LAW OF TAXATION

UNIT II

**Constitutional Provisions of Taxation:**

- *Explanation*: The Indian Constitution provides a framework for levying and collecting
taxes in the country. These provisions ensure that taxation is carried out in a lawful and
constitutional manner. Here are some key aspects explained in a simplified manner, along
with examples:

1. **Article 265 - No Tax without Authority of Law:**

- *Explanation*: This article states that no tax can be imposed or collected without the
authority of law. It ensures that all tax-related decisions must be based on legislation.
- *Example*: If the government wants to impose a new tax on luxury cars, it must pass a law
in Parliament or the State Legislature before implementing the tax.

2. **Article 266 - Consolidated Funds for Tax Collections:**

- *Explanation*: Article 266 specifies that all revenues received by the Government of India
and the State Governments must be credited to the Consolidated Fund of India or the
respective State's Consolidated Fund.
- *Example*: When individuals and businesses pay their income taxes, these collections go
into the Consolidated Fund, and the government uses these funds for various purposes.

3. **Article 268 - Duties Levied by the Union but Collected and Appropriated by the States:**
- *Explanation*: This article deals with the distribution of revenue from certain duties and
taxes. The Union (central government) may impose taxes, but the revenue collected goes to
the States where the goods are produced.
- *Example*: If the central government imposes excise duty on tobacco products, the
revenue collected from this tax is distributed to the tobacco-producing States.

4. **Article 269 - Taxes Levied and Collected by the Union but Assigned to the States:**
- *Explanation*: Article 269 deals with taxes like the Goods and Services Tax (GST), where
the Union (central government) collects the tax but assigns a portion of it to the States.
- *Example*: Under GST, when you buy a product or service, you pay the tax to the central
government. Later, this tax is assigned and distributed to your State government.

5. **Article 270 - Taxes Levied and Distributed between the Union and the States:**
 - *Explanation*: Article 270 pertains to taxes collected by the Union and distributed to both
the Union and the States.
- *Example*: Income tax is collected by the central government, and then it is divided
between the Union and the States as per the recommendations of the Finance Commission.

These constitutional provisions ensure that the process of taxation is transparent, lawful,
and consistent with the Constitution. Understanding these provisions is crucial in
maintaining the fiscal integrity of the nation.

**Taxation and Fundamental Rights:**

Taxation in India is influenced by Fundamental Rights guaranteed by the Constitution. Here's

a simplified explanation of how taxation aligns with Fundamental Rights, along with examples
for each point:

1. **Article 14 - Right to Equality:**

- *Explanation*: Taxation must be equal and not discriminate between individuals or entities
without a reasonable classification.
- *Example*: If two individuals with the same income are taxed differently based on their
gender, it would violate the Right to Equality.

2. **Article 19 - Right to Freedom:**

- *Explanation*: While Article 19 guarantees several freedoms, they can be subject to
reasonable restrictions, which may include taxation.
- *Example*: The government can impose taxes on the sale of alcohol to protect public
health, even though it restricts an individual's freedom to consume it.

3. **Article 21 - Right to Life and Personal Liberty:**

- *Explanation*: Taxation should not be arbitrary and should not deprive individuals of their
right to life and personal liberty.
- *Example*: Excessive and arbitrary taxes on essential goods could impact an individual's
right to a dignified life.

4. **Article 265 - No Tax without Authority of Law:**

- *Explanation*: Taxation must be based on a law enacted by a competent authority,
ensuring that citizens are aware of the legal basis for taxation.
- *Example*: A new tax on a specific luxury item can only be imposed after it has been
approved through a legal process in Parliament or State Legislature.
5. **Article 31A - Saving of Laws providing for acquisition of estates, etc:**
- *Explanation*: While this Article is not directly about taxation, it allows the government to
make laws related to land reforms and taxation for agrarian reform.
- *Example*: The government can implement a land tax to promote equitable land
distribution.

