Chapter 1: Introduction

A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed upon a taxpayer
(an individual or legal entity) by a state or the functional equivalent of a state such that failure to
pay, or evasion of or resistance to collection, is punishable by law. Taxes are also imposed by
many administrative divisions. Taxes consist of direct or indirect taxes and may be paid in
money or as its labour equivalent.

Overview
The legal definition and the economic definition of taxes differ in that economists do not
consider many transfers to governments to be taxes. For example, some transfers to the public
sector are comparable to prices. Examples include tuition at public universities and fees for
utilities provided by local governments. Governments also obtain resources by creating money
(e.g., printing bills and minting coins), through voluntary gifts (e.g., contributions to public
universities and museums), by imposing penalties (e.g., traffic fines), by borrowing, and by
confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer
of resources from the private to the public sector levied on a basis of predetermined criteria and
without reference to specific benefit received.
In modern taxation systems, taxes are levied in money; but, in-kind and corve taxation is
characteristic of traditional or pre-capitalist states and their functional equivalents. The method
of taxation and the government expenditure of taxes raised are often highly debated in politics
and economics. Tax collection is performed by a government agency such as the Canada
Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's
Revenue and Customs (HMRC) in the United Kingdom. When taxes are not fully paid, civil
penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) may be
imposed on the non-paying entity or individual.

Purpose
The main purpose of taxation is to accumulate funds for the functioning of the government
machineries. No government in the world can run its administrative office without funds and it
has no such system incorporated in itself to generate profit from its functioning.
In other words, a government can run its administrative set up only through public funding which
is collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is
very simple and obvious for proper functioning of a state. Taxes are charges levied against a
citizen's personal income or on property or for some specified activity.
Further, the other important purposes of taxation are as follows

Increase in effectiveness and productivity of the nation

Increase in the quantum of revenue collection

Improvement in services of the government

Improve employment at all industry verticals

Induction of modern technology in to the system

Rationalization of terms and condition of the economic system

Rationalization of employment terms and conditions

Objectives of Tax
Tax is permanent instrument for collecting revenues. It is a major source of revenue in the
developed world and has been appearing as an important source of revenue in the developing
world as well. It has been an instrument of social and economic policy for the government. The
main objectives of tax are as follows:
1. Raise More Revenue
The fundamental objective of taxation is to finance government expenditure. The government
requires carrying out various development and welfare activities in the country. For this, it needs
a huge amount of funds. The government collects funds by imposing taxes. So, raising more and
more revenues has been an important objective of tax.
2. Prevent Concentration of Wealth in A Few Hands
Tax is imposed on persons according to their income level. High earners are imposed on high tax
through progressive tax system. This prevents wealth being concentrated in a few hands of the
rich. So, narrowing the gap between rich and poor is another objective of tax.
3. Redistribute Wealth for Common Good
Tax collected by the government is expended for carrying out various welfare activities. In this
way, the wealth of the rich is redistributed to the whole community.
4. Boost up The Economy
Tax serves as an instrument for promoting economic growth, stability and efficiency. The
government controls or expands the economic activities of the country by providing various
concessions, rebates and other facilities. The effective tax system can boost up the economy.
Similarly, taxes can correct for externalities and other forms of market failure (such as
monopoly). Import taxes may control imports and therefore help the country's international
balance of payments and protect industries from overseas competition.

5. Reduce Unemployment
The government can reduce the unemployment problem in the country by promoting various
employment generating activities. Industries established in remote parts or industries providing
more employment are given more facilities. As a result, the unemployment problem can be
reduced to a great extent through liberal tax policy.
6. Remove Regional Disparities
Regional disparity has been a chronic problem to the developing countries. Tax is one of the
ways through which regional disparities can be minimized. The government provides tax
exemptions or concessions for industries established or activities carried out in backward areas.
This will help increase economic activities in those areas and ultimately regional disparity
reduces to minimum.

Importance of tax
For the worldwide operation of firms, taxation plays a vital role. Taxation has become the core of
various financing decisions which includes international investment decisions, international
working capital decisions, fund raising decisions and the decisions related to dividend and other
payments. The tax decision is also relevant in domestic firms also.
The managing of taxation is an extremely difficult issue for the international corporations. The
various reasons are given as follows:

The firms are supposed to work in several tax jurisdiction or authorities where the tax

rates are diverse and also the administration of the tax system is not uniform.
The ultimate load of tax in the framework of international firms is determined by means of

a more complex interaction of varying descriptions of the tax base.

The difference in tax treatment in different nations will direct to distortions in worldwide
trade and investment. The companies which are situated in the low-tax country can have a
periphery over other firms in worldwide market. There are possibilities to divert the

investment to those countries that have low cost rates.

The overlapping takes place between the international firms with different tax jurisdictions,
utilise the arbitrage opportunities and retain an edge over the domestic firms.

