Basic concepts

Taxation in India plays a critical role in maintaining the welfare and development of society. According to Article 366(28) of the Indian Constitution, "Taxation" includes any imposed charge, whether it’s a tax, duty, or levy, applied at national, state, or local levels. In simpler terms, taxes represent the cost we bear to live within a structured society, supporting public services and infrastructure.

Broadly, there are two main types of taxes:

Direct Taxes – Taxes imposed directly on individuals' income or wealth. Examples include income tax, which individuals or entities pay on their earnings. One of the defining traits of direct taxes is that the taxpayer bears the cost directly without shifting it to others.
Indirect Taxes – These are applied to goods and services, such as the Goods and Services Tax (GST). In this case, businesses often shift the tax burden onto the consumer by incorporating it into product prices.

Income tax remains a significant form of direct taxation in India. According to Entry 82 of the Union List (List I) in the Seventh Schedule of the Constitution, only Parliament can make laws related to income tax on non-agricultural income. However, the power to levy taxes on agricultural income lies with the state governments. The Income Tax Act of 1961, enacted on April 1, 1962, outlines the framework for income tax across the nation.

1. The Constitutional Basis for Taxation

Under Article 265 of the Constitution, “No tax shall be levied or collected except by authority of law,” meaning that taxes cannot be charged unless there is a legal basis. Article 246 and the Seventh Schedule divide the authority to tax between the central and state governments, enabling each to create tax laws within their jurisdiction.

The Seventh Schedule is divided into three lists:

Union List – Matters where only Parliament has the power to legislate.
State List – Subjects where only state legislatures can enact laws.
Concurrent List – Areas where both Parliament and state legislatures can make laws.

2. Key Legislation and Rules for Income Tax in India

a. The Income Tax Act, 1961

This comprehensive act governs income tax, covering various sections (1 to 298) and schedules (I to XIV). It applies to all of India and serves as the foundation for income tax procedures and liabilities.

b. Annual Finance Act

The Finance Minister presents an annual Finance Bill in the Parliament during the budget session, which, upon approval, becomes the Finance Act. This act updates tax rates and regulations for the coming financial year. For instance, the Finance Act, 2023, defines income tax rates and deductions for the financial year 2022-23.

c. Income Tax Rules, 1962

The Central Board of Direct Taxes (CBDT) administers the Income Tax Act. To facilitate implementation, the CBDT issues rules, collectively called the Income Tax Rules, 1962, which provide specific guidelines for applying tax provisions.

d. Circulars and Notifications

Circulars clarify certain provisions of the tax laws and address practical challenges for taxpayers and officers alike. While these are binding on the tax department, they can benefit taxpayers if favorable. Additionally, Notifications are issued to implement specific provisions of the Act, and these are obligatory for both the department and taxpayers.

e. Judicial Decisions and Case Laws

Courts play a vital role in interpreting tax laws. Since it’s challenging for lawmakers to foresee every scenario, the judiciary steps in to resolve disputes. The Supreme Court is the highest authority, and its decisions are binding nationwide, while High Court rulings are authoritative within their respective states.

3. Key Points to Remember

Definition of Taxation (Article 366(28)): Taxation includes any tax or levy at the national, state, or local level.
Types of Taxes:
1. Direct Tax: Paid directly by individuals (e.g., Income Tax), burden cannot be shifted.
2. Indirect Tax: Levied on goods and services (e.g., GST), burden passed to consumers.
Income Tax Authority:
1. Entry 82 of Union List grants Parliament the power to tax non-agricultural income.
2. State Governments hold authority over taxes on agricultural income.
Income Tax Act, 1961:
1. Governs income tax provisions across India, in force since April 1, 1962.
2. Contains Sections 1 to 298, defining everything from tax rates to liabilities.
Finance Act:
1. Introduced annually to update tax rates; becomes law after Parliament and Presidential assent.
Circulars and Notifications:
1. Circulars: Clarify tax provisions; binding on the tax department but not on taxpayers, though beneficial circulars can be used.
2. Notifications: Enforce specific provisions, binding on both the department and taxpayers.
Judicial Decisions:

Supreme Court rulings are binding nationwide, while High Court decisions are binding within their jurisdiction.