Introduction and Basic concepts
Meaning of tax
A tax may be defined as a compulsory extraction made by central government from the general public.It is a financial charge imposed on individuals or legal entities by the Government in pursuant to its legislative authority .A tax is not a voluntary payment or donation, but an enforced contribution.The proceeds from taxes constitute a major source of revenue to government
Structure ofIndian taxation system
Indian taxation system is one of the world’s largest taxation system—wide application on large number of peopleWell structured systemIndia has federal system of Government with clear demarcation of power between the central and state Government similarly tax administration is also based on clear demarcation between central and state Government
Constitutional provision governing taxation in India
Article 246 (seventh schedule) of the Indian constitution contains the legislative powers of the union Government and the state Government.It contain the following listlist 1 – central list – areas in which only the parliament can make lawslist 2- state list– state legislative can make lawslist 3– concurrent list – both parliament and the state legislative can make laws
Seventh schedule( article 246)
List 1 --central listtaxes on income other than agriculture incomeduties of customs including export dutiesduties of excise on tobacco and other goods manufactured or product in India except (i) alcoholic liquor for human consumption (ii) opium Indian hemp and other narcotic drugs
4. Corporation tax5. Taxes on capital value of assets exclusive of agriculture land of individuals and companies, taxes on capital of companies6. Estate duty in respect of property other than agricultural land7. Duties in respect of succession to property other than agriculture land8. Terminal taxes on goods pr passengers , carried by railways , sea or air; taxes on railways fares and freight ;9. Taxes other than stamp duties on transactions in stock exchanges and futures markets10. Rate of stamp duty in respect of bills of exchange , cheques, promissory notes bills of landing, letter of credit.
List 2 ( state list)
Land revenue , including the assessment and collection of revenueTaxes on agriculture incomeduties in respect of succession to agricultural incomeEstate duty in respect of agricultural landTaxes on lands and buildingsTaxes on minerals rightsDuties of excise for following goods manufactured within stateTaxes on entry of goods into a local area for consumption
9. Taxes on the consumption or sale of electricity10. Taxes on sale and purchase of goods other than news papers11. Taxes in animals and boats12. Taxes on goods and passengers carried by roads or on in land waterwaysList 3—concurent listno heads of taxation
Taxes to be imposed only by authority of law
No tax shall be levied or collected in India except by the authority of law as sanctioned by constitutionTaxes in IndiaDirect taxes indirect taxesIncome tax central excise taxWealth tax customs dutyservice taxcentral sales taxstate level VATstate excise dutysecurities transaction tax
INCOME TAX – A FAMOUS FORM OF TAX
It is a tax on income, gains or profits earned by a person such as individuals and other artificial entities. Income tax is an important type of tax which is found practically in almost all the countries of the world.
FEATURES OF INCOME TAX IN INDIA
Levied as per the ConstitutionLevied by Central GovernmentDirect TaxAnnual TaxTax on personTax on IncomeIncome of ‘Previous Year’ is assessable in ‘Assessment Year’Charged at prescribed rate(s)Administered by the Central GovernmentApplicability throughout India
HISTORY OF INCOME TAX IN INDIA
Introduced in India in 1860 by British rulers following the mutiny of 1875.Period between 1860 to 1886 was a period of experiments in the context f Income-tax.The pattern laid down in it for levying of tax continues to operate even to this day though in some changed form.In 1918 another Act – Income-tax Act,1918 was passed but it was short lived and was replaced by Income-tax Act,1922.Income-tax Act,1922 remained in existence and operation till 31stMarch, 1961.
DOCUMENTS CONTAINING LAWS RELATING TO INCOME TAX
Income Tax Act, 1961Income Tax Rules, 1962Annual Finance ActCirculars and Clarifications issued by CBDTJudicial Decisions/Case Law
AGICULTURAL INCOME [ Section 2(1A) ]Agricultural income is fully exempted from u/s 10(1) and as such does not form part of total income:any rent or revenue derived from land which is situated in India and is used for agricultural purposes;any income derived from such land by-agriculture ; orthe performance by a cultivator or receiver of rent –in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him to fit to be taken to market;any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which , or the produce of which, any process mentioned in paragraphs (b) of above sub-clause is carried on.
Provided that –the building is on or in the immediate vicinity of the land, and is a building which is the receiver of the or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, andthe land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not, so assessed to land revenue or subject to a local rate, it is not situated:in any area which is comprised within the jurisdiction of municipality which has a population of not less than ten thousand ; orin any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board.
ASSESSEE [Section 2(7)]‘Assessee’ means a person by whom any tax or any other sum of money is payable under this Act and includes :every person in respect of whom any proceedings under this Act have been taken for the assessment of his income or of the income of any other person in respect of which he is assessable or loss sustained by him or by such other person or of the amount of refund due to him or to such person ;every person who is deemed to be an assessee under any provision of this Act ;every person who is deemed to be an assessee-in-default under any provision of this Act.The above definition divides various types of assesses into three categories :Ordinary AssesseeRepresentative Assessee or deemed assesseeAssessee-in-default
AVERAGE RATE [Section 2(10)]“average rate of income-tax” means the rate arrived at by dividing the amount of income-tax calculated on total income by such total income.Average rate = Total tax (including Surcharge + Education Cess)/ Total Income × 100MAXIMUM MARGINAL RATE [MRR] [Section 2(29C)]It means the rate of income-tax (including surcharge on income tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI as specified in the Finance Act of the relevant year. At present, for assessment year 2016-2017, it is 30% (excluding surcharge).
BLOCK OF ASSETS [Section 2(11)]It means a group of assets falling within a class of assets comprising :tangible assets being building, machinery, plant or furniture.intangible assets being know-how, patents, copyrights, trade marks , licenses, franchises or any other business or commercial rights of similar naturein respect of which same percentage of depreciation is prescribed.BUSINESS TRUST [Section 2(13A)] [w.e.f. A.Y. 2016-2017]A “business trust” shall mean a trust registered as,-an infrastructure investment trust under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014; ora Real Estate Investment Trust under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 and the units of which are required to be listed on a recognized stock exchange in accordance with the aforesaid regulations.
CHARITABLE PURPOSE [Section 2(15)]“Charitable purpose” includes –relief of the poor,education,yoga,medical relief, andadvancement of any other object of general public utility.It is further provided that any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration irrespective of the nature of use or application or retention, of income from such activity, unlesssuch activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; andthe aggregate receipts from such activity o activities during the previous year do not exceed 20% of actual receipts of such trust or institution.
8.Child (section2(15A)Child in relation to an individual, includes a step- child and an adopted child of that individual.It includes both male and female children.9.Fair Market Value[section 2(22)](a) the price that the capital assets would ordinarily fetch on sale in the open market on the relevant day; and
(b) where the price referred to in sub-clause (i) is not ascertainable,such price as may be determined in accordance with the rules made under this act.10. PERSON [section2(31)]PERSON includes : (i) an individual ;(ii) a Hindu undivided family;(iii)a company ;
(iv)a firm ;(v) an association of persons or a body of individuals, whether incorporated or not;(vi) local authority; and(vii)every artificial juridical person not falling within any of the preceding sub-clauses11.Income [Section 2(24)]Income includes:
(i) Profits and gains ;(ii) Dividends ;(iii)Voluntary Contributions received by a trust(iv)The value of any perquisite or profits in lieu of salary taxable under section17(2)(3) ;(v) Any special allowance granted to assessee to meet expenses wholly,for the performance of duties of an office(vi) allowance granted to meet his personal
expenses or to compensate him for increased cost of living;(vii)benefit obtained by representative see in respect of any obligation(Viii)profits & gains of any business of banking carried on by co-operative society(ix) Amy sum chargeable u/s 28(ii) & (iii) or section 41 or section 59(x)any sum chargeable u/s iii(a),(b),(c)
(xi)any capital gain taxable u/s45(xii)Sum receivednor not carrying out any activity in relation to any business(xiii) The profit an gain of any business(xiv)Any winning from lotteries , crosswords puzzle, race including horse races(xv) Any sum received by theassesseeas his employer’ contribution to anyprodvintfun or superannuation fund
(xvi)Any um received under a key man insurance policy.(xvii) Any gift received exceeding 50000 in a previous year by an individual or HUF(xviii) Gift received by a firm in section 56(2)(viia)(xix) Any subsidy , grant , cash incentive /duty drawback from government.
Features of Income
Definite sourceIncome must come from outsideTainted incomeDiversion of income vs. application of incomeTemporary or permanentReimbursement of payment made on behalf of others.Dispute regarding the titleIncome of anassesseemade by devotee
(x) Treatment of Gifts: W.e.f 1-10-2009 these three income are considered to be income under the head other income(a)Monetary Gifts: income exceeding 50000(b)Gift of immovable property- stamp duty(c)Gift of property other than immovable property : (i)without consideration:income – F.M.V of such property(ii)for inadequate consideration:Income – F.M.V. Value- Actual consideration
(xi) Income includes loss(xii) Surplus from mutual activity
Surplus from mutual activity:- Mutual activity refers to an activity or value where contributions are made to common pool by certain people who are entitled to participate or derive benefit from that common pool/fund. The contributors are also entitled to any surplus left in that pool/ fund. Such a surplus cannot be deemed as income unless specifically provided under the Act. For example in the following cases, surplus from mutual activity is treated as income:Income of a trade, professional or similar association by rendering specific services to its membersProfits and Gains derived from any insurance business carried on by a mutual insurance company or a cooperative society.Profits and gains derived from any banking business (including providing credit facilities) carried on by a cooperative society with its members.No double taxation of income:-Unless specifically provided in the Income Tax Act, 1961, an income cannot be put to tax twice in the hands of same person.TAX TREATMENT OF INCOME-For the purposes of treatment of income for tax purposes it can be divided into three categories:Taxable Income:-These incomes form part of total income and are fully taxable. These are treated u/s 14 to 69 of the Act. These are salaries, rent , business profits, professional gain, capital gain, interest , dividend , winnings from lotteries, races etc.