The bases of international tax system are:

Tax neutrality - The neutrality of international tax system is important because it must not
affect the economic efficiency. If the tax is neutral then it will not influence the locality of
the investment or nationality of the investor. The capital can shift from a nation with lesser
return to a nation with higher return. Therefore, resources will be allocated well, and the

gross world output in turn will be high.

Tax equity - The principle of tax equity states that all equally positioned tax players
contribute in the cost of operating the government according to the equal rules. The idea of
equity can be understood in two ways. The first one states that the input of each tax player
must be consistent with the amount of public services as received. The second idea is that

the contribution of each tax player must be in terms of their ability to pay. The ability to

pay means the one with greater ability is likely to pay a larger amount of tax.
Avoidance of double taxation - The avoidance of double income states that one must not
be taxed twice for the same income. However, if the post-tax income is sent to the foreign
countries then in that case the receiver of such income is taxed again. This implies the same
income is subjected to double taxation. As an alternative, the requirements of foreign tax
credits may be formed in the domestic tax system.

There also exist some tax laws which prevent the tax through artificial transactions such as
transfer pricing. In addition, the corporate structures will help to reduce the overall tax burden to
the enterprise.

Types of Taxes
Direct and indirect
Taxes are sometimes referred to as "direct taxes" or "indirect taxes". The meaning of these terms
can vary in different contexts, which can sometimes lead to confusion. An economic definition,
by Atkinson, states that "...direct taxes may be adjusted to the individual characteristics of the
taxpayer, whereas indirect taxes are levied on transactions irrespective of the circumstances of
buyer or seller."] According to this definition, for example, income tax is "direct", and sales tax is
"indirect". In law, the terms may have different meanings. In U.S. constitutional law, for
instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence
or ownership. Indirect taxes are imposed on events, rights, privileges, and activities. Thus, a tax
on the sale of property would be considered an indirect tax, whereas the tax on simply owning
the property itself would be a direct tax.

The Organisation for Economic Co-operation and Development (OECD) publishes an analysis of
tax systems of member countries. As part of such analysis, OECD developed a definition and
system of classification of internal taxes, generally followed below. In addition, many countries
impose taxes (tariffs) on the import of goods.

Taxes on income
Income tax
Many jurisdictions tax the income of individuals and business entities, including corporations.
Generally the tax is imposed on net profits from business, net gains, and other income.
Computation of income subject to tax may be determined under accounting principles used in the
jurisdiction, which may be modified or replaced by tax law principles in the jurisdiction.
The incidence of taxation varies by system, and some systems may be viewed
as progressive or regressive. Rates of tax may vary or be constant (flat) by income level. Many
systems allow individuals certain personal allowances and other non business reductions to
taxable income.
Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made
soon after the end of the tax year. These corrections take one of two forms: payments to the
government, for taxpayers who have not paid enough during the tax year; and tax refunds from
the government for those who have overpaid. Income tax systems will often have deductions
available that lessen the total tax liability by reducing total taxable income. They may allow
losses from one type of income to be counted against another. For example, a loss on the stock
market may be deducted against taxes paid on wages. Other tax systems may isolate the loss,
such that business losses can only be deducted against business tax by carrying forward the loss
to later tax years.
Negative income tax
In economics, a negative income tax (abbreviated NIT) is a progressive income tax system where
people earning below a certain amount receive supplemental pay from the government instead of
paying taxes to the government.
Capital gains tax
Most jurisdictions imposing an income tax treat capital gains as part of income subject to tax.
Capital gain is generally a gain on sale of capital assets that is those assets not held for sale in the

ordinary course of business. Capital assets include personal assets in many jurisdictions. Some
jurisdictions provide preferential rates of tax or only partial taxation for capital gains. Some
jurisdictions impose different rates or levels of capital gains taxation based on the length of time
the asset was held.
Corporate tax
Corporate tax refers to income, capital, net worth, or other taxes imposed on corporations. Rates
of tax and the taxable base for corporations may differ from those for individuals or other taxable
persons.

Social security contributions

Many countries provide publicly funded retirement or health care systems. In connection with
these systems, the country typically requires employers and/or employees to make compulsory
payments. These payments are often computed by reference to wages or earnings from selfemployment. Tax rates are generally fixed, but a different rate may be imposed on employers
than on employees. Some systems provide an upper limit on earnings subject to the tax. A few
systems provide that the tax is payable only on wages above a particular amount. Such upper or
lower limits may apply for retirement but not health care components of the tax.

Taxes on payroll or workforce

Unemployment and similar taxes are often imposed on employers based on total payroll. These
taxes may be imposed in both the country and sub-country levels.

