What Does Income Mean?

What is the definition of incomeIncome is used in the accounting profession to mean

several different things.
One meaning of income refers to revenue or sales. Revenue is the money that a company
receives from selling goods or services throughout the course of business. Revenue is an
equity account that has a credit balance. Throughout the year sales are recorded in the
revenue accounts and posted to trial balance. The revenue is then reported on the first line
of the income statement. This is often called gross income, total sales, or top line sales since
it includes all the company income and sales before deducting expenses.
Another meaning of income refers to net income. Net income is completely different than
gross income. Net income appears at the bottom of the income statement after all of the
cost of goods sold and operating expenses have been subtracted out. Net income equals the
total company revenues minus total company expenses. As you can see, the net income
definition is much different than the revenue definition of income.
The generic term income is most commonly used to refer to net income instead of
revenues. Be careful when you read examples or see problems that reference a company’s
income. You’ll need to analyze the question and figure out what meaning of income the
question is using. More often than not, the net income definition will be used.

Example
Ted’s Pizzeria sells pizzas for $10 each. One of Ted’s customers orders 10 pizzas. Thus, Ted
records the income by crediting the revenues account for $100 and debiting the cash
account for $100.
Summary Definition
Define Income: Income means the earnings a company receives from selling services and
goods to customers and returns on any investments.

What is Income Tax Act 1961

Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in India.
It came into force from 1st April 1962.

Income Tax including surcharge (if any) & cess is charged for any person at the rate as
prescribed by Central Act for that assessment year.  Income-tax Act has provided separate
provisions with respect to levy of tax on income received in advance as well as the income
with respect of which the amount has not yet been received. A person also has to keep
track of his TDS deducted while calculating his final tax liability at the end of the year.

Previous Year:
For Income Tax Act 1961, previous year is defined as the financial year which immediately
precedes the assessment year. In case the source of income is new or the business set up is
new, previous year for that entity will start from the date of setting up of that business or
profession or from the date when the source of income of this new existence starts and
ends in the said financial year.

Exception to Previous Year:

These incomes are taxed as the income of year immediately preceding the assessment year
at the rates applicable to such person.

1. Income of a person who is leaving India for a long period or permanently

2. Income of a person who is trying to alienate his assets with an intention to avoid taxes

3. Income of a discontinued business

4. Income of non-resident shipping companies who don’t have any representative in India
Scope of Total income:
As per Income Tax Act 1961, the total income of previous year for a person who is resident
of India will include all his income irrespective of source of that income which is either
received or has accrued in India in previous year.
 However, if person is not an ordinarily resident in India as per Section 6 of Income Tax Act,
1961, income from the sources which accrues or arises for him outside India shall not be
included in total income. In respect of non-residents any income which is received or arises
in India is taxable in India.

Various Heads for Income under Income Tax Act 1961:

Every income arising to any person will always be classified under one of the following
headers provided by the Act: -

1. Salaries

2. Income from house property

3. Profit and gains of business or profession

4. Capital gains

5. Income from other sources

Type of Taxes:
Income Tax holds its importance for it is the money which tends to support the running of
our government. It is one of the major sources of revenue for the government and thus is
inevitable to not to impose it on the income earned or utilized in the country. It helps meet
the funds required to develop the country and other defense related needs of a nation.
There are basically two kinds of taxes - Direct Tax and Indirect Tax. Direct Tax is tax that is
paid by an individual or any other person on the basis of his Income. It is a form of tax that
is directly paid by the person to the government, i.e., the liability to pay the tax and the
burden of tax falls on the same person.  Indirect taxes are the types of taxes where the
person depositing the tax with government and the person actually having been burdened
by the tax are different. Generally these taxes are included in the prices of the goods or
services which are provided to the people and then such taxes are deposited by the person
collecting the same from their customers. GST is one of the most popular type of indirect
tax.

Some Important Definition under Income-Tax Act 1961:

1. Income Tax:
It is the tax that is collected by Central Government for each financial year levied on total
taxable income of an assessee during the previous year.
2. Assessee:
As per Income Tax Act 1961 section 2(7), an assessee is a person who is liable to pay the
taxes under any provision of Income Tax Act 1961. Assessee can also be a person with
respect of whom any proceedings have been initiated or whose income has been assessed 
under the Income Tax Act 1961 Assessee is any person who is deemed assessee under any
of the provisions of this act or an assessee in default under any provisions of this Act.

3. Assessment:
Assessment is primarily a process of determining the correctness of income declared by the
assessee and calculating the amount of tax payable by him and further procedure of
imposing that tax liability on that person.
4. Assessment Year:
Assessment year is the 12 months’ period commencing on 1st of April till 31st March of
next year. It is the year in which the income of previous year is assessed.
5. Person:
As per section 2(31) of Income-Tax Act 1961, a Person would be any one who is-

 An Individual
 A HUF (Hindu Undivided Family)
 A Company
 A Firm
 An association of person or body of individuals
 A local Authority
 Every artificial and juridical person who is not included in any of the above
mentioned category.
6. Income:
The definition of Income as per section 2 (24) is inclusive but not exhaustive of below
mentioned items:

 Any illegal income arising to the assessee 

 Any income that is received at irregular intervals 

 Any Taxable income that have been received from asource outside India

 Any benefit that can be measured in money

 Any subsidy or relief or reimbursement 

 Gift the value of which exceed INR 50,000 without any consideration by an
individual or HUF.

 Any prize

 Causal incomes like winning from lotteries or horse race gambling etc.
Residential Status for Income Tax – Individuals & Residents

Updated on Oct 12, 2020 - 11:58:10 PM

It is important for Income Tax Department to determine the residential status of a tax
paying individual or company. It becomes particularly relevant during the tax filing season.
In fact, this is one of the factors based on which a person’s taxability is decided. Let us
explore the residential status and taxability in detail.

