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Forms of Taxation/Income Tax Act/ Definition

Forms of Taxation

he Constitution of India gives power to the Central and State Governments to levy taxes in area falling under their jurisdiction. State government has power to levy house tax, toll tax, entertainment tax, Stamp duty, etc. The Central Government has power to levy taxes like Income Tax, Wealth Tax, Gift Tax, Excise duty, Custom, Service Tax etc. The taxes levied by the Central Government can be broadly categorized into Direct Taxes and Indirect Taxes. Direct Taxes are the ones which go directly from the pocket of the taxpayer and he feels the pinch directly. Indirect taxes are the taxes which are paid by some one else but susequently passed on to final consumer/beneficiary. Examples of Direct Taxes are, Income Tax, Wealth Tax, Gift Tax, Security Transaction Tax. Examples of Indirect Taxes are Custom, Excise, Service Tax. These taxes are administered by two Boards, Central Board of Direct Taxes (CBDT) and Central Board of Excise and Custom (CBEC) who work under the Ministry of Finance. Income Tax Act Entry 82 of List I of the Seventh Schedule to the Constitution empowers Parliament to levy taxes on income other than agricultural income. Accordingly, the parliament enacted Income-tax Act 1961 to tax income. The provisions of income-tax Act extends to the whole of India and became effective from 1st April 1962. Every Act gives power to an authority, responsible for administration of the Act, to make rules for effective implementation. Section 295 of the Income-tax Act gives power to CBDT to make such rules, subject to the approval of the Central Government which are then notified in the Gazette of India and form part of Income-tax Rules, 1962. Hence, in addition to Income-tax Act, study of Income-tax Rules, 1962, various circulars and clarifications issued by CBDT and various court judgments are necessary for proper understanding of the Income-tax law and procedures. The Income-tax Act is divided into various chapters and sections. It also has 14 schedules at the end which form part of the Act. The Act is all comprehensive. Any action undertaken by any officer of the Income-tax Department will have to be in accordance with the provisions of the Act. The officers of the Income-tax department cannot undertake any activity that is not provided in the act or is not in accordance with what is provided in the Act. The rates of income tax or for tax deduction at source are not provided either in the Income-tax Act or Income-tax Rules. They are prescribed every year separately in the Finance Act. Chapter II (section 2) of the Finance Act, every year, deals with Rates of Income Tax which subsequently prescribes for these

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rates in the First Schedule of the Finance Act. This first schedule also provides for rates for deduction of tax at source in certain cases. Definitions The act defines various terms in section 2 of the Income-tax Act, 1961. Whichever term is not defined in the Act, will take its natural dictionary meaning. Some of the important definitions are given below: (a) Income: The definition of the income in section 2(24) of the Income-tax act is inclusive definition. It starts with the words Income includes. That means in addition to what is given in the definition, what is normally understood as income, is also income. As per the definition, the income includes the following: Profit and gains Dividend Voluntary contribution received by a trust, scientific research association or institution or by university or other educational institution. Value of any perquisite or profit in lieu of salary under section 17. Any special allowance or benefit specifically granted to the assessee to meet his expenses wholly, necessarily and exclusively for the performance of his duties. Any allowance granted to the assessee either to meet his personal expenses at the place where he performs his duty or to compensate him for increased cost of living. The value of any benefit or perquisite obtained from a company by a director or person holding substantial interest or relative of such director/person. Any sum in the nature of interest, salary, bonus, commission or remuneration due to a partner of a firm. Any sum due to an exporter in the nature of duty drawback, cash incentive or REP license. Capital gain Value of any benefit or perquisite arising from business or exercise of profession. Insurance profit Winnings from lotteries crossword puzzles, races, card games and other games Sum received under keyman insurance policy Income from business of banking carried on by cooperative society with its members. Any sum received by an assessee from his employees as contribution to any provident fund or superannuation fund or any other fund for welfare of employees (b) Person: This is also an inclusive definition. It includes an individual, HUF, company, firm, Association of Person (AOP), Body of Individual (BOI), local authority, and artificial juridical person. HUF stands for Hindu Undivided Family. As per Hindu Law, it means a family which consists of all persons lineally descended from a common ancestor including their wives and unmarried daughters. Its Karta is always a male member. Association of Person means two or more persons who join for a common purpose with a view to earn an income. There need not be a contract between them. So if two or more persons do business together and it is not a partnership then it can be association of person. Body of Individual is similar to AOP but a bit different.. First of all it consists of only individuals and ot persons. Secondly, an AOP implies a voluntary getting together for a common design or intention to engage in an income producing activities, whereas a BOI may or may not have such common intention.

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(c)

Assessee. It means a person by whom any tax or any other sum of money is payable under this act. Assessee also includes some other person as assessee, though they may not have any tax payable. They are the person in respect of whom any proceeding under the Income-tax Act has been initiated, legal representative of deceased assessee or agent of non-resident and the person who are in default under any provision of the act. Assessment Year: It means the period of 12 months commencing on the first day of April every year. The tax is levied, in each assessment year, with respect to or on the total income earned by the assessee in the previous year. Previous Year is the financial year immediately preceeding the assessment year. It is the year in which income is earned. Thus accounting year 2006-2007 will be the previous year for assessment year 2007-2008.

(d)

Chapter Review

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