Income Tax Definition and Types | Who has to pay income tax? | What is the minimum salary to pay income tax?

Introduction

Every country wants to be a world superpower. This is only possible by the economic development of the nation. It takes a lot of funding from a number of different sources. Income tax is a very important direct tax and a significant source of revenue for the government. Because of the freedom movement (military mutiny) of 1857, most of the nation's assets were destroyed. To cope with these financial difficulties, income tax was introduced in India for the first time in 1860 by Sir James Wilson. It was based on the Income Tax Act of Great Britain relating to the valuation of the following four incomes:

(i) Salary and Pension;

(ii) Interest on Securities;

(iii) Income from Land and Property;

(iv) Income from Business and Profession.

After various amendments, a new Income Tax Act of 1886 was enacted to make income tax a permanent and principal source of public revenue. That act has been in place for 32 years. Afterwards, the Income Tax Act, 1919 and 1922 was promulgated on the recommendations of the "All India Taxation Inquiry Commission". In 1958 the government appointed the “Direct Taxes Administration Enquiry Committee” under the Chairmanship of Dr Mahavir Tyagi recommends ways to check tax evasion, reduce the complexities and minimise the inconveniences caused to assess.

The Indian Tax Act of 1961 covers all of India. It came into force with effect on 1st April 1962 with 298 sections, various sub-sections and 14 schedules for the determination of the present tax structure. Since 01-04-1990 it is also applicable in Sikkim. In 1991-92 the government set up a committee to suggest measures to improve the current tax structure, chaired by "Raja Chailleya". At present, there are approximately 625 clauses in the Income Tax Act. Total income and income tax for the current 2019-20 assessment year are calculated by the provisions of the Income Tax Act, 1961 and the Finance Act, 2017.

Definitions of Relevant Concepts in the Income Tax Act, 1961:

(1) Income: Income tax is applied against the previous year's income. However, there is no definition of income in the 1961 Income Tax Act. As a business student, we developed this concept of an income-based accounting system. Under this system, income means the surplus of income over cost. Income consists of:

i. Income from salary

ii. Income from house property

iii. Income from business and profession

iv. Income from capital gains

v. Income from other sources

It refers to five types of income of a taxable person.

One important point to remember when determining income:

a) There is no difference between lawful and illegal income.

b) Income and loss are not distinguished,

c) An identified source of income may exist,

d) The income source can be temporary or permanent,

e) Revenues do not need to be collected in cash, they may be received in kind,

f) PIN money (savings to someone else on surplus income) cannot be treated as taxable income.

g) The impugned income is taxed against the beneficiary of the income,

h) Dharmada (amount collected by appraisers from others for charitable purposes) is not an appraiser's taxable income,

i) The reimbursement of expenses is not revenue,

j) Misappropriation of income (misappropriation of income from another person under a statutory obligation) and application of income (misappropriation of income from another person voluntarily),

k) Income is taxable on accrual accounting or upon receipt.

(2) Gross Total Income (G.T.I.): G.T.I. means the total income of an appraised person from all counts of income after allowing their deductions in respect of, but before allowing deductions from Article 80C to Article 80U.

(3) Total / Taxable Income: The total income means the amount of income left after making all the deductions allowed under section 80C to section 80U from the G.T.I. It is the income on which the tax to be paid is determined. Round in multiples by ten rupees.

Total Income = G.T.I. – Deductions u/s 80C to 80U

(4) Casual income: income for which evaluators are not making efforts. This income is dependent upon the evaluator's chances and luck. Casual earnings include lotteries, crosswords, horse racing, gambling, betting, playing cards, television, games, etc.

(5) Person: Person refers to:

(a) Individual – the human being – male or female;

(b) H.U.F. (Hindu Undivided Family/Joint Hindu Family);

(c) Company;

(d) Firm;

(e) Association of Person and Body of Individuals;

(f) Local authority, statutory corporations, an autonomous body, club, cooperative society;

(g) Any other artificial person, not falling within any of the above e.g. a Hindu Idol or a Deity (Bala Ji etc.) or God or Allah.

(6) Person Assessed: A person who has met any of the following conditions:

(a) a person liable to pay income tax,

(b) the person liable for the payment of any penalty imposed by the Ministry of Taxation,

(c) a person whose income is to be assessed whether there is an income or loss,

(d) a person whose income is to be investigated to confirm a specific transaction between them and another person,

(e) a person in respect of whom procedures for assessing their income have been initiated.

(f)Deemed Assessed Person (Legal Representative): The income of the deceased is taxable in the hands of his or her legal heir. He may be the agent of a stranger, a madman, a minor or an incompetent person.

(g) The person assessed in default: If a person is responsible for doing a job under the law and does not do it, he or she is referred to as the "person assessed in default". E.g. No T.D.S. was deducted by the Employer from the employee's taxable salary income.

