Parliament.
• Laws on subjects in List II can be made exclusively by the State Legislatures.
• Laws on subjects in List III can be made by both the Parliament and State Legislatures.

The power to levy a particular tax is determined by which list that tax is mentioned in. If a tax is not mentioned in any of the three lists, the residuary power to legislate on that subject rests with the Parliament under Article 248 and Entry 97 of the Union List.

Union List (List I)

This list contains subjects of national importance on which only the Parliament has the power to make laws. The major tax-related entries in List I are:

State List (List II)

This list contains subjects of regional or local importance on which only the State Legislatures have the power to make laws. The major tax-related entries are:

Concurrent List (List III)

This list contains subjects where both the Parliament and State Legislatures can make laws. However, it is important to note that the Concurrent List contains no specific entries related to the levying of taxes. Taxation powers are meant to be clearly separated between the Centre and the States to avoid conflicts.

Goods and Services Tax (GST): A Special Concurrent Power

The introduction of GST required a constitutional amendment because it needed a new framework where both the Centre and the States could tax the same transaction (supply of goods or services). This was achieved by inserting Article 246A, which creates a special concurrent power. It overrides Article 246 and gives both Parliament and State Legislatures the power to make laws with respect to GST. This is a unique feature, creating a concurrent taxing power that did not exist before.

Restrictions on Taxing Powers

While the Constitution grants the power to tax, it also imposes several restrictions to ensure that this power is exercised fairly, legally, and in a manner that does not violate the fundamental rights of citizens or the federal structure of the country.

Article 265: No tax shall be levied or collected except by authority of law

This is the most fundamental restriction on the taxing power of the state. It establishes the principle of legality, meaning every tax must be backed by a valid law. This article has two key components:

• "Levied or Collected": A tax cannot be imposed or collected based on a mere executive order or administrative instruction. The entire process, from levy (imposition) to assessment and collection, must be governed by a law.
• "Authority of Law": The 'law' must be a validly enacted statute passed by the competent legislature (Parliament or State Legislature). Furthermore, this law must not violate any other provision of the Constitution, including the Fundamental Rights (e.g., Article 14 - Right to Equality). A tax law that is arbitrary or discriminatory can be struck down as unconstitutional.

Article 276: Taxes on professions, trades, callings and employments

This article empowers State Legislatures to levy a tax on professions, trades, callings, and employments (commonly known as Professional Tax). However, it imposes a crucial restriction:

Article 276(2) states that the total amount of professional tax payable by any one person to the State or to any one municipality, district board, or other local authority in the State shall not exceed two thousand and five hundred rupees per annum (₹2,500).

This is a ceiling on the amount of tax that can be levied. While states can set rates lower than this, they cannot exceed this constitutional limit.

Article 277: Savings

This is a transitional provision designed to ensure a smooth changeover from the pre-Constitution tax regime to the new one. It states that any taxes, duties, cesses, or fees which were lawfully being levied by a State or a municipality before the commencement of the Constitution could continue to be levied even if the power to levy that tax now falls under the Union List. This was allowed to continue until the Parliament made a law to the contrary. This provision is now largely of historical significance.

Article 286: Restrictions as to imposition of tax on sale or purchase of goods

This article places explicit restrictions on the power of a State to levy a tax on the sale or purchase of goods. Before the GST regime, this was a critical provision to regulate inter-state trade and commerce.

The key restrictions are:

1. A State cannot impose a tax on the sale or purchase of goods where the sale takes place outside the State.
2. A State cannot impose a tax on the sale or purchase of goods where the sale takes place in the course of the import of the goods into, or export of the goods out of, the territory of India.

The purpose was to prevent multiple taxation of the same transaction by different states and to ensure that imports and exports were not burdened with state-level taxes. While the introduction of the Integrated Goods and Services Tax (IGST) has streamlined the taxation of inter-state trade, the principles of this article remain fundamental to the constitutional scheme for certain goods still outside the GST net (e.g., petroleum and alcohol for human consumption).