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The Income Tax Act ("the Act") enjoys the dubious distinction of being the
law which has witnessed the highest number of amendments being made to it.
It must perhaps be the world's most amended legislation, it having been
amended more than 3500 times in 35 years! This makes it a very complicated
and haphazard law, resulting in thousands of man-hours of tax-payers and
tax-gatherers being wasted every year to interpret the law. We have tried
to explain the basics of the Act here,
The Act provides a mechanism for computing the tax relating to the income of an assessee pertaining to an assessment year. Such computation is made after allowing various deductions, exemptions, and rebates to the assessee, and is called assessment.
Assessment year is the year in which the income of the previous year is to be assessed to tax. Got more confused? An illustration will clarify the matter. Income of the Financial Year 1997-98 will be assessed to tax in the assessment year 1998-99, that is to say , the rates of Assessment year 1998-99, will be applied to income of the Financial year 1997-98. Incidentally, Financial Year is referred to as the Previous Year in the Act
Assessee is a person by whom any tax or any other sum of money is payable under the Act. The assessee could be any of the following:
1. An Individual
2. A Hindu Undivided Family ( HUF ), which is a type of assessee recognized under the Act, consisting of all persons lineally descended from a common ancestor and deriving income from joint family corpus. Hindu, Jain , Buddhist, and Sikh families have been so recognized.
3. A Company
4. A Firm
5. An Association of Persons or a Body of Individuals
6. Artificial Juridical Person, e.g. a Hindu deity
Residential status of an assessee:To know the residential status of an assessee as per the Act is very important, because the taxability of an income in the hands of an assessee depends upon his residential status. It may be noted that being a Non-resident under other laws does not automatically make one a Non-resident under the Act. The status for the purpose of taxability is determined as per the provisions of this Act.
Residence In IndiaBasic Conditions:
a. Presence for more than 182 days in India during the year
b. Presence in India of more then 60 days during the year AND more than 365 days during the previous 4 years
c. This period is extended to 182 days in case of persons leaving India during the year for employment abroad
a. he should satisfy one of the above two basic conditions in 9 out of 10 preceding years
b. he should be present for 730 days in India in the 7 preceding years
Resident but not ordinarily a resident
An individual who satisfy one or more of the two basic conditions, but does not satisfy the two additional conditions is treated as a Resident but not ordinarily a resident.
A person who does not satisfy any of the basic conditions becomes a Non-resident
Similar rules have been laid down for the residential status of HUF's, Firms and Companies also.
The determination of residential status is of utmost importance, because, as I said earlier, it helps you determine the taxability of certain incomes. Special concessional provisions have been made for the taxability of Non-residents. Refer to Investment income info for NRIs for the details.
Income of certain other persons is deemed to be the assessee's income and clubbed with his income. For example, income of spouse derived by way of remuneration from a concern where the assessee has a substantial interest, is clubbed with his income. Similarly, income of minor children is clubbed with the income of the parent who has the higher income. Don't tell me it is illogical : logic sometimes has no concern in our laws.
Total Income of an assessee is calculated as under:
1. Income of the assessee is computed under the following heads:
# Income from Salaries
# Income from House Property
# Profits or gains of Business or Profession
# Capital gains
# Income from other sources
2. Income exempt from tax is reduced from other income. The Act gives a list of Income which are considered exempt from tax. It is a long list, which one is advised to go through before proceeding to compute the income. An example of such exemptions is the exemption pertaining to agriculture income.
3. Deductions allowable under the Act are allowed from the above figure. Deductions are allowed from certain incomes and for certain assessees. An example of such deductions is the deduction from bank interest earned by the assessees.
4. Tax is calculated on figure arrived at Para 3.
5. From the tax so calculated, rebates regarding investments made in Government savings like LIC, National Savings Certificates, Provident Funds etc., and rebate for Senior Citizens and other eligible rebate is given.
6. The balance amount is the amount of tax payable. This is reduced by the amount of tax paid as Advance Tax and Tax Deducted at Source , to arrive at the net tax payable.
A brief overview of the Wealth Tax ActThe Wealth Tax Act is an important direct tax legislation. Given below is a brief overview of the provisions of the Wealth Tax Act ("the Act").
Assessee means a person by whom the wealth tax or any other sum of money is payable under the provisions of the Act, and includes the legal representative , executor or administrator of a deceased person and a person deemed to be an agent of a non-resident. Under the Act tax is charged on the following persons in respect of the wealth held by them during the assessment year:
2. Hindu Undivided Family;
Chargeability to tax also depends upon the residential status of the assessee. The Act provides that the residential status for the purpose of the Act shall be same as the residential status for the purpose of Income Tax Act. The chargeability also depends upon the Citizenship of a person. In order to be a citizen of India, a person must have domicile in the territories of India and must fulfil any of the following conditions:
a) He must have been born in India;
b) Either of his parents must have been born in India;
c) Before the formation of Republic i.e. 26th January 1950, he has been ordinarily resident in India, for a period of 5 years.
A person ceases to be a citizen of India, if he voluntarily acquires the citizenship of a foreign nation. The incidence of tax has been explained here with the help of the following chart:
Incidence of Tax
Citizen of India
1) If he is "resident and ordinarily resident", his assets and debts located anywhere in the world are chargeable to tax.
2) In any other case only the assets and debts located in India are chargeable to tax.
In this case all his assets and debts located in India are taxable, irrespective of whether he is a resident, a non-resident, or not ordinarily a resident. The value of all assets and debts located outside India are exempt here.
Wealth tax is chargeable only on the following assets:1. Any guest house, residential house, commercial property, urban farm house. However an exception is provided in this clause regarding the following:
a) a residential house allotted by a company to an employee, officer or director, drawing annual salary of less than Rs. 200000.
b) a residential or a commercial house forming part of stock in trade.
c) commercial house used in own business of the assessee.
The implication of this clause is that while wealth tax is chargeable on house properties , it is exempt in respect of the exceptions provided.
2.Motor car for personal use.
4. Yachts, boats, and air-crafts used for non-business purposes.
5.Urban land, subject to the conditions specified.
6. Cash in hand exceeding Rs. 50000.
The value of all the taxable assets on the valuation date is clubbed together and is reduced by the amount of debt owed by the assessee. The net wealth so arrived at is charged to tax at the rates specified. The present rate of tax is 1% of the amount by which the net wealth exceeds Rs. 1500000. The rate is same for individuals, HUF's and companies. Special rules have been laid down in the Act regarding valuation of various assets like immovable properties, shares, jewellery etc.
Important Tax Articles
Royalty - Taxability Under Vat Laws
Application of Income
Pre-requisite of Taxes
How SEBI Should Deal With Disgorged Money
Special Economic Zone
Taxability - Issues Therein
Canons of Taxation
Tax on Works Contract
Foreign Currency Convertible Bonds
Valuation of excisable Goods for the purpose of charging excise Duty
Analysis of value added chain (Value Added Tax)
Fiscal Federalism In India
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