Introduction
Taxes are considered to be the ‘cost of
living in a society’. Taxes are levied by the Governments to meet the common
welfare expenditure of the society. The reason for levy of taxes of that they
constitute the basic source of revenue to the Government. Revenue so raised is
utilised to meet the expenses of the Government like defence, provision of
education, health care, infrastructure facilities, etc. Income tax is charged
as per the rates fixed by the Annual Finance Act.
Types of taxes in India
There are 2 types of taxes
Direct taxes: It is levied directly on the
income of a person. Simultaneously, the person who pays the tax to the
Government cannot recover it from somebody else. In other words, the burden of
a direct tax cannot be shifted. For example, income tax.
Indirect taxes: It is levied on the price
of goods and services. The person paying indirect taxes passes on the incidence
to another person. Example for indirect taxes are Goods and 3Service Tax (GST)
and Custom Duty.
Income tax laws in India
The income tax law in India consists of the
following components
● Income Tax Act - The levy of
income tax in India is governed by the Income-tax Act of 1961. It undergoes
change every year with addition and substitutions brought in by the Annual
Finance Act passed by Parliament. It is also amended by other legislations like
Taxation Laws (Amendment) Act.
● Annual Finance Act - Every year
the Finance Minister of the Government of India introduces the Finance Bill in
the Parliament’s Budget Session. When the Finance Bill is passed by both the
houses of Parliament and gets the assent of the President, it becomes the
Finance Act. Amendments are made every year to the Income Tax Act, 1961 and
other tax laws by the Finance Act.
● Income Tax Rules- For the
proper administration of the Income Tax Act of 1961, the Central Board of
Direct Taxes (CBDT) frames rules from time to time. These rules are
collectively called as Income Tax Rules, 1962.
● Circulars or Notifications -
Circulars are issued by CBDT from time to time to deal with certain specific
problems and to clarify doubts regarding the scope and meaning of certain
provisions of the Act. Whereas, 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 issue of
notification.
● Legal Decision of the Court -
Case Laws refers to the decision given by the Court. The study of case laws is
an important and unavoidable part of the study of Income Tax laws.
Levy of income tax
According to Section 4 , income tax is a
tax levied on the total income of the previous year of every person. A person
includes an individual, Hindu Undivided Family (HUF), Association of Persons
(AOP) Body of individuals, a firm, a company, etc.
The following is the procedure for
computation of total income of an individual for the purpose of levy of income
tax:
Step 1 - Determination of residential
status
Step 2 - Classification of income under
different heads
Step 3 - Computation of income under each
head
Step 4 - Clubbing of income of spouse,
minor child, etc..
Step 5 - set-off or carried forward and
set-off of losses
Step 6 - Computation of Gross Total Income
Step 7 - Deductions from Gross Total Income
Step 8 - Total Income
Step 9 - Application of the rates of tax on
the total income
Step 10 - Surcharge or Rebate under Section
87A
Step 11 - Health and education cess on
income tax
Step 12 - Advance tax and tax deduction at
source
Step 13 - Tax payable or tax refundable
Charge of Income Tax
Section 4 of the Income Tax Act, 1961 is the charging section which provides that:
Tax shall b charged at the rates prescribed for the year by the Annual Finance Act or the Income Tax Act, 1961 or both
Tax charge is on every person specified under Section 2(31)
Tax is chargeable on the total income earned during the previous year and not the assessment year except under certain circumstances
Tax shall be levied in accordance with and subject to the various provisions contained in the Act.
Assessment Year and Previous Year
The term assessment year has been defined under Section 2(9). It
means a period of 12 months commencing on 1st of April every year. The year in
which income is earned is the previous year and such income is taxable in the
immediately following year which is the assessment year. For example:- Income
earned in the previous year 2021-22 is taxable in the assessment year 2022-23.
Assessment year always start from 1st of April and it is always a period of 12
months.
The term previous year has been defined under Section 3. It means
the financial year immediately preceding the assessment year.
If a business or profession has been newly set up in the financial
year, the previous year shall be the period beginning on the date of setting up
of the business or profession and ending with 31st March of said financial year
If a source of income comes into existence in the said financial
year, then, the previous year will commence from the date on which the source
of income newly comes into existence and will end with 31st March of the
financial year
Cases where income of a Previous Year is assessed in the Previous
Year itself:
Shipping business of non-resident
Persons leaving India
AOP/BOI/Artificial person formed for a particular event or purpose
Persons likely to transfer property to avoid tax
Discontinued business
Undisclosed source of income includes:-