1. Meaning and importance of residential status

2. How to determine residential status?
o Resident
o Resident Not Ordinarily Resident
 o Non-resident
3. Taxability

1. Meaning and importance of residential status

The taxability of an individual in India depends upon his residential status in India for any
particular financial year. The term residential status has been coined under the income tax
laws of India and must not be confused with an individual’s citizenship in India. An
individual may be a citizen of India but may end up being a non-resident for a particular
year. Similarly, a foreign citizen may end up being a resident of India for income tax
purposes for a particular year.
Also to note that the residential status of different types of persons viz an individual, a firm,
a company etc is determined differently. In this article, we have discussed about how the
residential status of an individual taxpayer can be determined for any particular financial
year

2. How to determine residential status?

For the purpose of income tax in India, the income tax laws in India classifies taxable
persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into
taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2
conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or
more in the relevant financial year
In the event an individual who is a citizen of India or person of Indian origin leaves India
for employment during an FY, he will qualify as a resident of India only if he stays in India
for 182 days or more. Such individuals are allowed a longer time greater than 60 days and
less than 182 days to stay in India. However, from the financial year 2020-21, the period is
reduced to 120 days or more for such an individual whose total income (other than foreign
sources) exceeds Rs 15 lakh.
In another significant amendment from FY 2020-21, an individual who is a citizen of India
who is not liable to tax in any other country will be deemed to be a resident in India. The
condition for deemed residential status applies only if the total income (other than foreign
sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason
of his domicile or residence or any other criteria of similar nature.

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident
ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following
conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an
RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for
employment outside India during the year will be a resident and ordinarily resident if he
stays in India for an aggregate period of 182 days or more. However, this condition will
apply only if his total income (other than foreign sources) exceeds Rs 15 lakh.
Also, a citizen of India who is deemed to be a resident in India (w.e.f FY 2020-21) will be a
resident and ordinarily resident in India.
NOTE: Income from foreign sources means income which accrues or arises outside India
(except income derived from a business controlled in India or profession set up in India).

Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR
for the year.

3. Taxability
Resident: A resident will be charged to tax in India on his global income i.e. income earned
in India as well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn in India.
They need not pay any tax in India on their foreign income.
Also note that in a case of double taxation of income where the same income is getting
taxed in India as well as abroad, one may resort to the Double Taxation Avoidance
Agreement (DTAA) that India would have entered into with the other country in order to
eliminate the possibility of paying taxes twice.

Principles of good taxation

Taxation: one of the clearest manifestations of the powers of a public authority.

It has existed since the earliest forms of recorded government in history: from ancient
Egypt, when the pharaohs levied taxes in the form of shares of agricultural production and
labour; to ancient Rome where farmers were required to pay a tenth of their production
(decima) to the tax administration (aerarium); and even in Medieval Europe, where a
similar taxation system became one source of financing for the Church.

Nowadays, governments have developed more sophisticated systems and processes for
defining who is taxed, what is taxed (the ‘tax base’), how much is taxed and which personal
conditions of the taxpayers should be taken into account. But what are the principles that
should underpin taxation and how do these impact on our daily lives?

Firstly, while it’s true that it’s typically implemented through the coercive power of a public
authority, taxation should not be imposed arbitrarily. Indeed, many modern institutions
include some restraints on the uncontrolled levying of taxes, with parliament usually
having to approve the executive’s proposals (for example, in 1628, the Petition of Rights
introduced restrictions on the Crown on non-parliamentary taxation in England). Rather,
there should be careful consideration of how the forced acquisition of money affects
taxpayers: on the one hand, taxation provides a fundamental source of income for running
the government and providing public services; on the other, taxation reduces individual
disposable income and business profits and could therefore have a negative impact on
decisions about work, consumption and investments.

Adam Smith’s principles of good taxation form a sound basis for taxation today, however
they’re not always followed. Sometimes tax systems hit certain categories of taxpayers or
kinds of consumption while leaving others relatively untouched. Sometimes tax systems
lack transparency, imposing charges on some goods (eg, fuel excise) without any explicit
indication on our bills. Sometimes taxpayers are burdened with administrative tasks, for
example filing yearly tax returns online. Sometimes the tax administration does not, or
cannot, apply regulations or prosecute those who evade taxes in a cost-effective manner.

Taxation and the economy

How can governments levy taxes while minimising negative effects on the economy?
Generally taxes (on income, on production, or on consumption of goods) have distortionary
effects: they alter the decisions that individuals and businesses would make if the taxes
were not in place. For example, excises (taxes that are levied on the production of goods)
often cause producers to increase the prices of goods, passing the burden of taxation on to
consumers. When prices go up, there’s less demand, so businesses earn less income and
consumers enjoy less consumption. In addition, personal income tax reduces consumer
purchasing power: consumers purchase fewer goods than they would do without the
income tax, generally cutting luxury and unnecessary items first, and thereby hitting some
industries more strongly than others.

Taxation can also have important effects on economic development and growth. When
international financial markets are liberalised, for example, capital tends to flock towards
countries where tax regimes are more advantageous. When personal income tax is
relatively high, individuals may prefer spending their time on recreational activities rather
than on additional work. When taxation on savings (including taxation on financial rents
and on real estate) is relatively high, individuals may prefer consuming their income today
rather than putting part of it aside for the future. Overall, the effects of decisions that
individuals and businesses make may result in less money being available for investments
and less effort to undertake business activities.

Exemption Under Total Income

INCOME WHICH DOES NOT PART OF TOTAL INCOME UNDER INCOME TAX ACT SECTION-
10.

INTRODUCTION:

Various categories of income are exempt from income tax under section 10. however, the
ones of showing the class of income is exempt from taxation lies on the assessee. To learn
the assessee has to establish that his case clearly and squarely falls within the ambit of the
said provisions of the act.

1. Agriculture Income:

We can still consider India is the country mostly depending upon the agriculture and
income generated from the activities of agriculture. Agriculture income shall be excluded
from the assessee total income (section 10, (1)) however, it shall be taken for considering
rate to tax non-agriculture income.

