Basic Concepts of Income Tax

Taxation, on of the most interesting and tricky subjects in the syllabus of Chartered Accountancy is actually more about the concepts than the learning. Like all other subjects, if it is studied with an easy and happy approach, its going to be as simple as water. But the students mainly go wrong while starting the subject. The directly move to the ‘Heads of Income’ before studying the basic concepts of taxation. As a result their foundation in this particular subject remains weak and they become prone to making mistakes during exam. Sincerely the first few days should be given to basic concepts about taxation (though I must say that there won’t be any direct question from theses parts in the examination).

What is Tax?

Tax is that part of our income which the Government of India takes from us for providing us numerous facilities like, water and drainage system, protection against internal and external enemies, developing infrastructure.

In simple words Tax is a source of revenue for the Government. There are two types of taxes –

1. Direct Tax

2. Indirect Tax

Let us discuss these in brief:

Direct tax is the tax which can’t be shifted to others. Income tax is a direct tax (and we all try to save it to the best possible limit!) Now while talking about tax saving, three relevant concepts are tax planning, tax omission & tax evasion that we will discuss later.

Indirect Tax on the other hand is a tax that causes rise in the price of goods and is ultimately borne by the customer. That means, if I and Mr. Ambani enjoy Parle- G with the morning tea, both of us are bearing the same amount of tax (that’s soo unfair, isn’t it!). But still we don’t crib about it because the amount of indirect tax can’t be seen by us, the customers. And this is one of the reasons why, Indirect tax is the main source of revenue for the Government.

What are Tax Planning, Avoidance and Evasion?

The Government has given us some provisions to reduce the tax on our income. Proper use of those tools for reducing the tax is called Tax Planning.

The CAs try to find out the loopholes within the provisions of Income Tax Act, and work within those loopholes to save taxes for their clients while the Income Tax department just keeps on staring. It is tax avoidance.