Introduction

Tax is a mandatory charges levied or imposed by the government on individuals, corporates, Hindu undivided family, Partnership Firms and various other entities. The revenue generated from these taxes is utilized by the government to finance public services, infrastructure project and government operations, ensuring the welfare and development of the country.

Understanding the tax regulation is essential for ensuring compliance with the applicable rules and laws.

What is Tax?

Definition of taxation as per Article 366(28) of the Constitution of India is –

“Taxation include the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly.”

It means the government can collect any type of tax or financial charges that applies to everyone, a local tax for specific area, or a special tax for a particular purpose. All these different kinds of taxes are considered part of taxation.

History of Taxation

The first known system of taxation was in Ancient Egypt around 3000–2800 BC, in the First Dynasty of the Old Kingdom of Egypt. In ancient Egyptian society the term labour used as synonym for taxes. In 1922 India started its Income-tax Department. The Income-tax Act, 1922 came into force. The current governing Act is income-tax Act, 1961. It undergoes a change every year by the Annual Finance Act passed by Parliament.

Power to levy taxes

In Article 265 of the Constitution of India it is said that “No tax shall be levied or collected except by authority of law.” The government holds the power to create laws for levy of any tax.

The constitution of India gives the power to levy and collect direct or indirect taxes to the Central and State Government. The parliament and State Legislatures are empowered to make laws on the matter enumerated in the 7^th Schedule of Article 246 of the Constitution of India.

Types of Taxes

There are two types of taxes – Direct taxes and Indirect Taxes.

Direct taxes

The taxes which is levied directly on the income or wealth of person, then it is a direct tax. This form of taxation is not refundable by any other person. The burden of direct tax cannot be shifted. Example of Direct tax is Income-tax.

The levy of income-tax in India is governed by the Income-tax Act, 1961. It came into force on 1^st April, 1962. It contains Section 1 to 298 and schedules I to XIV.

Income-tax Rules, 1962

For the proper administration of the Income-tax Act, 1962, the Central Board of Direct Taxes (CBDT) frames rules from time to time. These rules are collectively called Income-tax Rules, 1962.

The Finance Act

In India every year, the Finance Minister of India presents the Finance Bill in the parliament’s Budget Session.  When the Finance Bill is passed by the both houses of parliament (Loksabha and Rajyasabha), it becomes the Finance Act.

The First Schedule to the Finance Act contains four parts which specify rates of tax –

• Part I – Part I specify rates of tax applicable to the current Assessment Year.
• Part II – It specify the tax deductible at source (TDS) rates for the current financial year.
• Part III – Income chargeable under the head “Salaries” and computation of advance tax is taxed at the rates given in part III.
• Part IV- It provide the rules for computation of net agricultural income.

Indirect taxes

Tax is levied on the price of a good or service is an Indirect-tax. Indirect-tax is the tax paid to the government by one entity, but its ultimate burden is shifted to the person who consumes the goods and services. Example- Goods and Service tax (GST) and Customs Duty.

GST is a value added tax levied on supply i.e, manufacture or sale of goods and provision of services. It provides a seamless system of tax credits that flows from the producer or service provider to the retailer or consumer. This ensures that tax is only charged on the value added at each stage of the supply chain. The supplier at each stage is permitted to avail credit of GST paid on purchase. Thus, only the final consumer bears the tax.

CUSTOMS is a duty imposed on imported/exported goods. The term ‘Customs’ is derived from the term custom which means a practice or way of behaving that is common within a particular group or society over a long period.

How taxes work

India’s tax system is a broad framework designed to manage taxes efficiently. It ensures proper collection, assessment, and use of taxes. The system meets the country’s revenue needs, supports economic growth, and improves social welfare.

Tax collection is a process of collecting direct and indirect-tax by government to gather revenue from individuals, businesses and other entities.

Mechanisms to collect tax are TDS, Advance tax, Self-Assessment tax and GST collection.

Assessment of tax involves determining a taxpayer’s liability based on their income, expenses, and applicable tax laws.

There are multiple steps in Assessment of tax

• Self-Assessment
• Processing by tax authorities
• Scrutiny Assessment
• Appeals and Disputes

Importance of Taxes

Taxes constitute the basic source of revenue to the government that is used for meeting the expenses in Public services like healthcare, education, and transportation. Infrastructure projects such as roads, bridges, and airports. Salaries of government employees and administrative costs. Taxes help support welfare schemes aimed at improving the quality of life for citizens, such as Poverty alleviation programs, subsidies for essential goods like food and fuel and social security and healthcare initiatives.

Who is Obligated to pay tax in India?

The obligation to pay taxes depends on the type of tax and the individual’s or entity’s income, transactions, or activities. Generally, taxes are paid by Individuals, Businesses, Professionals and Freelancers, Employers and Employees and Property Owners etc.  For individuals earning income above the basic exemption limit from sources includes salaries, house property income i.e. rent, business profit, capital gain and income from other sources such as interest, dividend income etc.  is required to pay income tax.

Every individual and business should stay informed about tax regulations. Tax laws are changing constantly evolving, and understanding these changes can help you plan your finances more effectively, maximize savings through deductions, and avoid penalties for non-compliance. Being aware of your tax obligations empowers you to make informed decisions, whether it’s filing returns on time, claiming eligible benefits, or contributing responsibly to the nation’s development. Knowledge of tax laws not only ensures compliance but also provides opportunities to optimize your tax liability. Make it a habit to stay updated through trusted sources, consult professionals when needed, and take control of your financial future.