For funding public works and services and building and maintaining the infrastructure in a country, funds are required by government to undertake these activities. For doing so, government collects taxes from its individuals and corporate residents to develop and build the economy. Thus, tax is nothing but an involuntary fee paid by individuals and corporation to a government which can be local, regional or national for financing the activities undertaken by it. This tax is collected by remitting a certain percentage of taxpayers’ earning to the government. The rates at which the tax is collected differs in various income groups.
Since tax is collected from various sources, it is majorly divided into direct tax and indirect tax. Direct tax refer to the tax levied on the income, profit or revenue, which is paid directly to the government. Whereas, indirect tax refers to the tax paid on goods and services, paid indirectly through a third party to the government. Income tax falls under direct tax and it means tax imposed on an individual or entity on the basis of the level of earnings or gains during a financial year.
The Income Tax Act, 1961 does not define the term income tax, however under section 2(24) it provides what constitutes income. The items provided under section 2(24) are inclusive and not exhaustive and includes: Any illegal income arising to the assesse, any income that is received at irregular intervals, any Taxable income that have been received from sources outside India, any benefit that can be measured in money, any subsidy or relief or reimbursement, gift the value of which exceed INR 50,000 without any consideration by an individual or HUF, any prize, causal incomes like winning from lotteries or horse race gambling etc. Thus, the various heads for which income tax is payable includes salary, income from house property, capital gains, profits from business and profession and income from other sources.
Laws Dealing with Income Tax in India
In India, the Constitution of India, Income Tax Act, 1961, Income Tax Rules, 1962, Notifications issued by CBDT (Central Board of Direct Taxes), Annual Finance Act and judicial decisions pronounced by Supreme Court and High Courts provide laws governing income tax. Under the Seventh Schedule of the Constitution of India, Entry 82 of the Union List gives power to the Central Government for levying a tax on any income other than agricultural income, as provided under Section 10 of the Income Tax Act. The Income Tax Act, 1961 lays out details for levy, administration, collection and recovery of Income Tax in India. Due to presentation of the Finance Budget every year in the month of February, amendments are brought to the Income Tax, 1961 to accommodate the changes as specified which majorly includes alteration of tax slabs. The procedure to be followed in implementing the provisions of the Income Tax Act are provided under the Income Tax Rules. Being a part of the Ministry of Finance, Central Board of Direct Taxes administers direct taxation in India and provides input for policy formulation and planning of direct taxation in India.
Being a hub of international investment and trade and with huge number of emigrants residing here, India has currently 85 Double Taxation Avoidance Agreements in force which provide for avoiding the tax between two countries when there is a difference in jurisdiction of the tax payer and his source of income or when he is generating income in more than one country. Due to increased cooperation and collaboration between India and Organisation for Economic Co-operation and Development (OECD), India has become a member of Global Forum on Transparency and Exchange of Information for Tax Purposes and OECD-India also continues to build its area of work in taxation, thus the OECD guidelines for taxation have found persuasive value in India.
Income tax slab rates: In India, the income tax is levied on the income earned. Thus, the tax applies to the range of income, which is referred as Income Tax Slabs. The slabs of income tax keep differ from year to year and is announced by Finance Minister in the Union Budget each year.
Different legislation to determine the mode of computation and the amount payable: This means that the liability to pay the tax is given under the Income Tax Act, however, the rate at which this tax is to be levied is given under the Finance Act. Its advantage is there is no need to regularly amend the main act to adjust the tax slabs, but such absence of tax rates makes the legislation incomplete.
Retrospective amendment and retrospective tax: The Income Tax Act, 1961 can be amended retrospectively and income tax can also be levied retrospectively.
Non-comprehensive definition of Income: There is no definition of income for the purpose of income tax. What is given under section 2(24) of the Income Tax Act, 1961 is the item to be taken into consideration for income tax purposes. Since the list is inclusive and not exhaustive, various times for interpretation of what falls under the term income, reliance has to be placed on judicial precedents.
Adam Smith’s Canons of Taxation: Adam Smith propounded four canons in his book ‘Wealth of Nation’ which provides rules and principles for developing and functioning effective tax collection system. These canons include equality, certainty, convenience and economy. The canon of equality requires paying taxes proportional to your income to reduce the gap between rich and poor. The presence of different tax slabs on the basis of the income or revenue earned shows application of this principle. The canon of certainty requires that tax to not be arbitrarily fixed or imposed by the income tax authorities.
The taxpayer should be aware about the amount of tax, the mode or manner of payment and to whom to be paid, in order to avoid harassment of the taxpayer. The canon of convenience requires the tax to be levied at such time and in such manner so that it is convenient for the contributor to pay it. The recent example of pushing the income tax return date from March 31, 2020 to June 30, 2020 due to Covid-19 outbreak shows how importance to taxpayers; convenience is given. Canon of economy requires the cost of tax collection to be miniscule as compared to the tax collected. With introduction of online income tax system, the cost of tax collection has reduced drastically.
Progressive Tax Rate Structure: In India, income-tax rate is based upon the taxpayer’s ability to pay, i.e. low income earners pay lower tax as compared to those with high earners. As against regressive and flat tax structures, such tax rates allow people with more resources to contribute more to the economy of the country.
Minimum Alternate Tax: Since companies end up taking benefit of depreciation, exemptions, deductions etc. from government to minimise the tax, they end up paying nearly zero percent tax to the government. In order to avoid such practices, government imposes minimum alternate tax as an advance tax on companies.
Direct Tax Code
For replacing the current Income Tax Act, 1961, the government is developing a new Direct Tax Code to simply the structure of direct taxation in India and bring the laws governing it under one umbrella. Under the convenorship of Akhilesh Ranjan, a 200 page report dealing with such code has been submitted to the Finance Minister. Some of the key points of the Code are chances of major tax relief for those earning up to Rs. 55 lakh, payment of branch profit tax by foreign firms, removal of dividend distribution tax, incentives for start-ups, promotion of mediation for dispute settlement between CBDT and taxpayers, reduction in number of provisions (sections) as against the Income Tax Act, 1961.
It has been observed that income tax or direct tax as a field has become unpopular due to the complexity it carries with it. Since for computation of taxable income, various deductions and exemptions have to be kept in mind, it is not easy for a layman to have clarity regarding the same. Moreover, with presentation for annual budget every year, a lot of provisions are amended. Thus the complex nature and frequent amendments make the process more cumbersome.
As stated in the landmark Vodafone case, for a stable economy to exist, there must be stable taxation policies in place. Even with introduction of new tax regime which provides for not taking into consideration any deduction and exemption, rather paying tax at a lesser rate does not provide a solution, as till individuals and corporates will consult accountants to determine under which system will they accrue lesser taxes. Even the retrospective applicability of tax laws creates extra burden on the income tax department as well on the pockets of taxpayers. Efforts should made to simplify and stabilise taxation laws in India.
Author- Garima Darda