Chapter-3: Introduction to Taxation in India

A: A Brief History of Income Tax in India

 

Income tax in India has a long history, dating back to 1860 when the first Income Tax Act was introduced by James Wilson to overcome the financial crisis following the Sepoy Mutiny of 1857. Over the years, the tax system has undergone numerous changes, with significant reforms in 1922 and 1961. The current Income Tax Act, 1961, came into effect on April 1, 1962, and it governs the levy, collection, and administration of income tax in India.

 

 Tax Structure in India

 

India's tax structure comprises two main types of taxes: Direct Taxes and Indirect Taxes.

 

1. Direct Tax: These taxes are directly levied on the income or wealth of individuals and organizations. The main direct taxes in India are:

    Income Tax: Levied on individuals, Hindu Undivided Families (HUFs), firms, companies, etc.

    Corporate Tax: Levied on the income of companies.

    Wealth Tax (abolished in 2015): Previously levied on the net wealth of individuals, HUFs, and companies.

 

2. Indirect Tax: These taxes are levied on goods and services and are collected by intermediaries (like retailers) from the consumer. The main indirect taxes are:

    Goods and Services Tax (GST): Introduced in 2017, replacing multiple indirect taxes like VAT, service tax, and excise duty.

    Customs Duty: Levied on goods imported into India.

    Excise Duty: Levied on the manufacture of goods within India (now largely subsumed under GST).

 

 B: Basic Concepts and Definitions under the Income Tax Act

 

1. Previous Year: The financial year immediately preceding the assessment year. It is the year in which income is earned. For example, if the assessment year is 202324, the previous year would be 202223.

 

2. Assessment Year: The financial year in which the income of the previous year is assessed and taxed. For example, if the income is earned in the previous year 202223, it will be assessed in the assessment year 202324.

 

3. Assessee: A person by whom any tax or any other sum of money is payable under the Income Tax Act. This includes individuals, HUFs, companies, firms, association of persons (AOP), body of individuals (BOI), and any other person.

 

4. Person: The term includes an individual, HUF, company, firm, AOP, BOI, local authority, and every artificial juridical person not falling within any of the preceding categories.

 

5. Sources of Income: The origin from which income is derived, such as salaries, business or profession, house property, capital gains, and other sources.

 

6. Heads of Income: Under the Income Tax Act, income is categorized into five heads:

    Salaries

    Income from House Property

    Profits and Gains of Business or Profession

    Capital Gains

    Income from Other Sources

 

7. Gross Total Income: The aggregate of income computed under the five heads of income before making any deductions under Chapter VIA of the Income Tax Act.

 

8. Total Income: The income on which tax is calculated after making deductions under Chapter VIA from the gross total income.

 

 C: Incomes Which Do Not Form Part of Total Income

 

Certain incomes are exempt from tax under Section 10 of the Income Tax Act. Some of these are:

 

1. Receipts by a Member from Hindu Undivided Family [Section 10(2)]: Any sum received by an individual as a member of an HUF from the income of the HUF is exempt from tax.

 

2. Share of Profit from a Partnership Firm [Section 10(2A)]: The share of profit received by a partner from a partnership firm is exempt from tax, as the firm itself is taxed on its profits.

 

3. Sums Received under Life Insurance Policy [Section 10(10D)]: Any sum received under a life insurance policy, including the sum allocated by way of bonus, is exempt from tax, provided certain conditions are met.

 

4. Daily Allowance to MPs and MLAs [Section 10(17)]: Any daily allowance received by a Member of Parliament or Member of Legislative Assembly is exempt from tax.

 

5. Awards [Section 10(17A)]: Any award instituted in the public interest by the Central or State Government or any other approved award is exempt from tax.

 

6. Income of a Local Authority [Section 10(20)]: The income of a local authority (such as a municipal corporation) is exempt from tax.

 

7. Income from Dividend [Section 10(34)]: Dividend income from Indian companies is exempt from tax as the company paying the dividend has already paid Dividend Distribution Tax.

 

8. Income from Units [Section 10(35)]: Income received in respect of units of a mutual fund or specified undertaking is exempt from tax.

 

9. LongTerm Capital Gains from Transfer of Equity Shares or Units [Section 10(38)]: Longterm capital gains arising from the transfer of equity shares or units of an equityoriented fund are exempt from tax, provided the transaction is subject to Securities Transaction Tax (STT).

 

 Examples

 

Example 1: An individual receiving a share of profit from a partnership firm does not include this income in their total income for tax purposes as it is exempt under Section 10(2A).

 

Example 2: A person receiving a sum from a life insurance policy on maturity is not required to pay tax on this amount, provided the policy meets the conditions under Section 10(10D).

 

 References

 

1. Singhania, V.K. (2021). Direct Taxes Law & Practice. Taxmann Publications.

2. Ahuja, G., & Gupta, R. (2021). Systematic Approach to Income Tax. Bharat Law House.

3. Income Tax Act, 1961. Government of India.

4. Official website of the Income Tax Department of India (incometaxindia.gov.in).