Direct and Indirect Taxes

• In a welfare state, the government is primarily responsible for its citizens' well-being, requiring government revenue.
• Taxation is the government's main revenue source for public welfare.
• The government collects taxes to fund public welfare expenditures.
• Taxes are compulsory contributions to the government revenue.
• Taxes may be levied on income, business profits, wealth, or added to the cost of goods, services, and transactions.

Direct Tax & Indirect Tax

• There are two main types of taxes: direct and indirect.
• A direct tax's incidence and impact falls on the same person, such as income tax.
• An indirect tax's incidence and impact fall on two different persons, such as GST.

Direct Tax

• Incidence and impact of tax fall on the same person.
• The assessee bears the taxes directly, affecting the taxpayer.
• It is levied on income, for example, income tax.
• It's progressive; higher income earners pay higher taxes.

Indirect Tax

• Incidence and impact fall on two different persons.
• The tax is recovered from the assessee but passed on to another person.
• It is levied on goods and services, for example, GST and Customs Duty.
• It's regressive; all persons bear the same tax regardless of their ability.

Constitutional Validity of Taxes

• The Constitution of India is the supreme law, including a Preamble, 22 parts with 444 articles, and 12 schedules.
• Any tax law not conforming to the Constitution is ultra vires, illegal, and void.
• Article 265 states that no tax can be levied or collected without legal authority, ensuring legislative competence.
• Article 246 with Schedule VII divides law-making powers into three categories.
• Only the Central Government can legislate on subjects in the Union list.
• Only State Governments can legislate on subjects in the State list.
• Both Central and State Governments can legislate on subjects in the Concurrent list.
• Entry 82 of the Union List allows taxes on income other than agricultural income, like Income Tax.
• Entry 46 of the State List allows states to make laws on tax on agricultural income.

Administration of Tax Laws

• The Ministry of Finance and the Department of Revenue oversee tax administration.
• The Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes & Customs (CBIC) are involved.
• Both boards were established under the Central Board of Revenue Act, 1963.
• CBDT handles the levy and collection of all direct taxes.
• CBIC handles the levy and collection of all indirect taxes.

Sources of Income Tax Law In India

• The Income Tax Act, 1961, is amended up to date and extends to the whole of India, effective from April 1, 1962.
• It includes sections 1 to 298 and schedules I to XIV.
• The Act outlines how to determine taxable income and tax liability.
• It sets out procedures for assessment, appeals, penalties, and prosecutions.
• It specifies the powers and duties of Income Tax authorities.

Finance Act

• A Finance Bill is presented annually in Parliament by the Finance Minister.
• The bill includes various amendments to direct and indirect taxes levied by the Central Government.
• Once approved by both Houses and assented to by the President, it becomes the Finance Act.
• The provisions of the Finance Act get incorporated into the Income Tax Act.

Income Tax Rules, 1962

• As per Sec. 295, the Board may make rules for implementing the Act, subject to Central Government control.
• These rules are applicable through notification in the Gazette of India.
• These rules, first made in 1962, are known as Income Tax Rules, 1962.

Circulars and Notifications

• Circulars are issued by the CBDT to address specific problems and clarify the Act's provisions.
• Circulars guide officers and assessees.
• The department is bound by its circulars, and assessees can benefit from favorable ones, even though they are non-binding.
• Notifications are issued by the Central Government to implement the Act's provisions.
• The CBDT can also make and amend rules via notifications.

Judicial Decisions

• Supreme Court decisions are applicable as law unless changed by Parliament, binding all courts, tribunals, and authorities.
• High Court or ITAT decisions are binding on assessees and authorities within their jurisdiction unless overruled.

Levy of Income-Tax

• According to Section 4, income from the previous year is taxed in the immediately following assessment year.

Previous Year

• 'Previous Year' means the financial year immediately before the Assessment Year.
• Income earned during a year is assessed in the following year.
• Previous Year is when income is earned; Assessment Year is when that income is assessed.
• All assessees must follow the financial year (April 1 to March 31) as the previous year for income tax.
• For a new business or profession, the previous year starts from the setup date and ends on March 31.
• If a new income source arises during the financial year, that previous year begins when the income source comes into existence and ends on March 31.

