DR .B. RAMASWAMY*** (AUTHOR & LEGAL EXPERT) *** CHAIRPERSON (THE PRESIDING OFFICER ) STANDING APPELLATE COMMITTEE OF AICTE, GOVT OF INDIA.What is Tax? Tax is a compulsory financial burden imposed by the government on individuals, goods, services, activities, or transactions

 

 

DR .B. RAMASWAMY***

(AUTHOR & LEGAL EXPERT)

*** CHAIRPERSON (THE PRESIDING OFFICER ) STANDING APPELLATE COMMITTEE OF AICTE, GOVT OF INDIA.

 

SENIOR STANDING COUNSEL, MADRAS HIGH COURT FOR INCOME TAX DEPT, MINISTRY OF FINANCE, GOVT OF INDIA.

 

SENIOR STANDING COUNSEL – SUPREME COURT OF INDIA & DELHI HIGH COURT FOR EdCIL, MINISTRY OF EDUCATION, GOVT OF INDIA.

 

ADDL GOVT PLEADER (AGP) MADRAS HIGH COURT, FOR GOVT OF PUDUCHERRY.

 

 

What is Tax?

Tax is a compulsory financial burden imposed by the government on individuals, goods, services, activities, or transactions. Taxes serve as the primary source of revenue for the government, which is utilized for the betterment of the general populace through governmental policies, strategies, and practices.

References to taxes can be found in ancient texts such as Manusmurti and KautilyaArthashastra. In India, tax was first introduced in 1860 as a response to the financial crisis of 1857. Currently, the Income Tax Act of 1961 is in effect and applicable in India.

 

What constitution prescribes:

The constitutional provisions governing taxes in India establish the foundation for all legislation. According to Article 265 of the constitution, no tax can be imposed or collected unless authorized by law. The constitution contains several other provisions that allocate power. Under Entry 82 of List I in the Seventh Schedule of the Indian Constitution, the Parliament is empowered to levy taxes on income other than agricultural income. Consequently, the responsibility for collecting income tax falls under the Union list, making it the responsibility of the Central Government.

The Central Government possesses the jurisdiction to collect taxes on income, excluding taxes on agricultural income, which is collected by the State Government. Entry 46 of List II in the Seventh Schedule of the Indian Constitution specifies that the State Government has the authority to collect taxes on agricultural income.

 

Purpose of Income Tax:

Revenue Generation: Income tax serves as the primary source of government income, enabling it to carry out essential functions. The government’s responsibilities extend beyond defense and law enforcement to encompass welfare and development in sectors like healthcare, education, and rural development. Additionally, funds are needed for administrative purposes. Tax collection plays a vital role in generating the necessary public finances.
Development Funding: Taxes contribute to financing the construction of infrastructure such as roads, schools, hospitals, and the establishment of market regulations and legal systems. The revenue generated through tax collection facilitates the allocation of resources for these development initiatives.
Resource Redistribution: Income tax helps redistribute resources from wealthier segments of society to the less privileged sections. This redistribution aims to address socio-economic disparities and promote greater equality.
Correcting Externalities: Certain products and activities carry external costs that impact society negatively. Taxes can be imposed on such items, such as tobacco, to discourage their use and mitigate the associated externalities. This helps promote public health and address social concerns.

What is income tax as per the income tax 1961:

In case of a salaried person, whatever amount received from an employer, either in cash or kind or as a facility is considered as income.
For a businessman, his profits and gains will constitute income
For professionals, freelancers etc. their earnings from various sources like professional fees, other incomes etc. are considered as Income.
You might receive Rental income from house owned.
Or capital gains from sale of shares, buying or selling of property etc.
Income may also flow from investments in the form of Interest, Dividend, and Commission etc.

Income Tax Department has classified income in 5 broad categories. Those are:

Income from Salary : The amount received by you from your employer every month comes under the head income from salary. As per law, employer-employee relationship is must to consider the amount as income from salary else it will be considered under other head and therefore exemptions, allowances available to a salaried individuals will not be available.The amount of your Salary includes basic pay, dearness allowance, medical, transport, annuity, gratuity, advance of salary, allowances, commission, perquisites in lieu of salary and retirement benefits etc.; The aggregate of the above incomes, after the exemptions but before the deductions, is known as Gross Salary and this is charged under the head income from salary.

 

Income from House property : Any Rental Income from residential or commercial property that you own will be taxed. If you have home loan then interest part of it would also be considered as negative income from House property.

 

Income from Business or Profession : Income earned through business or profession is taxable under the head ‘profits and gains of business or profession. The income on which tax is levied shall be net of expenses.

 

Income from capital gains : Any profit or gain arising from transfer of capital asset held as investments (such as house, Jewellery is chargeable to tax under the head capital gains. The gain can be on account of short-term and long-term gains.