Taxes on property
Recurrent property taxes may be imposed on immovable property (real property) and some
classes of movable property. In addition, recurrent taxes may be imposed on net wealth of
individuals or corporations. Many jurisdictions impose estate tax, gift tax or other inheritance
taxes on property at death or gift transfer. Some jurisdictions impose taxes on financial or capital
transactions.
Property tax
A property tax (or millage tax) is an ad valorem tax levy on the value of property that the owner
of the property is required to pay to a government in which the property is situated. Multiple
jurisdictions may tax the same property. There are three general varieties of property: land,
improvements to land (immovable man-made things, e.g. buildings) and personal property
(movable things). Real estate or realty is the combination of land and improvements to land.
Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of property
tax is an annual charge on the ownership of real estate, where the tax base is the estimated value
of the property. For a period of over 150 years from 1695 a window tax was levied in England,
with the result that one can still see listed buildings with windows bricked up in order to save
their owners money. A similar tax on hearths existed in France and elsewhere, with similar
results. The two most common type of event driven property taxes are stamp duty, charged upon
change of ownership, and inheritance tax, which is imposed in many countries on the estates of
the deceased.
In contrast with a tax on real estate (land and buildings), a Land Value Tax (or LVT) is levied
only on the unimproved value of the land ("land" in this instance may mean either the economic
term, i.e., all natural resources, or the natural resources associated with specific areas of the

Earth's surface: "lots" or "land parcels"). Proponents of land value tax argue that it is
economically justified, as it will not deter production, distort market mechanisms or otherwise
create deadweight lossesthe way other taxes do.
When real estate is held by a higher government unit or some other entity not subject to taxation
by the local government, the taxing authority may receive apayment in lieu of taxes to
compensate it for some or all of the foregone tax revenues.
In many jurisdictions (including many American states), there is a general tax levied periodically
on residents who own personal property (personalty) within the jurisdiction. Vehicle and boat
registration fees are subsets of this kind of tax. The tax is often designed with blanket coverage
and large exceptions for things like food and clothing. Household goods are often exempt when
kept or used within the household. Any otherwise non-exempt object can lose its exemption if
regularly kept outside the household. Thus, tax collectors often monitor newspaper articles for
stories about wealthy people who have lent art to museums for public display, because the
artworks have then become subject to personal property tax. If an artwork had to be sent to
another state for some touch-ups, it may have become subject to personal property tax
in that state as well.
Inheritance tax
Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise
on the death of an individual. In United States tax law, there is a distinction between an estate tax
and an inheritance tax: the former taxes the personal representatives of the deceased, while the
latter taxes the beneficiaries of the estate. However, this distinction does not apply in other
jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.
Expatriation tax
An Expatriation Tax is a tax on individuals who renounce their citizenship or residence. The tax
is often imposed based on a deemed disposition of all the individual's property. One example is
the United States under the American Jobs Creation Act, where any individual who has a net
worth of $2 million or an average income-tax liability of $127,000 who renounces his or her

citizenship and leaves the country is automatically assumed to have done so for tax avoidance
reasons and is subject to a higher tax rate.
Transfer tax
Historically, in many countries, a contract needed to have a stamp affixed to make it valid. The
charge for the stamp was either a fixed amount or a percentage of the value of the transaction. In
most countries the stamp has been abolished but stamp duty remains. Stamp duty is levied in the
UK on the purchase of shares and securities, the issue of bearer instruments, and certain
partnership transactions. Its modern derivatives, stamp duty reserve tax and stamp duty land tax,
are respectively charged on transactions involving securities and land. Stamp duty has the effect
of discouraging speculative purchases of assets by decreasing liquidity. In the United States,
transfer tax is often charged by the state or local government and (in the case of real property
transfers) can be tied to the recording of the deed or other transfer documents.
Wealth (net worth) tax
Some countries' governments will require declaration of the tax payers' balance sheet (assets and
liabilities), and from that exact a tax on net worth (assets minus liabilities), as a percentage of the
net worth, or a percentage of the net worth exceeding a certain level. The tax may be levied on
"natural" or legal "persons". An example is France's ISF.

Taxes on goods and services

Value added tax (Goods and Services Tax)
A value added tax (VAT), also known as Goods and Services Tax (G.S.T), Single Business Tax,
or Turnover Tax in some countries, applies the equivalent of a sales tax to every operation that
creates value. To give an example, sheet steel is imported by a machine manufacturer. That
manufacturer will pay the VAT on the purchase price, remitting that amount to the government.
The manufacturer will then transform the steel into a machine, selling the machine for a higher
price to a wholesale distributor. The manufacturer will collect the VAT on the higher price, but
will remit to the government only the excess related to the "value added" (the price over the cost
of the sheet steel). The wholesale distributor will then continue the process, charging the retail
distributor the VAT on the entire price to the retailer, but remitting only the amount related to the
distribution mark-up to the government. The last VAT amount is paid by the eventual retail
customer who cannot recover any of the previously paid VAT. For a VAT and sales tax of
identical rates, the total tax paid is the same, but it is paid at differing points in the process.
VAT is usually administrated by requiring the company to complete a VAT return, giving details
of VAT it has been charged (referred to as input tax) and VAT it has charged to others (referred to
as output tax). The difference between output tax and input tax is payable to the Local Tax
Authority. If input tax is greater than output tax the company can claim back money from the
Local Tax Authority.
Sales taxes
Sales taxes are levied when a commodity is sold to its final consumer. Retail organizations
contend that such taxes discourage retail sales. The question of whether they are generally
progressive or regressive is a subject of much current debate. People with higher incomes spend
a lower proportion of them, so a flat-rate sales tax will tend to be regressive. It is therefore
common to exempt food, utilities and other necessities from sales taxes, since poor people spend
a higher proportion of their incomes on these commodities, so such exemptions make the tax