Assessment Year

• 'Assessment Year' is the 12-month period starting on April 1 every year.
• It is the year immediately following the previous year when income is taxed.
• For example, A.Y.2025-26 starts on April 1, 2025, and ends on March 31, 2026.
• Income earned in P.Y. 2024-25 is assessed in A.Y. 2025-26.

Person

• The term "person" includes:
• An Individual
• A Hindu Undivided Family (HUF)
• A Company
• A Firm (including LLP)
• An Association of Persons (AOP) or a Body of Individuals (BOI)
• A Local authority
• Every artificial juridical person not in the preceding categories

Assessee

• "Assessee" refers to:
• A person by whom any tax or any other sum of money, like penalty or interest, is payable under this Act
• Every person whom a proceeding has been taken, for assessment of their income, loss, or refund due
• A person who is assessable regarding the income or loss of another person
• A person deemed to be an ‘assessee in default’ under this Act, for example, failing to deduct tax when liable

Situations Where Income is Taxed in the Same Year (Previous Year Itself)

• Section 172: Applies to the shipping business of non-residents.
• If a non-resident's ship arrives at an Indian port, it cannot leave until all applicable taxes are paid.
• Section 174: Deals with persons leaving India.
• If an Assessing Officer (AO) believes that an individual is leaving India permanently, their income up to the departure date is taxed in the same year.
• Section 174A: Concerns AOPs, BOIs, or AJPs formed for a specific event or purpose.
• If such entities are expected to dissolve within the same year, the income until dissolution is taxed in that year.
• Section 175: Applies to persons likely to transfer property to avoid tax.
• If the AO suspects that someone is transferring assets to avoid taxes, their total income can be taxed in the current year.
• Section 176: Pertains to discontinued businesses.
• If a business is discontinued, income earned until that date may be taxed in the current year at the AO's discretion.

Heads of Income

• According to Section 14, all income is classified under five heads:
• Salaries
• Income from house property
• Profits and gains of business or profession
• Capital gains
• Income from other sources
• For computation purposes, all taxable income must fall under one of these five heads.
• If income does not fall under the first four heads, it defaults to the fifth head, "Income from other sources."

Difference between Heads of Income and Sources of Income

• There are only five heads of income, but an assessee can generate income from various sources.
• Within the same head of income, there can be multiple sources of income.
• For example, under "Income from house property," there can be multiple properties, each considered a source of income.
• The source of income determines under which head the income will be taxable.

Computation of Income

• Step 1: Determine Residential Status
• Step 2: Compute Income Under Each Head Of Income
• Step 3: Apply Clubbing of Income Provisions
• Step 4: Set-off/carry forward and set-off of losses as per the provisions of the Act
• Step 5: After Applying Step 2, 3 & 4 You will arrive at Gross total Income
• Step 6: Claim Deductions Under Section 80C to 80U (if any From GTI)
• Step 7: Total Income (Taxable Income) is arrived after claiming deductions from GTI
• Total Income is rounded off under Section 288A to the nearest multiple of 10.
• Any paisa is ignored; if the last digit is 5 or more, it's rounded up; otherwise, it's rounded down.
• Examples:
  • (i) ₹5,28,456 becomes ₹5,28,460
  • (ii) ₹5,28,455 becomes ₹5,28,460
  • (iii) ₹5,28,454 becomes ₹5,28,450
  • (iv) ₹5,28,454.88 becomes ₹5,28,450

Computation Of Tax Liability

• (Old Regime / Alternate Scheme / Normal Provisions) In case of Individual / Hindu Undivided Family | AOP | BOI | Artificial Judicial Person

Tax Rates for Individuals/HUFs/AOPs/BOIs/Artificial Judicial Persons

A. General Tax Rates:

• On First ₹ 2,50,000: Nil
• Next ₹ 2,50,000: 5%
• Next ₹ 5,00,000: 20%
• Balance Income: 30%

B. Senior Citizen (60 years or more, but less than 80 years):

• On First ₹ 3,00,000: Nil
• Next ₹ 2,00,000: 5%
• Next ₹ 5,00,000: 20%
• Balance Income: 30%

C. Very Senior Citizen (80 years or more):

• On First ₹ 5,00,000: Nil
• Next ₹ 5,00,000: 20%
• Balance Income: 30%
• An individual turning 60/80 on April 1, 2025, is considered to have completed that age on March 31, 2025, and is entitled to the higher basic exemption limit.

