Understanding Income Tax in India Part I

Aayush Kedia

Taxation refers to the amount to be paid by a person on the amount earned by them. The concept of Income Tax, as the name suggests, is the tax to be paid by a person on their ‘Income’.

The person paying the tax is called the Assessee, who needs to mandatorily have a Permanent Account Number (PAN) for the payment of taxes. Now, a person takes not of all the income he has earned in a year, and pays tax on it at the end of the year. This year for which he has to pay tax is called the Financial Year. In India, the Financial Year is from April 1 to March 31. To each and every Financial Year, is a corresponding Assessment Year, which we will deal with below. However, since a person cannot compute the income and pay it on the same day, hence, the government has given a period of time, for an individual to pay the tax, depending upon the nature of the Assessee and the earning capacity and structure. 

An Assessment Year, is the year in which the government authorities will assess your income and make a note whether the disclosure made by you, is correct or no. Hence, the Assessment Year is the year immediately subsequent to the Financial year. So, the Financial Year of 2019-20, is Assessment Year 2020-21.

Since, the income and the number of days for filing returns are directly proportional, we can see that the amount of money earned in addition to the nature of the Assessee is very important. Similarly, at the time of payment of the tax, also the percentage of tax to be paid depends upon the income. Hence, in India, for Individuals and Firms, we have a Progressive Taxation Structure, whereas for firms and companies the taxation is Regressive, whereby they need to pay a standard percentage irrespective of the income. 

A progressive tax structure is the system most suited for a country, where there is a large income disparity between the people. In such a case, it becomes unfair to tax everyone evenly. For example a person earning Rs. 1 lacs per annum and a person earning Rs. 10 lacs per annum, have different tax rates to pay. 

Another example of a nationwide regressive taxation mechanism is the Goods and Service Tax (“GST“) which is levied at standard rates on all products. The Tax charged on cloth is the same for a large company as it is for an individual person. 

The laws that govern Income Tax is the Income Tax Act of 1961, supplemented by the Finance Bill passed each year in the February Budget Session of the Parliament. Another catch here is the Finance Bill, will always be for the upcoming Financial Year. Hence, the Finance Bill of 2019 is applicable for the Financial Year of 2019-20, i.e. Assessment Year 2020-21.

Hence, this highlights the basics of income tax and how the taxation structure in India is.

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