WHAT IS A TAX?

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“A tax is a compulsory contribution from the person to the government to defray expenses incurred in the common interest of all without reference to special benefits conferred.”

                                                                                                                 –Prof Seligman

 

 

WHAT IS A TAX?

 

The word tax is based on the Latin term “taxo” which means to estimate. Tax is a fee charged by a government on a product, income, or activity. In other words, tax is the compulsory extortion of money under an act.

 

Taxation isn’t a modern economic phenomenon. It has existed since the birth of the early civilization. In ancient times taxes were either material or money like goods or services in primitive society. The subjects used to pay a share of their income to the head of a tribe or to the King who in return provided them with the administration security from foreign aggression and other civic amenities.

 

In the medieval centuries, feudalism was founded, which leads to the origin of the modern tax system. Feudal market dues, tools for protection, use of roads, bridges, ferries, land rent & other payments in goods and services were gradually transferred into money payment with the rise of the monetary economy.

 

Then with the development of economic Sciences and with the passage of time, the function of the modern state appeared & taxation gradually become a tool of usage with more than one goal and become an important source of revenue for the government. During 19th and 20th centuries, there has been both qualitative and quantitative changes in public expenditures.

 

As the tax functions and the objectives change from the ancient communities to medieval societies then gradually to modern societies leads to the evolutions in the tax system.

In the present time, taxation is not just a means of transferring money to the government for meeting the public expenditure or to raise revenue but it emerges as a tool to reduce demand in the public sector, redistribution of income and wealth amongst a different sections of the society in the country. Taxation helps to find out a solution for some economic problems like unemployment, inflation & depression.

 

 

CHARACTERISTICS OF TAX

 

  • Tax is Compulsory
  • Tax is Contribution
  • Tax is for Public Benefit
  • No Direct Benefit to the taxpayers
  • Tax is paid out of an income of Taxpayers
  • has the power to levy tax.
  • Tax isn’t the cost of the benefit conferred by the govt. on the public.
  • Tax is for the economic growth & public welfare

 

 

CANONS OF TAX

Canons of taxation refer to the administrative aspect of tax. They are related to the rate, amount, method of levy & collection of a tax. Despite the development of economic Sciences, Adam Smith’s canons of taxation still continue to be widely accepted in the modern era as well.

The basic principle of taxation has more or less remained unchanged for 220 years but to make it effective with the modern economic activities, modern economists like Charles F Bastable, H Dalton have modernized the canons in some respect.

 

So, in the present time, we have four cannons of taxations-

 

  1. CANON OF EQUITY

This Canon implies that a tax system should be based on the principle of social justice. Equity refers to both horizontal and vertical equity.  Horizontal equity describes the concept that tax payer with equal abilities to pay should pay the same amount of tax. While vertical equity means that the taxpayers with a greater ability to pay should pay greater tax.

 

 

  1. CANON OF CERTAINTY

The tax rules should clearly specify when the tax is to be paid, how it is to be paid, and in which way the amount to be paid is to be determined. The objective of this Canon is to create trust b/w the parties i.e. the tax payer & the authority which is collecting the tax.

 

 

 

 

 

  1. CANON OF CONVENIENCE

A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer. The appropriate payment mechanism depends on the amount of the liability & how convenient is to collect the tax.

This principle plays a paramount role in designing a particular rate or tax system. Deals with the formation of appropriate system & the collection of taxes.

 

 

  1. CANON OF ECONOMY

This canon deals with the administrative cost of collection of the tax at the lowest level. The costs to collect a tax should have to min. for both the govt. as well as for the taxpayers.

 

 

TYPES OF TAX

 

Basically, the taxation is divided into two sub-branches-

  • DIRECT TAX (INCOME TAX)
  • INDIRECT TAX (GST, CUSTOMS)

 

 

                    DIRECT TAX                     INDIRECT TAX
•       A tax which is levied on a person & the burden of the same falls on the taxpayer himself.

•       It is levied on the income or wealth of a person

•       Progressive in nature.

•       Income Tax.

 

 

•       A tax which is levied on a person but the burden of the same falls on another person i.e., the customer.

•       It is levied on the goods & services.

•       Regressive in nature

•       Custom, GST, etc.

 

 

 

 

INTRODUCTION OF INCOME TAX LAW

According to article 265 of the constitution of India, no tax of any nature can be levied and collected by the central or state government except by authority of law. The authority to enact law and to levy taxes and duties is given by the constitution of India under Article 246 which states that law can be enacted by the parliament or the state legislatures if such power is given by the constitution of India.

 

The Central Govt. has been empowered by Entry 82 of the Union List of Schedule VII of the constitution of India to levy tax on all income other than agricultural income. {Entry 46 of the state list of Schedule VII of the Constitution of India} [ subject to sec 10(1) of the income tax act]

 

Income tax is a tax levied on the total income of the previous year of every person. A person includes an individual, Hindu undivided family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company, etc. Income tax is the most significant direct tax.

 

SOURCES OF INCOME TAX LAW

  • Income Tax Act, 1961
  • Annual Finance Act
  • Income Tax Rules, 1962
  • Circulars & Notifications
  • Legal decision of Courts

 

FORMATION OF ACT

 

  • Budget for every year presented on last working day of Feb. However, in the election year, the Budget is presented after the formation of new government.

 

  • Budget 2021 presented on 1st Feb 2021 containing Finance Bill, 2021

& become Act on 27th March 2021

 

  • Finance bill contains amendments in Direct & Indirect taxes

 

  • Normally amendments are for the previous year 31.3.2022 i.e., Assessment year 2022-23.

 

 

  • Bill when passed by Lok Sabha & Rajya Sabha & assented by President becomes Finance Act,2021

 

 

References

  • Constitution of India, 1949
  • Taxman’s Income tax Act, 1961
  • Taxman’s Income tax Rules, 1962

 

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