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Understanding Taxation Law in India: A Comprehensive Overview

Updated: Jul 25, 2023

Taxation Law in India is governed by the Constitution and various Acts, with the main goal of generating revenue to fund essential public services and infrastructure. Let's delve into the key aspects of India's taxation system and the Income Tax Act of 1961.

Constitutional Framework and Taxation Authority

Article 265 of the Indian Constitution establishes that no tax shall be levied or collected without the authority of law. This means that any additional tax can only be imposed if it is supported by a bill or legislation passed by the government. Article 265 is especially significant in cases of Unjust Enrichment, where individuals who have been subjected to an illegal tax are entitled to a refund.

Regarding the distribution of taxation powers between the Central and State Governments, the Government of India Act, 1935 provides the framework. Subjects are classified into three categories: Union (Central), Provision (State), and Concurrent (Central and State). Article 246 of the Indian Constitution outlines the distribution of subjects between the Union and the Provinces.

Taxation Categories and Income Tax Act 1961

The Income Tax Act of 1961 plays a crucial role in India's tax system. It governs the levy, administration, collection, and recovery of income tax. According to this Act, five sources of income are subject to taxation:

  1. Income from Salaries

  2. Income from House Property

  3. Profits and Gains of Business or Profession

  4. Income from Capital Gains

  5. Income from Other Sources

Furthermore, Section 2(43) of the Income Tax Act defines two types of taxes: Direct and Indirect taxes.

Direct Tax and Indirect Tax

Direct taxes, such as Income Tax, Wealth Tax, and Gift Tax, are paid directly to the government by taxpayers. On the other hand, Indirect taxes are collected by intermediaries during transactions involving the purchase or sale of goods and services. Some examples of Indirect taxes include GST, VAT, Sales Tax, Central Sales Tax, and Central Excise.

Residential Status and Tax Liability

An individual's tax liability is determined based on their residential status, applicable even to foreigners working and residing in India. The Income Tax Act recognizes three categories of residential status:

  1. Resident: An individual who has stayed in India for 182 days or more in the relevant financial year or for a total of 365 days or more within the preceding four years, including 60 days in the current year.

  2. Resident but not ordinary Resident: An individual who has been a resident of India for at least 2 out of the 10 immediately preceding years and has stayed in India for at least 730 days in the last seven years.

  3. Non-Resident: An individual who does not meet the criteria for either of the above categories.

Exemptions and Deductions:

While all sources of income are taxable, certain incomes are exempted from taxation, and certain deductions are allowed. Exemptions are covered under Chapter III of the Income Tax Act (Section 10 to Sec 13) and include Income from Agriculture, Scholarships, Income from trusts, Gratuity, and Family pension received by widows, children, or nominated heirs.

Deductions, on the other hand, are covered under Chapter VI (A) of the Act (Section 80A to 80U) and reduce the taxable income. Examples of deductions include investments under Section 80C and National Saving Certificates, among others.

Income Tax Appellate Tribunal (ITAT): The Income Tax Appellate Tribunal (ITAT) is a quasi-judicial institution that deals with appeals related to Direct Taxes Acts. The decisions of the ITAT are final, and appeals can only be made to the High Court if a substantial question of law arises for determination. The ITAT operates under the Ministry of Law and Justice.

The Commissioner of Income-Tax (Appeals) serves as the first appellate authority, while the ITAT serves as the second appellate authority. Either the taxpayer or the Assessing Officer can file an appeal with the ITAT, subject to monetary limits set by the Central Board of Direct Taxes to manage the complexity and number of cases:

  • Appeal before the Income Tax Appellate Tribunal is Rs. 50 lakhs.

  • Appeal before the High Court - Rs. 1 crore.

  • Appeal before the Supreme Court - Rs. 2 crore.

Understanding the Indian taxation system is crucial for individuals and businesses to comply with their tax obligations and avoid legal complexities. By adhering to the relevant laws and regulations, taxpayers can contribute to the nation's growth and development.



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