 

Income from other sources : Any income that does not come under the above four heads of income is taxed under the head income from other sources. For eg. savings bank interest,lottery you win or Reality shows like “Kaun Banega crorepati” etc. all these Incomes are taxable that means the person winning 1 Crore in the show will have to pay 30% of tax.

 

Steps taken by the Modi Government:

Some Steps taken in each budget year regarding income tax reforms:

 

Budget Year: 2014

Tax exemption limit increased from Rs 2 lakh to Rs 2.5 lakh.
Tax exemption limit for senior citizens raised from Rs 2.5 lakh to Rs 3 lakh.
Tax exemption limit for very senior citizens (80 years and above) remained unchanged at Rs 5 lakh.
Deduction limit for interest on home loan increased from Rs 1.5 lakh to Rs 2 lakh.
Deduction limit under Section 80C raised from Rs 1 lakh to Rs 1.5 lakh.

Budget Year: 2015

Wealth tax abolished.
Additional surcharge of 2 percent introduced on the super-rich (taxable income of Rs 1 crore and above).
Transport allowance exemption increased from Rs 800 to Rs 1,600 per month.
Additional deduction of Rs 50,000 announced under the National Pension Scheme (NPS) (Section 80 CCD).
Deduction limit for health insurance premium increased from Rs 15,000 to Rs 25,000.
Deduction limit for senior citizens raised from Rs 20,000 to Rs 30,000.
Surcharge for people with income above Rs 1 crore increased from 10 percent to 12 percent.

Budget Year: 2016

Deduction limit on rent paid under Section 80GG increased from Rs 24,000 per year to Rs 60,000 per year.
Surcharge for people with income above Rs 1 crore increased from 12 percent to 15 percent.
10 percent income tax imposed on dividends exceeding Rs 10 lakh annually.
Tax rebate under Section 87A raised from Rs 2,000 to Rs 5,000.
Budget Year: 2017

Tax rebate under Section 87A reduced from Rs 5,000 to Rs 2,500 for annual income up to Rs 3.5 lakh.
Tax rate reduced from 10 percent to 5 percent for income in the Rs 2.5 lakh – Rs 5 lakh bracket.
Surcharge of 10 percent introduced on annual taxable income between Rs 50 lakh and Rs 1 crore.

Budget Year: 2018

Introduction of a standard deduction of Rs 40,000 in transport allowance and reimbursement of miscellaneous medical expenses.
Deduction for medical expenditure for senior citizens increased from Rs 30,000 to Rs 50,000.
Deduction for interest income earned on deposits with banks and post offices increased from Rs 10,000 to Rs 50,000.
Exemption from tax deduction for interest income up to Rs 50,000.
Long-term capital gains exceeding Rs 1 lakh taxed at 10 percent without indexation benefit.
3 percent education cess replaced with a 4 percent ‘Health and Education Cess’.

Budget Year: 2019 (Interim Budget)

Zero income tax for people earning less than Rs 5 lakh.
Standard deduction increased from Rs 40,000 to Rs 50,000 for the salaried class.

Budget Year: 2020

Introduction of a new personal income tax regime with revised tax slabs and reduced rates.
Optional new tax regime for individuals with an annual income of up to Rs 15 lakh.
Reduced tax rates for different income slabs:

10 percent for income between Rs 5 lakh and Rs 7.5 lakh.
15 percent for income between Rs 7.5 lakh and Rs 10 lakh.
20 percent for income between Rs 10 lakh and Rs 12.5 lakh.
25 percent for income between Rs 12.5 lakh and 15 lakhs.
Above Rs 15 lakh 30 percent

Budget Year: 2023

With the objective of benefitting the hard-working middle class of the country, Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitaraman made five major announcements with respect to personal income tax while presenting the Union Budget 2023-24 in Parliament.These announcements pertaining to rebate, change in tax structure, extension of benefit of standard deduction to the new tax regime, reduction of highest surcharge rate and extension of limit of tax exemption on leave encashment on retirement of non-government salaried employees will provide substantial benefits to the working middle class.

 

 

Courtesy: PIB

 

In her first announcement regarding rebate, she proposed to increase the rebate limit to Rs.7 lakh in the new tax regime, which would mean that the persons in the new tax regime, with income up to Rs. 7 lakh will not have to pay any tax. Currently, those with income up to Rs. 5 lakh do not pay any income tax in both old and new tax regimes.

