Unit – I: Basic concepts of Income Tax and Residential status

Income Tax: Direct Tax

Definition:

• Income tax is a direct tax imposed by the government on the income earned by individuals, businesses, and other entities within its jurisdiction.

Key Features:

• Direct Nature: Income tax is levied directly on the income of the taxpayer.
• Progressive Taxation: The tax rate often increases as income levels rise.
• Wide Scope: It covers various sources of income, including salary, business profits, capital gains, and more.
• Assessment Year: The tax is calculated for a specific financial year, and the assessment is done in the subsequent year.

Why Income Tax is a Direct Tax:

Direct vs. Indirect Taxes:

• Direct Tax: Imposed on individuals and entities directly. The burden cannot be shifted; the taxpayer bears it.
• Indirect Tax: Passed on to others, and the burden can be shifted. Examples include VAT, GST.

Characteristics of Income Tax as Direct Tax:

• Direct Impact: The taxpayer pays the tax directly to the government based on their income.
• Progressive Nature: Higher-income individuals generally pay a higher percentage of their income as tax.

Difference Between Income Tax and Indirect Tax:

Income Tax:

• Nature: Direct tax.
• Base: Imposed on income earned by individuals and entities.
• Burden: Borne by the taxpayer directly.
• Progressivity: Generally progressive, with higher income attracting higher tax rates.

Indirect Tax:

• Nature: Imposed on goods and services.
• Base: Applied at the point of sale or consumption.
• Burden: Can be shifted to the end consumer.
• Progressivity: Generally regressive, as it may affect lower-income individuals more.

Tax Liability:

Definition:

• Tax liability refers to the total amount of tax that an individual or entity owes to the government based on their taxable income and the applicable tax rates.

Components:

• Taxable Income: The income on which tax is calculated.
• Applicable Rates: The tax rates set by the government for different income brackets.
• Deductions and Credits: Certain deductions and credits may reduce the final tax liability.

Calculation:

• Tax liability is determined by applying the relevant tax rates to the taxable income and adjusting for any eligible deductions or credits.

Income Tax: Introduction and Basic Concepts

Residential Status:

• Significance: Residential status determines the scope of an individual's tax liability in a specific jurisdiction.
• Categories:
  • Resident: Satisfying conditions of physical presence (e.g., 182 days in a financial year).
  • Non-Resident: Failing to meet the residency criteria.
  • Resident but Not Ordinarily Resident: Considering factors beyond mere physical presence.
• Determining Factors:
  • Number of days present in the country during the financial year.
  • Preceding years' presence for a cumulative assessment.

How to Determine Residential Status:

• Resident:
  • Presence in India for 182 days or more in the financial year.
  • Presence for 60 days or more in the financial year and 365 days or more in the preceding four financial years.
• Non-Resident:
  • Not meeting the criteria for residency.
• Resident but Not Ordinarily Resident:
  • Non-resident in India in 9 out of the 10 preceding financial years.
  • Presence in India for 729 days or less in the preceding seven financial years.

Tax Incidence:

• Resident: Taxed on worldwide income.
• Non-Resident: Taxed only on income earned in the jurisdiction.
• Resident but Not Ordinarily Resident: Taxed on income earned or received in India and income deemed to be received or accrued in India.

Exempted Incomes - Agricultural Income:

• Definition: Income derived from agricultural operations or related activities.
• Tax Exemption: Agricultural income is exempt from income tax in India.
• Scope:
  • Income from cultivating land.
  • Revenue from agricultural processes.
• Conditions:
  • Income should be derived from land located in India.
  • Agricultural operations should be genuine and not a means of tax evasion.

Key Points to Note:

Residential status affects tax liability.

Determining factors include days of presence and historical data.

Tax incidence varies for residents, non-residents, and residents but not ordinarily resident.

Agricultural income is exempt, but definitions and conditions apply.