INTRODUCTION TO TAX

MBA 2nd Year

DEFINITION OF TAX

 Tax is a mandatory financial charge imposed by the government on individuals,

businesses, or other entities to generate revenue for public purposes.
 In India, taxation refers to the system by which the government collects revenue
from individuals, businesses, and other entities to finance its operations and
provide public services like infrastructure, education, healthcare, and defense.
Taxes are levied as per the Constitution of India, which grants the Central and
State governments the authority to impose and collect taxes.
 In India, taxes are categorized into two types:
• Direct Taxes: Paid directly by individuals or organizations to the government
(e.g., Income Tax, Corporate Tax).
• Indirect Taxes: Collected by intermediaries and passed on to the government
(e.g., GST).
CANNONS OF TAXATION

Adam Smith proposed four key principles of taxation, known as the cannons of
taxation:
1.Canon of Equity (fairness): Taxes should be levied based on the taxpayer's ability to
pay.
 The progressive tax structure of Income Tax in India ensures that those with higher incomes
pay a higher percentage in taxes.
 Tax exemptions and deductions (e.g., Section 80C of the Income Tax Act) aim to reduce the tax
burden on the economically weaker sections.

2. Canon of Certainty: The taxpayer should clearly know when, where, and how much tax
needs to be paid.
 The introduction of GST has streamlined indirect taxation, offering clarity on tax rates for
goods and services.
 E-filing and pre-filled Income Tax forms enhance transparency and predictability.
 3. Canon of Convenience: The tax collection system should be convenient for the
taxpayer.
 Online portals like the Income Tax Department's e-filing website and the GST Network
(GSTN) make tax filing easier and more accessible.
 Taxes like TDS (Tax Deducted at Source) simplify compliance for salaried individuals.
4. Canon of Economy: The cost of collecting tax should be minimal compared to the
revenue generated.
 Automation in tax filing and payment reduces administrative costs.
 Simplified tax structures like GST reduce compliance costs for businesses and the government.

In India, the Income Tax Act, 1961, ensures these principles are adhered to.
MODERN ADDITION TO THE PRINCIPLES

5. Canon of Simplicity: The tax system should be simple and easy to understand.
 GST replaced a complex web of indirect taxes with a unified tax system.
 The New Tax Regime (introduced in FY 2020-21) provides simpler income tax slabs
with fewer exemptions.
6. Canon of Flexibility: The tax system should adapt to changing economic and
social needs.
 During the COVID-19 pandemic, the government announced tax relief measures like
extended deadlines and reduced TDS rates.
 Tax reforms, like the introduction of Faceless Assessment in direct taxes, demonstrate
adaptability.
7. Canon of Productivity: Taxes should generate sufficient revenue for the
government.
 Broadening the tax base through measures like Aadhaar-PAN linkage and increased
compliance monitoring via GST.
 Taxes on sectors like technology, luxury goods, and digital services boost government
revenue.

8. Canon of Neutrality: Taxes should not distort resource allocation or economic

activities.
 GST aims to eliminate cascading taxes, ensuring fair competition across industries.
 Tax incentives for sectors like renewable energy and affordable housing aim to drive
growth without undue burden on taxpayers.
UNIQUE PRINCIPLES IN INDIAN CONTEXT

1. Social Justice : Taxes are used to promote social welfare, with schemes like PM
Kisan Samman Nidhi and subsidies for education and healthcare funded
through taxation.
2. Ease of Compliance : Initiatives like Vivad se Vishwas Scheme encourage
settlement of tax disputes to reduce litigation and ensure ease of doing
business.
3. Regional Balance : Specific tax holidays for industries in backward regions aim
to promote equitable development.
ASSESSEE

 An assessee is any person who is liable to pay tax, interest, or penalties under the Income
Tax Act.
 In the Indian context, an "assessee" refers to a person or entity that is subject to
assessment under the provisions of the Income Tax Act, 1961, or other taxation laws. The
term broadly covers all individuals, businesses, or entities liable to pay taxes, fulfill tax-
related obligations, or face proceedings under the law.
 The term "assessee" is defined under Section 2(7) of the Income Tax Act, 1961, and it
includes the following categories:
 Normal/Ordinary Assessee: Regular taxpayers.
 Deemed Assessee: Persons liable for taxes on behalf of others (e.g., legal heirs).
 Representative Assessee: Persons representing others for taxation purposes (e.g., guardians,
trustees).
 Assessee in Deafult: A person who fails to meet certain obligations under the law, such as an
employer who fails to deduct TDS from an employee's salary is considered an assessee in
default.
NORMAL/ORDINARY ASSESSEE

 A person who is required to pay taxes or file a return of income under the Income
Tax Act.
 Examples:
 Salaried individuals filing Income Tax Returns (ITR).
 Businesses or corporations paying corporate taxes.
 Entities registered under the Goods and Services Tax (GST).
DEEMED ASSESSEE

 A person who is not directly liable but is treated as an assessee under the law.
 Examples
 A legal heir filing income tax returns on behalf of a deceased person.
 A guardian or trustee responsible for managing the income of a minor or a mentally
incapacitated person.
 A receiver or liquidator handling the tax obligations of an insolvent entity.
SCOPE OF AN ASSESSEE

 An assessee includes all entities liable to taxation or under legal scrutiny for
financial compliance:
1. Individuals : A single person earning income through salaries, business, or other
sources.
2. Hindu Undivided Families (HUF) : A family earning income as a single unit.
3. Companies : Corporate entities registered under the Companies Act, 2013.
4. Firms/Partnership : Partnerships or LLPs earning business income.
5. Associations of Persons (AOPs) or Body of Individuals (BOIs): Groups earning income
jointly.
6. Local/Government authorities : Government bodies liable for taxation under specific
circumstances.
7. Artificial judicial persons : Charitable or religious trusts liable for compliance with tax
laws, societies etc
RESPONSIBILITIES OF AN ASSESSEE

 Filing Tax Returns: Submitting accurate income details annually.

