MEANING OF TAX

Understand the meaning of tax

Tax is a fee charged by a government on a product, income or activity. 

                                        There are two types of taxes – direct taxes and indirect taxes.

A) If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax.

B) If tax is levied on the price of a good or service, then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.

Why are Taxes Levied?

The reason for levy of taxes is that they constitute the basic source of revenue to the government. Revenue so raised is utilized for meeting the expenses of government like defence, provision of education, health-care, infrastructure facilities like roads, dams etc.

Concept of Income

Definition of income as per the Income-tax Act, 1961 begins with the words “Income includes”. income is  inclusive definition and not an exhaustive one. Its leaves room for more inclusions within the ambit of the term. Certain important principles relating to income are enumerated below -

Income, means a periodic monetary return which accrues or is expected to accrue regularly from definite sources. However, under the Income-tax Act, 1961, even certain income which do not arise regularly are treated as income for tax purposes e.g.

Winnings from lotteries, crossword puzzles.

Income normally refers to revenue receipts. Capital receipts are generally not included within the scope of income. However, the Income-tax Act, 1961 has specifically included certain capital receipts within the definition of income

e.g. Capital gains i.e. gains on sale of a capital asset like land.

Income means net receipts and not gross receipts. Net receipts are arrived at after deducting the expenditure incurred in connection with earning such receipts. The expenditure which can be deducted while computing income under each head is prescribed under the Income-tax Act.

Income is taxable either on due basis or receipt basis. For computing income under the heads “Profits and gains of business or profession” and “Income from other sources”, the method of accounting regularly employed by the assessee should be considered, which can be either cash system or mercantile system.

Income earned in a previous year is chargeable to tax in the assessment year. Previous year is the financial year, ending on 31st March, in which income has accrued/ received. Assessment year is the financial year (ending on 31st March) following the previous year. The income of the previous year is assessed during the assessment year following the previous year. For instance, income of previous year 2012-13 is assessed during 2013-14. Therefore, 2013-14 is the assessment year for assessment of income of the previous year 2012-13.