more progressive. This is the classic "You pay for what you spend" tax, as only those who spend
money on non-exempt (i.e. luxury) items pay the tax.
A small number of U.S. states rely entirely on sales taxes for state revenue, as those states do not
levy a state income tax. Such states tend to have a moderate to large amount of tourism or interstate travel that occurs within their borders, allowing the state to benefit from taxes from people
the state would otherwise not tax. In this way, the state is able to reduce the tax burden on its
citizens. The U.S. states that do not levy a state income tax are Alaska, Tennessee, Florida,
Nevada, South Dakota, Texas, Washington state, and Wyoming. Additionally, New Hampshire
and Tennessee levy state income taxes only on dividends and interest income. Of the above
states, only Alaska and New Hampshire do not levy a state sales tax. Additional information can
be obtained at the Federation of Tax Administrators website.
In the United States, there is a growing movement for the replacement of all federal payroll and
income taxes (both corporate and personal) with a national retail sales tax and monthly tax rebate
to households of citizens and legal resident aliens. The tax proposal is named Fair Tax. In
Canada, the federal sales tax is called the Goods and Services tax (GST) and now stands at 5%.
The provinces of British Columbia, Saskatchewan, Manitoba, and Prince Edward Island also
have a provincial sales tax [PST]. The provinces of Nova Scotia, New Brunswick,
Newfoundland & Labrador, and Ontario have harmonized their provincial sales taxes with the
GSTHarmonized Sales Tax [HST], and thus is a full VAT. The province of Quebec collects the
Quebec Sales Tax [QST] which is based on the GST with certain differences. Most businesses
can claim back the GST, HST and QST they pay, and so effectively it is the final consumer who
pays the tax.
Excises
Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise
taxes are based on the quantity, not the value, of product purchased. For example, in the United
States, the Federal government imposes an excise tax of 18.4 cents per U.S. gallon (4.86/L) of
gasoline, while state governments levy an additional 8 to 28 cents per U.S. gallon. Excises on
particular commodities are frequently hypothecated. For example, a fuel excise (use tax) is often

used to pay for public transportation, especially roads and bridges and for the protection of the
environment. A special form of hypothecation arises where an excise is used to compensate a
party to a transaction for alleged uncontrollable abuse; for example, a blank media tax is a tax on
recordable media such as CD-Rs, whose proceeds are typically allocated to copyright holders.
Critics charge that such taxes blindly tax those who make legitimate and illegitimate usages of
the products; for instance, a person or corporation using CD-R's for data archival should not have
to subsidize the producers of popular music.
Excises (or exemptions from them) are also used to modify consumption patterns (social
engineering). For example, a high excise is used to discourage alcohol consumption, relative to
other goods. This may be combined with hypothecation if the proceeds are then used to pay for
the costs of treating illness caused by alcohol abuse. Similar taxes may exist
on tobacco, pornography, etc., and they may be collectively referred to as "sin taxes". A carbon
tax is a tax on the consumption of carbon-based non-renewable fuels, such as petrol, diesel-fuel,
jet fuels, and natural gas. The object is to reduce the release of carbon into the atmosphere. In the
United Kingdom, vehicle excise duty is an annual tax on vehicle ownership.

Tariff
An import or export tariff (also called customs duty or impost) is a charge for the movement of
goods through a political border. Tariffs discourage trade, and they may be used by governments
to protect domestic industries. A proportion of tariff revenues is often hypothecated to pay
government to maintain a navy or border police. The classic ways of cheating a tariff
are smuggling or declaring a false value of goods. Tax, tariff and trade rules in modern times are
usually set together because of their common impact on industrial policy, investment policy,
and agricultural policy. A trade bloc is a group of allied countries agreeing to minimize or
eliminate tariffs against trade with each other, and possibly to impose protective tariffs on
imports from outside the bloc. A customs union has a common external tariff, and the
participating countries share the revenues from tariffs on goods entering the customs union.

In some societies, tariffs also could be imposed by local authorities on the movement of goods
between regions (or via specific internal gateways). A notable example is the likin, which became
an important revenue source for local governments in the late Qing China.

Other taxes
License fees
Occupational taxes or license fees may be imposed on businesses or individuals engaged in
certain businesses. Many jurisdictions impose a tax on vehicles.
Poll tax
A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a set amount per
individual. It is an example of the concept of fixed tax. One of the earliest taxes mentioned in
the Bible of a half-shekel per annum from each adult Jew (Ex. 30:1116) was a form of poll tax.
Poll taxes are administratively cheap because they are easy to compute and collect and difficult
to cheat. Economists have considered poll taxes economically efficient because people are
presumed to be in fixed supply. However, poll taxes are very unpopular because poorer people
pay a higher proportion of their income than richer people. In addition, the supply of people is in
fact not fixed over time: on average, couples will choose to have fewer children if a poll tax is
imposed. The introduction of a poll tax in medieval England was the primary cause of the
1381 Peasants' Revolt. Scotland was the first to be used to test the new poll tax in 1989 with
England and Wales in 1990. The change from a progressive local taxation based on property
values to a single-rate form of taxation regardless of ability to pay (the Community Charge, but
more popularly referred to as the Poll Tax), led to widespread refusal to pay and to incidents of
civil unrest, known colloquially as the 'Poll Tax Riots'.
Other
Some types of taxes have been proposed but not actually adopted in any major jurisdiction.
These include:

Bank tax

Financial transaction taxes including currency transaction taxes

Chapter 2: Taxation in India

Taxes in India are levied by the Central Government and the state governments. Some minor
taxes are also levied by the local authorities such as the Municipality.
The authority to levy a tax is derived from the Constitution of India which allocates the power to
levy various taxes between the Centre and the State. An important restriction on this power is
Article 265 of the Constitution which states that "No tax shall be levied or collected except by
the authority of law." Therefore each tax levied or collected has to be backed by an
accompanying law, passed either by the Parliament or the State Legislature. In 2013-2014, the
gross tax collection of the Centre amounted to 13.64 Trillion.

Constitutionally established scheme of taxation

Article 246 of the Indian Constitution, distributes legislative powers including taxation, between
the Parliament of India and the State Legislature. Schedule VII enumerates these subject matters
with the use of three lists;

List - I entailing the areas on which only the parliament is competent to make laws,

List - II entailing the areas on which only the state legislature can make laws, and

List - III listing the areas on which both the Parliament and the State Legislature can
make laws upon concurrently.

Separate heads of taxation are no head of taxation in the Concurrent List (Union and the States
have no concurrent power of taxation) The list of thirteen Union heads of taxation and the list of
nineteen State heads are given below:

Central government of India

S.
No.

Parliament of India

Taxes on income other than agricultural income (List I, Entry 82)

Duties of customs including export duties (List I, Entry 83)

Duties of excise on tobacco and other goods manufactured or produced in India except (i)
alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other
narcotic drugs and narcotics, but including medicinal and toilet preparations containing
alcohol or any substance included in (ii). (List I, Entry 84)

Corporation Tax (List I, Entry 85)

Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies,
taxes on capital of companies (List I, Entry 86)

Estate duty in respect of property other than agricultural land (List I, Entry 87)

Duties in respect of succession to property other than agricultural land (List I, Entry 88)

Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares
and freight (List I, Entry 89)

State governments
S.
No.

State Legislature

Land revenue, including the assessment and collection of revenue, the maintenance of land
records, survey for revenue purposes and records of rights, and alienation of revenues (List
II, Entry 45)

Taxes on agricultural income (List II, Entry 46)

Duties in respect of succession to agricultural income (List II, Entry 47)

Estate Duty in respect of agricultural income (List II, Entry 48)

Taxes on lands and buildings (List II, Entry 49)

Taxes on mineral rights (List II, Entry 50)

Duties of excise for following goods manufactured or produced within the State (i)
alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other narcotic

drugs and narcotics (List II, Entry 51)

8

Taxes on entry of goods into a local area for consumption, use or sale therein (see Value
added tax) (List II, Entry 52)

Taxes on the consumption or sale of electricity (List II, Entry 53)

10

Taxes on the sale or purchase of goods other than newspapers (List II, Entry 54)

11

Taxes on advertisements other than advertisements published in newspapers and

advertisements broadcast by radio or television (List II, Entry 55)

12

Taxes on goods and passengers carried by roads or on inland waterways (List II, Entry 56)

13

Taxes on vehicles suitable for use on roads (List II, Entry 57)

14

Taxes on animals and boats (List II, Entry 58)

15

Tolls (List II, Entry 59)

16

Taxes on profession, trades, callings and employments (List II, Entry 60)

17

Capitation taxes (List II, Entry 61)

18

Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling

(List II, Entry 62)

19

Stamp duty (List II, Entry 63)

Income Tax Act of 1961

The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of
the Constitution of India to levy tax on all income other than agricultural income (subject to
Section 10(1)). The Income Tax Law comprises The 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 Supreme Court and High Courts.
The government of India imposes an income tax on taxable income of all persons including
individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons, and
body of individuals, local authority and any other artificial judicial person. Levy of tax is
separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The
Indian Income Tax Department is governed by CBDT and is 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 Rs. 1392.26 billion in 1997-98 to Rs.
5889.09 billion in 2007-08.
The major tax enactment in India is the Income Tax Act of 1961 passed by the Parliament, which
imposes a tax on income of individuals and corporations.[9] This Act imposes a tax on income
under the following five heads:

