Basic concepts of Tax

₹
Dr. P. Ravichandran
M.Com., M.B.A., M.A (Astrology)., M.Phil., Ph.D.,
D.C.P., D.L.L & A.L., P.G.D.C.A., P.G.D.P.M & I.R.,
S.B.K. College, Aruppukottai – 626101.
 9443424090 & 9080030090
 e-mail id.- prcapk@gmail.com

A fee charged (“levied”) by a Government on –
 income,
 product (or)
 activity.

Types of Taxes
Direct
Tax
Indirect
Tax

TYPES OF TAXES
Direct Taxes
(Governed by
CBDT)
Indirect Taxes
(Governed by
CBIC)
Imposed on
persons
Imposed on
Goods & Services
Paid directly to the
Government
Paid to the Government
via third person

If tax is levied directly on the income (or)
wealth of a person, then it is a direct tax.
 e.g. Income-tax, Wealth tax.
If tax is levied on the price of a good (or)
service, then it is called an indirect tax.
 e.g. Excise duty, Customs duty, Service
tax and Sales tax (or) Value Added Tax.

 Tax – is a payment made to the Government
of a country without any return.
 Duty – is a levy on goods.
 Cess – is a tax levied for a specific purpose.
 Surcharge – is an additional tax burden to
those, whose income exceeds the specified
limit.
 Income tax – a levy on the income earned.
‘Levy’ is not a tax – it means ‘the act of
charging the tax’.
Tax – Duty – Cess - Surcharge

DUTY
This is an on-border tax charged on goods
(commodities (or) things that you can
physically touch) either while coming into
the country (or) going out of the country.
Generally, a percentage of the value of the
goods.
 The duty that is levied for goods
manufactured inside the country is called
as excise duty.
 Duty that is levied on goods imported from a
foreign country is called as customs duty.

DUTY vs TAX
Duty is a levy on goods.
 Pay the tax first and the take the goods.
 (Prior payment).
 Ex: Excise duty, Customs duty.
Tax is levy on other than goods.
 (No prior payment).
 Ex: Income tax, Sales tax, Service tax.

SURCHARGE
This is an additional burden to the tax
being already levied.
Generally, surcharge is levied for a certain
period of time.
 For instance, the surcharge being levied on
super rich in India.
 At present surcharge is levied –
@ 10% if total income exceeds ₹ 50 lakhs
@ 15% if total income exceeds ₹ 1 Crore.

CESS
This is a tax on tax, levied by the Govt.
for a specific purpose.
 Generally, cess is expected to be levied
till the time the Govt. gets enough
money for that purpose.
 The Education Cess @ 3%, is levied
currently, is meant to finance basic
education in the country.

WHY ARE TAXES LEVIED?
 The reason for levy of taxes is that they
constitute the basic source of revenue to
the government.
 Revenue so raised is utilised for meeting the
expenses of government like defence,
provision of education, health-care,
infrastructure facilities like roads, dams,
public lightings, drainage etc.
 The act of levying taxes is called taxation.

 The persons who are taxed have to pay the
taxes irrespective of any corresponding
return from the goods (or) services by the
government.
 The taxes may be imposed on the income
and wealth of persons (or) corporations
and the rate of taxes may vary.
 i.e., The categories into which we can place
direct and indirect taxes are called
taxation.
Taxation

 Inflation is taxation without legislation.
– Milton Friedman
Inflation is often called “the invisible tax”,
which is hardest on the poor, elderly,
savers, low-income workers, and fixed-
income retirees.
– Robert Kiyosaki.

Direct Tax Indirect Tax = GST
(Except customs)
IGST
Taxation System
Intra-State
Supplies
Inter-State
Supplies

Progressive
Taxation
Regressive
Taxation
Proportional
Taxation
Positive change in the
marginal rate of tax
Negative change in the
No change in the
Types of Taxation
Income Income IncomeTax rate Tax rate Tax rate

 A tax is called digressive when the rate of
progression in taxation does not increase in the
same proportion as the increase in income.
 In this case, the rate of tax increases upto a certain
limit, after that a uniform rate is charged.
 Digressive tax is a combination of progressive and
proportional taxation.
 This type of taxation is often used in case of income
tax.
 This is the case of income tax in India.
Digressive Taxation

INCOME TAX
You earn it
&
The Government
takes a part (a big part) of it.

Income tax was first introduced in India in
1860 by the British ruler James Wilson
(who become the 1st India’s Finance
Member), in order to meet heavy expenses
and losses suffered by the rulers due to
India’s first freedom movement of 1857.
 At present, the Income Tax Act 1961 is force
in India. The present Income Tax Act was
enacted in 1961, which came into force on
1st April 1962.
 This Act of 1961 has since been amended
number of times.

What is Income Tax?
 It is a tax on Income.
 It is revenue for government &
indicates outflow of cash for a
person who is liable to pay the tax.
 Income-tax is a tax levied on the
total income of the previous year of
every person.

Income-tax Act, 1961
The Act determines which persons are liable
to pay tax and in respect of which
income.
The sections lay down the law of income tax
and the schedules lay down certain
procedures and give certain lists, which
are referred to in the sections.
However, the Act does not prescribe the rates
of Income Tax.
The rates of Income-tax are prescribed every
year by the Finance Act (popularly
known as “The Budget”).

