No tax system can exist in a vacuum; it must be anchored in the sovereign constitution of a nation and governed by clear statutory definitions.
1. Direct vs. Indirect Taxes
| Direct Taxes | Indirect Taxes |
|---|---|
| The burden of tax cannot be shifted (paid directly by the person on whom it is levied). | The burden of tax can be shifted to the end consumer (e.g., GST, Custom Duty). |
| Levied on income or wealth of an individual/corporation (progressive in nature). | Levied on goods or services (regressive in nature, affecting all income levels equally). |
2. Constitutional Guidelines: Article 265 & Seventh Schedule
- Article 265: Dictates that no tax shall be levied or collected except by authority of law. This acts as a shield against arbitrary executive exactions, requiring a valid statute passed by the legislature.
- Seventh Schedule: Distributes legislative tax powers between the Union and the States:
- List I (Union List): Taxes on income other than agricultural income (Entry 82), Customs duties (Entry 83), Corporation tax (Entry 85).
- List II (State List): Taxes on agricultural income (Entry 46), Taxes on lands and buildings (Entry 49), Duties on alcoholic liquors (Entry 51).
3. Key Definitions under Income Tax Act, 1961
- Assessee (Section 2(7)): A person by whom any tax or any other sum of money (interest, penalty) is payable under the Act, including deemed assessees and assessees-in-default.
- Person (Section 2(31)): Includes: (1) Individual; (2) Hindu Undivided Family (HUF); (3) Company; (4) Firm; (5) Association of Persons (AOP); (6) Local Authority; (7) Every artificial juridical person.
- Previous Year (Section 3): The financial year immediately preceding the assessment year, in which the income is earned.
- Assessment Year (Section 2(9)): The period of twelve months commencing on the 1st day of April every year, in which earned income is assessed and taxed.