**Scope of Taxing Powers in India:**

Taxing powers in India are distributed between different levels of government, each with its
own jurisdiction. Here's a simplified explanation of the scope of taxing powers at various
levels, along with examples for each point:

1. **Parliament (Central Government):**

- *Explanation*: Parliament has the authority to levy taxes on matters listed in the Union
List (List I of the Seventh Schedule of the Constitution).
- *Example*: The Central Government can impose income tax, customs duties, and excise
duties on goods produced in India.

2. **State Legislatures:**
- *Explanation*: State Legislatures can levy taxes on matters listed in the State List (List II
of the Seventh Schedule).
- *Example*: State governments can impose taxes on land revenue, agricultural income,
and local trade.

3. **Local Bodies:**
- *Explanation*: Local bodies, such as municipal corporations, can impose taxes on certain
aspects of local governance.
- *Example*: Municipalities can impose property taxes, which vary from one locality to
another based on property values.

4. **Residuary Powers - Parliament:**

- *Explanation*: Matters not explicitly mentioned in the Union or State List fall under the
residuary powers of Parliament.
- *Example*: If a new form of digital transaction emerges that was not foreseen by the
Constitution, the Central Government can impose taxes on it.
5. **Specific Taxes:**
- *Explanation*: Apart from general taxes, governments can levy specific taxes for
particular purposes or activities.
- *Example*: Education Cess and Secondary and Higher Education Cess are specific taxes
levied by the Central Government to fund education initiatives.

6. **Goods and Services Tax (GST):**

- *Explanation*: GST is a comprehensive tax levied on the supply of goods and services,
shared between the Central and State Governments.
- *Example*: GST subsumes various taxes like excise, service tax, and VAT, simplifying the
taxation system.

● "Immunity of Instrumentalities"

1. **Instrumentalities of the State:** Immunity of instrumentalities refers to certain entities

that are considered instrumentalities of the government and are exempt from taxation. These
entities perform functions on behalf of the government. For instance, the Reserve Bank of
India (RBI) is considered an instrumentality of the Indian government.

- **Example:** RBI is exempt from income tax and other taxes because it performs critical
functions related to monetary policy and banking regulation on behalf of the government.

2. **Sovereign Functions:** Entities that carry out sovereign functions of the government
enjoy immunity from taxation. Sovereign functions are those directly related to the
governance of the country.

- **Example:** The Income Tax Department, which collects taxes on behalf of the
government, is an instrumentality of the state and is exempt from taxation itself.

3. **Revenue Collection Bodies:** Often, organizations responsible for collecting government

revenue are granted immunity. These include bodies like the Central Board of Direct Taxes
(CBDT) or the Goods and Services Tax Network (GSTN).

- **Example:** The GSTN, which manages the technology infrastructure for the GST
regime, is exempt from taxes because it operates on behalf of the government to facilitate
tax collection.
4. **Regulatory Authorities:** Certain regulatory authorities that oversee industries or
sectors on behalf of the government can also enjoy immunity from taxation.

- **Example:** The Securities and Exchange Board of India (SEBI) is responsible for
regulating the securities market and is exempt from income tax.

5. **Public Utilities:** Organizations providing essential public services, often under

government control, are generally granted immunity from taxation. These could include
entities responsible for water supply, electricity distribution, and more.

- **Example:** State electricity boards that distribute electricity are considered

instrumentalities and are typically exempt from income tax.

6. **Non-Profit Organizations (NPOs):** Some non-profit organizations that are closely

aligned with government objectives and work as instrumentalities for social welfare may also
be granted immunity from taxation.

- **Example:** Organizations working closely with government initiatives, like Swachh

Bharat Abhiyan or National Rural Health Mission, may receive tax exemptions due to their role
in implementing government policies.

● doctrines to taxation

1. **Doctrine of Reasonable Classification:**

- *Explanation:* This doctrine under Article 14 of the Indian Constitution allows the
government to classify individuals or entities for taxation as long as the classification is
reasonable and has a rational nexus with the object of the law.
- *Example:* The government might classify income taxpayers based on their income
levels, imposing higher tax rates on higher income earners, which is considered a reasonable
classification.

