Constitutional Framework for Income Tax in India

Article 265 of the Constitution of India states that “No tax shall be levied or collected except by authority of law.” This means that both the imposition (levy) and collection of any tax must be done under a law created by the government.

The Constitution grants the power to levy and collect taxes whether direct or indirect to both the Central and State Governments. According to Article 246, the Parliament and State Legislatures have the authority to make laws on various matters listed in the Seventh Schedule of the Constitution.

The Seventh Schedule, as referred to in Article 246, is divided into three lists that outline the subjects on which laws can be made for taxation:

1) Union List (List I): Only the Parliament has the exclusive power to make laws on the matters listed here.

2) State List (List II): Only the State Legislatures have the exclusive power to make laws on the matters included in this list.

3) Concurrent List (List III): Both Parliament and State Legislatures can make laws on the subjects mentioned in this list.

Income tax is the most important form of direct tax. Under Entry 82 of the Union List (List I) in the Seventh Schedule to Article 246 of the Constitution of India, the power to make laws regarding taxes on income excluding agricultural income has been granted to the Parliament.

Components Of Income Tax Law:

1) Income-tax Act, 1961

The levy of income-tax in India is regulated by the Income-tax Act, 1961, which we will briefly refer to as “the Act” in this material.

The Act applies to the entire country of India.
It came into effect on 1st April, 1962.
It comprises Sections 1 to 298 and Schedules I to XIV.

The Act is updated every year through the Annual Finance Act passed by Parliament, along with other legislations such as the Taxation Laws (Amendment) Act.

2) The Finance Act :

Each year, during the Budget Session of Parliament, the Finance Minister of the Government of India presents the Finance Bill. Once this Bill is passed by both Houses of Parliament and receives the President’s assent, it becomes the Finance Act.

Through the Finance Act, new provisions are introduced, and existing ones in the Income-tax Act, 1961 and other tax laws are either amended or replaced annually.

The First Schedule to the Finance Act is divided into four parts, which lay down the applicable tax rates.

Specifically, Part I of the First Schedule outlines the tax rates for the relevant Assessment Year. For example, Part I of the First Schedule to the Finance (No. 2) Act, 2024 specifies the tax rates for Assessment Year 2024–25, which corresponds to Financial Year 2023–24.
Part II specifies the rates at which tax is deductible at source for the current Financial Year. Accordingly, Part II of the First Schedule to the Finance (No. 2) Act, 2024 specifies the rates at which tax is deductible at source for F.Y. 2024-25.
Part III gives the rates for calculating income-tax for deducting tax from income chargeable under the head “Salaries” and computation of advance tax for F.Y. 2024-25 where the assessee exercises the option to shift out of the default tax regime provided under section 115BAC(1A).
Part IV contains the rules for computing net agricultural income.

3) Income-tax Rules, 1962 :

The administration of direct taxes in India is overseen by the Central Board of Direct Taxes (CBDT).

The CBDT has the authority to make rules to fulfill the objectives of the Income-tax Act.
To ensure proper implementation of the Income-tax Act, 1961, the CBDT periodically frames rules, which are collectively known as the Income-tax Rules, 1962.
These rules may include sub-rules, provisos, and Explanations. A proviso to a Rule or Sub-rule sets out exceptions to the specified limits, conditions, guidelines, or valuation basis. An Explanation provides clarifications for better understanding of the Rule.
It is important to study these rules alongside the Income-tax Act, 1961, as they are an integral part of tax law administration.

4) Circulars and Notifications :

Circulars are issued by the Central Board of Direct Taxes (CBDT) from time to time to address specific issues and clarify doubts about the scope and interpretation of certain provisions of the Income-tax Act.

These circulars are intended to guide both tax officers and assessees (taxpayers).
The Income Tax Department is bound by these circulars.
Although assessees are not legally bound by them, they are entitled to benefit from any circulars that are favorable to them.

Notifications are issued by the Central Government to give effect to the provisions of the Act. The CBDT is also empowered to make and amend rules for the purposes of the Act by issuing notifications which are binding on both department and assessees.

5) Legal Decisions Of Courts :

The study of case laws is an important and unavoidable part of the study of Income-tax law. It is not possible for Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues. The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is the law of the land. The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction.

Basic Concepts For Understanding Income Tax In india