CS Executive Tax Law Notes

CS Executive Tax Law Notes with MCQs

CS Executive Tax Law Notes - Chapter 1 - Direct Taxes at Glance

What is Tax?

Tax is not a new term for anyone of us. We all pay taxes directly or indirectly either in one form or another form like

  • when we earn income beyond a certain level we pay Income Tax
  • when we go to some restaurants, we pay GST on the price of food we purchase
  • for travelling on some roads, we pay Toll Tax
  • for certain entertainment activities like watching moving in a cinema hall, we pay Entertainment Taxes
  • on our house, we pay Property Tax

So we all are paying taxes to government either knowingly or unknowingly. Technically speaking, tax can be defined as financial charge on the income, property or a certain activities of a person. Here financial means payable in the form of money and charge means enforceable by government. So today, in India, tax is payable only in the form of money. Tax is not a donation or voluntary contribution. We have to pay taxes as per law. We don’t have choice in that. Only government can impose taxes.

Some Definitions of Tax

Prof SeligmanA tax is compulsory contribution from the person to the government to defray the expense incurred in the common interest of all without reference to special benefits conferred.
BastableA tax as a compulsory contribution of the wealth of a person, or body of persons for the service of public powers.
Deviti. De MarcoA tax as a share of the income of citizens which the state appropriate in order to procure for itself the means necessary for the production of general public services.
Hugh DaltonA tax is a compulsory charges imposed by a public authority irrespective of the exact amount of service rendered to the tax payer in return and not imposed as a penalty for legal offence.
Jom BouvierA pecuniary burden imposed for support of the government, the enforced proportional contribution of persons and property of the government and for all public needs.
TrussingThe essence of Tax as distinguished from other charges by government is the absence direct quid pro quo- tit for tat between the tax payers and the public authority.

Constitutional Powers of Government to impose Taxes

India is free country. There is no king or queen to direct how to administer India. Therefore, for proper management and administration of India, a rule book is created which is known as Constitution of India. It is the supreme document which shall be followed by every person and authority in India and even by governments. In India no one can do any act beyond the scope of Constitution of India. In India we elect governments at 2 levels
  • At central level we elect Central Government (also known as Union Government). Central Government is responsible for administration of entire India.
  • At state level we elect State Governments. State Governments are responsible for the administration of their respective states.
These governments get administrative and legislative powers (law making powers) from Constitution of India. Schedule 7 to the Constitution of India has divided all the law making powers in 3 different lists:
  • List 1 – known as Central List or Union List
  • List 2 – known as State List
  • List 3 – known as Concurrent List 
Matters in these lists are specified in the form of entries like entry 1, entry 2 and so on.
  1. In total, there are 97 entries in Central list. This list contains only those matters on which only central government can create laws.
  2. There are 66 entries in State list. This list contains only those matters on which only state government can create laws.
  3. There are 47 entries in Concurrent list. This list contains those matters on which both state government and central government can create laws. In case of any conflict between the provisions of law created by Central Government and provisions of law created by State Government, provisions of law created by Central Government shall prevail.
According to Article 265 of Constitution of India “No tax can be levied except with the authority of law”. Thus to impose tax on any matter, government shall create proper laws in that regard. So, by creating appropriate constitutional laws,
  • central government can impose taxes on those matters which are specified in list 1 of Schedule 7 to Constitution of India
  • state government can impose taxes on those matters which are specified in list 2 of Schedule 7 to Constitution of India
Some tax related entries of List I
Entries Matters on which Central  Government can create laws for imposing tax
Entry No. 82 Tax on income other than agricultural income.  (Income Tax)
Entry No. 83 Duties of custom on goods imported into or exported from India.
Entry No. 84 Duties of excise on the following goods manufactured or produced in India, namely: –          Petroleum crude –          High Speed Diesel –          Motor Spirit (Petrol) –          Natural Gases –          Aviation Turbine Fuel –          Tobacco and Tobacco Products
Entry No. 97 Any other matter not included in List II, List III and any tax not mentioned in List II or List III. (Residual Entry)
 Some tax related entries of List II
Entries Matters on which State  Government can create laws for imposing tax
Entry No. 46 Taxes on agricultural income
Entry No. 51 Duties of excise on the following goods manufactured or produced in the State — (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics,
Entry No. 54 Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.
Entry No. 62 Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council.