Default Tax Regime (Section 115BAC)

• Tax On Income of Individuals / Hindu Undivided family / AOPs | BOIs | Artificial Judicial Person

Income Tax Slabs:

• On First ₹ 3,00,000: Nil
• More than ₹ 3,00,000 but upto ₹ 7,00,000: 5%
• More than ₹ 7,00,000 but upto ₹ 10,00,000: 10%
• More than ₹ 10,00,000 but upto ₹ 12,00,000: 15%
• More than ₹ 12,00,000 but upto ₹ 15,00,000: 20%
• Exceeding ₹ 15,00,000: 30%

Health and Education Cess

• A cess is a tax for a specific purpose.
• Health and Education Cess is charged at 4% on the amount of income tax.

Rounding Off of Tax (Section 288B)

• Any amount payable or refundable is rounded off to the nearest multiple of ₹10. This is similar to the rounding of total income under section 288A.

Surcharge

• Surcharge is an additional tax on income tax, levied as a percentage when total income exceeds ₹ 50 lakhs.

A. Surcharge Under Default Tax Regime (Section 115BAC)

• If Total income does not exceed ₹ 50 lacs: Nil
• If Total income exceeds ₹ 50 lacs but does not exceed ₹ 1 crore: 10% of tax
• If Total income exceeds ₹ 1 crore but does not exceed ₹ 2 crores: 15% of tax
• If Total income exceeds ₹ 2 crores including Income u/s 112, 112A, 111A or dividend income then:
  • Income u/s 112, 112A, 111A or dividend income 15% of tax
  • Other Income is Upto ₹ 2 crores 15% of tax
  • Other Income is more than ₹ 2 crores 25% of tax

B. Surcharge When Tax Is Paid Under Old Regime

• Total income does not exceed ₹ 50 lacs: Nil
• Total income exceeds ₹ 50 lacs but does not exceed ₹ 1 crore: 10% of tax
• Total income exceeds ₹ 1 crore but does not exceed ₹ 2 crores: 15% of tax
• Total income exceeds ₹ 2 crores including Income u/s 112, 112A, 111A or dividend income then:
  • Income u/s 112, 112A, 111A or dividend income 15% of tax
  • Other Income is Upto ₹ 2 crores 15% of tax -Other Income is more than ₹ 2 crores but upto ₹ 5 crores 25% of tax -Other Income is exceeding ₹ 5 crores 37% of tax
• Health & education cess is charged on the total of tax plus surcharge.
• Maximum Surcharge applicable for AOPs consisting of only companies is 15%.

Marginal Relief

• If a surcharge is applicable (or a higher surcharge is levied) and the tax liability increases more than the increase in income, the assessee is eligible for marginal relief.
• Marginal Relief equals the difference between Increase in Tax and Increase in Income.

Rebate (Section 87A)

A. Rebate Under Default Regime (New Regime)

1. Applicable to: Resident Individual
2. Conditions to be satisfied: Total income of the assessee does not exceed ₹ 7,00,000.
3. Quantum of Rebate: Lower of the following: a. 100% of tax liability as computed above; or b. ₹ 25,000/-

• If total income exceeds ₹ 7,00,000, then rebate shall be allowed If tax liability increases more than increase in income.
• Rebate u/s 87A = Increase in Tax – Increase income

B. Rebate Under Old Regime (Normal Provisions)

1. Applicable to: Resident Individual
2. Conditions to be satisfied: Total income of the assessee does not exceed ₹ 5,00,000.
3. Quantum of Rebate: Lower of the following: a. 100% of tax liability as computed above; or b. ₹ 12,500/-

Taxability of Casual Income

• Casual income is taxable under the head "Other Sources".
• It is included in the gross total income and total income, but for tax liability, it is separated and taxed @ 30%.
• No expenses incurred to earn casual income can be deducted.
• As per Section 58(4), deductions under Section 80C to 80U are not allowed from casual income, but a rebate under Section 87A is allowed.

