The system of taxation is the backbone of a nation's economy which keeps
revenue consistent, manages growth in the economy, and fuels its industrial
activity. India's three-tier federal structure consists of Union Government, the
State Governments, and the Local Bodies which are empowered with the
responsibility of the different taxes and duties, which are applicable in the
country. The local bodies would include local councils and the municipalities.
The government of India is authorized to levy taxes on individuals and
organisations according to the Constitution. However, Article 265 of the Indian
constitution states that the right to levy/charge taxes hasn't been given to any
except the authority of law. The 7th schedule of the constitution has defined
the subjects on which Union/State or both can levy taxes. As per the 73rd and
74th amendments of the constitution, limited financial powers have been given to
the local governments which are enshrined in Part IX and IX-A of the
Definition of Tax:
A tax may be defined as a monetary burden rested upon individuals or people with
property to help add to the government's revenue. Tax is, therefore, a mandatory
contribution and not a voluntary payment or donation which one decides on one's
own. It is a payment exacted by the legislative authority. It may be direct tax
or indirect tax. Revenue growth which may be a little faster than GDP (Gross
Domestic Product) can result from revenue mobilization with an effective tax
system and measures.
The government uses this tax to carry out functions such as:
Types of Tax laws in India:
- Social welfare projects like schools, hospitals, housing projects for
the poor, etc.
- Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
- Security infrastructure of the country such as military equipment
- Enforcement of law and order
- Pensions for the elderly and benefits schemes to the unemployed or the
ones below the poverty line.
The two types of taxes in India are Direct and Indirect taxes. One of the
biggest and most successful tax reforms in India is the GST(Goods and Services
Tax). It assists as a comprehensive indirect tax which helps in eliminating the
flowing effect of tax as a whole.
Scope of tax law in India
- Direct Tax
It is a tax imposed on corporate units and individual people. It is a type
of tax that can't be moved or accepted by anyone else. Direct tax examples
are wealth tax, income tax, gift tax, etc. In the Ministry of Finance, the
Central Board of Direct Tax (CBDT) is a part of the revenue department. This
board has a two-fold role that gives important ideas, significant inputs of
planning, and policies to be implemented regarding direct tax in India. The
management of direct taxes which is done by the Income Tax department is
helped by the Central Board of Direct Taxes in doing so.
- Indirect Tax
Taxes that are indirectly imposed on the public through goods and services
are called indirect taxes. The government bodies collect taxes from people
who sell goods and services. When a good or product is sold in a state, then
a sales tax is levied on it and its rate is decided by the government, this
is called Value Added Tax (VAT).
Formulation of the policy regarding duty, collection of custom excise duty
and service tax is dealt with by the Central Board of Excise and Custom (CEBC)
The Central Board of Excise and Custom was given a new name which was the
Central Board of Indirect tax and Custom (CBIC) after GST came into force.
Its key role is to help the government in formulating policies related to
- Custom Duty
The customs duty is collected on all goods entering the country to ensure
that they are taxed and paid for. It is levied on both export and import of
goods and is important in regulating trade as well as being a source of
revenue to the government.
- Excise Duty
This is a commodity tax in the true sense as it is levied on the production
of goods and not on its sales. It is levied by the Central Government but
for alcohol/liquor and narcotics/drugs. Unlike custom duty, this applies
only to goods produced in India. It is also called the Central Value Added
- Service Tax
Here the product taxed is a service. In India, service tax was initially on
the services of telephone, share broking, and general insurance. This circle
includes far more services since then and now it has been replaced by a
consolidated Goods and Service tax.
- Value Added Tax
This tax was introduced because of India's indirect tax structure being weak
that created quite a stir. Value Added tax has a self-monitoring means which
makes the administration of this tax simple. VAT is applicable in India in
All-Union Territories and States except for the Union Territories of Andaman
and Nicobar and Lakshadweep.
After GST came into force, direct and indirect taxes were collected by the
three bodies of the government until 1 July 2017. Various indirect taxes
which were imposed by the central and state government are incorporated by
GST. Both the central and state government collect indirect tax through the
intrastate supply of goods and services.
