Basic Taxes (A Macro Overview of Income Tax)

If you are earning in India, there is a tax implications to that aspect and thus there is first a need to understand the type of prominent taxes in India first and then to understand the details within them.

What is Tax?

Tax is a fees charged by the government on a product, income of activity. In order to understand the methodology behind collection of these taxes, let us being by saying there are two type of taxes as (1) Direct Taxes, and (2) Indirect Taxes. If the tax is levied on the income or wealth of a person then it is direct tax for example income tax, however if the tax is levied on the price of a good or service, then it is a Indirect Tax for example service tax.

Therefore, type of taxes

(1) Direct Taxes – Income Tax and Wealth Tax

(2) Indirect Taxes – Custom Duty, Excise Duty, Service Tax and Sales Tax (VAT)

Why tax is levied?

The reason for levy of the taxes is because that they constitute the basic source of revenue to the government. Revenue that is raised through the collection of taxes is significantly utilized for meeting the expenses of government, such as – India defense system, providing education system, health care for the citizens, infrastructure facilities such as roads, parks, dams etc.

Income Tax

In the perspective of Income Tax, there are number of components which continue to affect the rules and regulations of this direct tax.

Here, a question arises as to what are these components which affect the Income tax?

(1) Income Tax Act, 1961

The levy of income tax in India is governed by the Income Tax Act, 1961. Briefly, this act came into force on 1^st April 1962 and the Act contains about 298 sections and XIV schedules. These undergo change every year with additions and deletions brought about the annual Finance Act passed by Parliament. In pursuance of the power given by the Income-tax Act, 1962 rules have been framed to facilitate proper administration of the Income Tax Act, 1961.

(2) The Finance Act

Finance Minister of the Government of India presents the Budget to the Parliament every year. Part A of the budget speech contains the proposed policies of the Government in fiscal areas and Part B of the budget speech contains the detailed tax proposals. In order to implement these proposals, the Finance Bill is introduced in the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President of India, it becomes the Finance Act.

(3) Income Tax Rules

The administration of direct taxes is looked after by the CBDT (Central Board of Direct Taxes). The CBDT is empowered to makes rules for carrying out the purposes of the Act. For the proper administration of the Income tax Act, the CBDT frames rules from time to time. These rules are collectively called Income Tax rules, 1962. It is important to keep in mind that along with the Income Tax Act, these rules should strongly be considered.

(4) Circulars and Notifications, and

Circulars also are issued by the CBDT time to time to deal with the certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessees. The department is bound by the circulars. While such circulars are not binding the assessees they can take advantage of beneficial circulars.

(5) Legal Decision of Courts / Case Laws

The study of the case law is an important ad unavoidable part of the study of income tax. It is not possible for the Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues. The Supreme is the Apex court of the country and the law laid down by the Supreme Court is the Law of the Land. However, the decisions given by various High Courts will apply in the respective states of India in which such High Courts have jurisdiction.

Levy of Income Tax

Income Tax is a tax levied on the total income of the previous year of every person. A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BoI), A firm, A Company etc.

Concept of Income

 The definition of income as per the Income Tax act, 1961 begins with the words “Income includes”. Therefore, it is an inclusive definition and not a exhaustive one. Such a definition does not confine the scope of income but leaves room for more inclusions within the ambit of the term. Certain important principles relating to incomes are explained below.

(i) Income normally refers to revenue receipts. Capital receipts are generally not included within the scope of income. However the Income Tax Act, 1961 has specifically included certain capital receipts with the definition of income such as capital gains i.e. gains on sale of a capital assets like land.

(ii) Income means net receipts and not gross receipts. Net receipts are arrived at after deducting the expenditure incurred in connection with earning such receipts. The expenditure which can be deducted while computing income under each heads will be explained below with the steps of computation.

(iii) Income is taxable either on due basis or receipt basis. For computing income under the heads “profits and gains of business or profession” and “Income from other sources” the method of accounting regularity employed by the assessee should be considered, which can be either cash system or mercantile systems.

(iv) etc

Total Income and Tax Payable (Brief Introductions and Steps)

Income-tax is levied on an assessee’s total income. Such total income has to be complied as per the provisions contained in the income tax act, 1961. Steps, those are required to compute the income tax, are laid down below. These need to be practiced with vital consideration of understating of each step inside out.

Steps:

(1) Determination of Residential Status

(2) Classification of Income under Different Heads (Salaries, House Property, PGBP, Capital Gains and Income from other Sources)

(3) Exclusion of Income not chargeable to Tax

(4) Computation of Income under each head (mentioned in step no. 2)

(5) Clubbing of income of spouse, minor child etc

(6) Set-off or carry forward and set-off of losses

(7) Computation of Gross Total Income

(8) Deductions from Gross Total Income

(9) Arriving at Total Income

(10) Application of the rates of tax on the total income

(11) Surcharge

(12) Education Cess and Secondary and Higher Education Cess on Income Tax

(13) Advance Tax and Tax Deducted at Source (TDS)

Return of Income

The Income Tax Act, 1961 contains provisions for filling of return of income. Return of income is the format in which the assessee furnishes information as to his total income and tax payable/ The format for filing the returns by different assessees is notified by the CBDT. The particulars of income earned under different heads, gross total income, deductions from gross total income, total income and tax payable by the assessee are required to be furnished in a return of Income. In short, a return of income is the declaration of income by the assessee in the prescribed format.

The Act has prescribed due dates for filling the return of income in case of different assessees. All companies and firms have to mandatorily file their return of income before the due date. Other persons have to file a return of income exceeds the basic exemption limit.

In conclusion, it is fundamental to the one to understand the basics of income tax and the elements that are affecting it time to time. Further to understand the steps that are to be taken in order to compute the income tax for the assessee. Finally, to furnish the details of computation on the prescribed format to be then further presented to the CBDT.

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Vijender Bansal (vijenderbansal@gmail.com)

ICAI Student – NRO-0318140