2. **Doctrine of Non-Arbitrariness:**
- *Explanation:* This doctrine, stemming from Article 14, ensures that tax laws should not
be arbitrary or discriminatory. Taxation should be fair and equitable.
- *Example:* If a state imposes a tax only on people of a particular religion without a valid
reason, it would violate the doctrine of non-arbitrariness and could be challenged in court.

3. **Doctrine of Proportionality:**
- *Explanation:* This doctrine requires that the tax imposed should be proportional to the
 - *Explanation:* This doctrine requires that the tax imposed should be proportional to the
benefit or service received by the taxpayer from the government. It is related to Articles 265
and 14.
- *Example:* If a municipality imposes a tax on property owners for maintaining local parks
and roads, the tax should be proportional to the benefits these property owners receive from
these services.

4. **Doctrine of Fiscal Federalism:**

- *Explanation:* This doctrine concerns the distribution of taxation powers between the
Union (Parliament) and the States (State Legislatures) under Articles 245 and 246. It ensures
a division of tax powers to avoid conflict.
- *Example:* Income tax falls under the Union List, while sales tax falls under the State
List, ensuring clear divisions of taxation powers.

5. **Doctrine of Territorial Nexus:**

- *Explanation:* Taxation laws must establish a nexus between the taxed event and the
taxing authority's jurisdiction, as per Article 245. Taxes should apply where there is a
connection to the taxing authority's territory.
- *Example:* State governments can levy taxes on the sale of goods within their territory
because there's a clear territorial nexus.

6. **Doctrine of No Taxation Without Representation:**

- *Explanation:* This doctrine ensures that taxpayers should have a say in the tax laws
imposed upon them, emphasizing the democratic nature of taxation.
- *Example:* Elected representatives in Parliament and State Legislatures pass tax laws,
representing the interests of their constituents.

7. **Doctrine of Maximum Social Welfare:**

- *Explanation:* Taxation should not only raise revenue but also promote the social welfare
of citizens, in line with Directive Principles of State Policy (Article 39).
- *Example:* Government policies like offering tax incentives for investing in rural
development projects to uplift the economically weaker sections of society.

Unit III
Indian Income Tax Act, 1961

**1. Preliminaries:**
- *Concepts:* The Act defines crucial terms like 'income,' 'agricultural income,' 'casual
income,' and 'assessed person.'
- *Example:* 'Income' includes salary, rental income, and business profits.

- *Residential Status:* Taxation depends on an individual's residential status, with

residents taxed on global income.
- *Example:* Residents are taxed on income earned both in India and abroad, while non-
residents are taxed only on income earned in India.

- *Previous Year and Assessment Year:* Understanding these terms is essential as they
define the tax year and the year in which the tax is assessed, respectively.

● **2. Exempted Income - Agricultural Income:**

- *Explanation:* Agricultural income is generally exempt from income tax, and it's important
to understand what qualifies as agricultural income.
- *Example:* Income from crop cultivation, animal husbandry, or fisheries on agricultural
land is considered agricultural income and is tax-exempt.

● **3. Taxability under Specific Heads:**

- *Income from 'Salaries,' 'House Property,' 'Business or Profession,' 'Capital Gains,' and
'Other Sources':* The Act categorizes income into these heads, each with its own rules and
tax treatment.
- *Example:* Income from salaries is taxed based on salary structure and deductions,
while income from house property is taxed on rental income minus standard deductions.

● **4. Clubbing of Income:**

- *Explanation:* This deals with the inclusion of income from other persons (like family
members) in the assessee's total income to prevent tax avoidance.
- *Example:* If an individual transfers his assets to his spouse without adequate
consideration, the income generated from those assets may be clubbed with the individual's
income.

- *Treatment of Losses:* The Act allows set-off and carry forward of losses to adjust
against future income.
- *Example:* If a business incurs a loss in a particular year, that loss can be set off against
future profits, reducing tax liability.

