Income tax in India

Income Tax in India

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The Constitution of India → Schedule VII → Union List → Entry 82 has given the power to the Central Government to levy a tax on any income other than agricultural income, which is defined in Section 10(1) of the Income Tax Act, 1961.^[1] The Income Tax Law consists of Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and judicial pronouncements by the Supreme Court and High Courts.

The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF's), companies, firms, LLP, association of persons, body of individuals, local authority and any other artificial juridical person. Levy of tax on a person depends upon his residential status. The CBDT administers the Income Tax Department, which is a part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

The Income Tax Department is the biggest revenue mobilizer for the Government. The total tax revenues of the Central Government increased from ₹1,392.26 billion (US$19 billion) in 1997-98 to ₹5,889.09 billion (US$82 billion) in 2007-08.^[2][3]

History

The "Direct Taxes Code Bill" was tabled in the Parliament on 30 August 2010 by the then Finance Minister to replace the Income Tax Act, 1961 and Wealth Tax Act.^[4] The bill, however, could not go through and eventually lapsed after revocation of the Wealth Tax Act in 2015.

Amnesty scheme

Government of India allowed the people to declare their undisclosed incomes in Income Declaration Scheme, 2016 and pay a total of 45% tax for one time settlement. 64,275 disclosures were made amounting to ₹652.5 billion (US$9.1 billion).^[5]

Charge to income tax

For the assessment year 2016-17, Individuals earning an income up to ₹2.5 lakh (US$3,500) were exempt from income tax.^[6]

About 1% of the national population, called the upper class, fall under the 30% slab. It grew 22% annually on average during 2000-10 to 0.58 million income taxpayers. The middle class, who fall under the 10% and 20% slabs, grew 7% annually on average to 2.78 million income taxpayers.^[7]

Agricultural income

Agricultural income is exempt from tax as per section 10(1) of the Act. Section 2(1A) defines agricultural income as:

• Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes.
• Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent-in-kind so as to render it fit for the market or sale of such produce.
• Income attributable to a farm house (subject to some conditions).
• Income derived from saplings or seedlings grown in a nursery.

Permissible deductions from gross total income

Ministry of Finance has notified certain deductions from gross total income of an assessee. Below are deductions as updated by Finance Act, 2015.

Due date of submission of return

The due date of submission of return shall be ascertained according to section 139(1) of the Act as under:-

If the Income of a Salaried Individual is less than ₹ 500,000 and he has earned income through salary or Interest or both, such Individuals are exempted from filing their Income Tax return provided that such payment has been received after the deduction of TDS and this person has not earned interest more than ₹ 10,000 from all source combined. Such a person should not have changed jobs in the financial year.^[9]

CBDT has announced that all individual/HUF taxpayers with income more than ₹ 500,000 are required to file their income tax returns online. However, digital signatures won't be mandatory for such class of taxpayers.^[9]

Advance tax

Under this schemes, every assessee is required to pay tax in a particular financial year, preceding the assessment year, on an estimated basis. However, if such estimated tax liability for an individual who is not above 60 years of age at any point of time during the previous year and does not conduct any business in the previous year, and the estimated tax liability is below ₹ 10,000, advance tax will not be payable.

Until FY 2015-16, the due dates and amount of advance tax were different for corporate taxpayers and individual taxpayers.However, from FY 2016-17, both categories of taxpayers were brought at par. Further, individuals opting presumptive scheme of taxation u/s 44AD, 44ADA are liable to pay advance tax in single instalment.

The due dates of payment of advance tax for F.Y 17-18 are:-

Any default in payment of advance tax attracts interest under section 234B and any deferment of advance tax attracts interest under section 234C.

Tax deducted at source (TDS)

The general rule is that the total income of an assessee for the previous year is taxable in the relevant assessment year. However, income tax is recovered from the assessee in the previous year itself by way of TDS. The relevant provisions therein are listed below. (To be used for reference only. The detailed provisions therein are not listed below.¹)

In most cases, the tax deducted should be deposited within 7 days from the end of the month in which tax was deducted.

