In Come Tax Introduction

Income-tax - an Introduction Paper 4 Income Tax

Chapter 1 Unit 1

2013

By: P Shivanand Nayak

Some Basics

Income-tax Act, 1961

What is tax?

Genesis can be traced to latin term taxo which means "I estimate"

It is a fee charged by the government on a product, income or activity;

Taxes are most often levied as a percentage, called the tax rate;

Main purpose of taxation is to accumulate funds for functioning of the

government machineries:

This money is used for various expenditures such as - war, the enforcement

of law and public order, protection of property, economic infrastructure (roads, legal

tender, enforcement of contracts, etc.), public works, social engineering, subsidies,

and the operation of government itself.

Broadly 2 types of taxes

Direct Taxes

IndirectTaxes

Direct taxes

A direct tax is a tax when the burden of tax is borne by the same person on

whom it is levied. In other words, the ultimate burden of taxation falls on the

person on whom the tax is levied.

Generally based on the income and property of a person.

Some examples are : income-tax, property tax, wealth tax

Indirect Taxes

An indirect tax is a tax collected by an intermediary (such as a retail store)

from the person who bears the ultimate economic burden of the tax (such as

the customer).

An indirect tax is one that can be shifted by the taxpayer to someone else.

For instance - Custom duty, Service tax, Value Added Tax etc

Genesis of Income-tax

Pecuniary burden laid upon individuals or property owners to support the

government, a payment exacted by legislative authority.

It is the Constitution of India which empowers the government with right to

levy taxes. Thus, no one has the right to levy or charge taxes except the

authority of law [Article 246 of the Constitution].

The legislative powers including taxation, has been distributed between the

Parliament and the State Legislature.

Power to levy income-tax

There are 3 lists in the Constitution which enumerate various subject matters:

List - I [Union List] - entailing the areas on which only the parliament is competent

to makes laws;

List - II [State List] - entailing the areas on which only the state legislature can

make laws; and

List - III [Concurrent List] - listing the areas on which both the Parliament and the

State Legislature can make laws upon concurrently.

Income-tax is found in entry no. 82 of the Union List & is Central government levy

Study of Income-tax law


Income-tax Rules, 1962

Circulars & Notifications

Judicial precedents & legal decisions of courts


What is the significance of the year - 1961?

Year of enactment

Are we reading a 50 year old law?

No. Year-on-year the legislature provides mechanism to amend these income-tax

law through Finance bills/ yearly budgets

What is the procedure of amendment?

Finance Bill

Parliamentary debate

Presidential assent

Finance Act

Other facets of income-tax study

Income-tax Rules

Central Board of Direct Taxes (CBDT) is the highest body under the direct tax

regime;

It is empowered to make rules for carrying out the purpose of the Act.

CBDT frames rules for proper administration of Income-tax Act.

Notifications & Circulars

Notifications & Circulars are other arms of income-tax study. They are issued

by the CBDT

Judicial precedents

Judicial precedents enables one to interpret income-tax statute & clarifies in

case of any ambiguities

Levy of Income-tax

Step 1: Determination of residential status

Step 2: Classification of income under different heads

Step 3: Exclusion of income not chargeable to tax

Step 4: Computation of income under each head

Step 5: Clubbing of income

Step 6: Set-off or carry forward and set-off of losses

Step 7: Compute Gross total income

Levy of income-tax

Step 8: Deductions from Gross Total income

Step 9: Total income

Step 10: Application of rates of taxes

Step 11: Surcharge

Step 12: Education cess

Income-tax Surcharge Education cess

Taxes on income-other than agricultural income is levied and

collected by the Central government;

A percentage of the net proceeds is set apart for distribution

among all the states within which the tax is leviable;

The sum is distributed among states in certain proportions.

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Finance act levies surcharge as a percentage of income-tax

payable by the assessee;

The rate of surcharge may vary from year to year and may be

different for different kinds of assessee;

The surcharge levied and collected goes to the Union government

and not to the divisible pool - because it is levied for a specific

purpose laid out by the Union government

Inco

me-

tax

Surc

harg

e

Income-tax Surcharge Education cess

Educational cess

Educational cess is levied on income-tax increased by surcharge (wherever

applicable);

The objective of this levy was to provide universal access to quality basic

education;

Currently, such cess is levied on the income-tax irrespective of whether

surcharge is chargeable or not

Flow chart of levy of tax

Income computation

Taxation Process

Tax

The path to tax

Is it an income under section 2(24)?

Is the income subject to income tax under

section 5 & 6?

If yes, then the income is chargeable to tax

under section 4 subject to provisions

of the Act

Such income is chargeable under

which head of income? (section 14) - Salaries

- House Property - Business/ Profession

income - Capital gains - Income from other sources

Heads of income

Charging provisions & computation mechanism

Sec 15 to 17 Sec 22 to 27 Sec 28 to 44DA

Sec 45 to 55 Sec 56 to 59

Section 4 is the omnibus charging section

Salaries House Property

Business/ Profession

income

Capital gains

Other sources

Thank You

THANK YOU
Income-tax - an IntroductionPaper 4 Income TaxChapter 1 Unit 1Some BasicsWhat is tax?Broadly 2 types of taxesDirect taxesIndirect TaxesGenesis of Income-taxPower to levy income-taxStudy of Income-tax lawIncome-tax Act, 1961Other facets of income-tax studyLevy of Income-taxLevy of income-taxIncome-tax Surcharge Education cessIncome-tax Surcharge Education cessFlow chart of levy of taxThe path to taxCharging provisions & computation mechanismThank You

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In Come Tax Introduction