Characteristics of Good Tax System

  • Equity (Should be based on ability to pay)
  • Certainty (Taxpayer must know what to pay)
  • Economy (Cost of collection of taxes should by low)
  • Convenience (Taxes must be easy to collect)
  • Redistribution (Taxation must enable the redistribution of wealth from rich to poor)
  • Flexible (Government should be able to change the taxation according to the economic conditions)
  • Shall not discourage work or investment

Canons of Taxation

  • Canon of Equity
    • Equity means fair and equal treatment. According to this canon, government should levy taxes on the basis of equity.
    • Taxpayers with equal abilities should pay the same amount of tax. This is Horizontal Equity.
    • Taxpayers with a greater ability should pay more tax. This is Vertical Equity.
  • Canon of Certainty
    According to this canon, taxpayer should know
    • when the tax is to be paid,
    • how it is to be paid, and
    • how the amount to be paid is to be determined.
  • Canon of Convenience
    According to this canon,
    • It should be easy for taxpayer to pay taxes (in terms of payment mechanism and calculation). Convenience in paying a tax helps to ensure compliance.
    • It should be easy for authorities to collect taxes (in terms of procedures).
  • Canon of Economy
    According to this canon,
    • Administrative cost of collection of the taxes shall be at the lowest level.
    • The costs to collect a tax should be kept to a minimum for both the government and taxpayers.

Why government impose taxes?

In India, we elect government at 2 levels:

  • At central level, Central Government is elected which is also known as Union Government. Central Government is responsible for Administration of entire India.
  • At state level, State Governments are elected. State Governments is responsible for Administration of respective states only.

Governments require money and resources for proper administration and management of country or respective states. Tax is a major source of revenue for the Governments. With the help of this revenue, governments provide us various facilities like

  • Safety and Security
  • Law and Order
  • Various infrastructure facilities like roads, transportation, ports, electricity connectivity, telephone connectivity etc.
  • Financial facilities

Further, governments provide various public welfare facilities like

  • Free hospitals
  • Free Education
  • Free or Concessional Food

Further, tax works as tool

  • to reduce inequality through the system of slab rate of taxation
  • to develop backward areas through tax holidays exemptions, concessions
  • to enhance any industrial or service sector through tax holidays exemptions, concessions
  • to encourage Export through tax holidays exemptions, concessions
  • to encourage savings by providing various deductions
  • to attain economic stability in case of inflation/depression
  • to fight against bad and injurious customs by imposing heavy taxes

tax as a tool to reduce inequality
Tax as a tool to reduce inequality

What are Direct Taxes and Indirect Taxes?

Basically, we can divide all taxes into 2 broad categories:
  • Direct Taxes and
  • Indirect Taxes
Direct taxes are those taxes where there is a direct link between the government and the tax payers. It means tax is payable by the tax payer directly to the government. For example: Income Tax, toll tax, property tax etc. Indirect taxes are those taxes where there is no direct link between the government and the tax payers. Infact in case of indirect taxes taxpayer is not directly liable to pay the taxes as per laws. But the person who is directly liable to pay taxes can recover the taxes from the taxpayer or you can say the person who is directly liable to pay taxes can shift the burden of tax on other’s shoulders.
Criteria Direct Taxes Indirect Taxes
Incidence & Impact Impact and incidence of a tax are on one and same Person Here the impact of tax is on one person and incidence on the another
Burden Direct tax is imposed on one person and burden of tax cannot be shifted to others. Indirect tax is imposed on commodities and seller/ supplier can shift the tax burden on the buyer.
Viability of payment Based on Income earning ability of people. Borne by the consumers of commodities and services, irrespective of financial ability
Administrative Viability Cost of collecting direct taxes is more and improper administration may result in tax evasion Cost of collecting Indirect taxes is very less as indirect taxes and tax evasion is very difficult
 For example: When you buy certain goods, it is the duty of seller to pay the sales tax to the government on such transaction. But, as per law, seller can recover such taxes from you (i.e from the consumers) by adding such taxes in the price of the goods. So here you (means taxpayer) have to bear the burden of taxes indirectly, although the direct liability lies on seller. So from taxpayer point of views, such taxes are indirect taxes. Excise Duty, GST and Custom Duty are the some of the examples of indirect taxes. Merits/Demerits of Direct Taxes
Merits Demerits
Equity (Based on the level of Income) Easy to evade
Elasticity and productivity (Flexibility) Uneconomical (Collecting Cost is heavy)
Certainty Unpopular (lump sum amount is payable for whole year)
Helps in reducing inequality Tax rates are of progressive nature (tax payer feels disincentive to work hard and save money)
Good instrument in the case of inflation/ depression Not suitable to a poor country (Collecting Cost is heavy)
Simple (rules, procedures, regulations of income tax) Arbitrary (No logical or scientific principle to determine tax rates)
Merits/Demerits of Indirect Taxes
Merits Demerits
High Revenue as compare to Direct Taxes Regressive in effect – Payable by everyone irrespective of level of Income
Very less chances of evasion Uncertainty in Collection
Convenient for taxpayers as well as Government Discourage savings
Economical (Collecting Cost is less) Increase Inflation
Payable on wide range of goods/services
Elasticity (modifications in tax rates and tax laws are very easy)

Flat Tax Rates and Slab Tax Rates

In India, there are 2 systems of taxation

  • Slab rate of taxation
  • Flat rate of taxation

Under flat rate of taxation, tax is payable at a constant rate irrespective of the income of a person.

Suppose,

  • income of Mr. Aallu is Rs. 1,00,000,
  • income of Mr. Kachallu is Rs. 4,00,000,
  • income of Mr. Babu is Rs. 7,00,000, and
  • income of Mr. Nonu is Rs. 11,00,000

Under flat rate of taxation they all shall pay taxes at the same rate, let say 30%. So,

  • Aallu shall pay tax of Rs. 30,000 (30% of Rs. 1,00,000)
  • Kachallu shall pay tax of Rs. 1,20,000 (30% of Rs. 4,00,000)
  • Babu shall pay tax of Rs. 2,10,000 (30% of Rs. 7,00,000)
  • Nonu shall pay tax of Rs. 3,30,000 (30% of Rs. 11,00,000)

Thus flat rate of taxation does not make any discrimination between rich and poor, as far as, rate of taxation is concerned.

Under slab rate of taxation, we divide the income of a person in different income slabs, for example:

Income SlabsTax Rates
1.On income upto 2.5 LakhsNo tax is payable
2.On income above 2.5 Lakhs upto 5 Lakhs5%
3.On income above 5 Lakhs upto 10 Lakhs20%
4.On income above 10 Lakhs30%

Slab rate of taxation is also known as progressive taxation.

In Indian, slab rate of taxation is applicable only under of Income tax laws. In case of indirect taxes like sales tax, excise, VAT etc., we have to pay taxes at flat rates.

History of Income Tax in India

History of Income Tax in India

  • Income Tax Act in India
    • Introduced in British Raj
    • In Year 1860 by passing Income Tax Act, 1860
  • Income Tax Act, 1860
    • Passed for 5 Years
    • Lapsed in 1865
    • Replaced by a licence tax on professions and trades
  • Income Tax Act, 1886
    • Taxed income of Residents as well as Non Residents
    • Defined Agricultural Income and exempted it from Income Tax
    • HUF was considered as distinct taxable entity
    • Exempted life insurance premiums paid by assesse policies of his own life
  • Income Tax Act, 1918
    • Covered receipts of casual or non-recurring nature pertaining to business or professions.
    • Provides business deductions for the purpose of computing net income.
  • Income Tax Act, 1922
    • Introduced the concepts of Annual Finance Act
    • Specified the nomenclature to various income tax authorities and laid the foundation of a proper system of administration

Current Income Act -> Income Tax Act, 1961

Administration of Tax Laws

Administration of Tax Laws

Organisational Structure of CBDT

The CBDT is headed by CBDT Chairman and also comprises 6 members. The Chairperson holds the rank of Special Secretary to Government of India while the members rank of Additional Secretary to Government of India.

  • Member (Income Tax)
  • Member (Legislation and Computerisation)
  • Member (Revenue)
  • Member (Personnel & Vigilance)
  • Member (Investigation)
  • Member (Audit & Judicial)

The CBDT Chairman and Members of CBDT are selected from Indian Revenue Service (IRS).

CS Executive Income Tax MCQs - Chapter 1 - Direct Taxes at Glance


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Tax is-
According to ____________________________, no tax can be imposed except with the authority of the law.
____________________ has divided all the law making powers in three different lists
By making proper laws, Central Government can impose taxes on the matters specified in
Under which entry of List I of schedule 7 to Constitution of India, Central Government can create laws for imposing Income Tax
Under which entry of List I of schedule 7 to Constitution of India, Central Government can create laws for imposing Excise Duty
Under which entry of List I of schedule 7 to Constitution of India, Central Government can create laws for imposing Custom Duty
______________________is known as Residual entry.
______________________List is known as Concurrent List.
Who can create laws on the matters specified in Concurrent List?
Who can impose Excise Duty on alcohol for direct human consumption?
__________ can be utilised by government as tool to reduce inequality.
Cannons of taxation as propounded by Adam Smith despite the modern development of economic sciences still apply and hold good. These cannons of taxation refer to administrative aspect of a tax. Find out from the following, which have been considered too under the Income Tax Act as being the fundamental cannons of taxation : (i) Cannon of Equity; (ii) Cannon of Economy (iii) Cannon of Uncertainty; (iv) Cannon of Non-convenience; (v) Cannon of Certainty
The Central Board of Direct Taxes (CBDT) is a statutory authority for providing essential inputs for policy and planning of direct taxes in India and is also responsible for administration of direct tax laws through Income Tax Department and is functioning under the :

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