For a layman it is difficult to understand that on which rate the Income Tax is calculated on the Income Earned in the F.Y. 2016-17, whether the rates which are announced in Budget 2017 or on the rates announced in Budget 2016. Even if someone would know which rates would be applicable, but would not know the reason for the same.
First of all we shall incept with applicability of rate of tax. Different person would be covered under different provisions of the Income Tax Act, 1961, for example person earning capital gain shall be chargeable under Section 111A or Section 112 of the Income Tax Act, 1961 and person earning salary shall be chargeable at the slab rate.
However we should be cognizant of the fact that slab rates shall be the rates mentioned in the Finance Act of the relevant year and the same is not referred from the Income Tax Act, 1961. As taking reference of Section 2(37A) of the Income Tax Act, 1961 which defines rate in force as “for the purpose of calculating Income Tax for specified Sections the rates of Income Tax shall be the rate as mentioned in the Finance Act of the relevant year” i.e. it is the Finance Act that provides the applicable rate of Income Tax, Surcharge and Education Cess.
However there is a protocol which requires to be adhered for enforcing a Finance Bill that demands certain time which shall be as follows:
The gist of Indian Constitution’s prerequisite for enforcing the Finance bill is as follows:
Hence Finance Bill announced in February 2017 would be given accent in between May to July 2017 subsequent to the above procedure.
Furthermore in accordance to Section 4 of the Income Tax Act, 1961 Income Tax shall be charged on the income earned by a person in the previous year (2016-17) at the rates applicable on the first day of the assessment year (2017-18).
Previous Year refers to the year in which Income is earned whereas Assessment Year refers to the year in which Tax is to be computed and paid on the aforesaid Income.
As mentioned above for the income earned in a previous year the rates shall be the rates applicable on the first day of the Assessment year, and hence in accordance to Section 4 of the Income Tax Act, 1961 income earned in previous year 2016-17 shall be chargeable to tax at the rates as specified in the Finance Act 2016 as Finance Bill announced in February 2017 is not accented by the President of India up to the first day of
Assessment Year 2017-18 i.e. 1st April 2017, therefore proposed rates in the Budget 2017 shall not be applicable while computing tax on income earned in financial year 2016-17.
A Bird’s Eye view on the applicability of tax: