Tax is the mandatory financial charge demand by the government on pay, product, administrations, exercises or exchange. Taxes are the fundamental modes of income for the government, which are used for the welfare of the general population of the nation through government strategies, arrangements, and practices.
Need for Income Tax in India
Income tax is a tax on the income of an individual or an entity. Income tax is the main source of income for the government to carry out its functions. The jobs of government are not just restricted to defense, law, and order, etc., but it also has to undertake activities like welfare and development under sectors of health, education, rural development, etc. the government also has to pay for its own administration. All of these activities need huge public finance which is raised by the collection of taxes.
Purpose of Taxation
- The money spent on the development of roads, schools, and hospitals, market regulations or legal systems, etc. is raised by the revenue generated by the collection of taxes
- Redistribution of resources by the richer section to the poorer section of the society.
- Taxes are levied on certain products to eliminate externalities such as the taxes on tobacco to discourage smoking
Taxes are broadly divided into two categories- Direct and Indirect taxes.
Income tax is a direct tax imposed on an individual. Estate and wealth tax were also direct taxes, however, these are abolished now
Indirect taxes that were imposed in India are customs duty, central excise duty, service tax, sales tax, and value-added tax.
As of now GST has been implemented and has made all the other indirect taxes obsolete.
Important Terms and Definitions under the Income Tax Act, 1961
Assessment year and previous year
As per Section 2(9) of the Income Tax Act, 1961, states that assessment year means the 12 month period beginning on the 1st day of April every year. The assessee is required to file the income tax return of the previous year in the assessment year. As per S.2 (34) of Income Tax Act, 1961, unless the context otherwise requires, the term “previous year” means the previous year as defined in section 3.
As per Section.3 of Income Tax Act, 1961, the term “previous year” means the financial year immediately preceding the assessment year
Say, for example, the year starting from 1st April 2018 and ending on 31st March 2019 is the assessment year 2018-19, the previous year would be 2017-18. The rates of assessment year are taken into consideration.
Who is a person under income tax?
A person is defined under section 2(31) of the act. The term ‘person’ includes –
- An individual.
- A Hindu Undivided Family.
- A Company.
- A Firm.
- An association of persons or body of individuals whether incorporated or not;
- A local authority; and
- Every artificial judicial; person not falling within any of the preceding
Who is an Assessee?
Any individual who has income earned or losses incurred, and is liable to pay taxes on these to the government in a particular assessment year, is an assessee.
Categories of the assessee –
1. Normal Assessee
- a person against whom proceedings are going on under the Income Tax Act, despite the fact that any tax or other amount is payable by him or not;
- a person who has undergone loss and filed a return of loss u/s 139(3);
- a person by whom some amount of interest or tax or penalty is payable under the income tax Act;
- Any person who is entitled to refund of tax under this Act.
2. Representative Assessee
- A person may not be liable for his own income or loss but he might also be liable for the income or loss of other persons say for example agent of a non-resident, guardian of a minor or a lunatic person, etc. In such cases, the person responsible for the assessment of the income of such a person is called representative assessee. Such a person is deemed to be an assessee.
3. Deemed Assessee
- In the case of a deceased person who has died after writing down his will, the administrators of the property of the deceased are deemed as assessee.
- In case if a person dies intestate (without writing down his will) the eldest son or other legal heirs of the deceased person are deemed as assessee.
- In case a minor, lunatic or an idiot person has income taxable under the Income Tax Act, their guardian is deemed to be an assessee.
- In case a non-resident has income in India, any person acting on his behalf is deemed as an assessee.
- A person is deemed as an assessee-in-default if he fails to fulfill his statutory obligations. In case an employer is paying a salary or a person who is paying interest, it is their duty to deduct TDS and deposit the amount of tax so collected in Government treasury. If he fails to deduct TDS or deducts tax but does not deposit it in the treasury, he is known as assessee-in-default.
Concept of income
The Income Tax Act does not define the term Income but section 2 (24) of the Act describes the various receipts which are included under the ambit of income.
- Profits and gains.
- Voluntary contributions received by a charitable trusts
- The value of any perquisite or profit in lieu of salary.
- Any capital gains.
- Any winnings from lotteries,
- Crossword puzzles etc.
- Section 4 of the Income-Tax Act, 1961 is the Charging section of the Act
Accordingly, the section provides that:
- The rates are prescribed under the finance act of every assessment year. Income tax for the previous year is to be charged according to the given rates.
- The taxable income is that of the previous year not the assessment year
- The total income, computed according to the provisions of the act, is leviable
- Tds or advance tax wherever applicable is to be charged
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