**5. Authorities under the Act, Appeals, Review and Revision:**

- *Explanation:* This section explains the hierarchy of tax authorities, the role of High Court
and Supreme Court, and the processes for assessment and appeals.
- *Example:* If a taxpayer disagrees with their assessment, they can file an appeal with
the Commissioner of Income Tax (Appeals) or the Income Tax Appellate Tribunal.

**6. Penalties and Prosecution:**

- *Explanation:* The Act specifies penalties for non-compliance and fraudulent activities.
Prosecution may be initiated in severe cases.
- *Example:* Underreporting income to evade taxes can lead to penalties and even
prosecution.

**7. Deductions Allowed in Certain Cases, Chapter VIA Deductions:**

- *Explanation:* This section lists deductions available to taxpayers, including those under
Chapter VIA, such as deductions for investments in specified savings schemes and
charitable contributions.
- *Example:* Deductions under Section 80C provide tax benefits for investments in
provident funds, life insurance premiums, and National Savings Certificates.

Unit IV
● Goods and Service Tax (GST):

● **1. Constitutional Amendment for Introduction of GST:**

- *Explanation:*
1. The introduction of GST required a constitutional amendment, which led to the 101st
Amendment Act, 2016.
2. The amendment added Article 246A, granting concurrent taxation powers to both the
Centre and States for GST.
3. This amendment aimed to establish a unified and integrated tax system across India.

- *Example:*
1. The 101st Amendment Act enabled the implementation of GST, transforming India's
indirect tax structure.
2. States can now levy State Goods and Services Tax (SGST) alongside the Central Goods
and Services Tax (CGST) levied by the Centre.

● **2. History of GST:**- *Explanation:*

1. The idea of GST was initially proposed in the 2006-07 Union Budget as a comprehensive
tax reform.
 2. It took several years of deliberation, negotiation, and consensus-building among States
to pass the necessary legislation.
3. The Goods and Services Tax was finally implemented on July 1, 2017, replacing a
complex system of indirect taxes.

- *Example:*
1. The concept of GST had been discussed for over a decade before it was successfully
implemented.
2. The GST Council, established in September 2016, played a crucial role in shaping the
GST framework.

● **3. Models of GST Law:**

- *Explanation:*
1. Different countries implement GST in various models, including the dual GST and single
GST models.
2. The dual GST model divides the tax base between the Central and State governments.
3. In India, the dual GST model involves Central GST (CGST) and State GST (SGST).

- *Example:*
1. Canada follows a dual GST model with Goods and Services Tax (GST) at the federal level
and Provincial Sales Tax (PST) at the provincial level.
2. India's GST model aligns with the dual tax system, but it also has an Integrated GST
(IGST) for interstate transactions.

● **4. International Comparison:**

- *Explanation:*
1. GST is implemented in various forms worldwide, each with unique features and rates.
2. Countries like Australia, Canada, and Malaysia also have GST or similar systems.
3. Tax rates, exemptions, and administrative processes differ significantly among these
countries.

- *Example:*
1. Australia's Goods and Services Tax (GST) is a broad-based consumption tax at a rate of
10%, while India has multiple GST rates.
2. Canada's GST and Harmonized Sales Tax (HST) vary by province, making it a complex
system.

● **5. Comparison of Previous Indirect Tax Regime with GST Regime:**

 - *Explanation:*
1. The previous tax regime in India included a multitude of indirect taxes like VAT, excise,
and service tax.
2. GST unified these taxes into a single, comprehensive tax system with standardized
rules.
3. The new regime simplified compliance and reduced the cascading effect of taxes.

- *Example:*
1. Under the previous system, manufacturers paid excise tax, while service providers paid
service tax, leading to complex compliance.
2. GST streamlined taxation by merging these different taxes into one system.