(7) Securities: Written documentary evidence from the organisation in which the appraiser has invested money to obtain a return on their investment. Securities includes shares, debentures, bonds, units, mutual funds, certificates, Indira/ Kisan Vikas Patra, etc. There are two types of securities: government securities and commercial securities. Income from securities is taxed as business income or other source income, as applicable.

(8) Previous year: The year the income was earned or received is referred to as the previous year. The previous fiscal year is the fiscal year immediately preceding A.Y. starts from 1 April and ends on 31 March of next year. The maximum duration of the preceding year is approximately 12 months for all revenue managers. The previous year may be for less than 12 months in the following circumstances:

(i) new company created,

(ii) close of business during the fiscal year,

(iii) when an appraiser wants to leave India and does not intend to return to India within the same year.

The income tax is applicable to the previous year's income. But there are some exceptions where the previous year and the evaluation year are the same for the relevant year. These include the following: .

(a) A non-resident's income from a marine transportation business. (7½ % of transport)

(b) the income of the person who moved from India in the preceding year.

(c) Income of an A.O.P. or B.O.I. constituted for a specific event or purpose in the previous year.

d) Transfer of goods to avoid tax.

e) If an enterprise or occupation is abandoned.

Appraisers may close their accounts on a date other than March 31 because of personal or religious reasons. But they would be required to prepare their accounts on March 31 to file their tax returns.

(9) Assessment Year: The assessment year is the 12 months beginning on April 1 and ending on March 31 of the following year, immediately after the end of the preceding year. A taxable person is subject to tax on income from the previous financial year in the next financial year (A.Y.). If the prior year is 2017-2018 then A.Y. of this is 2018–2019.

(10) Company: The meaning and types of various companies as per the Company Act 2013 are as below:

Company is an artificial person created by law, having separate entity and a common seal. ( By L.H. Haney)

(i) Indian company: A company which is registered and incorporated according to the Companies Act 1956.

(ii) Foreign company: A company which is registered and incorporated according to the provisions of any Foreign Companies Act.

(iii) Domestic company: An Indian company whose business is managed and controlled from India during the previous year.

(iv) Closely-held company: A company whose total share capital is subscribed by a few number of shareholders. (Private companies).

(v) Widely held company: A company whose maximum share capital is subscribed by the public. (Public companies).

(11) Substantial interest: Specific shareholding.

(a) For closely held companies: with 10 % or more of the capital or voting rights.

(b) For all other companies: 20% or over 20% of the share capital or voting rights.

(12) Vouchers: Any written document evidencing any transactions carried out by the appraiser that may be filed as evidence. Vouchers are very useful for accounting management as well as auditors for their work.

(13) Tax Evasion: When a person reduces his total income by making false claims or by withholding the information regarding his real income so that his tax liability is reduced, is known as tax evasion. Tax avoidance is not only illegal, it is also immoral, antisocial and anti-national.

(14) Tax Avoidance: Tax avoidance is an art of preventing and reducing tax liability by availing the advantages of certain loopholes in the law without breaking rules, regulations and the provisions of the Income Tax Act. It does not include fraud, concealment or other illegal measures. This is a device that technically meets the requirements of the act, but in fact does not comply with the legislative intent.

(15) Tax Planning: Tax planning is an arrangement of an assesses’s financial affairs in such a way that without violating any legal provisions of the  I.T.Act, full advantages are taken of exemptions, deductions, rebates and reliefs permissible under the Act so that burden of tax liability can be reduced. Tax planning is a law in all four corners of the Act, and it is not an easy way to escape the tax. As a result, fiscal planning is legal, social and ethical.

(16) Tax rate: The income tax is calculated on the contributor's taxable income for the previous year at the rates applied by the finance law applicable to that taxation year.

(a) Occasional Income Tax – 30%

(b) Tax on L.T. capital gains generally – 20%

(c) Tax on S.T.Capital Gains U/S 111A – @ 15%

(d) On other income

At normal rates

(i) In the case of an Indian resident who is 60 years of age or older but under 80 years of age: 

Up to Rs.3, 00,000 – Nil.

Next year Rs.2.00.000 – 5%

At next Rs.5.00.000 – 20%

In the case of exceeding Rs.10,00,000 - 30%

(ii) In the case of a senior Indian resident, male or female aged 80 years or older:

Up to Rs.5,00,000 – Nil

At next Rs.5.00.000 – 20%

For exceeding Rs.10,00,000 – 30%

(iii) In the case of a male or female resident of India under the age of 60,

Up to Rs.2,50,000 – NIL.

Next Rs.2.50,000 – at 5%

At next Rs.5.00.000 – 20%

If exceeding Rs.10,00,000 – 30%

When the taxable income of a resident individual does not exceed Rs3,50,000 then a rebate of Rs2,500 and tax payable whichever is less is allowed u/s 87 A

The surcharge is 10% if the total income exceeds Rs.50 lakhs but does not exceed Rs. A crore in the previous year and 15% if the total income is greater than Rs. one crore in the previous year.