2. Share Of Profit From A Firm:

A partners share in the total income of the firm is totally exempted from the total income of
the hands of the partner because firm is separately assess as such. However, any salary
interest commission paid or payable to the partner which was deductible from the total
income of the firm shall be included in the income of the partners total income as his
business.

3. Leave Travel Concession:

If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by
the employer, then such reimbursement is fully exempted. But some provisions for it was
as bellow;

1) Journey may be performed during service or after retirement.

2) Employer may be present or former.

3) Journey must be performed to any place within India.

4) In case, journey was performed to various places together, then exemption is limited to
the extent of cost of journey from the place of origin to the farthest point reached, by the
shortest route.

5) Employee may or may not be a citizen of India.

6) Stay cost is not exempt.

4. Remuneration To Person Who Is Not A Citizen Of India In Certain Cases [Sec.

10(6)]

Following remuneration to an individual who is not a citizen of India shall be exempt-

Remuneration received by him as an official of an embassy, high commission, legation,
commission, consulate, or the trade representation of a foreign state or as a staff of any of
these officials provided corresponding Indian officials in that foreign country enjoy similar
exemptions in their country – Sec. 10(6)(ii).

Remuneration received as an employee of a foreign enterprise for services rendered by

him during his stay in India provided – a. the foreign enterprise is not engaged in any
business or profession in India; b. his stay in India does not exceed 90 days in aggregate;
and c. such remuneration is not liable to be deducted from the income of the employer
under this Act – Sec.10(6) (vi).

Remuneration for services rendered in connection with his employment on a foreign ship
provided his total stay in India does not exceed 90 days in the previous year – Sec. 10(6)
(viii).

Remuneration received as an employee of the Government of a foreign State during his stay
in India in connection with his training in any undertaking owned by Government,
Government company, subsidiary of a Government company, corporation established by
any Central, State or Provincial Act and any society wholly financed by the Central or State
Government – Sec. 10(6)(xi)

5. Tax Paid By Government On Royalty Or Fees For Technical Service [Sec. 10(6a)]

6.Tax Paid By Government On Income Of A Non-Resident Or A Foreign Company [Sec.

10(6b)]

7.Tax Paid On Income From Leasing Of Aircraft [Sec. 10(6bb)]

Tax paid by an Indian company on income arising from leasing of aircraft, etc. to the
Government of a foreign state or foreign enterprise under an approved agreement entered
into with such Indian company engaged in the business of operation of aircraft, provided
such agreement was entered into between 1-4-1997 and 31-3-1999 or after 31-3-2007.

8. Fees For Technical Services In Project Connected With Security Of India [Sec.
10(6C)]:
Any income arising to notified foreign company by way of royalty or fees for technical
services received in pursuance of an agreement entered into with Central Government for
providing services in or outside India in projects connected with security of India.

9. Income From Service Provided To National Technical Research Organisation [Sec.

10(6D)]:

Any income arising to a non-resident or to a foreign company, by way of royalty from, or

fees for technical services rendered in or outside India to, the National Technical Research
Organisation

10. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:

Any allowance or perquisite paid outside India by the Government to a citizen of India for
Rendering Services Outside India.

11. Remuneration Received For Co-Operative Technical Assistance Programmes

With An Agreement Entered Into By The Central Government In Certain Cases [Sec.
10(8)].

12. Remuneration Received By Non-Resident Consultant Or Employee Or Family

Member Of Such Consultant [Sec. 10(8a), (8b) & (9)].

13. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:

Gratuity is a retirement benefit given by the employer to the employee in consideration of

past services. Sec. 10(10) deals with the exemptions from gratuity income. Such exemption
can be claimed by a salaried assessee. Gratuity received by an assessee other than
employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent
of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of
India.

14. Compensation For Any Disaster [Sec. 10(10bc)]

Any amount received or receivable from the Central Government or a State Government or
a local authority by an individual or his legal heir by way of compensation on account of
any disaster, except the amount received or receivable to the extent such individual or his
legal heir has been allowed a deduction under this Act on account of any loss or damage
caused by such disaster.

15. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:

Any sum received under a life insurance policy including bonus on such policy is wholly
exempt from tax. However, exemption is not available on – 1. any sum received u/s
80DD(3) or u/s 80DDA(3); or 2. any sum received under a Keyman insurance policy; or 3.
any sum received under an insurance policy issued on or after 1-4-20121 in respect of
which the premium payable for any of the years during the term of the policy exceeds
10%2 of the actual capital sum assured.

16. Payment From National Pension Trust [Sec. 10(12a) & 10(12b)]:

Any payment from the National Pension System

Trust to an assessee on closure of his account or on his opting out of the pension scheme
referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable
to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)] Any
payment from the National Pension System Trust to an employee under the pension
scheme referred to in sec. 80CCD, on partial withdrawal made out of his account in
accordance with the terms and conditions, specified under the Pension Fund Regulatory
and Development Authority Act, 2013, to the extent it does not exceed 25% of the amount
of contributions made by him [Sec. 10(12B)]

17. Payment From Approved Superannuation Fund [Sec. 10(13)]:

Any payment from an approved superannuation fund made – • on the death of a

beneficiary; or • to an employee in lieu of or in commutation of an annuity on his
retirement at or after a specified age or on his becoming incapacitated prior to such
retirement; or • by way of refund of contributions on the death of a beneficiary; or • by way
of refund of contributions to an employee on his leaving the service (otherwise than by
retirement at or after a specified age or on his becoming incapacitated prior to such
retirement) to the extent to which such payment does not exceed the contributions made
prior to 1-4-1962 and any interest thereon. • by way of transfer to the account of the
employee under a pension scheme referred to in sec. 80CCD

and notified by the Central Government.

18. Income From Leasing Of Aircraft [Sec. 10(15A)].

Any payment made, by an Indian company engaged in the business of operation of aircraft,
to acquire an aircraft or an aircraft engine (other than a payment for providing spares,
facilities or services in connection with the operation of leased aircraft) on lease from the
foreign Government or a foreign enterprise under an approved agreement. The agreement
must not be entered into-  between 1-4-1997 to 31-3-1999; and  on or after 1-4-2007.