Comparison Between The New Tax Regime Vs Old Tax Regime In India – ZOHAL

Source: TOI

 

 

Role of the CBDT:

The CBDT is responsible for overseeing income tax matters in India under the Income Tax Act of 1961. Its main roles include:

Policy Formulation: CBDT develops and implements tax policies and laws.
Tax Administration: It ensures proper tax collection, fair assessments, and enforcement of tax laws.
Rule Making: CBDT creates rules and provides guidance on interpreting tax provisions.
Taxpayer Services: It focuses on simplifying tax processes and providing assistance to taxpayers.
Tax Policy Research: CBDT conducts research on tax policy matters and suggests reforms.
International Taxation: CBDT handles tax matters related to other countries and enforces international tax obligations.
Coordination and Supervision: It supervises income tax authorities and ensures uniformity in tax assessments.

Supreme Court rulings:

Some significant Supreme Court rulings on income tax in India:

Commissioner of Income Tax vs. Vatika Township Pvt. Ltd. (2014): The Supreme Court clarified the principles for computing capital gains tax on the transfer of development rights.
Union of India vs. Azadi BachaoAndolan (2003): The court upheld the validity of the Double Taxation Avoidance Agreements (DTAAs) and held that tax treaties override domestic tax laws.
CIT vs. B.C. Srinivasa Setty (1981): The court established the “real income theory” and held that income tax should be levied on real income earned and not on hypothetical income.
McDowell and Company Ltd. vs. Commercial Tax Officer (1985): The court held that tax planning is legal, but tax evasion and colorable devices to avoid tax are not permissible.
CIT vs. R.S. Agarwal (1965): The court ruled that gifts made by a third party to a relative of the assessee would not be treated as taxable income.
Azadi BachaoAndolan vs. Union of India (2003): The court held that the General Anti-Avoidance Rule (GAAR) provisions are constitutional and can be invoked to counteract tax avoidance arrangements.
CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996): The court clarified the concept of “business expenditure” and held that expenses incurred for the purpose of business and commercial expediency are deductible.
CIT vs. B.C. Srinivasa Setty (1981): The court emphasized that taxpayers have the right to arrange their affairs legitimately to minimize tax liability within the framework of the law.

Way Forward:

Some innovative income tax reforms inspired by global best practices:

Simplification and Consolidation: Simplify the income tax laws by consolidating various tax provisions and eliminating redundant exemptions and deductions. This reduces complexity and improves ease of compliance for taxpayers.
Flat Tax Rate: Consider implementing a flat tax rate system, where all income is taxed at a single rate. This promotes simplicity, reduces tax planning strategies, and minimizes distortions in the tax system.
Digital Transformation: Embrace digital technologies to streamline tax administration processes. Implement online tax filing systems, electronic record-keeping, and data analytics to enhance efficiency, reduce administrative costs, and improve taxpayer services.
Transparent Tax Rulings: Establish a transparent framework for tax rulings and advance pricing agreements to provide clarity and certainty to taxpayers, thereby reducing disputes and promoting investment.
General Anti-Avoidance Rule (GAAR): Strengthen and enforce GAAR provisions to prevent aggressive tax planning and curb tax avoidance schemes. Ensure that the rules strike a balance between addressing tax abuse and providing certainty for genuine transactions.
Base Erosion and Profit Shifting (BEPS) Measures: Adopt measures to counter BEPS practices, such as introducing country-by-country reporting requirements, strengthening transfer pricing regulations, and collaborating with other jurisdictions to exchange tax-related information.
Rethinking Tax Incentives: Review and rationalize tax incentives, ensuring they are targeted, time-bound, and aligned with specific policy objectives. Evaluate the effectiveness of tax incentives in promoting desired outcomes and sunset those that are ineffective or no longer necessary.
Collaboration and Exchange of Information: Strengthen international cooperation and information exchange mechanisms to combat tax evasion and ensure effective enforcement of tax laws across borders. Participate in global initiatives like the Common Reporting Standard (CRS) for automatic exchange of financial account information.
Taxpayer Education and Support: Invest in taxpayer education programs to enhance awareness and understanding of tax obligations and rights. Provide user-friendly guidance and support services to assist taxpayers in fulfilling their tax responsibilities.
Risk-Based Audits: Implement risk-based audit selection processes using data analytics and risk assessment tools. This allows tax authorities to focus resources on high-risk areas, improving compliance outcomes and minimizing the burden on compliant taxpayers.

Conclusion:

The income tax reforms introduced by the Modi government have positively impacted India’s development and promoted inclusivity through the principle of “Sabka Saath, Sabka Vishwas” (Together with All, Trust of All). These reforms simplified the tax system, attracted investments, and created job opportunities. Transparent tax rulings and anti-avoidance measures increased trust among taxpayers. Targeted tax incentives supported social welfare initiatives, such as affordable housing and healthcare. Overall, these reforms have empowered individuals, fostered fairness, and contributed to India’s progress.