 Payment of Taxes: Ensuring timely payment of taxes, including advance tax and self-
assessment tax.
 Maintenance of Records: Keeping books of accounts and other documentation as per legal
requirements.
 Compliance with Notices: Responding to notices or scrutiny assessments by the Income
Tax Department
 Examples of assessee:
 A salaried individual earning more than ₹2,50,000 per annum and filing ITR.
 A small business owner with an annual turnover exceeding ₹40 lakhs, liable to GST.
 A company filing returns under Corporate Tax provisions.
 A parent managing the income of their minor child (deemed assessee).
 A person managing a deceased individual's property income until its transfer to legal heirs.
INCOME HEADS

Income includes all earnings in cash or kind, received or accrued during a financial
year, and is taxable under five heads:
1.Income from Salary
2.Income from House Property
3.Profits and Gains from Business or Profession
4.Capital Gains
5.Income from Other Sources
PREVIOUS YEAR & ASSESSMENT YEAR

 Previous Year (PY): The financial year in which income is earned. In India, it runs
from 1st April to 31st March.
 Assessment Year (AY): The financial year following the previous year, in which the
income of the previous year is assessed and taxed.
 The Assessment Year always comes immediately after the Previous Year.
 Income Tax Returns (ITRs) are filed in the Assessment Year for income earned
during the Previous Year.
 DIFFERENCE

Aspect Previous Year Assessment Year

Definition The financial year immediately following
The financial year in which the income is the Previous Year in which the income is
earned by the taxpayer. assessed and taxed by the Income Tax
Department.
Purpose Refers to the year in which income is Refers to the year in which income earned
generated or accrued. during the previous year is assessed for tax
liability.
Timeline Also runs from 1st April to 31st March, but
Runs from 1st April to 31st March of the it is the year immediately following the
following year. previous year.
Income Relationship Income earned during this period is taxable Income of the Previous Year is assessed and
in the Assessment Year. taxed in this year.
Relevance Tax payer maintain records of income Government assesses and collects tax
INCOME TAX IMPORTANT DATES AND
FORMS
 Important Dates
 31st July: Due date for filing income tax returns for individuals (not requiring
audit).
 30th September: Due date for taxpayers requiring audit.
 15th March: Advance tax final installment due date.
FORMS

 Form 16: Issued by employers as proof of TDS on salaries.

 Form 26AS: Annual tax statement showing taxes paid and TDS details.
 ITR Forms: Various forms for filing income tax returns based on income type (e.g.,
ITR-1 for salaried individuals).
Form Primary Use
ITR-1 Simplified filing for salaried individuals with basic income sources.
ITR-2 For individuals with income from capital gains or foreign assets.
ITR-3 For business/professional income.
ITR-4 Presumptive taxation for small businesses or professionals.
ITR-5 For partnerships, LLPs, and other entities.
ITR-6 For companies other than those claiming tax exemptions.
ITR-7 For trusts, political parties, or specific institutions.
RESIDENTIAL STATUS & TAX INCIDENCE

 Residential Status
 Residential status determines the scope of taxable income in India. It is classified
into:
 Resident (ROR): Lived in India for 182+ days in the financial year or fulfills specific
conditions.
 Non-Resident (NR): Does not meet the conditions for residency.
 Resident but Not Ordinarily Resident (RNOR): Recently moved back to India,
with limited taxable scope.
TYPES OF INCOME TYPICALLY EXEMPTED FROM TAXATION

 Incomes are exempted from taxation in India to achieve specific social, economic, and
administrative objectives. These exemptions are provided under the Income Tax Act, 1961 are as
follow:
 Income derived from agricultural operations in India is exempt under Section 10(1).

 Dividends from domestic companies are exempt up to ₹10 lakh under Section 10(34).

 Gifts received from specified relatives or on occasions such as marriage are exempt under Section
56(2).

 Gains on the sale of listed securities are exempt up to ₹1 lakh under Section 112A.

 Amounts received from the Public Provident Fund (PPF) or statutory provident fund are fully
exempt under Section 10(11).
 Gratuity received by government employees is fully exempt, while for private-sector employees, it is
exempt up to ₹20 lakh under Section 10(10).

 Leave encashment for government employees is fully exempt. For non-government employees:
Exempt up to certain limits under Section 10(10AA).

 Scholarships for education are exempt under Section 10(16).

 Income of institutions registered under Section 12A or 12AB is exempt if applied to charitable or
religious purposes.

 Interest on specific tax-free bonds issued by government entities is exempt under Section 10(15).

 Amounts received on partition of a Hindu Undivided Family (HUF) are exempt.

 Amounts received under life insurance policies are exempt under Section 10(10D), provided the
premium does not exceed 10% of the sum assured.