Finally, 4% of the tax is collected like Education Cess.

(17) Agricultural income: Under the 1961 Indian Income Tax Act, agricultural income was fully exempt until the 1973-74 taxation year. But since the assessment year 1974-75 agriculture income will be taken into consideration in calculating the tax liability of an individual, H.U.F., AOP and BOI provided non-agriculture income of an assessee is more than the minimum exemption limit (i.e. Rs.2,50,000, in case of male or female, Rs.3,00,000 in case of the senior assessee and Rs.5,00,000 in case of the super senior assessee) and net agriculture income is more than Rs.5,000 during the previous year. When the total/taxable income of an appraised person is to be calculated, farming income may not be included in the taxable income.

I. Any rent or income on farmland in India where agricultural operations are carried out by a farmer the previous year. Two types of farming operations exist:

(a) Basic operations: all activities required to produce agricultural products are known as basic operations. Such as tilling of land, sowing of seeds, and watering and planting the saplings.

(b) Subsequent Operations: All activities that are necessary to produce more commodities on farmland are referred to as subsequent operations. These activities consist of weeding, harvesting, supplying fertilisers, and cutting and processing the product. It also covers the activities necessary to make the product consumable by the consumer or to make it suitable for the market.

When a person has only carried out subsequent transactions, the income he has earned cannot be regarded as farming income. Agriculture product does not merely mean the consumable goods or foods and grains but it also includes the production of commercial goods i.e. jute, tobacco, indigo, etc.

II.Income earned through specific process: Income earned by a farmer through those activities which are required to make the product usable by consumers or fit for the market for sale is also an agriculture income. To this end, a specific procedure must be applied to these products, e.g. jute, tea and coffee drying, tobacco drying, cotton ginning, etc.

When a farmer sells his products in the market in his shop, the income so earned by the farmer is also included in agriculture income provided the products are produced by himself on agricultural land.

III.Income from farm house: Income from farm house is also an agricultural income provided the following conditions are satisfied.

(i) The agricultural home must be the property of the appraiser.

(ii) It is situated on or in the immediate vicinity of farmland.

(iii) It can be used as a dwelling house, outer house or warehouse.

(iv) Land receipts or local taxes are levied on these lands by the government or local authority.

If real estate income or local tax is not payable on the land, then:

a) The land is located in a rural or non-urban region.

b) The land is located at a distance of more than 8 km from the limits of the municipality or township council.

c) Land falls within the jurisdiction of a municipal committee with a population of less than 10,000.

Income from the flower’s garden, income from the lease of land for grazing of cattle required for agriculture products, profit from the firm, interest and remuneration from the firm received by the partner and compensation received from insurance companies against loss are also included in agriculture income.

IV. Partial income from agriculture.

(a) Income of Sugar Mills: In determining the real business income from a sugar mill, the average market price of sugarcane is deducted from total income like agriculture income although sugarcane was produced by the sugar mill on its agricultural land. In this case, real spending on sugar cane production will not be taken into account. Any surplus of the market price of sugar cane in relation to the cost of production is also regarded as agricultural income.

(b) Income from growing and manufacturing of tea: Out of this total income 60% is agriculture income and 40% is business income for tea growers in India.

(c) Income from growing and manufacturing coffee: 75% of total income from growing and manufacturing of coffee is agriculture income and 25% is his business income chargeable for tax.

When income was derived from the sale of coffee grown, cured, roasted and grounded by the seller in India with or without mixing of chicory or another flavour then 60% of total income is agriculture income and 40% is the business income of the assessee.

(d) Income from the cultivation and production of latex and centrifuged Cenex: 65% of total income is agricultural income while 35% is the business income of the farmer or evaluator.

Some important examples of non-agricultural incomes:

(i) Income from the sale of free-growing grasses, bamboos, trees or plants.

(ii) income from contracts, ferries and fisheries, and

(iii) Royalties from rock mines or quarries,

(iv) Income from land (clay sold) provided to brick-making contractors,

(v) Income from water supply to irrigate another farmer's land,

(vi) Revenue from the resale of live crops, and

(vii) Income from dairy, cattle or poultry production,

(viii) Dividend or remuneration of an undertaking engaged in agriculture,

(ix) Revenues from butter, cheese making and lake cultivation,

(x) Income from land rented for the storage of agricultural property of others,

(xi) Farm Land Sale Commission,

(xii) Compensation for Requisition of Land for Service Purposes,

(xiii) Income from the sale of a branch,

(xiv) Income from the sale of salt made from inundated water,

(xv) Income of an agricultural home that is used for non-agricultural purposes,

(xvi) Remuneration of trustee based on farm income of wakf,

(xvii) reward on the occasion of higher production compared to other farmers,

(xviii) Interest in rental arrears on farmland.