B. Exempted Incomes:- These incomes do not form part of total income either fully or partially. Hence no tax is payable on such incomes. These incomes are given u/s 10(1) to 10(32) of the Act.C.Rebateable(Tax free) Incomes:- These incomes form part of total income and are fully taxable. Tax is calculated on total income out of which a rebate of tax at average rate is allowed. Therebateableincomes given u/s 86 of the Act is:Share of income received by a member of an association of persons provided the total income of such AOP is assessed to tax at the rates applicable to an individual.11. Heads of Income (section 14)Section 14 of Income-tax 1961 provides for the computation of total income of an assesse which is divided under five heads of income. Each head of income has its own method of computation.These five heads are:1.Income from ‘salaries’ ( section 15-17)2.Income from ‘House property’ (section22-27)3. Income from ‘Profits and gains of business or profession’ (section28-44)4.Income from ‘ Capitals Gains’ (section45-55)5.Income from ‘other sources’ (section 56-59)Income from all these heads shall be computed separately according to the provisions given in the Act. Income computed under these heads shall be aggregated after adjusting past and present losses and the total so arrived at is known as ‘Gross Total Income’.Out of Gross Total Income, Income –tax Act 1961 allows certain deductions under section 80. After allowing these deductions the figure which we arrive at is called ‘Total Income’ and on this figure tax liability is computed at the prescribed rates.
12.Gross Total Income (section 80B(5))Section 14 of the Act provides that for the purpose of charge of Income tax and computation of total income, all incomes shall be classified under following five heads of income:Income under the head “salaries”Income under the head “ House Property”Income under the head “profits and gains of business or profession”Income under the head “capitals gains”Income under the head “ Other sources”After aggregating income under various heads ,losses are adjusted and the resultant figure is called “ Gross Total Income”. Gross Total Income may also understood as the total income of an assesse before making any deductionG.T.I.=Salary income + House property Income+ Business or Profession Income+ Capital Gains + Other sources + Clubbing of Income –Set off lossesT.I.= Salary Income13.Total Income ( Section 2(45))Total Income means income remaining after allowing deductions from Gross Total Income.Total Income= Gross Total Income- Deductions
COMPUTATION OF TOTAL INCOME AND TAX LIABILITYTotal IncomeIncome from salariesAmountSalary u/s 17(1)Perquisites including fringe benefits u/s 17(2)Profits in lieu of salary u/s 17(3)Gross salaryDeductions u/s16Entertainment allowance u/s16(ii)Tax on employment u/s16(iii)SALARY INCOMEXXXXXX2.Income from House PropertyAnnual rental valueLess Municipal TaxesNet Annual Taxes
Deductions u/s 24Income from house propertyxxxxx3. Profits and gains of business or professionNet profit as per P&L accountAdd Expenses debited but not allowed under the ActLess Expenses allowed but not debitedLess Incomes credited but not taxable under this headBusiness Profitxxxxx4.Capital GainsShort Term Capital GainLong Term Capital GainIncome Under the head ‘Capital Gains’XXXX5. Income from other sourcesGeneral Incomes u/s 56(1)Specific Incomes u/s56(2)Less: expenses allowed u/s57Income from other sourcesXXXXAdd:Income of other personsGROSS TOTAL INCOMEXXXXX
6. Deductions u/s 80c to 80uxxxxTotal IncomexxxxCOMPUTATION OF TAXTax on short-term capital gain on shares, which are subject to (STT)xxxxxTax on long-term, capital gain on sale of any other assetxxxxxTax on casual incomes such as winnings from lotteries, races,puzzles,etcxxxxxTax on incomes other than given abovexxxxxTaxless:Rebate u/s87A (If total income of an individual does not exceed Rs.500,000Total TaxxxxxxAdd:EducationCess@2% of taxSecondary and higher educationcess@ 1% of taxTotal TaxLess:Relief u/s 86 and 89(1)Balance TaxLess:Prepaid taxes : Tax deducted at sourceAdvance tax paidNet tax payable at the time of filing of return (self assessment tax)xxxxx
Note: Surcharge @12% of tax shall be added if total income of an individual exceedsRs. 1croreRATES OF TAXOn Normal Income:- The rates of tax for the assessment year 2016-2017 are:For Resident Senior Citizens ( Age 60 years or more at any time during P.Y. but less than 80 years on the day of P.Y.)If total income is up toRs. 3,00,000 NILIf total income exceedsRs. 3,00,000but does not exceedRs. 5,00,000 10% of income exceeding Rs.3,00,000If total income exceeds Rs.5,00,000but does not exceedRs. 10,00,000 Rs.20,000 + 20% of income exceeding Rs.5,00,000If total income exceeds Rs.10,00,000Rs. 1,20,000+30% of income exceeding Rs.10,00,0002.For Resident Super Senior Citizens (Age 80 years or more at any time during the P.Y. )If total income is up toRs. 5,00,000 NILIf total income exceedsRs. 5,00,000but does not exceedRs. 10,00,000 20% of income exceedingRs. 5,00,000
