What is Income Tax? Definition, Features, Scope, Objective

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What is Income Tax?

According to the Constitution of India, income tax is a central subject. Income Tax on all types of income, other than agricultural income is charged and collected by the Central Government. Income Tax is tax on income.

The Income Tax Act, 1961 has been brought into force with effect from 1st April, 1962. It applies to the whole of India (including Jammu and Kashmir). Since then several amendments of far-reaching nature have been made in the Income Tax Act by the Finance Acts of every year. Besides this, amendments have also been made.

Features of Income Tax

  1. Income Tax is charged on the income of previous year, at a rate which is prescribed by the Finance Act for the relevant assessment year.

  2. The Finance Act is passed every year by the Parliament in the form popularly known as “Budget”

  3. Income Tax is levied on a person in relation to his income of the previous year.

  4. The tax payer’s liability is determined with reference to his residential status in the previous year or accounting year.

  5. Liability to income tax arises only where the total income in the accounting year exceeds the maximum tax free amount prescribed by the Finance Act to that relevant year.

  6. The rates of income tax are progressive and incidence of tax increases with the rise in income.

  7. It is compulsory to deduct the tax at source and to pay it to the Government Treasury.

Scope of Income Tax Act

The Income Tax Act, 1961 is applicable to whole of India. Income Tax Act covers:

  1. Basis of charging income.
  2. Income exempt from income tax.
  3. Computation of income under various heads of income.
  4. Clubbing of income.
  5. Set-off and carry forward of losses.
  6. Permissible deductions.
  7. Rebates and reliefs.
  8. Determination of tax in certain special cases.
  9. Tax on dividends distributed by domestic companies.
  10. Income Tax Authorities and their powers.
  11. Survey, search and seizure.
  12. Assessment procedures.
  13. Collection and recovery of tax and Tax Deduction at Source (TDS).
  14. Payment of advance tax.
  15. Refund.
  16. Appeal and revisions.
  17. Acquisitions of immovable property.
  18. Penalty and prosecution.

Objectives of Income Tax

The objectives of income tax may be summarized as follows:

  • To reduce inequalities in the distribution of income and wealth.

  • To bring out a greater measures of equity between different classes of tax payers.

  • To achieve the twin objectives of higher yields with reduction in inequalities.

  • To accelerate the temp of economic growth and development of the country.

  • To maintain reasonable economic stability in the force of long run inflationary pressure and short run international price movements.

  • To make available of funds for economic development.

  • To reduce extreme inequalities in wealth, income and consumptions standards with undetermined productive efficiency, offence, justice and political stability.

  • To encourage investment in new capital goods.

  • To channelize investment into those sectors which contribute the most of economic growth.

Important Definitions in Income Tax

Definition of Income under Income Tax Act, is inclusive and it includes

  1. Profits and gains
  2. Dividend
  3. Charity received to trust
  4. Remuneration
  5. Allowances other than salary
  6. Perquisites provided
  7. Daily allowance to directors
  8. Profit from insurance business
  9. Any casual receipts
  10. Profit from keyman insurance policy
  11. Any gift in excess of ₹50,000 at a time
  12. Profits on sale of a license granted
  13. Interest, salary,

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