Income-tax - an Introduction

Paper 4 Income Tax

Chapter 1 Unit 1
By: P Shivanand Nayak

2013

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

Indirect
Taxes
Direct
Taxes

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 Act, 1961

Income-tax Rules, 1962

Circulars & Notifications

Judicial precedents & legal decisions of courts

Income-tax Act, 1961

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

Income-tax

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.

===================================================

Finance act levies surcharge as a percentage of income-tax

Surcharge

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

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

Heads of income
- Salaries
- House Property
- Business/ Profession
income
- Capital gains
- Income from other sources

Such income is
chargeable under
which head of
income? (section 14)

Charging provisions & computation

mechanism
Section 4 is the omnibus charging section

Sec 15 to 17

Sec 22 to 27

Sec 28 to
44DA

Sec 45 to 55

Sec 56 to 59

Salaries

House
Property

Business/
Profession
income

Capital
gains

Other
sources

Thank You

THANK YOU