Definitions and Basic Concepts of Income Tax

Tax is the compulsory financial charge levy by the government on income, commodity, services, activities or transaction. The word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the basic source of revenue for the government, which are utilized for the welfare of the people of the country through government policies, provisions and practices.

The Income Tax law in India consists of the following components;

• Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in India.
• Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks after the administration of Direct Tax. The CBDT is empowered to make rules for carrying out the purpose of this Act.
• Finance Act: Every year Finance Minister of Government of India presents the budget to the parliament. Once the finance bill is approved by the parliament and get the clearance from President of India, it became the Finance Act.
• Circulars and Notifications: Sometimes the provisions of an act may need clarification and that clarification usually in a form of circulars and notifications which has been issued by the CBDT from time to time. It includes clarifying the doubts regarding the scope and meaning of the provisions.

Every statute gains sanction from the law of land, i.e.,the Constitution of India. Similarly, the government is authorised by the Constitution to collect the taxes. According to Article 265 of the Constitution of India, no tax shall be levied or collected except by authority of law.[1] Thus, the tax levied and collected must be within the competency of authority authorised by the legislature.

Entry 82 of List I of Seventh Schedule of the Constitution of India confer power on Parliament to levy taxes on income other than agricultural income. Thus, Income Tax is under the Union list and henceforth Central Government is authorised and responsible for the collection of income tax.

The Central Government enjoys the power to collect taxes on income except for the tax on agricultural income, which is being enjoyed by the State Government. Entry 46 of List II of Seventh Schedule of the Constitution of India provides that the State Government has the power to collect taxes on agricultural income.

“Income Tax is levied on the total income of the previous year of every person”. To understand the basic concept.It is very important to know the various other concepts.

Concept of Income

In common parlance, Income is known as a regular periodic return to a person from his activities. However, the Income has broader classified in Income Tax law. The Income Tax Act, even take consideration of income which has not arisen regularly and periodically. For instance, winning from lotteries, crossword puzzles, income from winning of shows is also subject to tax as per income tax.

The word “Person” is a very wide term and embraces in itself the following:

• Individual: It refers to a natural human being whether Male or Female, Minor or Major.
• Hindu Undivided Family (HUF): It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “Karta” and its member are called ‘Coparceners’.
• Company: It is an artificial person registered under Indian Companies Act 1956 or any other Law.
• Firm: It is an entity which comes into existence as a result of partnership agreement. The Income Tax accepts only these entities as Firms which are accessed as Firms under Section 184 of the Act.
• Association of Persons (AOP) or Body of Individuals (BOI): Co-operative societies, MARKFED, NAFED, etc are the example of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and individuals as its members. A Body of Individual ( B.O.I.) cannot have non-individuals as its members. Only natural human being can be members of a Body of Individuals.
• Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.
• Artificial Judicial Person: Statutory Corporations like Life Insurance Corporation, a University etc. are called Artificial Judicial Persons.

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.

List 1

• Entry 82: Tax on Income other than the agriculture income.
• Entry 83: Duties of customs including the export duties.
• Entry 84: Duties of excise on tobacco and other goods manufactured or produced in India except for alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.
• Entry 85: Corporation tax
• Entry 92A: Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of interstate trade or commerce.
• Entry 92B: Taxes on consignment of the goods where such consignment takes place during Inter-State trade or commerce.
• Entry 92C: Taxes on services
• Entry 97: Any other matter which is not included in List II, List III and any tax not mentioned in List II or List III.

List 2

• Entry 46: Taxes on agricultural income.
• Entry 51: Excise duty on all alcoholic liquors, opium and narcotics.
• Entry 52: Tax on entry of the goods into a local area for consumption, use or sale therein (usually termed as Octroi or Entry Tax).
• Entry 54: Tax on sale or purchase of goods other than newspapers except for tax on interstate sale or purchase.
• Entry 55: Tax on advertisements except advertisements in newspapers.
• Entry 56: Tax on goods and passengers that are carried by road transport or inland waterways.
• Entry 59: Tax on professionals, trades, callings, and employment.