Taxability of Capital Gains

• There are two Types of Capital Gains -Long Term Capital Gains -Short Term Capital Gains

Long Term Capital Gains

• Section 112 Prior to 23rd July 2024 20%
• Section 112 W.e.f. 23rd July 2024 12.5%
• Section 112A (Listed Equity Shares) Prior to 23rd July 2024 10%
• Section 112A (Listed Equity Shares) W.e.f. 23rd July 2024 12.5%
• However, capital gains u/s 112A are exempt upto ₹ 1,25,000 (aggregate).

Short Term Capital Gains

• Section 111A (Listed Equity Shares) Prior to 23rd July 2024 15%
• Section 111A (Listed Equity Shares) W.e.f. 23rd July 2024 20%
• Other STCG Prior to 23rd July 2024 Slab Rate -Other STCG W.e.f. 23rd July 2024 Slab Rate
• Deduction u/s 80C to 80U shall not be allowed from capital gain u/s 112, 112A & 111A.
• Rebate u/s 87A shall not be allowed from income u/s 112A.

Special provision for resident individual / HUF

• In case of a resident individual / HUF if total income excluding
• long term capital gains u/s 112 / u/s 112A
• short term capital gain covered under section 111A, and
• is below the Amount which is exempt from income tax (i.e.2,50,000/3,00,000/5,00,000), in such cases deficiency in the exemption shall be allowed from LTCG u/s 112 or STCG u/s 111A or LTCG u/s 112A as the case may be.

Unexplained Money, Investments, etc. (Section 115BBE)

• Deemed income is taxed at 60% plus a 25% surcharge, resulting in an effective tax rate of 78% (including a 4% cess on tax and surcharge).
• No basic exemption, allowance, or expenditure is allowed under the Income-tax Act, 1961.
• No loss set off is allowed against such income.

(a) Cash Credits [Section 68]

• Where a sum is found credited in the books and the assessee offers no satisfactory explanation, it may be charged as income of that previous year.

(b) Unexplained Investments [Section 69]

• Where the assessee has made investments not recorded in the books and offers no satisfactory explanation, the value of the investments is taxed as deemed income.

(c) Unexplained Money, etc. [Section 69A]

• Where the assessee owns money, bullion, jewelry, or valuables not recorded in the books and offers no satisfactory explanation, it may be deemed income.

(d) Amount of Investments, etc., Not Fully Disclosed [Section 69B]

• Where the amount spent on investments exceeds the amount recorded in the books, and no satisfactory explanation is given, the excess may be deemed income.

(e) Unexplained Expenditure [Section 69C]

• Where the assessee incurs expenditure but offers no satisfactory explanation, it can be treated as income of that year.

(f) Amount Borrowed or Repaid on Hundi [Section 69D]

• If an amount is borrowed or repaid on a hundi other than through an account-payee cheque, it shall be deemed to be the income of the borrower or repayer.

Tax Rate for Partnership Firm including LLP

• Tax: 30%
• Surcharge: 12%, if total income exceeds ₹ 1 crore.

Marginal Relief

• Is shall be allowed if income has exceeded ₹ 1 crore.

Domestic Company

• 30%. However, if Total Turnover or gross receipts of the previous year 2022-23 does not exceed 400 Crore then 25% Tax Shall be levied
• Surcharge
  • Income Exceeds 1 Crore but upto 10 Crore - 7% -Income Exceeds 10 Crore 12%
• Marginal Relief Allowed

Foreign Company

• Tax- 35% -Surcharge
  • Income Exceeds 1 Crore but upto 10 Crore 2% -Income Exceeds 10 Crore 5%
• Marginal Relief Allowed

Co-operative Societies

• Old Regime
  • Income Rate
  • First 10,000 10%
  • Next 10,000 20%
  • Balance 30%
  • Surcharge
    • Income Exceeds 1 crore but upto 10 crore 7%
    • Income Exceeds 10 crore 12%