The Finance Act
 Every year, the Finance Minister of the
Government of India presents the Budget to the
Parliament.
 Part A of the budget speech contains the proposed
policies of the Government in fiscal areas.
 Part B of the budget speech contains the detailed
tax proposals.
 In order to implement the above 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,
it becomes the Finance Act.

Income-tax Rules, 1962
 The administration of direct taxes is looked after by
the Central Board of Direct Taxes (CBDT).
 The CBDT is empowered to make 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.
 To amend the Act, an amendment Bill has to be
passed in the Parliament.
 In case of a conflict between the Act and the Rules,
the provisions of the Act shall prevail.

Circulars and Notifications
Circulars are issued by the CBDT from time
to time to deal with 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.

Case Laws and Doctrine of Precedents
 Case Laws are the decisions of the various Income-
tax Appellate Tribunals (ITAT) and the High
Courts (HC) and the Supreme Court (SC).
 Decisions of the SC are binding on all lower Courts
and tax authorities in India.
 HC decisions are binding only in the states which are
within the jurisdiction of that particular High
Court.
 Decisions of one HC has persuasive powers over other
HCs when deciding similar issues.
 ITAT can be a Single Member Bench (SMC) (or) a
two member bench (or) a Special Bench (or) a
Third Member Bench.

Definitions
 Section 2 gives definitions of various
terms referred to in the Act.
 Definitions can be inclusive definitions
(or) exclusive definitions.
Definition of one term may lead to the
definition of another term.

 Some of the important definitions
contained in the Act are of:
 Person;
 Assessee;
 Assessment Year;
 Previous Year;
 Assessment;
 Income;
 Dividend.

Important Terms
 Income
 Assessee
 Assessment Year (A.Y. 2018-19)
 Previous Year (P.Y. 2017-18)
 Residential Status
 Gross Total Income
Deductions
 Total Income

Income means some monetary returns
periodically received from some definite
sources.
 i.e., it is an earning (or) continuing income
from the business (or) from a definite
source.
 It includes –
 Incomes in cash;
 Incomes in kind;
 Gifts.
Income- Sec.2(24)

According to sec. 2(7) assessee means:
A person liable to pay any tax (or) any other
sum of money under this Act.
Every person :
1. who is assessable in respect of income
(or) loss of another person, (or)
2. who is deemed to be an assessee, (or)
3. who is deemed to be assessee in default.
Assessee

PERSON : Sec. 2(31)
 According to law an assessee is a person by whom
any tax is payable.
Person includes -
 An individual;
 A firm;
 A HUF;
 A company;
 An Association of Persons (AOP) (or)
Body of Individuals (BOI);
 A local authority;
 Any artificial and juridical person not
included in the above category.

 Residential status of a person decides
income tax liability.
 Previous year is the year in which the
income is earned.
Assessment year is the year in which the
income is taxed.
 AY consist of 12 months which
commences on the 1st day of April
immediately after the previous year.
Income Tax liability of a
person

ASSESSMENT
 It is a process of determining the
correctness of income of an assessee
and of assessing the amount of tax
payable by him and procedure for
imposing tax liability.

 This means the year commencing on the
1st day of April every year and ending
on 31st march of the next year.
 The current Assessment Year is 2018-19.
Assessment year [Sec.2(9)]
Previous year [Sec.3]
 Previous year means the financial year
immediately preceding the assessment year.
 The current Previous Year is 2017-18.

Previous Year and Assessment Year
Assessment
Year 2018 -19
1 / 4 / 2017 31 / 3 / 2018
1 / 4 / 2018 31 / 3 / 2019
 The year in which the income is earned is known as
Previous Year (PY) and
 The year in which the income earned is taxed is called
AY.
 i.e., Income earned in the PY is taxed in the AY.
Previous Year
2017-18

Previous Year
2017-18
Assessment Year
2018-19
10 / 10 / 2017 31 / 3 / 2018
1 / 4 / 2018 31 / 3 / 2019
 PY in the case of newly started business –
 In case of a newly set up business during a financial
year, the previous year shall be the period beginning
with the date of such setting up and ending with the
said financial year. i.e., the immediately following
March 31st.
 Date of starting the business is 10-10-2017

Total Income and Tax Payable
 Income-tax is levied on an assessee’s total income. Such total
income has to be computed as per the provisions contained in
the Income-tax Act, 1961. The step by step procedure of
computation of total income for the purpose of levy of income-tax.
 Step 1 Determination of residential status;
 Step 2 Classification of income under different heads;
 Step 3 Exclusion of income not chargeable to tax;
 Step 4 Computation of income under each head;
 Step 5 Clubbing of income of spouse, minor child etc.;
 Step 6 Set-off (or) carry forward and set-off of losses;
 Step 7 Computation of Gross Total Income;
 Step 8 Deductions from Gross Total Income;
 Step 9 Total income;
 Step 10 Application of the rates of tax on the total income;
 Step 11 Surcharge;
 Step 12 Education cess and secondary and higher education cess;
 Step 13 Advance tax and tax deducted at source.

Basic concepts of Tax

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