GROUP ,DIV B MMS1 Sem 2

Bhartividyapeeth’s Institute of Management Research &

Studies

2011
 GROUP MEMBERS

Sr.
Name Roll No.
No.
1 Suraj Bhandare 67
2 Vivek Chothani 69
3 Mahak Mattoo 91
4 Jigar Mody 93
5 Ankita Nair 94
6 Dilip Pandey 98
7 Amrita Sinha 114
8 Jitesh Thadani 116

2
 ACKNOWLEDGEMENT

We acknowledge the kind-hearted co-operation extended to us by our project

guide Prof. Vasudevan and his timely advice at various stages in the project.

We would like to thank our director DR. D.Y. PATIL for granting us the
permission to do our project and for his time to time encouragement.

3
 INDEX

Sr. No. Content Pg. No.

1. What Is Income Tax? 5
2. Persons 8
3. Slabs 10
4. Sources Of Income & Deductions 15
5. Deductions 20
6. Computation 22
7. E - filing 26
8. Role of income tax 28
9. De - merits 30
10. Conclusion 31

WHAT IS INCOME-TAX?

4
Income tax is a tax on income, earned by person. Any person, who is having income in
excess of non taxable limits, is required to pay tax. The term income is well defined under the
income tax act (1961). Law has taken proper care to cover all sorts of income & receipts of
gains in hands of person chargeable to tax. It defines the term person in such a fashion that
each & every sort of entity is covered. It also states clearly what income is not chargeable to
tax. There are certain incomes which are exempt up to certain limit & thereafter chargeable to
tax. Thus the technique of computation of income depends upon classification of income
under different heads of income. Deductions have also been specified under each head of
income to ascertain the income chargeable to tax under each respective head. Over & above
there are certain admissible deductions which have been stated to be deducted from the Gross
Total Income, so as to arrive at the net taxable income. Having derived the Net Taxable
Income, a person calculates his gross tax liability. Then he considers whether there is any tax
deduction as source (TDS). After reducing the TDS from Gross Tax liability he arrives at the
final Net Tax liability.

Apart from this, the act also describes various tax authorities, procedures of assessment,
collection & recoveries, interest & penalties, appeal & revisions, offences & prosecutions etc.
These all are well dealt with in the 298 sections of The Income tax Act, 1961 as amended up
to date. There are hundreds of sub section, clauses, sub clauses explanations & provision to
these sections. Along with it, quite good numbers of circulars are issued by the department to
clarify various provisions of the act. This act is been amended very frequently & drastically
too. This amendment is effected through the Finance bill introduced in the parliament & gets
the assent of the Parliament it becomes the Finance Act. Thus the Finance Act makes the
amendment in the form of omission insertions & substitutions in the Income Tax Act. One
finds it very difficult to trace the correct provisions of law as it is applicable as on particular
day, though it is not possible. The Act provides for determination of Total income of the
assessee. It does not provide for rate of tax. The rate of tax on the total Income is decided
every year by passing the Finance Act.

Income Tax Act, 1961

The levy of income tax in India is governed by Income tax Act, 1961. This act came into
force on 1st April, 1962. The act contains 298 sections & XIV schedules. These undergo

5
change every year with additions & deletions brought by the Finance Act passed by the
parliament. In pursuance of power given by the Income-tax act, rules have been framed to
facilitate proper administration of the Income-tax Act.

How to charge tax on income

Annual tax: Income tax is an annual tax on income.

Tax rate of assessment year – Income of previous year is chargeable to tax in the next
following assessment year at the tax rates applicable for the assessment year.

Rates fixed by Finance Act – Tax rates are fixed by the annual Finance Act and not by the
Income – tax act. For instance, tax rates for the assessment year 2005-06 are fixed by the
Finance Act 2005. If however, on the first day of April of the assessment year, the new
Finance Bill has not been placed on the statute book, the provisions in force in the preceding
assessment year or the provisions proposed in the Finance Bill before Parliament, whichever
is beneficial to the assesse, will apply until the new provisions become effective.

Tax on person – tax is charged on every person.

Tax on total income – Tax is levied on the “total income” of eyery assessee computed in
accordance with the provisions of the act.

6
IMPORATANT TERMINOLOGY

ASSESSEE : Assessee means a person by whom income- tax or any other sum of money is
payable under the act. It includes every person in respect of whom any proceeding under the
Act has been taken for the assessment of his income or loss or the amount of refund due to
him. It also includes a person who is assessable in respect of income or loss of another person
or who is deemed to be an assessee or an assessee in defaultr under any provision of the act.

PREVIOUS YEAR & Assessment Year : Income earned in a year is taxable in the next year.
The year in which income is earned is known as previous year and the next year in which
income is taxable is known as assessment year.

When income of previous year is not taxable in the immediately following assessment
year :

a) Income of non resident from shipping;

b) Income of persons leaving India either permanently or for a long period of time;
c) Income of bodies formed for short duration;
d) Income of a person trying to alienate his assests with a view to avoiding payment of
tax;
e) Income of a discontinued business.

In these cases, income of a previous year may be taxed as the income of the
assessment year immediately preceding the normal assessment year.

PERSONS

7
 Every artificial juridical person

An Individual

An individual means a natural human being. This term individual also includes a minor or a
person of unsound mind.

A Hindu Undivided Family

A Hindu Undivided Family is the normal; condition of Hindu society. The members of Hindu
Undivided Family are living in the state of union unless the contrary is stated. A Hindu
Undivided Family (H.U.F.) is unit of assessment under the Income Tax Act. It consists of all
the persons lineally descended from a common ancestor.