If total income exceedsRs. 10,00,000Rs. 1,00,000 + 30% of income exceeding Rs.10,00,0003. For any other Individual ( Male or Female) ,HUF , AOP, BOI andArtificalJuridical personIf total income is up toRs. 2,50,000 NilIf total income exceedsRs. 2,50,000but does not exceedRs. 5,00,000 10% of income exceedingRs. 2,50,000If total income exceedsRs. 5,00,000but does not exceedRs. 10,00,000 Rs.25,000+ 20% of income exceeding Rs.5,00,000If total income exceedsRs. 10,00,000 Rs.1,25,000+30% of income exceeding Rs.10,00,000(B) On special IncomesFor short term capital gain on shares which are subject to STT 15%For long term capital gains 20%For casual incomes ( lotteries , races , puzzles etc.) 30%Surcharge:-Surcharge @ 12% of tax shall be added in those cases where total income of the assesse exceedsRs. 1croreEducationCess:-It is to be levied @ 2% of tax plus Secondary and Higher educationcess@ 1% of tax for all persons irrespective of income.
Assessment Year [Section 2(9)]
“ASSESSMENT YEAR” means the period of 12 months commencing on the 1stday of April every year.In INDIA period of 12 monthsi.e.1stApril to 31stmarch . As such it is known as financial year .TheAssessment Yearis the Financial Year of the Govt. of India during which income a person relating to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act, files Return of Income by prescribed dates. These Returns are processed by the Income Tax Department Officials and Officers. This processing is called Assessment. Under this Income Returned by theassesseeis checked and verified.Tax is calculated and compared with the amount paid and assessment order is issued. The year in which whole of this process is under taken is called Assessment Year.Example-Assessment year 2008-09 which will commence on April 1, 2010, will end on March 31, 2011.
Previous Year : [Sec.2(34)r.w. sect3]
As the word ‘Previous’ means ‘coming before’ , hence it can be simply said that the Previous Year is the Financial Year preceding the Assessment Year e.g. for Assessment Year 2008-2009 the Previous Year should be the Financial Year ending 31stMarch 2008.Previous Year in case of a continuing Business :It is the Financial Year preceding the Assessment Year. As such for the assessment year 2008-2009, the Previous Year for continuing business is 2007-2008 i.e. 1-4-2007 to 31-3-2008.Previous Year in case of newly set up Business :The Previous Year in case of newly started business shall be the period between commencement of business and 31stMarch next following . e.g. in case of a newly started business commencing its operations onDiwali2007, the Previous Year in relation to Assessment Year 2008-2009. shall be the period betweenDiwali2007 to 31 March 2008.Previous Year in case of newly created source of income :In such case the Previous Year shall be the period between the day on which such source comes existence and 31stMarch next following.
1: Shipping business of non resident (U/S.172 )If all the following conditions are satisfied than section 172 is applicableAssesseeis non residentHe owns a ship or ship is chartered by himThe ship carries passenger, live stock, mail or goods and all are shipped at port in IndiaThe non residentassesseemay or may not have an agent or representative in India.Deemed incomeIf all of the above conditions are satisfied than7.5 % of amount received or receivable by non resident, towards fright, fare, demur-rage charges, handling charges etc.. , shall be deemed to be the income of non resident.Person responsible for filling of return and payment of taxes:Master of the shipshall pay tax on the deemed income (i.e, 7.5 %) and file the return of income before the departure of the ship from the Indian Port.However, If assessing officer is satisfied that it will be difficult to submit the return before departure and if satisfactory arrangement have been made for payment of tax amount than such return may be filed within 30 days from the date of departure of the Ship.Thus income is taxable in the same year in which fright fare etc. is collected and not in the immediately following year.
2. Personliving India and he/she has no present intention of returning to India(u/s.174).3.Association of person or body of individual, formed or established for a particular event and purpose and likely to be dissolved in the same year in which the same was established.(u/s.174A)4.Person likely to transfer property to avoid tax(u/s.175)5.Discontinued Business(u/s 176)