What is Income Tax? Describe the history of Income Tax in India. What is the basis of charge of Income Tax?

     Government levies tax not only to collect required revenue to meet its expenditure but also with a view to attain certain economic objectives as well. Most important among them is reallocation of economics resources. Income tax is most important tax from this view. It is a direct tax and a very powerful tool to promote economic cause of the nation.

What is Income tax?

     Income tax is an annual tax charged from every individual, HUF, firm association of persons, body of individual, Company, Corporation, authority and Juristic person on the total income of the previous year completed with reference to the provisions of the Income Tax Act, 1861 at rates specified by the finance Act for the relevant assessment year. The income chargeable to tax should have some definite sources of income – salaries, house property, business and profession, Capital gains and other sources.

Meaning of Income Tax:  

   Income Tax is a direct tax. It is levied and collected by the central government. The government has set up a seprate Income Tax Department for this purpose. Income Tax is a very important source of income of the central government. Although income tax is levied and collected by the Central government yet a certain portion of its distributed among the states of their welfare projects. Income tax Department functions under the direct control and supervision of ‘Central Board of Direct Taxes’ (CBDT) WHICH IS UNDER Finance Ministry Of the government of India. Income tax is tax on income, levied on the previous year’s total taxable income of an assessee at the rates applicable during the current year. The rates of Income Tax are given in the Finance Act passed by the Parliament every year. These rates are divided into various slabs of income. For every income-slab there is a different rate of income-tax. As the income slab goes up, the rate of income-tax also goes up. As a result more income tax is charged on higher income.

History of Income Tax in India .

     In India, this tax was introduced for the first time in the year 1860 by Sir James Wilson to meet the losses of military mutiny of the year 1857. A separate Income Tax Act was passed in 1886 which remained in force upto 1917 with several amendments from time to time. In the year 1918 a new Income Tax replaced the old one . The Income Tax Act was again replaced by another new act in the year 1922. This act remained effective upto the assessment year 1961-62 with numerous amendments made therein time to time. Income Tax Act, 1961 replaced the Act of 1922 and came in force with effect April 1, 1962. It applies to whole of India including Sikkim and Jammu and Kashmir.

     The income Tax Act, 1961 has been since amended substantially every year by Union Budget which also includes Finance Bill. The Union Budget including the Finance Bill is passed by both of the houses of parliament and receives assent of the president of India. Finance Bill proposes among other thing rates of Income Tax chargeable on the Income earned in the coming year.

     After many substantial amendments of varied nature the Act has become very complicated for both tax administration authorities and the tax payers. A new simplified Income Tax is badly needed.

     Basis of charge: The basis of charge of income Tax are follows:

1.    Tax is charged on incomes as defined in section 2(24) of the act.

2.    Tax is charged annually on the total income earned in the previous year.

3.    Tax rates are determined every year by the relevant Finance Act for different types of assessee.

4.    Tax is charged from every person as defined in section 2(31).

5.    Tax is deducted at source or paid in advance as per scheme of the act.    

6.    Income of every assessee is assessed under five heads namely – Income from salaries, Income from house properties, Profits and Gains of business and profession, Capital gains and Income from other sources.