Taxability of income in India depends on a person's residential status.
For tax purposes, the residential status of an individual is classified as:
Taxability of Ordinary Resident (OR)
- Ordinarily Resident
- Not Ordinarily Resident
Ordinary Residents are chargeable to tax in India in respect of their worldwide
income. This includes even foreign income even if it is not received or brought
into India. There is no escape from taxability in India even if the remittance
of income is restricted by the foreign country.
Non-residents are chargeable to tax in India on the following "Indian source
- Income received1 in India, whether earned in India or elsewhere;
- Income deemed to be received in India, whether earned in India or
- Income which accrues or arises2 in India, whether received in India or
- Income which is deemed to accrue or arise in India, whether received in
India or elsewhere.
Taxability of Non-Resident (NR
- Income is said to be received when it first reaches the person.
- Income is said to accrue or arise when the right to receive the income
becomes vested in the person and such income must be due to the person.
NR can, however, claim the beneficial provisions of the Indian Income tax law
or the applicable Double Taxation Avoidance Agreement, in order to avoid
possible double taxation.
Taxability of Resident Not Ordinarily Resident (NOR)
The NOR status is unique to India. No other country has such an intermediate
residential status. The NOR residential status is mainly intended as a relief
from taxability during the transitory period from NR
Not Ordinarily Residents are chargeable to tax in India on the following
- Indian source income;
- Income which accrues or arises outside India from business controlled /
profession set up in
As compared to an NR, NOR is additionally chargeable to tax in India in
respect of their income accruing outside India from a business controlled from
India or from a profession set up in India. The expression 'business controlled
in India' means that the 'head and brain' of the business - the controlling
power - should be situated in India and should direct the business activities
Thus, foreign passive incomes like interest, dividend, royalty etc. would not be
taxable in India for a person who is NOR. Even share of profit of a partnership
firm or any other business income would not be taxable in India, if the business
in respect of which such income arises is not controlled from India.
If business is controlled from India, then the income is taxable in India. In
other words, all foreign sourced income of a NOR is normally not taxable in
India unless it is derived from a business controlled in or a profession set up
Tax resources distribution between union and state:
The importance of such a distribution is very clear, as with the distribution
only, Government will come to conclusion as how has been distributed to each
states and how much it should be kept in consolidated fund of India to meet
future needs. So, it's very important to see that equal distribution is made of
revenues with respect to their contribution.
Distribution of revenues thus, leads to clarity and leaves no scope for any
confusion. With the help of distribution, we meet justice. Also, the
relationship between center and state grows and the Government doesn't go only
unitary but equal participation of State is also there in colleting taxes. So,
distribution of revenue leads to a better form of Government as the provisions
with regard to distribution can be changed according to needs and circumstances
if any conflicts between the distributions arise.
There are few Articles in the Indian Constitution which specifically focuses on
distribution of revenues.
Article 269: Taxes levied and collected by the Union but assigned to the
Sub-clause (1) of Article 269
Article 269(1) includes all the taxes on the "sale or purchase of goods" and
"taxes on the consignment of goods" except those included in Article 269 A.
These taxes are assigned to States as provided by the law but are collected and
levied by the Government of India.
It may include:
- The expression "taxes on the sale or purchase of goods" does not imply
on all kinds of trade but essentially refers to the taxes that are levied on
inter-state sale or purchase of all kinds of goods except newspapers.
- The expression "taxes on the consignment of goods" refers to tax duty
levied on the consignment of goods when happening in the course of
Inter-state trade. It includes both the cases even when the consignment is
to the person making it or to any other person.
Sub-clause (2) of Article 269
- Succession Duty
- Central Sales Tax
- Estate Duty etc
Article 269(2) lays down that the revenue obtained from such tax is distributed
between states (except in case of Union territories where it goes to the central
government), It does not form the part of the consolidated fund of India. The
manner of the distribution is to be prescribed by the Parliament.