Income from house and property,

Income from business and profession,

Income from salaries,

Income in the form of Capital gains, and

Income from other sources

However, this Act is about to be repealed and be replaced with a new Act which consolidates the
law relating to Income Tax and Wealth Tax, the new proposed legislation is called the Direct
Taxes Code (to become the Direct Taxes Code, Act 2010). Act was referred to Parliamentary
standing committee which has submitted its recommendations. Act is expected to be
implemented with changes from the Financial Year 2013-14.
Income tax rates
In terms of the Income Tax Act, 1961, a tax on income is levied on individuals,Firms,
corporations and body of persons, Local authorities,Artificial Juridical persons. The rate of taxes
are prescribed every year by the Parliament in the Finance Act, popularly called the Budget. In
terms of the Finance Act, 2009, the rate of tax for individuals, HUF, Association of Persons
(AOP) and Body of individuals (BOI) is as under;

A surcharge of 2.50% of the total tax liability is applicable in case the Payee is a NonResident or a Foreign Company; where the total income exceeds Rs 10,000,000.

Note: Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any. A
marginal relief may be provided to ensure that the additional IT payable, including surcharge, on
excess of income over 1,000,000 is limited to an amount by which the income is more than this
mentioned amount.

Chapter 3: ASSESSMENT PROCEDURE

Inquiry before assessment [Section 142]
Inquiry:
(1) The Assessing Officer has power to make inquiry from any person (a) who has made a return
under section 139 or (b) in whose case the time allowed under sub-section (1) or sub-section
(4) of section 139 for furnishing the return has expired. For this purpose a notice can be
issued for:
(i) where such person has not made a return within the time allowed under section 139(1) or
139(4), to furnish a return of his income, or
(ii) To produce such accounts or documents as the Assessing Officer may require, or
(iii) To furnish in writing and verified in the prescribed manner information in such form and on
such points or matters including a statement of all assets and liabilities of the assessee,
whether included in the accounts or not, as the Assessing Officer may require
Provided that
(i) Previous approval of Joint Commissioner shall be obtained before requiring the assessee to
furnish a statement of all assets and liabilities not included in the accounts.
(ii) The Assessing Officer shall not require the production of any accounts relating to a period
more than three years prior to the Previous Year.
(2) For the purpose of obtaining full information in respect of the income or loss of any person,
the Assessing Officer may make such inquiry as he considers necessary.
Audit
If the Assessing Officer, having regard to the nature and complexity of the accounts volume of
the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the
accounts or specialised nature of business activity of the assessee and the interests of the
revenue, opines that it is necessary so to do, he may with the prior approval of the Chief
Commisioner or Commisioner, direct the assessee to get the accounts audited by an accountant,

as defined in the Explanation below section 288(2) and to furnish an audit report, within such
period as may be specified, in the prescribed form. The expenses of such audit shall be paid by
the assessee.
These provisions of audit shall have effect notwithstanding that the accounts of the assessee have
been already audited.
Opportunity to Assessee:
The assessee shall be given an opportunity of being heard in respect of any material gathered on
the basis of any inquiry or any audit and proposed to be utilised for the purposes of the
assessment. Such opportunity need not be given where the assessment is made under section 144.

Estimate by Valuation Officer in certain cases [Sec. 142A]

For the purposes of making an assessment or reassessment under this Act, where an estimate of
the value of any investment referred to in section 69 or section 69B or the value of any bullion,
jewellery or other valuable article referred to in section 69A or section 69B or fair market value
of any property reffered to in sub-section 2 or section 56 is required to be made, the Assessing
Officer may require the Valuation Officer to make an estimate of such value and report the same
to him.
On receipt of the report from the Valuation Officer, the Assessing Officer may, after giving the
assessee an opportunity of being heard, take into account such report in making such assessment
or reassessment.

Assessment
Assessment means appraisal, evaluation, estimation, measurement, judgment etc. In the context
income tax law it means then evaluation, estimation, or measurement of income. The term
assessment' in field of taxation law has a definite meaning. This term is comprehensive and may
include varied ranges of activities and procedures. The definition of assessment has not been
provided with the IT Act, but a perusal of the term within the scope of the Act makes it obvious
that it implies an investigation and ascertainment of the correctness of the returns and accounts
filed by the assessee. Essentially the assessment would evidently mean determination of the
quantum of taxable turnover and also the quantum of taxable amount payable by the tax payer
This assessment is made on the basis of returns and accounts furnished by an assessee in support
thereof but on an estimate made by the assessing authority which may, of course, be based inter
alia on the accounts and documents furnished by the assessee. The expression of assessment has
a wide scope within the purposes of the Act whether the said assessment made are correct or not.
Therefore any assessment made would not essentially mean an assessment correctly or properly
but would signify all assessment made or purported to have been made under the said act.
Basically assessment is estimation for an amount assessed while paying Income Tax. It is a
compulsory contribution that is required for the support of a government.

Income tax assessment is estimation for an amount assessed while paying Income Tax by
assessee himself or by income tax officer. Following types of assessment are carried out
under Income tax act. We will discuss each type of assessment in detailed in this article.
1.

