Basic Concepts

Tax

• A tax may be defined as a compulsory extraction made by General Government from the general public. It is a financial charge imposed on individuals or legal entities by the government in pursuant to its legislative authority.

• A tax is not a voluntary payment or donation, but an enforced contribution.

• The proceeds from taxes constitute a major source of revenue to government that spends the collected amount for the common benefits of the society.

Types of Taxes

Important Taxes in India

Direct Taxes Indirect Taxes Income Tax Central Excise Duty Wealth Tax Customs Duty Service Tax Central Sales Tax State Level VAT State Excise Duty Securities Transaction Tax

Structure of Indian Taxation

• Like political setup of governance, the tax administration is also based on clear demarcation between Central Government and State Government at first instance and then between State Governments and Local Bodies.

• The government has the right to levy taxes on individuals and other artificial bodies/organisations (whether juridic or not).

Constitutional Provisions

Article 246 (Seventh Schedule) of the Indian Constitution contains the legislative powers (including taxation) of the Union Government and the State Governments. It contains the following 3 lists covering the various subjects:

List I- Central List. It contains the areas in respect of which only the parliament i.e., Central Government can make laws.

List II- State List. It contains the areas in respect of which only the State Legislature can make laws (including taxation laws).

List III- Concurrent List. It contains the areas in respect of which both the parliament and the State Legislature can make laws concurrently. It is important to note that this list does not specify any law relating to taxation.

Income Tax

Income tax is an important type of tax which is found practically in all countries of the world. It is a tax an income, gains or profits earned by a person such as individuals and other artificial entities.

Features of Income Tax

1. Levied as per the constitution.2. Levied by Central Government.3. Direct Tax.4. Annual Tax.5. Tax on Person.6. Tax on Income.7. Income of ‘Previous Year’ is assessable in ‘Assessment

Year’.8. Charged at prescribed rate(s).9. Administered by the Central Government.

Laws Relating to Income Tax1. Income Tax Act, 1961- The Act contains detailed provisions regarding

applicability, basis of charge, residential status, heads of income, clubbing provisions, set-off of losses, deductions, exemptions and assessment procedures involving appeals, penalities and filing of return etc.

2. Income Tax Rules, 1962- Certain Examples:• Valuations of prerequisites for calculating ‘Salary Income’.• Prescribed authority for expenditure on scientific research.3. Annual Finance Act- It updates/amends the Income Tax Act, 1961.4. Circulars and Clarifications issued by CBDT- It regulates the overall

administration of the direct taxes (Income Tax and Wealth Tax) of the country.5. Judicial Decisions/ Case Law- • Any decision given by any High Court shall be applicable in the particular case.• Any decision given by the honourable Supreme Court shall be treated as law

applicable throughout the country.

Definitions

Agricultural Income

Agricultural income is fully exempted from tax u/s 10(1) and as such does not form part of total income:

a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

b) Any income derived from agricultural land, performance by cultivator, sale by a cultivator.

c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land.

Assessee

‘Assessee’ means a person by whom any tax or any other sum of money is payable under this Act and includes:

a) Every person in respect of whom any proceedings under this Act have been taken for the assessment of his income or of the income of any other person in respect of which he is assessable or loss sustained by him or by such other person or of the amount of refund due to him or to such person;

b) Every person who is deemed to be an assessee under any provision of this Act.

c) Every person who is deemed to be an assessee-in-default under any provision of this Act.

Average Rate

“Average rate of income-tax” means the rate arrived at by dividing the amount of income-tax calculated on the total income by such total income”.

Average Rate = Total Tax (including Surcharge+ Education Cess)/Total Income*100

Maximum Marginal Rate

It means the rate of income tax (including surcharge or income tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI as specified in the Finance Act of the relevant year. At present, for assessment year 2014-15, it is 30%.

Block of Assets

It means a group of assets falling within a class of assets comprising:

a) Tangible assets being buildings, machinery, plant or furniture.

b) Intangible assets being know-how, patents, copyrights, trade marks licenses, franchises or any other business or commercial rights of similar nature in respect of which same percentage of depreciation is prescribed.

Charitable Purpose

Charitable purpose includes-i. Relief of the poor,ii. Educationiii. Medical relief,iv. Advancement of any other object of general

public utility.

Child

“Child” in relation to an individual, includes a step-child and an adopted child of that individual. It includes both male and female children.

Fair Market Value

The fair market value in relation to a capital asset means:

a) The price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and

b) Where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.

Person

Person includes:i. An individualii. A Hindu Undivided Familyiii. A Companyiv. A Firmv. An association of persons or a body of individuals,

whether incorporated or notvi. A local authorityvii. Every artificial juridical person not falling within any of

the preceding sub-clauses

Income

The term income includes not only what is received by using the property but also the amount saved by using it himself. Anything which is convertible into income can be regarded as source of accrual of income.

Heads of Income

i. Income from ‘Salaries’.ii. Income from ‘House Property’.iii. Income from ‘Profits and Gains of Business

or Profession’.iv. Income from ‘Capital Gains’.v. Income from ‘Other Sources’.

Gross Total Income

Section 14 of the Act provides that for the purpose of charge of Income tax and computation of total income, all incomes shall be classified under following five heads of income:

i. Income under the head ‘Salaries’.ii. Income under the head ‘House Property’.iii. Income under the head ‘Profits and Gains of Business or

Profession’.iv. Income under the head ‘Capital Gains’.v. Income under the head ‘Other Sources’.G.T.I = Salary Income + House Property Income + Business or

Profession Income + Capital Gains + Other Sources Income + Clubbing of Income – set off losses

Total Income

‘Total Income’ means the total amount of income referred to in section 5, computed in the manner laid down in this Act. In other words, ‘Total Income’ means income remaining after allowing deductions under Chapter VIA (i.e., u/s 80C to 80U) from Gross Total Income. It is important to note that income tax is charged on total income at prescribed rate(s).

Assessment Year

• The Assessment year is the financial year of the Govt. of India during which income of a person relating to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act files return of income by prescribed dates. These returns are processed by the income tax department officials and officers. This processing is called assessment. Under this income returned by the assessee is checked and verified.

Previous Year

In simple words, it may be said that the year in which income is earned is called previous year and the next year in which such income is computed and put to tax is known as assessment year. For example, income earned by an assessee in the previous year 2013-14 is taxable in the assessment year relevant to the previous year 2013-14 and so it is taxable in the assessment year 2014-15. The simple rule is that the income of the previous year is taxed in its relevant assessment year subject to certain exceptions.

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