Sub-clause (3) of Article 269
Article 269(3) further explains that the parliament has the power to define the
scope of what constitutes the sale, purchase or consignment of goods in the
course of inter-State trade or commerce.
Article 269 (A) - Positions in GST Regime
With the latest 101st Amendment a new article 269 A was inserted which brought
some considerable changes.
Sub-clause (1) of Article 269
Article 269A (1) basically involves the following aspects:
- Levying and collection of goods and services tax (GST).
- It applies in the case of inter-State trade or commerce.
- The tax collected shall be appropriated between the States and the
- The Parliament has the power to lay down the law regarding the sharing
of taxes collected under this article as per the recommendations of the
Goods and Services Tax (GST) Council.
The Parliament, in Section 17 of the Integrated Goods and Services Tax Act, 2017
in the exercise of its powers provided in Article 269A(1) of the Constitution
has provided the manner in which integrated tax collected by the Union under the
IGST Act can be apportioned in between the Union and the States.
Import of goods is a tax on supply
Article 269A(1) is followed by an explanation that in the context of India, all
the imports of goods and services in the course of inter-State trade, shall be
deemed to be considered as the part of the supply of goods and services.
Article 270- Taxes levied and distributed between the Union and the States:
Article 270 of the Indian Constitution basically deals with the subject of how
the taxes are levied and distributed between the Union and the states.
Clause (1) of Article 270
It lays down the procedure of the appropriation for certain taxes i.e. all the
taxes except those mentioned under Article 268, 269 and 269A and any surcharge
on taxes and duties mentioned in Article 271 or, any cess levied for a specific
purpose, other than these the provision holds true for every other tax.
- These taxes are levied and collected by the Union.
- The tax shall be distributed between the States and the Central
- It may include taxes such as:
- Excise Duty on Non-GST products
- Income Tax
- Basic Customs Duty etc.
- The manner for this distribution is provided under Article 270(2).
But before proceeding with understanding the manner of distribution as provided
under Article 270(2), Let us first study what changes the 101st Amendment
brought to this Article and what are its implications.
Clause (2) of Article 270
This clause lays down that the central tax obtained by the government as
mentioned in clause (1) shall be distributed between the states as per the time
and manner provided under clause (3) and such share will not form the part of
the consolidated fund of India.
Clause (3) of Article 270
According to Article 270(3), all central taxes formed in one central pool shall
be distributed in the manner prescribed by the President of India as per the
recommendations of the Finance Commission. For the operational period of
2015-2020, the share of the states in the net proceeds of the Union tax revenue
Article 271 � Surcharge on certain duties and taxes for purposes of the
Article 271 has the following key elements:
Article 273 - Grants in lieu of export duty on jute and jute products:
- Parliament has the power to increase any duty or tax anytime by levying
a surcharge except in the case of GST mentioned under Article 246A.
- All the proceeds obtained from the surcharges will be part of the
consolidated fund of India.
- All the amount from such an increase in tax shall be retained by the
parliament and it is not shared amongst the states.
- The Article has its basis to Section 137 and Section 136(1) of the
Government of India Act, 1935.
- Further, no authority has the power to prevent the Parliament from
imposing a surcharge.
According to Article 273, the Government of India before independence provided
the provision regarding the sharing of net proceeds of the jute export duty with
the jute growing provinces. But under the constitution, the states are not
entitled to obtain any apportion of such duty.
The Provision specifies that for a period of 10 years from the commencement of
the Constitution, the jute growing states of West Bengal, Bihar, Orissa and
Assam will receive grants-in-aid from the Union from the share of the jute
export duty. But as this provision was applicable only up to 10 years after the
commencement of the constitution, so now this Article does not hold any
Article 274- Prior recommendation of President required to Bills affecting
taxation in which States are interested:
As per this article, any bill or amendment on the following listed subject
matters cannot be moved or introduced in either house of the Parliament before a
prior sanction from the President which include bills/amendments dealing with:
The clause(2) under Article 274 provides the definition of the term " tax
or duty in which states are interested" which can split into two-parts:
- The imposition or varying of any tax within which the States are
- It modifies or changes the meaning of the expression "Agricultural
Income" as laid down in the Indian Income-Tax Act; or
- It lays down, modifies or amends any principle by which money is
distributed to the States; or
- It levies a surcharge on the state taxes for the purpose of the Union.
Article 275: Statutory grants:
These grants are given by the Parliament to the specific states who are in
need of assistance.
- Any tax or duty the whole or part of the net proceeds of which are
assigned to any State; or
- Net proceeds of any tax or duty that are actually part of the
consolidated fund of India but for the time being, assigned to the States.
- Under this, different amounts of grants are fixed for different states.
- The amount is given out of the consolidated fund of India.
- There are two provisos to clause (1) dealing with the granting of aid to
the states for any developmental scheme approved by the government of India
for the welfare of scheduled areas and scheduled tribes, with a special
focus to Assam.
According to clause (2) of Article 275, any order made by the Parliament
regarding the grants-in-aid as provided under clause (1) shall need a prior
recommendation of the Finance Commission.
Further, it also lays down that the Finance Commission has the power to make
recommendations other than those which are mentioned in provisos to clause (1).
Article 276- Taxes on professions, trades, callings and employments:
Article 276 empowers a state or other local authority to impose taxes on
professions and trades. But the total amount payable under any such tax shall
not exceed two thousand and five hundred rupees per annum. Earlier this limit
was up to two fifty rupees only and was raised after the recommendations of the
Sarkaria Committee in 1988.
Article 277 - Saving of Pre-Constitutional laws:
According to Article 277, if any taxes, duties, cesses or fees which were
lawfully levied by the Government of any state, municipality, or local bodies
before the commencement of the Constitution shall be continued even after the
commencement. It will not be affected by the fact that the same subject is now a
part of the Union list. Though however, it will be continued only till the
Parliament does not make any law to the contrary.
Article 279- Calculation of net proceeds:
Article 279 basically defines the net proceeds of a tax. As per clause (1) of
this article, all the earnings from the taxes excluding the cost of the
collection will constitute the net proceeds of India.
Further, it provides that the net proceeds of a tax or duty, in whole or in part
or of any area will be certified by the Comptroller and the Auditor General of
India and the decision of the CAG shall be final subject to conditions mentioned
under clause (2) of the Article.
Article 279 A- GST Council:
Article 279A empowers the president of India to constitute a Council named Goods
and Services Tax Council (GST Council) within 60 days after the commencement of
the 101st Constitution Amendment Act, 2016.
Article 280-Finance Commission:
Article 280 of the Indian Constitution is a very important article as it
deals with the Finance Commission of India. It lays down the composition, power
and functions of the finance commission. The idea of the finance committee has
been borrowed from the Common-wealth Commission of Australia.
As per Article 280, the President has the power to set up a Finance Commission
after a period of every five years. The Finance Commission will assist the
President by making recommendations to him regarding the distribution of net
proceeds of taxes to be divided between the centre and the states.
Article 281-Recommendations of the Finance Commission:
Article 281 defines the process of how the recommendations of the Finance
committee will be introduced in parliament. As per this article, the President
of India shall cause to lay down all the recommendations made by the Finance
Commission under the provisions of this Constitution along with an explanatory
memorandum before each House of the Parliament.
India is a large country with people from various communities, wealth levels,
and income levels. Taxation cannot be the same for everyone. This is one of the
reasons why India's tax system has been so difficult for so long.
The procedure has grown smoother since the establishment of the GST, which is an
all-inclusive indirect tax that has helped eliminate the cascading effect that
To summarise, the Parliament's rights are unrestricted, and the Indian
Constitution grants the Parliament broad powers that are neither rigorous nor
consistent. As a result, there exist provisions that can amend the rules of law
based on future demands.
- Varun Sharma (BBA LLB 7th semester) - Geeta Institute of Law
- Shubham Tyagi (BBA LLB 7th semester) - Geeta Institute of Law