Self assessment u/s 140A.

2.

Summary Assessment u/s 143(1)

3.

Scrutiny assessment u/s 143(3).

4.

Best judgment assessment u/s 144.

5.

Protective Assessment.

6.

Income escaping assessment u/s 147.

7.

Assessment in case of search u/s 153A

For making assessment under these various provisions of the act, some compliance is mandatory
to assessing officer:
Particulars

Mandatory Requirements

Self assessment u/s 140A.

Scrutiny assessment u/s 143(3).

Section 143(2) Notice

Best judgment assessment u/s 144.

Show cause notice u/s 144

Protective Assessment

Income escaping assessment u/s 147. Section 148 Notice

Assessment in case of search u/s
153A

Section 153A

Self-assessment
140A. Self-assessment.- (1) Where any tax is payable on the basis of any return required to be
furnished under section 115WD or section 115WH or section 139 or section 142 78[or section
148 or section 153A or, as the case may be, section 158BC, after taking into account,
(i)

The amount of tax, if any, already paid under any provision of this Act\;

(ii) any tax deducted or collected at source;

(iii) any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax
paid in a country outside India;
(iv) any relief of tax claimed under section 90A on account of tax paid in any specified territory
outside India referred to in that section; and
(v) any tax credit claimed to be set off in accordance with the provisions of section 115JAA,
the assessee shall be liable to pay such tax together with interest payable under any provision of
this Act for any delay in furnishing the return or any default or delay in payment of advance tax,
before furnishing the return and the return shall be accompanied by proof of payment of such tax
and interest.
Explanation.Where the amount paid by the assessee under this sub-section falls short of the
aggregate of the tax and interest as aforesaid, the amount so paid shall first be adjusted towards
the interest payable as aforesaid and the balance, if any, shall be adjusted towards the tax
payable.

(1A) For the purposes of sub-section (1), interest payable,

(i) under section 234A shall be computed on the amount of the tax on the total income as
declared in the return as reduced by the amount of,
(a) advance tax, if any, paid;
(b) any tax deducted or collected at source;
(c) any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax
paid in a country outside India;
(d) any relief of tax claimed under section 90A on account of tax paid in any specified territory
outside India referred to in that section; and
(e) any tax credit claimed to be set off in accordance with the provisions of section 115JAA;
(ii) under section 115WK shall be computed on the amount of tax on the value of the fringe
benefits as declared in the return as reduced by the advance tax, paid, if any.
(1B) For the purposes of sub-section (1), interest payable under section 234B shall be computed
on an amount equal to the assessed tax or, as the case may be, on the amount by which the
advance tax paid falls short of the assessed tax.
Explanation.For the purposes of this sub-section, assessed tax means the tax on the total
income as declared in the return as reduced by the amount of,
(i) tax deducted or collected at source, in accordance with the provisions of Chapter XVII, on
any income which is subject to such deduction or collection and which is taken into account in
computing such total income;
(ii) any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax
paid in a country outside India;

(iii) any relief of tax claimed under section 90A on account of tax paid in any specified territory
outside India referred to in that section; and
(iv) any tax credit claimed to be set off in accordance with the provisions of section 115JAA.
(2) After a regular assessment under section 115WE or section 115WF or section 143 or section
144 or an assessment under section 153A or section 158BC has been made, any amount paid
under sub-section (1) shall be deemed to have been paid towards such regular assessment or
assessment, as the case may be.
(3) If any assessee fails to pay the whole or any part of such tax or interest or both in accordance
with the provisions of sub-section (1), he shall, without prejudice to any other consequences
which he may incur, be deemed to be an assessee in default in respect of the tax or interest or
both remaining unpaid, and all the provisions of this Act shall apply accordingly.
(4) The provisions of this section as they stood immediately before their amend-ment by the
Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), shall apply to and in relation to any
assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier
assessment year and references in this section to the other provisions of this Act shall be
construed as references to those provisions as for the time being in force and applicable to the
relevant assessment year.

Best judgment assessment

Assessment refers to evaluation or judgment. As per the income tax law it refers to
evaluation of income. It includes various procedures. Though in the strict sense
assessment has not been defined in the Income Tax Act, but it refers to an investigation
for judging the correctness of the returns and documents filed by the tax payers.
Assessment includes determination of the amount of taxable income as well as the
amount of tax payable by an assessee.
This assessment is an estimate made by the income tax authority which is based on the
accounts and documents filed by the assessee. The term assessment has a wide scope in
the Income Tax Act. An assessment whether is correct or not would signify all
assessments made under the Act.
Section 144 of the Income Tax Act: Best judgment assessment:
Section 144 of the Income Tax Act deals with the provisions relating to best judgment
assessment. In a best judgment assessment an assessing officer makes an assessment
based on his best reasoning. He should neither be dishonest in his assessment, nor should
he not have a vindictive attitude.
Kinds of best judgment assessment:
There are two kinds of best judgment assessment:
a.

