Key features of taxation law in India
India’s taxation system features a federal structure, progressive direct taxes, a unified Goods and Services Tax (GST), tax incentives, a strong digital infrastructure, and an efficient dispute resolution framework. The primary legal foundation is established under the Income Tax Act, 1961, along with the Central and State GST Acts.
Constitutional provisions related to taxation in India
The Constitution of India forms the foundation for all laws, making an understanding of its taxation provisions essential. Key articles outline the legal authority, distribution, and limitations of taxes across the Union and the States.
Article 265: Article 265 establishes that taxes cannot be imposed without legal authority. The Supreme Court has reinforced this in cases like Tangkhul v. Simirei Shailei, where a customary levy was deemed illegal as no statute authorized it.
Article 266: Article 266 covers the Consolidated Funds of India and the States. All revenues, loans, and repayments form the Consolidated Fund, from which withdrawals are allowed only for constitutional purposes.
Article 268: Article 268 lists duties levied by the Union but collected by states, such as excise and stamp duties. Article 269 specifies taxes collected by the Union, with provisions for revenue distribution to states. The Supreme Court, in cases like Gannon Dunkerley & Co. and Kalpana Glass Fibre Pvt. Ltd., emphasized that interstate trade, imports, and exports are exempt from state taxation under the CST Act.
Article 269(A): Article 269(A), introduced for the GST framework, allows the Union to collect GST on interstate commerce. States receive their share either through direct apportionment or via the Consolidated Fund of India.
Other constitutional provisions regulate state and Union taxation further, including Articles 270, 271, 273, 275, 276, 277, and 279, covering tax distribution, special levies, grants-in-aid, and limits on state powers. Collectively, these provisions ensure a structured, legally backed, and equitable taxation system, safeguarding state rights while enabling central oversight.
Understanding these constitutional articles provides clarity on the legal framework governing taxation, the division of fiscal powers, and the mechanisms for revenue collection, distribution, and legal compliance in India.
Types of taxes in India: Direct and indirect
India’s taxation system includes both direct and indirect taxes. These taxes differ in how they are imposed and collected.
Direct taxes:
- Income tax: Tax levied on the income of individuals and businesses.
- Corporate tax: Tax on the profits earned by companies.
- Wealth tax: A tax on the net wealth of individuals, although it was abolished in 2015.
Indirect taxes:
- GST: A unified tax on the supply of goods and services.
- Excise duty: Levied on the manufacture of goods within the country.
- Customs duty: Imposed on the import and export of goods.
Role of central and state governments in taxation law
The Constitution of India assigns different powers to the central and state governments when it comes to taxation. The central government imposes taxes on national-level activities, while state governments collect taxes related to regional and local matters. This division of authority ensures a balanced taxation system.
Central government’s role:
- Imposes taxes like income tax, customs duty, and excise duty.
- Introduces national economic policies related to taxes.
State government’s role:
Imposes taxes like sales tax, property tax, and excise duty on alcohol.
Administers taxes within the state boundaries.
Tax administration bodies of India
The Indian tax administration is managed by the Department of Revenue under the Ministry of Finance, primarily through two apex bodies—the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC).
- Ministry of Finance
Headed by the Union Finance Minister, it oversees all financial and taxation matters through the Department of Revenue.
- CBDT
Established under the Central Board of Revenue Act, 1963, the CBDT manages direct taxes like income and corporate tax. It is led by a Chairman and six members, and functions through the Income Tax Department, which issues PAN, processes returns, and investigates tax evasion.
- CBIC
Formerly CBEC, renamed in 2017 after GST implementation, CBIC administers indirect taxes like GST and Customs. It has a Chairman and six members, and its DGGI wing handles GST evasion.
Other key bodies include State GST Authorities, Municipal Bodies, Enforcement Directorate (ED), and Financial Intelligence Unit-India (FIU-IND).
Tax filing procedures and compliance
For individuals and businesses in India, filing taxes annually is mandatory to report income and pay dues to the Income Tax Department. Timely and accurate filing ensures compliance through proper record-keeping, payment of taxes, and submission of the correct Income Tax Return (ITR) via the official e-filing portal.
Tax Filing for Individuals:
Residents earning above the basic exemption limit must file returns. The new tax regime applies by default, though taxpayers can choose the old regime if preferred. Filing is also required for individuals with foreign assets, foreign travel expenses over ₹2 lakh, or deposits exceeding Rs. 50 lakh in savings accounts. For FY 2024–25 (AY 2025–26), the due date is September 16, 2025. The process involves collecting documents such as Form 16 and Form 26AS, selecting the appropriate ITR form, completing and submitting it online, and e-verifying the return.
