This article has been written by Namrata SInghal, pursuing the Certificate Course in Advanced Corporate Taxation from LawSikho.
Taxation is the most important component of the financial structure of any country. Taxes are imposed upon individuals and business entities that are paid to the government or the state. Taxes are considered to be contributions made by the individuals and business entities for the economical growth and development. In simple words, it is the source of revenue for the government to manage public expenditure.
On the contrasting side, taxes are involuntary payments made by the individuals and business entities to the government which decreases their annual income or profits. Going by the normative standards, it has been understood that taxes should be levied in such a manner that they don’t pinch the taxpayer. This conflict of interest in the taxation domain is guided by the principles of fairness, transparency, effectiveness and efficiency to balance both the interests of the taxpayers as well as of the government.
If we go by this regard, one would be able to understand that taxation, though niche, is an interdisciplinary subject that touches upon subjects of law, economics and accountancy. Such intersectionality of different subjects makes taxation a complex subject to comprehend and practice. The interaction of the world economies, also known as globalization has accelerated the complexity to comprehend taxation. It is because the tax laws are not only concentrated to merely the interest of the taxpayer and government but have expanded to inculcate and consider the international relationship between the two nations who are subjected to such tax rules.
Classification of taxes
The tax levied on the individuals and business entities are divided into two categories:
- Direct Tax: As the name suggests, it is paid directly to the government. Direct taxes are levied on income and property, which are directly assessed by the government. The tax rates are determined by the Ministry of Finance in the budget for the financial year. It includes income tax, expenditure tax and interests tax. The Income Tax Act, 1961 (“act”) governs the implication of direct taxes in India. Direct taxation in India is progressive as the tax rate increases with the increase in income.
- Indirect Tax: It is the indirect levy paid to the government on the sales of goods and services. It is governed by the Goods and Services Act, 2017. The execution of the goods and services act, plays an important role in the determination of India as a federal state wherein the Central Goods and Services Tax (CGST) and Integrated Goods and Services Tax (IGST) is paid to the Union and State Goods and Services Tax (SGST) is paid to the state. It includes the Goods and Services Act, 2017, The Central Excise Act 1944, and The Customs Act 1962.
Rules of interpretation for taxation statute
For the purposes of interpretation of taxation statutes, the law goes by the strict interpretation and plain meaning rule is applied. In case of conflict between two possible meanings, the preference is given to the one that is beneficial to the taxpayer or the assessee. The constitutional mandate behind enacture of taxation statutes according to article 265 states that no tax can be levied or collected without the authority of the law. Any law related to taxation should be enacted by the competent legislature. Such laws should be implemented and interpreted in expressed terms in a strict sense.
The court cannot go into the implied meaning of any tax provision so as to detract its organic meaning from the intention of the legislature in a case when the language used in the legislature is plain and unambiguous. There is no room for equity in the interpretation of the tax statues. The interpretation of the tax status should go in hand with the original objects and purposes of the act. In case of exemption notifications, the exemptions must be strictly applied to the interests of the assessee. But in case of any ambiguity in exemption notifications, it must be interpreted in favour of the revenue. However, in the case of the interpretation of tax liability, in case of any ambiguity, it must be decided in favour of the assessee.
Determination of tax implication
The tax implications on any individual or business entity for the previous year are paid in the subsequent assessment year. For example, A is liable to pay a tax of the amount of Rs.1000/- in the assessment year 2020-21. It means that the income was earned in 2019-2020, known as the previous year for the tax purposes. The imposition of taxes for individuals is based upon the principle of residency by the virtue of section 6 of the Income Tax Act, 1961 (“act”) and not on the basis of citizenship. So, for the purposes of paying taxes in India, it is pertinent to determine the status of an individual as the resident of India immaterial of the fact whether he is a citizen of India or not. For a company to be resident in India, it has to be an Indian company with its place of effective management in India as per section 6(3) of the Act. In case of a Hindu undivided family, firm or other association of persons the control and management of its affairs should be in India.
However, before deciding the tax implication on the taxpayer on the principle of residency, it has to be borne in mind that section 90 of the Act has to be taken into consideration. Section 90 provides for an agreement between two nations to avoid double taxation. In simpler words, when the tax laws of the two countries are in conflict on the same subject matter as to comprehend the taxing rights, the provision which is more beneficial to the assessee is applicable. The Income Tax Appellate Tribunal of the Cochin Bench in M/S. Mathewsons Exports & Imports v ACIT determined the question of whether which provision will prevail over others when there is a conflict between the Indian Income-tax Act and the UAE-DTAA. The court in this case observed that the provisions of the UAE-DTAA have to be applied on the assessee as the provisions are more beneficial to the assessee as compared to the provision of the Income Tax Act.
According to section 5(1), a resident is subjected to pay income tax on income earned from all sources which is received or deemed to receive in India or accrue or arise or deemed to accrue or arise in or outside India. For an ordinarily resident, income which is accrued or arise outside India is not considered unless it is derived from a business controlled in or a profession set up in India.
According to section 5(2), a non-resident is subjected to pay income tax on income earned from all sources which is received or deemed to receive or accrue or arise or deemed to accrue or arise in India.
In Vodafone International Holdings B.V. v. Union of India (UOI), the court determined whether the income accruing or arising to a non-resident from the transfer of capital assets situated in India is taxable in India or not. It was held that such income is deemed to accrue or arise in India and thus is taxable as per section 5(2)(b) of the act. The court observed that in the case of non-resident one has to judge whether the income accrued or arise in India has been operating from outside India. Here, unless it is not determined that the income arose within India, the non-resident cannot be subjected to tax under section 5 of the act. This creates a legal fiction in the present case. To give effect to the unambiguous terminology and the legal fiction, it was decided that in this case the income is deemed to be accrued and arising in India.
Heads of income for the computation of the total income
As per the provisions of the act, salary, income from house property, profits and gains of business or profession, capital gains and income from other sources are taken into consideration for the purposes of the computation of taxes.
Income from salary
Section 15 of the act provides that salary that is due but not paid by the employer, paid but not due or paid before it became due or arrears of salary that were not paid in the previous year by the employer. However, the salary paid in advance is not taken into consideration for the purposes of computation of the total income. The salary of the partner by the firm is not a salary for the purpose of this Act. This principal section is read with section 16 and 17 of the act.
Income from house property
Section 18 of the act provides that the annual value of any building or land appurtenant of which the assessee is the owner is subjected to tax under this act. It exempts the portion of such building or land appurtenant which is used by the assessee in business or profession for which he pays the tax on profits arising out of that business or profession. This principal section is read with section 22 to 27 of the act.
Profits and gains of business or profession
Section 28 of the act provides that profits and gains of business or profession are subjected to tax under this act during the previous year.
Section 45 of the act provides that profits or gains arising out of the transfer of capital assets in the previous year are taxable under this tax. In addition, money or assets received from the insurer to the assessee in the previous year on account of flood, typhoon, hurricane, cyclone, earthquake or another convulsion of nature; riot, civil disturbance; accidental fire, explosion; or action by an enemy is taxable under this act.
Income from other sources
As per section 56 of the act, any income which is not covered under the head “Income from other sources” is subjected to be taxable under this head. For example, it includes dividend income, interest from government bonds, gifts received other than from the relatives, lottery etc.
In my personal opinion, the best way to comprehend and decode laws related to taxation would be to study it as an interdisciplinary subject. The correlation of the legal aspect of taxation would be much easier to understand when one would be acquainted with the basic principles of accountancy and economics. The present article is articulated especially for the beginners who are planning to indulge in the practice of taxation laws. By establishing nexus of the provisions of tax laws, one would be in a better position to identify the intentions of the legislature in formulating laws on the subject.
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