19. Daily Allowance, Etc. To MP And MLA [Sec. 10(17)].

Any income by way of – a. Daily allowance received by any person by reason of his
membership of Parliament or of any State Legislature or of any Committee thereof; b. Any
allowance received by any person by reason of his membership of Parliament; c.
Constituency Allowance received by any person by reason of his membership of State
legislature.

20. Income Of Professional Institutions [Sec. 10(23A)].

Any income (other than income chargeable under the head “Income from house property”
or any income received for rendering any specific services or income by way of interest or
dividends derived from its investments) of professional association shall be exempt
provided – a. Such association or institution is established in India having as its object the
control, supervision, regulation or encouragement of the profession of law, medicine,
accountancy, engineering or architecture or other specified profession; b. Such association
or institution applies its income, or accumulates it for application, solely to the objects for
which it is established; and c. The association or institution is approved by the Central
Government.

21. Income Of Mutual Fund [Sec. 10(23D)].

Any income of – a. A Mutual Fund registered under the Securities and Exchange Board of
India Act, 1992 or regulation made thereunder; b. A Mutual Fund set up by a public sector
bank or a public financial institution or authorised by the Reserve Bank of India and subject
to certain notified conditions.

22. Income Of Business Trust [Sec 10(23FC)]:

Any income of a business trust by way of a) interest received or receivable from a special
purpose vehicle; or b) dividend referred to in sec. 115-O(7) Ø “Special purpose vehicle”
means an Indian company in which the business trust holds controlling interest and any
specific percentage of shareholding or interest, as may be required by the regulations
under which such trust is granted registration.

23. Income Of Specified Boards [Sec. 10(29A)]:

Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board;
The Tobacco Board; The Marine Products Export Development Authority; The Coir Board;
The Agricultural and Processed Food Products Export Development Authority and The
Spices Board.

24. Subsidy Received From Tea Board [Sec. 10(30)]:

Any subsidy received from or through the Tea Board under any scheme for replantation or
replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation
of tea as the Central Government may specify, is exempt.

25. Awards And Rewards [Sec. 10(17A)].

Any payment made, whether in cash or in kind – a. in pursuance of any award instituted in
the public interest by the Central Government or any State Government or by any other
approved body; or b. as a reward by the Central Government or any State Government for
approved purposes.

26. Income Of Scientific Research Association [Sec. 10(21)]:

Any income of a scientific research association [being approved for the purpose of Sec.
35(1)(ii)] or research association which has its object, undertaking research in social
science or statistical research [being approved and notified for the purpose of Sec. 35(1)
(iii)], is exempt provided such association— a. applies its income, or accumulates it for
application, wholly and exclusively to the objects for which it is established; and b. invest or
deposit its funds in specified investments.

27. Income Of Professional Institutions [Sec. 10(23A)]:

Any income (other than income chargeable under the head “Income from house
property” or any income received for rendering any specific services or income by way of
interest or dividends derived from its investments) of professional association shall be
exempt provided- a. Such association or institution is established in India having as its
object the control, supervision, regulation or encouragement of the profession of law,
medicine, accountancy, engineering or architecture or other specified profession; b. Such
association or institution applies its income, or accumulates it for application, solely to the
objects for which it is established; and c. The association or institution is approved by the
Central Government.

28. Expenditure Related To Exempted Income [Sec. 14A]:

For the purposes of computing the total income, no deduction shall be allowed in respect of
expenditure incurred by the assessee in relation to income, which does not form part of the
total income under this Act. Where the AO is not satisfied with the correctness of the claim
of such expenditure by assessee, he can determine the disallowable expenditure in
accordance with the method prescribed by the CBDT.