Corporate income tax

Income-wise number of corporate assessees in India

For Domestic Companies, the tax rate shall be flat 30%. However, as per Finance Act, 2018, the tax rate for MSME has been reduced from 29% to 25% for companies having turnover or gross receipts less than Rs.250 Crores in the last year i.e. in Financial Year 2016-17. Surcharge and Cess shall be levied over and above the flat rate of tax. Therefore, for large corporates, the tax rate is still 30% but for MSME (Micro, Small and Medium Enterprise) it has been reduced to 25%.

For Foreign companies, the tax rate shall be 40% in India for normal income. However, specifically in case of Royalty income or fees for rendering technical services the tax rate shall be 50%. Surcharge and Cess shall be levied over and above the flat rate of tax.^[10]

Note - For both companies, an EC and SHEC of 3% (on both the tax and the surcharge) will be payable till F.Y 17-18.But, from F.Y 18-19, the EC and SHEC has been replaced by Health and Education Cess @ 4%.From 2005-06, electronic filing of company returns is mandatory till date.^[11]

Tax returns

Annual information return and statements

Income tax rates for individuals

^[14]

Assessments

Self-assessment is done by the assessee himself in his Return of Income. The department assess the tax of an assessee under section 143(3) (scrutiny), 144 (best judgement), 147 and 153A (search and seizure). The notices for such assessments are issued under section 143(2), 148 and 153A respectively. The time limits are prescribed under section 153.^[15]

Tax penalties

There are various penalties & fees which can be levied as per the Income Tax Act, 1961. Some of the important penalties and fees are discussed as under :

1. Penalty under section 271(1)(c)^[16] for either concealment of income or for furnishing inaccurate particulars of income:-

If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

he may direct that such person shall pay by way of penalty,-

(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

In other words, u/s 271(1)(c), the penalty may range from 100 % to 300% of the amount of tax sought to be evaded.

2. Penalty u/s 270A for under reporting or misreporting of income :-

The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may direct any person to pay a penalty in addition to tax, if he has under-reported or misreported his income while filing his return.

In case of under reported income, the penalty shall be 50% of the amount of tax payable on under reported income. Further, in case of misreporting income, the penalty shall be 200% of the amount of tax payable on misreported income.

3. Fee u/s 234F for late filing of ITR :-

As per the budget 2017, a new section 234F has been introduced to ensure timely filing of returns of income. According to Section 234F, if a person is required to file income tax return (ITR) as per income tax law (section 139(1)) but does not file it within the due date then late fees shall be levied upon him. The amount of fees shall depend upon the time of filing the return and total income.

The quantum of fees u/s 234F has been enumerated as below : (i) If the return is filed after 31st July but on or before the 31st day of December of the assessment year - Rs. 5000 (ii) If the return is filed after 31st December of the assessment year - Rs. 10,000 However, if the Total income is less than or equal to five lakh rupees, then in that case, the fee amount shall not exceed Rs. 1000.

The provisions of this section shall be applicable from in respect of Income Tax returns to be filed for FY 2017-18 (or AY 2018-19).This section shall be applicable on all persons including Individual, HUF, Company, Firm, AOP etc., if the return is filed after their respective due dates.Financial year 17-18 would be the first year when any such fees would be leviable without the intervention of Assessing Officer.

Appeals

When taxpayers dispute the income tax demands raised on them, a structured appeal process has to be followed. The first level of appeals lies with the CIT (A). The next level of appeal lies with the Income Tax Appellate Tribunal - an independent body, which is the final fact finding authority. Courts can subsequently be approached by the aggrieved party only if a question of law is involved.^[17]

See also

• Service tax in India
• Central Excise (India)

References

External links

• Indian Income Tax Department
• Electronic Filing of Income Tax returns
• Union budget and Economic Survey
• Income Tax Settlement Commission Website