● **6. Revenue Loss Compensation Scheme for States:**

- *Explanation:*
1. GST compensation was introduced to help states cope with potential revenue losses
during the initial years of GST implementation.
2. The GST Compensation Cess is levied on select goods to generate funds for this
purpose.
3. It ensures states do not suffer financial losses due to the transition to GST.

- *Example:*
1. The Compensation Cess is applied to items like tobacco products, aerated drinks, and
automobiles to create a revenue pool for compensating states.
2. The compensation mechanism provides financial stability to states during the GST
transition.

UNIT V
International Taxation & Transfer Pricing:

**1. International Transactions:**

- *Explanation:*
1. International transactions involve economic activities between entities in different
countries, leading to cross-border financial flows.
2. These transactions can include the sale of goods, provision of services, and
international investments.

- *Example:*
 1. A company in the USA exporting electronics to Europe is engaged in an international
transaction.
2. A foreign investor purchasing shares in an Indian company represents an international
transaction involving an inflow of funds.

**2. International Tax Provisions:**

- *Explanation:*
1. International tax provisions refer to the rules and regulations that govern taxation for
cross-border transactions.
2. These provisions are designed to ensure that income is taxed appropriately in different
jurisdictions.

- *Example:*
1. The United States has provisions for taxing foreign income earned by its citizens.
2. India has provisions for taxing income earned by foreign companies doing business in
India.

**3. Double Taxation:**

- *Explanation:*
1. Double taxation occurs when the same income is subject to tax in more than one
country.
2. It can result in a heavy tax burden and hinder international trade and investment.

- *Example:*
1. An individual who is a tax resident in both the USA and the UK may face double taxation
on their global income.
2. A multinational corporation operating in multiple countries may encounter double
taxation on its profits.

● **4. DTAA (Double Taxation Avoidance Agreement):**

- *Explanation:*
1. DTAA is an international agreement between two countries to prevent double taxation.
2. These agreements specify the rules for allocating taxing rights and provide relief from
double taxation.

- *Example:*
1. The India-US DTAA outlines the tax treatment of income earned by residents of both
countries to avoid double taxation.
 2. The treaty may specify reduced withholding tax rates on interest, royalties, and
dividends.

● **5. Double Taxation Relief:**

- *Explanation:*
1. Double taxation relief refers to mechanisms for resolving or mitigating double taxation
issues.
2. Relief can take the form of a tax credit, exemption, or deduction.

- *Example:*
1. A taxpayer in Country A receives a foreign tax credit for taxes paid in Country B on the
same income.
2. Exemption relief may apply when certain types of foreign income are not subject to tax
in the taxpayer's home country.

● **6. Necessity for DTAA:**

- *Explanation:*
1. DTAA is necessary to provide clarity and avoid conflicts between countries regarding
taxation of cross-border income.
2. It promotes international trade, investment, and cooperation by reducing uncertainty
and double taxation.

- *Example:*
1. DTAA helps Indian companies investing in the USA understand how their income will be
taxed in both countries.
2. It also encourages foreign investors to enter the Indian market, knowing their tax
liabilities are defined by DTAA.

● **7. Tax Haven:**

- *Explanation:*
1. Tax havens are countries or regions with low or zero tax rates and favorable financial
secrecy laws.
2. Businesses and individuals use tax havens for tax optimization, asset protection, and
privacy.

- *Example:*
1. The Cayman Islands is known as a tax haven due to its absence of direct taxation and
strong financial privacy laws.
 2. Offshore companies may use tax havens like Bermuda to reduce their global tax
liabilities.

● **8. Basics of Transfer Pricing:**

- *Explanation:*
1. Transfer pricing involves pricing transactions between related entities in different
countries.
2. It ensures that the pricing of goods, services, or intellectual property reflects the fair
market value or "arm's length" price.

- *Example:*
1. A US-based parent company selling components to its subsidiary in India must price the
components as if they were dealing with an unrelated party.
2. If a French company licenses its technology to its subsidiary in China, the licensing fee
should align with the price that unrelated parties would pay.