Meaning of Tax

Taxation is the primary source of revenue to the Government for incurring such public welfare
expenditure. In other words, the Government is taking taxes from the public on its one hand, and on
another hand; it incurs welfare expenditure for the public at large. However, no one enjoys handing
over his hard-earned money to the government to pay taxes. Taxes are compulsory or enforced
contributions to the Government revenue by the public. The government may levy taxes on income,
business profits, or wealth or add it to the cost of some goods, services, and transactions.

Types of Tax
There are two types of taxes: Direct Tax and Indirect Tax

Tax, of which incidence and impact fall on the same person, is known as Direct Tax, such as Income
Tax.

On the other hand, tax, of which incidence and impact fall on two different persons, is known as
Indirect Tax, such as GST, etc.

It means, in the case of Direct Tax, tax is recovered directly from the assessee, who ultimately bears
such taxes,

whereas in the case of Indirect Tax, tax is recovered from the assessee, who passes such burden to
another person & is ultimately borne by consumers of such goods or services.

Direct Tax Indirect Tax

• Incidence and impact fall on the same • Incidence and impact fall on two
person different persons
• Assessee, himself bears such taxes. • Tax is recovered from the assessee, who
Thus, it pinches the taxpayer. passes such burden to another person.
Thus, it does not pinch the taxpayer.
• Levied on income • Levied on goods and services. Thus, this
type of tax leads to inflation and has a
wider base.
• E.g. Income Tax • E.g. GST, Customs Duty, etc.
• Progressive in nature i.e., higher taxes • Regressive in nature i.e., all persons will
are levied on a person earning higher bear equal wrath of tax on goods or
income and vice versa. services consumed by them irrespective
of their ability.
ADMINISTRATION OF TAX LAWS

The administrative hierarchy of tax law is as follows:

Central Board of Direct Tax (CBDT)

Ministry of Finance Department of Revenue

Central Board of Indirect Tax & Customs (CBIC)

ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]

Assessment year means the period of 12 months commencing on the 1st day of April every year. It is
the year (just after the previous year) in which income earned in the previous year is charged to tax.
E.g., A.Y.2023-24 is a year, which commences on April 1, 2023, and ends on March 31, 2024. The
income of an assessee earned in the previous year 2022-2023 is assessed in the A.Y. 2031-24.

PREVIOUS YEAR OR UNIFORM PREVIOUS YEAR [SEC. 3]

Previous Year means the financial year immediately preceding the Assessment Year. Income earned
in a year is assessed in the next year. The year in which income is earned is known as the Previous
Year and the next year in which income is assessed is known as Assessment Year. It is mandatory for
all assessees to follow the financial year (from 1st April to 31st March) as the previous year for
Income-Tax purposes.

Exceptions to the general rule that income of a Previous Year is taxed in its Assessment Year

This is the general rule that income of the previous year of an assessee is charged to tax in the
immediately following assessment year. However, in the following cases, the income of the previous
year is assessed in the same year in order to ensure a smooth collection of income tax from the
taxpayer who may not be traceable, if the assessment is postponed till the commencement of the
Assessment Year:

1. Income of a non-resident assessee from shipping business (Sec. 172)

2. Income of a person who is leaving India either permanently or for a long period (Sec. 174)

3. Income of bodies, formed for a short duration (Sec. 174A)

4. Income of a person who is likely to transfer property to avoid tax (Sec. 175)

5. Income of a discontinued business (Sec. 176). In this case, the Assessing Officer has the
discretionary power i.e. he may assess the income in the same previous year or may wait till the
Assessment year.

ASSESSEE [SEC. 2(7)]

“Assessee” means,
 a) person by whom any tax or any other sum of money (i.e., penalty or interest) is payable
under this Act (irrespective of the fact whether any proceeding under the Act has been taken
against him or not);
b) every person in respect of whom any proceeding under this Act has been taken (whether or
not he is liable for any tax, interest, or penalty) for the assessment of his income or loss or
the amount of refund due to him;
c) a person who is assessable in respect of income or loss of another person;
d) every person who is deemed to be an assessee under any provision of this Act; and
e) a person who is deemed to be an ‘assessee in default’ under any provision of this Act. E.g. A
person, who was liable to deduct tax but has failed to do so, shall be treated as an ‘assessee
in default’.

PERSON [SEC. 2(31)]

The term person includes the following:

i) an Individual;
ii) a Hindu Undivided Family (HUF);
iii) a Company;
iv) a Firm;
v) an Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not;
vi) a Local authority; &
vii) every artificial juridical person not falling within any of the preceding categories.

HEADS OF INCOME [SEC. 14]

According to Sec.14 of the Act, all income of a person shall be classified under the following five
heads:

1. Salaries
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.

For the computation of income, all taxable income should fall under any of the five heads of income
as mentioned above. If any type of income does not become part of any one of the above-mentioned
first four heads, it should be part of the fifth head, i.e. Income from other sources, which may be
termed as the residual head.

GROSS TOTAL INCOME (GTI) [SEC. 80B(5)]

Gross total income is the aggregate of income under all the five heads of income after adjusting the
set-off & carry forward of losses. Deductions under chapter VIA is provided from GTI, to arrive at
Total income or taxable income.
 Computation of Total Income for the A.Y.___

Particular Amount( in Rs)

1. Salaries xxx
2. Income from house property xxx
3. Profits and gains of business or profession xxx
4. Capital gains xxx
5. Income from other sources xxx
Gross Total Income xxx
Less: Deduction u/s 80C to 80U xxx
Total Income xxx

TAX PLANNING, TAX EVASION AND TAX AVOIDANCE

Tax planning is a way to reduce tax liability by taking full advantages provided by the Act through
various exemptions, deductions, rebates & relief. In other words, it is a way to reduce tax liability by
applying the script & moral of the law. It is the scientific planning so as to attract minimum tax
liability or postponement of tax liability for the subsequent period by availing various incentives,
concessions, allowances, rebates, and relief provided in the Act.

Tax evasion is the illegal way to reduce tax liability by deliberately suppressing income or sale or by
increasing expenses, etc., which results in a reduction of total income of the assessee. Tax evasion is
illegal, both in script & moral. It is the cancer of modern society and work as a clog in the
development of the nation.

Tax avoidance is an exercise by which the assessee legally takes advantage of loopholes in the Act.
Tax avoidance is a practice of bending the law without breaking it. It is a way to reduce tax liability by
applying script of law only. Most of the amendments are aimed to curb such loopholes.