Class Notes on Taxation – Unit I
Concept of Tax
Definition:
- Tax: A compulsory financial charge imposed by the government on individuals, businesses, or other entities to fund government spending and public services.
Nature and Characteristics of Taxes:
- Compulsory Payment: Taxes are not voluntary contributions; they are enforced by law.
- Non-Refundable: Taxes are not returned to the taxpayer except under specific conditions.
- Revenue Generation: The primary purpose is to generate revenue for the government.
- Legislative Basis: Taxes are levied and collected based on legislation enacted by the government.
- General Benefit: Taxes are used to provide public goods and services that benefit society as a whole.
Examples:
- Income Tax: Levied on individual and corporate income.
- Sales Tax/VAT: Imposed on the sale of goods and services.
Distinction Between Tax, Fee, and Cess
Tax:
- Purpose: Revenue generation for general public expenditure.
- Characteristics: Compulsory, general application, not directly related to any specific benefit.
Fee:
- Purpose: Compensation for specific services rendered or regulatory activities.
- Characteristics: Typically paid for a specific service or benefit (e.g., application fee, examination fee).
- Example: Fees paid for licensing, registration, or permits.
Cess:
- Purpose: Additional levy for a specific purpose or project.
- Characteristics: Imposed over and above the regular taxes, usually for a designated purpose (e.g., education cess, health cess).
- Example: Education cess on income tax to fund educational initiatives.
Direct and Indirect Taxes
Direct Taxes:
- Definition: Taxes that are directly levied on the income or wealth of individuals and entities.
- Examples:
- Income Tax: On the income of individuals, companies, etc.
- Wealth Tax: On the wealth owned by individuals and entities (repealed in India but was once applicable).
Indirect Taxes:
- Definition: Taxes that are levied on goods and services rather than on income or wealth. They are collected by intermediaries from the person who ultimately bears the economic burden of the tax.
- Examples:
- Goods and Services Tax (GST): Applied on the sale of goods and services.
- Excise Duty: On the manufacture of goods within the country.
Tax Evasion and Tax Avoidance
Tax Evasion:
- Definition: The illegal practice of not paying taxes owed by underreporting income, inflating deductions, or hiding money in offshore accounts.
- Characteristics:
- Illegal: Breaking tax laws and regulations.
- Penalties: Results in legal penalties and interest charges.
- Example: Underreporting income or using fake documents to claim deductions.
Tax Avoidance:
- Definition: The legal practice of arranging one’s financial affairs in such a way as to minimize tax liability within the bounds of the law.
- Characteristics:
- Legal: Exploiting loopholes or provisions in the tax law.
- Strategies: Utilizing exemptions, deductions, and allowances.
- Example: Investing in tax-saving instruments like PPF or claiming deductions for charitable donations.
Scope of Taxing Powers
Parliament, State Legislatures, and Local Bodies:
- Parliament: Has the power to levy taxes on income, customs duties, and excise duties on certain goods. Also has authority over central indirect taxes such as GST.
- State Legislatures: Can levy taxes on items such as land, property, state sales tax (now part of GST), and agricultural income.
- Local Bodies: Municipalities and panchayats can levy property taxes and user charges for local services.
The Income Tax Act, 1961
Basis of Taxation of Income:
- Concept: Income is assessed based on the financial year (April 1 to March 31). Taxable income is categorized into various heads, and tax is computed accordingly.
Incomes Exempted from Tax:
- Examples:
- Agricultural Income: Generally exempt from tax.
- Certain Allowances: House Rent Allowance (HRA) and other specific exemptions under certain conditions.
- Income from Specific Investments: Investments in specified savings schemes.
Income from Salaries:
- Components:
- Basic Salary: Fixed component.
- Allowances: HRA, Conveyance Allowance, etc.
- Perquisites: Benefits like accommodation, car, etc.
- Deductions: Professional Tax, Employee Provident Fund (EPF) contributions.
Income from House Property:
- Types:
- Self-Occupied Property: Taxable under certain conditions with deductions for interest on housing loans.
- Rented Property: Rental income is taxable after deducting municipal taxes and standard deductions.
Income from Business or Profession:
- Components: Profit or loss from business operations, professional fees, etc.
- Deductions: Business expenses, depreciation, etc.
- Assessment: Based on the accounts maintained and provisions of the Act.
Income from Other Sources:
- Includes:
- Interest Income: From savings accounts, fixed deposits, etc.
- Dividend Income: From investments in shares.
- Rental Income: From properties not covered under house property.
Taxation of Different Entities:
- Individuals: Tax based on income slabs and deductions available.
- Hindu Undivided Family (HUF): Similar to individuals but considers the family as a separate entity.
- Firms: Partnership firms are taxed separately; profits are taxed as per the applicable slab rates.
- Association of Persons (AOP)/Body of Individuals (BOI): Taxed similarly to individuals based on the nature of income.
- Co-operative Societies: Taxed at a specific rate with various exemptions and deductions.
- Non-Residents: Taxed on income earned in India, with provisions for tax treaties affecting taxation.
Case Example: CIT v. N.R. Porwal & Co. [2008] 2 SCC 735 – Discussed the principles related to taxation of income from business and profession.