Compulsory best judgment assessment It is done when the assessing officer finds

that there is an act amounting to non-co-operation by the assessee or where the assessee
is found to be a defaulter in supplying information to the department.
b.

Discretionary best judgment assessment It is done in cases where the assessing

officer is dissatisfied with the authenticity of the accounts given by the assessee or where
no regular method of accounting has been applied by the assessee.

Principle of application of best judgment assessment:

The process of Best Judgment Assessment is applied in conformity with the principles of
natural justice. As per the provisions of Section 144 of the Income Tax Act, 1961, the
Assessing Officer is supposed to make an assessment of the income of an assessee to the
best of his judgment in the following cases:
1.

When an assessee fails to file a return under section 139(1) of the Act or a revised

return under section 139(4) or 139(5) of the Act;

2.

When an assessee fails to comply with the terms and conditions laid down in the

provisions relating to a notice under section 142 or fails to get his accounts audited as per
section 142(2A) of the Act;
3.

When an assessee after filing a return fails to comply with the terms of a notice as

given in section 143(2) for production of evidence or documents.

Options available to an assessee after receiving best judgment assessment:
Upon receiving best judgment assessment an assessee can file an appeal under Section
246A of the Act or can file a revision under Section 246 of the Act before the Income Tax
Commissioner. An assessee gets an opportunity of being heard before the best judgment
assessment is made. A notice by means of a show cause is issued to the assessee before
such assessment is made.

Summary Assessment u/s 143(1)

Summary Assessment, it is not an actual assessment. Under this section, the Return of Income
filed by assessee will not be scrutinized, however whatever, is claimed by assessee in his ROI
will be accepted by assessing officer after only confirming arithmetical accuracy.
Assessing Officer can complete the assessment without passing a regular assessment order. The
assessment is completed on the basis of return submitted by the assessee.
Assessing Officer has adopted a two-stage procedure of assessment as part of risk management
strategy. In the first stage, all tax returns are processed to correct arithmetical mistakes, internal
inconsistencies, tax calculation and verification of tax payment. At this stage, no verification of
the income is undertaken. In the second stage, certain percentage of the tax returns are selected
for scrutiny/ audit on the basis of the probability of deducting tax evasion. At this stage, the tax
administration is concerned with the verification of the income.
Total income of the assessee shall be computed under section 143(1) after making the following
adjustments to the total income in the return (i) any arithmetical errors in the return; or
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return.
An intimation shall be sent to the assessee specifying the sum determined to be payable by, or the
amount of refund due to, the assessee after the aforesaid corrections. The amount of refund due
to the assessee shall be granted to him. No intimation shall be sent after the expiry of one year
from the end of the financial year in which the return is made. The acknowledgement of the
return shall be deemed to be the intimation in a case where no sum is payable by, or refundable
to, the assessee, and where no adjustment has been made.
An incorrect claim apparent from any information in the return has been defined. It means
claim on the basis of an entry, in the return (i) Of an item, which is inconsistent with another entry of the same or some other item in such
return;
(ii) information required to be furnished to substantiate such entry, has not been furnished under
the Act; or

(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may
have been expressed as monetary amount or percentage or ratio or fraction.
As per amendment in section 143(1D) provides that processing of a return under section 143(1)
shall not be necessary, where a scrutiny notice has been issued to the assessee under sub-section
(2) of Section 143 (w.e.f. July 1, 2012)
Adjustment through computerised processing only : All the adjustments such as arithmetical
error, incorrect claim, etc. are made only in the course of computerised processing. For this
purpose, a system of centralised processing of returns has been established by the Department.
Software will be designed to detect arithmetical inaccuracies and internal inconsistencies and
make appropriate adjustments in the computation of total income.
To facilitate this, the Board has formulated a scheme with view to expeditiously determine the
tax payable by, or refund due to, the assessee.
16.1.3.2 Notice under section 143(2)
A notice shall be served on the asessee within a period of 6 months from the end of the financial
year in which return is furnished. The notice requires the assessee to produce any evidence which
the assessee may rely in support of the return.
If notice is sent to the assessee by registered post on last day of the period of limitation and it is
served on the assessee a few days later, beyond period of limitation, it cannot be said to be
validly served.

1.

The total income or loss shall be computed after making the following adjustments,

namely:
(i)

Any arithmetical error in the return; or

(ii)

An incorrect claim, if such incorrect claim is apparent from any information in the return;

2.

The tax and interest, if any, shall be computed on the basis of the total income computed

under clause (a);

3.

The sum payable by, or the amount of refund due to, the assessee shall be determined

after adjustment of the tax and interest, if any, computed under clause (b) by any tax deducted at
source, any tax collected at source, any advance tax paid, any relief allowable under an
agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate
allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid
otherwise by way of tax or interest;
4.

An intimation shall be prepared or generated and sent to the assessee specifying the sum

determined to be payable by, or the amount of refund due to, the assessee under clause (c); and
5.

The amount of refund due to the assessee in pursuance of the determination under clause

(c) shall be granted to the assessee: