Tax Law: Meaning & Application

Tax laws in India are imposed by the central government and state governments with the authority granted by the Indian Constitution. Local government entities like the municipality also impose a few small taxes.

The Constitution of India, which divides the ability to levy different taxes between the Union Government and the State Governments, is where the authority to levy a tax derives from. The Constitution's Article 265, which declares that "No tax shall be imposed or collected unless by authority of law," places a significant limit on this ability. As a result, each tax imposed or collected must be supported by a corresponding statute that was either passed by the state legislature or the parliament.

What is the meaning of Tax Law?

Tax law involves the application of current tax laws to persons, entities, and companies in sectors where tax revenue is collected or levied. With the passage of time, India has both eliminated and implemented numerous levies. Inheritance tax, interest tax, gift tax, wealth tax, and so on are a few of these levies. In India, the Income Tax Act of 1961 and the Wealth Tax Act of 1957 served as the primary pieces of law governing direct taxes, but the Wealth Tax Act was abolished in 2015.

Objective of Tax Law

The main objective of tax law in India is −

• Increasing public revenue.

• Reduction of wealth inequality.

• The main purpose of tax collection is for public welfare.

• Prohibition of the creation and use of dangerous products.

• Import and export regulations.

Structure of Tax Law in India

The structure of tax law in India is −

Direct Tax

Direct tax is a type of tax in which the tax is payable directly to the central government without any intermediates. It includes income tax, property tax, gift tax, etc. The following are the major direct taxes in India:

Income Tax

A tax on a person's annual taxable income that is imposed by the federal government at set rates is known as income tax. Individuals, businesses, trusts, Hindu undivided families, and other entities pay taxes.

Taxable income is defined as income determined in accordance with the Income Tax Act of 1961. The following are features of income tax −

• The extent of taxation applies not just to individuals but also to businesses, HUFs, trusts, and cooperative societies.

• The wealthy bear the brunt of the income tax burden.

• It is governed by either the central government or the state government.

Wealth Tax

A wealth tax is assessed annually on a person's net worth. Prof. Kaldor's recommendations led to the introduction of the wealth tax in India. It came into force in 1957. Individuals' net worth was subject to this tax. H.U.F. and businesses as well as a yearly tax. Due to its fairness, benefits to the economy, and administrative effectiveness, the tax was thought to be justifiable. Prof. Kaldor also stated that money alone is not a reliable indicator of one's ability to pay, but rather a combination of income and property. The central government abolished this type of tax in 2015.

Indirect Tax

A tax that is applied to products and services before they are delivered to the customer is known as an indirect tax. The client ultimately pays the indirect tax as part of the market price of the good or service they have purchased. The tax is indirect if, on the other hand, the entity that pays the tax to the tax collecting authority does not experience a comparable drop in income, i.e., impact and tax incidence are not on the same entity, implying that tax can be moved or passed on.

The individual (such as the customer) who pays the tax that is included in the cost of a purchased good is the one who pays the indirect tax, and the intermediary (such as a retail store) is the one who collects the money from them. In the next year, the intermediary files a tax return and sends the money from the tax to the government together with the return.

Following are some examples of indirect tax −

Custom Duty

Customs duties are an indirect tax that the national government imposes on the import and export of commodities. Foreign trade is subject to customs duty. It serves as a crucial revenue generator and tool for controlling the nation's imports and exports. Following are the two business categories that are subject to customs duty:

• Import Duty − When a person imports products from outside of India, it is referred to as an import, and any tax or duty that is due on those items is referred to as an "import duty."

• Export Duty − Exporting goods from India to other nations is referred to as doing so, and the duty that must be paid on those items is referred to as the "Export Duty."

Service Tax

The service tax is a tax levied by the central government on taxable services.A taxable service is one that is on the list of taxable services as defined in Section 65 of the Act. The key aspects of service tax are covered −

• The quantity of taxable services

• service tax rate

• Service Tax Form of Collection

• Use of Service Tax

• The value of taxable services for service tax purposes

• Small service providers are exempt.

Value Added Tax (VAT)

A value-added tax (VAT), often referred to as a "goods and services tax" (GST) in some nations, is a sort of tax that is levied gradually. Every time a good or service is produced, distributed, or sold to a final customer, a fee is added to the price. The business that collects and pays the government VAT on its goods or services, if it is the ultimate consumer, may recoup the tax it has already paid. It is comparable to and frequently compared to a sales tax because the individual who eventually pays the tax is not always the same as the person who pays it to the tax authorities, VAT is considered an indirect tax.

Conclusion

All citizens are required to pay taxes specifically who are covered under tax paying slab. India has two different types of taxes: direct taxes and indirect taxes. The origins of taxes in India date back to the Manu Smriti and Arthasastra periods. The current tax structure in India is derived from an earlier tax structure with a focus on increasing social welfare. Everyone who lives in the country is required to pay taxes. India has two different types of taxes: direct taxes and indirect taxes.

Taxes must be paid by everyone as required by law. Government exemptions are paid for with total tax income. The government makes decisions about the budget's preparation and tax expenditures. If a person's admission is taxed, they cannot opt out of paying tax; they must do so. Tax payment is a responsibility shared by all residents. The government can put more money into welfare programs with increased tax revenue.

Frequently Asked Questions

Q1. What were the major deficiencies of the VAT system in India?

Ans: The major deficiencies of the VAT system in India were as follows:

• There was a lack of uniformity in the rates of VAT in different states. Distortion occurs on account of different rates of VAT, composition schemes, exemptions, differences in classification of goods, etc.

• The central sales tax was not integrated with the state VAT. Therefore, it was difficult to put the purchases from other states on par with the purchases within the state. Consequently, the advantage of neutrality was confined only to purchases within the state.

• For complying with the VAT provisions, the accounting cost increased, which was not commensurate with the benefit to traders and small firms.

Q2. What is "Goods and Services Tax" (GST) and what are the principles of GST?

Ans: GST is an indirect tax that has replaced many indirect taxes in India. It is a destination-based tax on the consumption of goods and services. It is levied at all stages, right from manufacture up to final consumption, with credit for taxes paid at previous stages available as a set-off. In a nutshell, only value addition will be taxed, and the burden of tax is to be borne by the final consumer. From July 1, 2017, the Goods and Services Tax (GST) will be implemented in India.

Q3.  What is land revenue?

Ans: Land revenue is the oldest tax. It is imposed on landowners, especially agricultural ones, and is levied on the basis of the area of land or a certain percentage of crop earned. It is as well-known as the name "Lagan."