TYPES OF TAXES

Taxes are an essential part of any nation to promote its economic growth. The taxes that we
pay fill the coffers of the government, which are then utilized by it to deliver various
services to the country’s population. The government has been given the authority to
collect taxes by the Indian Constitution. All the taxes that we pay are backed by laws passed
by either the Parliament or the State Legislature.
Now that we know what taxes are, let’s look at the type of taxes in India.
Different types of taxes
India has two types of taxes, namely Direct Tax and Indirect Tax. The core difference
between both the taxes lies in their implementation.
Apart from these types of taxation, there are other taxes or cess levied by the government
for specific purposes, which are – Krishi Kalyan Cess, Swachh Bharat Cess and
Infrastructure Cess Tax.
Direct Tax
Direct Taxes comprise taxes that you pay directly to the government. These taxes are levied
directly on an individual and therefore can’t be transferred to another entity or person. The
Central Board of Direct Taxes (CBDT) under the Department of Revenue is responsible for
the governance of this tax.
There are various types of Direct Taxes, which include:
Income Tax
Income Tax came into force with the Income Tax Act of 1961. All the rules of income tax are
set by this act. This tax will apply to any income you generate for profits, owning a
property, salary, investments or business.
Besides stipulating from where income tax is to be collected, this act has provisions that
allow tax benefits for taxpayers through fixed deposits and life insurance premiums. This
act also determines your position on the income tax slab.
Gift Tax
In 1958, the Gift Tax Act was originally introduced. According to the act, if you receive
presents of any kind, then you will have to pay a tax of 30%. This was later tweaked to
exclude gifts from family such as spouse, parents and blood relatives. If anyone else gives a
gift whose value exceeds Rs. 50000, then you will have to pay tax.
Wealth Tax
Amongst the various types of taxes, Wealth Tax is applicable not only on an individual but
also on a Hindu Unified Family (HUF) and businesses.
For example: If your net wealth is more than Rs. 1 crore, then you have a surcharge of 12%.
Companies whose turnover exceeds 10 crores will also have to pay wealth tax.
Capital Gains Tax
This is a type of Income Tax levied on the gains you make after the sale of an investment or
property. There are two types of Gains Tax – Long Term Capital Gains Tax and Short Term
Capital Gains Tax. The former is applied when the holding period of the investment exceeds
36 months. The latter is applicable if the duration of the investment is less than 36 months.
Securities Transaction Tax
Share trading on the stock market is subject to this tax. For every share purchase or sale,
you pay the Securities Transaction Tax.
Corporate Tax
Another type of Income Tax, the Corporate Tax is levied on the earning of businesses. An
Indian firm whose turnover is less than Rs. 1 crore is not subject to this tax. There is a
corporate tax slab according to which companies pay tax. Moreover, the tax structure for
international firms is different from domestic firms.
Indirect Taxes
Unlike Direct Taxes, these taxes are not levied on individuals but on goods and services.
This tax is not levied on profit, income or the revenue of an individual or an entity. Also,
this tax can be transferred from one person to another.
Here’s a list of various types of Indirect Taxes:
Sales Tax
Any product being sold is subject to Sales Tax. The product can be either produced
domestically or be imported. The government subjects the seller of the product to the sales
tax, who can then pass it on the buyer.
Sales Tax is different for different states. Also, the central government levies the sales tax.
For some states, sales tax is one of their largest revenue sources.
Service Tax
Service Tax is applicable on services provided by companies. Unlike Sales Tax, it is not
charged on every sale. This tax is charged with on a monthly or quarterly basis. Service
providers pay this tax once their customers clear their bills.
Goods and Service Tax
The Goods and Services Tax was introduced in 2017. This tax is applied at the consumption
stage. GST is applied at every stage of the supply chain wherever consumption takes place.
Value Added Tax (VAT)
VAT is levied on products other than commodities such as food and essential drugs. This
tax is placed at stages in the supply chain where value is added. This tax comes under the
purview of the state government.
Customs Duty
If you buy a product from a different country and import it to India, then you have pay tax
on it. This tax is called Customs Duty.
Toll Tax
Toll Tax is levied either by the state or central governments on roads and bridges. The
purpose of the tax is to fund road construction and maintenance activities.
Both Direct and Indirect Taxes are essential for the economic growth of the country.
Income
What Is Income?
Income is money (or some equivalent value) that an individual or business receives,
usually in exchange for providing a good or service or through investing capital. Income is
used to fund day-to-day expenditures. Investments, pensions, and Social Security are
primary sources of income for retirees. For individuals, income is most often received in
the form of wages or salary. Business income can refer to a company's remaining revenues
after paying all expenses and taxes. In this case, income is referred to as "earnings.” Most
forms of income are subject to taxation.

Income
Understanding Income
Individuals receive income through earning wages by working and making investments
into financial assets such as stocks, bonds, and real estate. For instance, an investor’s stock
holding may pay income in the form of an annual 5% dividend.

In most countries, earned income is taxed by the government before it is received. The

revenue generated by income taxes finances government actions and programs as
determined by federal and state budgets. The Internal Revenue Service (IRS) calls income
from sources other than a job, such as investment income, “unearned income.”1

Taxable Income
Income from wages, salaries, interest, dividends, business income, capital gains, and
pensions received during a given tax year are considered taxable income in the United
States. Other taxable income includes annuity payments, rental income, farming, and
fishing income, unemployment compensation, retirement plan distributions, and stock
options. Lesser-known taxable income includes gambling income, bartering income, and
jury duty pay.2

The types of income listed above would be classified as ordinary income, which is
composed mainly of wages, salaries, commissions, and interest income from bonds, and it
is taxable using ordinary income rates. This type of income differs from capital gains or
dividend income in that it can only be offset with standard tax deductions, while capital
gains can only be offset with capital losses.3

Tax-Exempt and Tax-Reduced Income

Types of income that may be tax-exempt include interest income from U.S.
Treasury securities (which is exempt at the state and local levels) 4 , interest
from municipal bonds (which is potentially exempt at the federal, state and local levels) 5
and capital gains that are offset by capital losses.3

Types of income taxed at lower rates include qualified dividends and long-term capital
gains. 3  6 Social Security income is sometimes taxable, depending on how much other
income the taxpayer receives during the year.7
Disposable and Discretionary Income
Disposable income is money that’s remaining after paying taxes. Individuals
spend disposable income on necessities, such as housing, food, and transportation.
Discretionary income is the money that remains after paying all necessary
expenses. People spend discretionary income on items like vacations, restaurant meals,
cable television, and movies.

In a recession, individuals tend to be more prudent with their discretionary income. For

example, a family may use their discretionary income to make extra payments on their
mortgage or save it for an unexpected expense.

Disposable income is typically higher than discretionary income within the same
household because expenses of necessary items are not removed from the disposable
income. Both measures can be used to project the amount of consumer spending. However,
either measure must also take into account the willingness of people to make purchases.

Examples of Income
For private individuals, ordinary income is usually only made up of the salaries and wages
they earn from their employers pretax. If, for example, a person works a customer service
job at Target and earns $3,000 per month, his annual ordinary income would be $36,000,
derived as $3,000 x 12. If he has no other income sources, this is the amount that would be
taxed on his year-end tax return as gross income.

Additionally, if the same person also owned a rental property and earned $1,000 a month
in rental income, his ordinary income would increase to $48,000 per year. If the same
person earned $1,500 in qualified municipal bond interest payments, that portion of
income would be tax-exempt.

For businesses, ordinary income is the pretax profit earned from selling its product or
service. For example, the retailer, Target, had $69.5 million worth of total sales or revenue
in the year ended in January 2017. The company had $48.9 million in costs of goods sold
(COGS) and $15.6 million in total operating expenses. Target’s ordinary income was $5
million8 , derived as follows:

 $69,500,000 - $48,900,000 - $15,600,000

This is the amount of income that would be taxed for the year. However, businesses are
required to pay taxes quarterly.9

What Is Direct Tax?

Direct tax is a type of tax that is paid by an individual to the government. This individual
can be a person or an organization. As this type of tax is directly imposed by the
government, hence, it cannot be transferred to another entity. Some advantages of direct
tax are that it aids in curbing inflation and also distributing wealth equally in the society.
Types of Direct Tax
1. Income Tax

Income tax is a common tax paid by most salaried and self-employed person. This tax
varies from person to person as one pays income tax according to the tax bracket their
income falls in and is directly levied on the salary.
2. Wealth Tax

Wealth tax is levied on the value of certain assets in the market for that particular
financial year. This asset can be held by an individual, HUFs (Hindu Undivided Family) or
companies. Though wealth tax was widely used before, now it has been abolished and is
not in use anymore.
3. Corporate Tax

Corporate tax is levied on the profits of companies and businesses in India. This tax is
also applicable to foreign companies where the income is arising from India.
4. Capital Gains Tax

Capital Gains tax is taxed on the income arising out of the sale of investments. The tax is
levied based on how long you hold the asset. Capital gains are of two types, Long Term
Capital Gains (LTCG) and Short Term Capital Gains (STCG) according to which the tax
rates differ.
What Is Indirect Tax?

Indirect tax is a type of tax imposed by the government on the supply of goods and
services and can be transferred from one entity to another. Recently, Goods and Services
Tax (GST) was introduced by the government on 1 July 2017 which subsumed all the
other kinds of indirect taxes. Some of the benefits of GST as indirect tax are the
elimination of multiplicity of taxes and an eventual decrease in the cost of goods due to
the reduction in the cascading effect of taxes.
Types of Indirect Tax
1. Goods and Services Tax (GST)

GST is charged twice where the Central Government will levy Central GST (CGST) and the
State Government will levy State GST (SGST) on intra-state supply of goods or services.
The Centre will also levy Integrated GST (IGST) on inter-state supply of goods or services.
2. Tax on Liquor and Petrol Products

Taxes on liquor and petrol products do not come under GST and are taxed separately.
Difference between Direct and Indirect Tax:

When looking at both these types of taxes, there are various differences that you need to
know. Here are some of the key differences:

1.Taxpayer of the particular type of tax: Direct taxes are levied on every individual, HUFs,
and companies. For indirect taxes, the end-consumer becomes the taxpayer.

2.Applicability of the tax: Direct taxes are applicable only to the taxpayer whereas
indirect taxes are levied on every single stage of production-distribution stage of the
goods.

3.Transferability of the taxes: Direct taxes cannot be transferred as compared to indirect

taxes which can be transferred.

4.Evasion from paying tax: Direct tax can be evaded by investing in tax-savings
instruments whereas indirect tax cannot be evaded.

Difference between Tax and Fees

Tax is levied compulsorily by the government on its citizens to defray the expenses of the
government. A tax, by definition, is a payment in return for which no direct and specific
quid pro quo is rendered to the taxpayer. From the definition of a tax, we can pinpoint
some of the important characteristics of tax.

Firstly, a tax is a compulsory payment levied by the government on its citizens and various
business firms. As payment of tax is compulsory, refusal to pay tax invites punishment.

Secondly, there is no direct quid pro quo relationship between the taxpayer and the tax-
levying authority. That is to say, a taxpayer cannot demand any reciprocal benefits for
paying taxes.
Thirdly, a tax is levied to incur public expenditure for the benefit of the country as a whole.

Fourthly, the basis of taxation cannot be the same for all periods. It is reviewed periodically
by the taxing authority.

On the other hand, a fee is a voluntary payment to the government for the special services
rendered by it in the public interest, but conferring a specific advantage on the person
paying it.

Now, it is possible to mention some of the important differences between tax and
fees:
In the first place, a tax is a compulsory contribution made by a taxpayer. A fee, by
definition, is a voluntary payment.

Secondly, as far as tax is concerned, there is no direct give-and-take relationship between

the taxpayer and the tax-levying authority.

A taxpayer cannot demand any special favour from the authority in return for taxes paid by
him. A fee is a direct payment by those who receives some special advantages or the
government guarantees the services who pays fees. Fees are, therefore, deemed to be the
by-products of the administrative activities of the government.

Thirdly, fees are mostly imposed to regulate or control various types of activities. But the
objectives of taxation are many. It has no separate objective. Taxes are levied in the greater
interests of the country

Constitutional provisions relating to taxation-How important to understand tax laws

Constitution is the foundation and source of powers to legislate all laws in India.
Parliament, as well as State Legislatures gets the power to legislate various laws from the
Constitution only and therefore every law has to be within the vires of the Constitution.

Constitution is the foundation and source of powers to legislate all laws in India.
Parliament, as well as State Legislatures gets the power to legislate various laws from the
Constitution only and therefore every law has to be within the vires of the Constitution.

Talking about the taxation laws and the interpretation of taxation laws, every lawyer or a
tax professional practicing taxation laws must understand the basic provisions of
Constitution relating to taxation including the powers of Parliament and State Legislatures
to legislate regarding levy and collection of tax, the restrictions imposed by our
Constitution on such powers, entries concerning taxation in Central List i.e List-1 and State
List i.e List-2 of Seventh Schedule to Constitution of India.

All laws and executive actions are subordinate to the Constitution. To form clear
understanding of the basic concepts relating to taxation laws one must understand the
relevant provisions of the Constitution, as the power to levy and collect tax by State
Governments or Union Government comes from the Constitution only.

One thing must be kept in mind that there is always an object behind every law and that
object ultimately exists to achieve the objects enumerated in the Preamble of our
Constitution, which runs as under:

WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a
SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:

JUSTICE, social, economic and political;

LIBERTY, of thought, expression, belief, faith and worship;

EQUALITY of status and of opportunity;

and to promote among them all

FRATERNITY assuring the dignity of the individual and the unity and integrity of the
Nation;

IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949,DO HEREBY

ADOPT, ENACT AND GIVE TO OURSELVES THIS CONSTITUTION.

While interpreting every law one has to keep in mind the object behind the law, if any
provision of the law or any administrative action or any interpretation of the law defeats
the object of such law for which it is being legislated and consequently is not in accordance
with the Constitution then it is illegal, void and ultra vires of the Constitution.

Therefore it is important to understand the powers and scheme of taxation under

Constitution before understanding the taxation laws. Whenever I try to understand any
complicated provision of law, I refer to the object of the law for which it has been legislated
and also the power of the Parliament or State legislature under the Constitution to legislate
such law for better understanding of the subject.

For example State VAT Acts have been legislated by State Legislatures under Entry 54 of
List-II of the Seventh Schedule to the Constitution, which runs as under:

“Tax on sale or purchase of goods other than newspapers except tax on interstate sale or
purchase.”

Hence every law legislated under Entry 54 of State List must levy tax only on the sale or
purchase of goods other than newspapers within the State Jurisdiction. If a State law
legislated under entry 54 levies tax on the inter-state sale or purchase of goods, it has to be
struck down as ultra vires of the Constitution.

The roots of every law in India lies in the Constitution, therefore understanding the
provisions of Constitution is foremost to have clear understanding of any law.

Now, Let us go through some of the relevant provisions of our Constitution relating to
taxation:

Article 246(1) of Constitution of India states that Parliament has exclusive powers to make
laws with respect to any of matters enumerated in List I in Seventh Schedule to
Constitution(i.e Union list). Article 246(3) provides that State Government has exclusive
powers to make laws for State with respect to any matter enumerated in List II of Seventh
Schedule to Constitution(i.e. State List).

Parliament has exclusive powers to make laws in respect of matters given in Union List and
State Government has the exclusive jurisdiction to legislate on the matters containing in
State List.

There is yet another list i.e List III (called concurrent list) in the Seventh Schedule to the
Constitution. In respect of the matters contained in List III both the Central Government
and State Governments can exercise powers to legislate. In case of Union Territories Union
Government can make laws in respect of all the entries in all the three lists.

List III of Seventh Schedule(i.e Concurrent list) includes entries like Criminal law and
Procedure, Trust and Trustees, Civil Procedures, economic and social planning, trade
unions, charitable institutions, price control factories, etc.

In case there is a conflict between the laws legislated by State Government and Central
Government in respect of entries contained in Concurrent list, law made by Union
Government prevails.

However there is one exception to this rule, if law made by State contains any provision
repugnant to earlier law made by Parliament, law made by State Government prevails, if it
has received assent of President. Even in such cases, Parliament can make fresh law and
amend, repeal or vary law made by State.

Now lets go through the Entries in Union list and State list relevant to Taxation.

Union List:

Entry No. 82 – Tax on Income other than agriculture income.

Entry No. 83 – Duties of customs including export duties.

Entry No. 84 – Duties of excise on Tobacco and other goods manufactured or produced in
India except alcoholic liquors for human consumption, opium, narcotic drugs, but including
medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.
Entry No. 85 – Corporation tax

Entry No. 92A – Taxes on sale or purchase of goods other than newspapers, where such
sale or purchase takes place in the cource of Interstate trade or commerce.

Entry No. 92B – Taxes on consignment of goods where such consignment takes place
during Inter-State trade or commerce.

Entry No. 92C – Tax on services

Entry No. 97 – Any other matter not included in List II, List III and any tax not mentioned
in List II or List III.

State List:

Entry No. 46 – Taxes on agricultural income.

Entry No. 51 – Excise duty on alcoholic liquors, opium and narcotics.

Entry No. 52 – Tax on entry of goods into a local area for consumption, use or sale therein
(usually called Octroi or Entry Tax).

Entry No. 54 – Tax on sale or purchase of goods other than newspapers except tax on
interstate sale or purchase.

Entry No. 55 – Tax on advertisements other than advertisements in newspapers.

Entry No. 56 – Tax on goods and passengers carried by road or inland waterways.

Entry No. 59 – Tax on professionals, trades, callings and employment.

There are also certain restrictions which have been imposed in our Constitution on the
powers of State Governments and Union Government. So far indirect tax especially the tax
on sale and purchase of goods is concerned certain restrictions imposed in Constitution are
provided here below:

Article 286(1) – State Government cannot impose tax on sale or purchase during imports
or exports; or tax on sale outside the State.

Article 286(2) – Parliament is authorized to formulate principles for determining when a

sale or purchase takes place (a) outside the State (b) in the course of import or export.
[sections 3,4,5 of CST Act, 1956 have been legislated under these powers].

Article 286(3) – Parliament can place restrictions on tax on sale or purchase of goods
declared as goods of special importance and the State Government can tax such declared
goods subject to these restrictions[section 14, 15 of CST Act, 1956 imposes restrictions and
conditions on the power of State Governments to levy tax on declared goods.]
Article 301- Trade, commerce and inter -course through out the territory of India shall be
free, subject to provisions of Article 302 to 304 of Constitution.[Entry tax in Haryana was
held as ultra vires of article 301 by Punjab & Haryana High Court in Jindal Strips Ltd. v
State of Haryana and others, (2007) 29 PHT 385 (P&H)].

Article 302 – Restriction on trade or commerce can be placed by Parliament in the public
interest.

Article 303(1), 303(2) – No discrimination can be made between one State and another or
give preference to one State over another. Such discrimination or preference can be made
only by Parliament by law to deal with situation arising from scarcity of the goods.

Article 304 – State can impose tax on goods imported from other States or Union
territories, but a State cannot discriminate between goods manufactured in the State and
goods brought from other States.

Proviso to article 304 provides that State legislature can impose reasonable restrictions on
freedom of trade and commerce within the state in public interest. However, such bill
cannot be introduced in State Legislature without previous sanction of the President.

Article 265 – No tax shall be levied or collected except by authority of law.

Article 300A – No person shall be deprived of its property save by authority of law.

Concluding in the end, all the above articles of the Constitution are very important in
relation to taxation and must be deeply understood by every tax
professional. Interpretation of every law, validity of subordinate legislation’s and
administrative actions must be judged in the background of the provisions of Constitution.

Canons of Taxation: Meaning, Types and Characteristics

Meaning of Canons of Taxation:
By canons of taxation we simply mean the characteristics or qualities which a good tax
system should possess. In fact, canons of taxation are related to the administrative part of a
tax. Adam Smith first devised the principles or canons of taxation in 1776.

Even in the 21st century, Smithian canons of taxation are applied by the modern
governments while imposing and collecting taxes.

Types of Canons of Taxation:

In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of taxation
are:
(i) Canon of equality or equity
(ii) Canon of certainty

(iii) Canon of economy

(iv) Canon of convenience.

Modern economists have added more in the list of canons of taxation.

These are:
(v) Canon of productivity

(vi) Canon of elasticity

(vii) Canon of simplicity

(viii) Canon of diversity.

Now we explain all these canons of taxation:

i. Canon of Equality:
Canon of equality states that the burden of taxation must be distributed equally or
equitably among the taxpayers. However, this sort of equality robs of justice because not all
taxpayers have the same ability to pay taxes. Rich people are capable of paying more taxes
than poor people. Thus, justice demands that a person having greater ability to pay must
pay large taxes.

If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers
become equal. This is the essence of canon of equality (of sacrifice). To establish equality in
sacrifice, taxes are to be imposed in accordance with the principle of ability to pay. In view
of this, canon of equality and canon of ability are the two sides of the same coin.

ii. Canon of Certainty:

The tax which an individual has to pay should be certain and not arbitrary. According to A.
Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax liability,
ought all to be clear and plain to the contributor and to everyone. Thus, canon of certainty
embraces a lot of things. It must be certain to the taxpayer as well as to the tax-levying
authority.

ADVERTISEMENTS:
Not only taxpayers should know when, where and how much taxes are to be paid. In other
words, the certainty of liability must be known beforehand. Similarly, there must also be
certainty of revenue that the government intends to collect over the given time period. Any
amount of uncertainty in these respects may invite a lot of trouble.

iii. Canon of Economy:

This canon implies that the cost of collecting a tax should be as minimum as possible. Any
tax that involves high administrative cost and unusual delay in assessment and high
collection of taxes should be avoided altogether.

According to A. Smith: “Every tax ought to be contrived as both to take out and to

keep out of the pockets of the people as little as possible, over and above what it
brings into the public treasury of the State.”
ADVERTISEMENTS:

iv. Canon of Convenience:

Taxes should be levied and collected in such a manner that it provides the greatest
convenience not only to the taxpayer but also to the government.

Thus, it should be painless and trouble-free as far as practicable. “Every tax”, stresses A.

Smith: “ought to be levied at time or the manner in which it is most likely to be
convenient for the contributor to pay it.” That is why, after the harvest, agricultural
income tax is collected. Salaried people are taxed at source at the time of receiving salaries.
These canons of taxation are observed, of course, not always faithfully, by modern
governments. Hence these are basic and classic canons of taxation.

ADVERTISEMENTS:

We now present other canons of taxation:

i. Canon of Productivity:
According to a well-known classical economist in the field of public finance, Charles F.
Bastable, taxes must be productive or cost-effective. This implies that the revenue yield
from any tax must be a sizable one. Further, this canon states that only those taxes should
be imposed that do not hamper productive effort of the community. A tax is said to be a
productive one only when it acts as an incentive to production.

ii. Canon of Elasticity:

ADVERTISEMENTS:

Modern economists attach great importance to the canon of elasticity. This canon implies
that a tax should be flexible or elastic in yield.

It should be levied in such a way that the rate of taxes can be changed according to
exigencies of the situation. Whenever the government needs money, it must be able to
extract as much income as possible without generating any harmful consequences through
raising tax rates. Income tax satisfies this canon.

iii. Canon of Simplicity:

Every tax must be simple and intelligible to the people so that the taxpayer is able to
calculate it without taking the help of tax consultants. A complex as well as a complicated
tax is bound to yield undesirable side-effects. It may encourage taxpayers to evade taxes if
the tax system is found to be complicated.

A complicated tax system is expensive in the sense that even the most honest educated
taxpayers will have to seek advice of the tax consultants. Ultimately, such a tax system has
the potentiality of breeding corruption in the society.

iv. Canon of Diversity:

Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic
or diverse in nature rather than having a single or two taxes. Diversification in a tax
structure will demand involvement of the majority of the sectors of the population.

If a single tax system is introduced, only a particular sector will be asked to pay to the
national exchequer leaving a large number of population untouched. Obviously, incidence
of such a tax system will be greatest on certain taxpayers. A dynamic or a diversified tax
structure will result in the allocation of burden of taxes among the vast population
resulting in a low degree of incidence of a tax in the aggregate.

The above canons of taxation are considered to be essential requirements of a good tax
policy. Unfortunately, such an ideal tax system is rarely observed in the real world. But a
tax authority must go on maintaining relentlessly the above canons of taxation so that a
near- ideal tax structure can be built-up.
Characteristics of Canons of Taxation:
A good (may be a near-ideal) tax system has to fulfill the following characteristics:
i. The distribution of tax burden should be equitable such that every person is made to pay
his ‘fair share’.
This is known as the ‘fairness’ criterion which focuses on two principles:
Horizontal equity— equals should pay equal taxes; and vertical equity—un-equals should
pay unequal taxes. That is to say, rich people should pay more taxes.

ii. But equity must not hamper productive efficiency such that burdens should be provided
to correct inefficiencies. This ‘efficiency’ criterion says that it should raise revenue with
the least costs to the taxpayers so that tax system can allocate resources without distortion.
iii. The two other criteria are: ‘flexibility’ and ‘transparency’.

A good tax system demands changes in tax rates whenever circumstances change the
system. Further, a good tax must be transparent in the sense that taxpayers should know
what they are paying for the services they are getting.

iv. A good tax system is expected to facilitate the use of fiscal policy to achieve the goals of

(a) stability

(b) economic growth.

For the attainment of these goals, there must be built-in-flexibility in the tax structure.

From the above discussion, it follows that taxation serves the following purposes:
(i) To raise revenue for the government

(ii) To redistribute income and wealth from the rich to the poor people

(iii) To protect domestic industries from foreign competition

(iv) To promote social welfare.