Tax Filing for Businesses:
All companies, LLPs, and firms must file ITRs annually, irrespective of profit or loss. Businesses subject to audit must file by October 31, 2025, while transfer pricing cases must comply by November 30, 2025. Required documents include PAN, TAN (if applicable), and GST registration when eligible.
Penalties:
Late filing attracts a penalty of Rs. 5,000 (Rs. 1,000 if income ≤ Rs. 5 lakh), 1% monthly interest on due taxes, and potential loss of the carry-forward of business losses.
Recent amendments and updates in taxation law
Significant updates to India’s taxation laws for FY 2025–26 (AY 2026–27) include a proposed new Income Tax Act, a simplified new tax regime, and changes to TDS/TCS provisions.
Proposed Income Tax Act, 2025:
Passed in August 2025, it replaces the 1961 Act to simplify tax laws. Key updates: removes obsolete clauses, defines Virtual Digital Assets (VDAs) including cryptocurrencies, and replaces “Assessment Year” with “Tax Year.”
New vs. Old Tax Regimes:
The new regime is default for individuals and HUFs; the old regime is optional. Key updates: Section 87A rebate increased to ₹60,000 (tax-free income up to ₹12 lakh), standard deduction ₹75,000 (tax-free limit ₹12.75 lakh).
Revised Tax Slabs (New Regime):
Income (₹ lakh)
|
Tax Rate
|
Up to 4
|
Nil
|
4–8
|
5%
|
8–12
|
10%
|
12–16
|
15%
|
16–20
|
20%
|
20–24
|
25%
|
Above 24
|
30%
|
TDS/TCS Changes:
Higher thresholds for TDS, LRS remittance raised to ₹10 lakh, TCS exemptions on education loans, and removal of TCS on goods sales.
Other Amendments:
Unified Pension Scheme aligned with NPS, ITR-U filing extended to 48 months, revised capital gains rules, simplified search assessments, and relaxed house property income provisions.
Common challenges in the India taxation system
Key challenges in India’s taxation system include its complex legal framework, a narrow tax base, widespread tax evasion, and ongoing issues in GST implementation. Although technology has improved compliance, a fully integrated and transparent system is still evolving.
Complexity and Compliance Burden:
- Intricate tax structure: Multiple tax rates, exemptions, and rules often confuse taxpayers, increasing reliance on a tax lawyer or tax advisory services.
- Frequent regulatory changes: Constant amendments, including retrospective ones, add to compliance challenges and reduce investor confidence.
- High compliance costs: SMEs face significant accounting and documentation expenses, particularly under GST.
- Lengthy litigation: Conflicting rulings lead to delays, uncertainty, and revenue blockage, often requiring professional tax advisory support.
- Narrow Tax Base and Inequality:
- Uneven tax burden: Middle-income earners shoulder most direct taxes, while high-income individuals and corporations benefit from exemptions.
- Heavy reliance on indirect taxes: GST disproportionately impacts lower-income groups.
Tax Evasion and Black Money:
- Informal economy: Cash-based transactions and real estate dealings contribute to evasion, while low tax compliance persists.
GST Implementation Challenges:
- Operational hurdles: Initial disruptions, higher service taxes, sector-specific complications, and digital infrastructure limitations continue to affect smooth execution.
Given these complexities, consulting a tax lawyer or a professional tax advisory service has become increasingly important for individuals and businesses to ensure compliance, optimize tax planning, and navigate legal disputes efficiently.
Importance of taxation law for individuals and businesses
Taxation law is crucial for the proper functioning of the economy. For businesses, it ensures they comply with the rules while minimising tax burdens. For individuals, understanding tax law helps in efficient financial planning and reduces the chances of tax-related issues.
Importance for individuals and businesses:
- Legal compliance: Helps avoid legal penalties for non-compliance.
- Financial planning: Businesses and individuals can benefit from tax-saving strategies and exemptions.
- Economic growth: A fair tax system contributes to the country’s economic stability and growth.
Conclusion
Taxation law in India plays a pivotal role in sustaining the country’s economy. By ensuring compliance with tax provisions, both individuals and businesses can contribute to the nation’s development while avoiding legal complications. For lawyers specialising in taxation, resources like our lawyer loan or professional loan can help in expanding their practice and serving clients better.