A Company

A Company is well defined under section 2[17] to mean the following:

A) An Indian Company ; or
B) Anybody corporate incorporated under the laws of foreign country; or
C) Any institution, Association or body which is assessed or was assessable as a
company for assessment year 1970-71 or before; or
D) Any institution, Association or body whether incorporated or not and whether Indian
or Non Indian which is declared by general or special order of the central board of
Direct Taxes to be company.

A Firm

Under the partnership law, a firm is not a legal entity. However, for the Tax law, Income Tax
as well as sales-Tax, It is a separate legal entity. Thus, a firm is regarded as unit of
assessment.

Association of Persons or Body of Individuals

8
The term Association of Persons or Body of Individuals has not been defined by the Act. The
term is explained in recent decisions. AOP or BOI means an association of persons for a
common cause or a common purpose or aim being to produce income or hold income
producing assets or it may involve a group of persons having under some common tie or
occupation, e.g. Geeta Sadan Housing Society LTD.

However there are 2 major differences between association of persons and body of individual

a) Any person as defines under this section can become a member of association of
persons whereas, only INDIVIDUAL can be member in body of Individual.
b) In case of association of persons there is a common will and desire among the
members to produce income. However in case of body of individual it may arise due
to operation of law. e.g. Legal heir of deceased persons earning Income from
property inherited.

A Local Authority

A Local Authority means a municipality, District board, Gram Panchayat, Corporation or

other authorities entrusted by the government with the control and management of a
municipal or local fund.

Artificial Juridical Persons

Artificial Juridical Persons means and includes all artificial persons with the juridic
personality. This will include idols of gods and goddesses and deities such as Allah, Sai Baba
etc and public corporations established under special Act. This is a residuary classification
and therefore it will cover only those who did not fall within any of the preceding
classifications.

INCOME TAX SLAB RATES ASSESSMENT YEAR 2010- 2011 :

9
For resident woman –

NET INCOME SECONDARY &

RANGE INCOME TAX EDUCATION HIGHER
RATES CESS EDUCATION
CESS

UPTO Rs 190000 NIL NIL NIL

10% of (Total income
Rs 190000 to Rs – Rs 190000) 2 % of Income tax 1 % of Income tax
300000
11000+ 20% 0f (total
Rs 300000 to Rs income – Rs 300000) 2 % of Income tax 1 % of Income tax
500000
Rs 51000+ 30% of
Above Rs 500000 (total income – Rs 2 % of Income tax 1 % of Income tax
500000)

For resident senior citizen –

NET INCOME SECONDARY &

RANGE INCOME TAX EDUCATION HIGHER
RATES CESS EDUCATION
CESS

UPTO Rs 240000 NIL NIL NIL

10% of (Total
Rs 240000- Rs income - Rs240000) 2% of income tax 1% of income tax
300000
Rs 6000+ 20% of
Rs 300000 – Rs (Total income- 2% of income tax 1% of income tax
500000 300000)
Rs 46000 +30% of
Above Rs 500000 (Total income –Rs 2% of income tax 1% of income tax
50000)

10
For any other individual every HUF/AOP/BOI / Artificial juridical person

SECONDARY &
NET INCOME INCOME TAX EDUCATION HIGHER
RANGE RATES CESS EDUCATION
CESS
Upto Rs 160000 NIL NIL NIL

Rs 160000 – Rs 10% OF (TOTAL

300000 INCOME – Rs 2% 0f income tax 1% of total income
160000)
Rs 300000 – Rs Rs 14000 +20%
500000 of(Total income – 2% 0f income tax 1% of total income
Rs300000)
Above Rs 500000 Rs54000 +30% of
(total income – Rs 2% 0f income tax 1% of total income
500000)

11
INCOME TAX SLAB RATES ASSESSMENT YEAR 2011- 2012 :

For resident woman –

NET INCOME SECONDARY &

RANGE INCOME TAX EDUCATION HIGHER
RATES CESS EDUCATION
CESS

UPTO Rs 190000 NIL NIL NIL

10% of (Total income
Rs 190000 to Rs – Rs 190000) 2 % of Income tax 1 % of Income tax
500000
31000+ 20% 0f (total
Rs 500000 to Rs income – Rs 500000) 2 % of Income tax 1 % of Income tax
800000
Rs 91000+ 30% of
Above Rs 800000 (total income – Rs 2 % of Income tax 1 % of Income tax
800000)

For resident senior citizen –

NET INCOME SECONDARY &

RANGE INCOME TAX EDUCATION HIGHER
RATES CESS EDUCATION
CESS

UPTO Rs 240000 NIL NIL NIL

10% of (Total
Rs 240000- Rs income - Rs240000) 2% of income tax 1% of income tax
500000
Rs26000+ 20% of
Rs 500000 – Rs (Total income- 2% of income tax 1% of income tax
800000 500000)
Rs 86000 +30% of
Above Rs 800000 (Total income –Rs 2% of income tax 1% of income tax
800000)

12
For any other individual every HUF/AOP/BOI / Artificial juridical person

SECONDARY &
NET INCOME INCOME TAX EDUCATION HIGHER
RANGE RATES CESS EDUCATION
CESS
Upto Rs 160000 NIL NIL NIL

Rs 160000 – Rs 10% OF (TOTAL

500000 INCOME – Rs 2% 0f income tax 1% of total income
160000)
Rs 500000 – Rs Rs 34000 +20%
800000 of(Total income – 2% 0f income tax 1% of total income
Rs300000)
Above Rs 800000 Rs94000 +30% of
(total income – Rs 2% 0f income tax 1% of total income
500000)

13
14
 1) Company

In the case of a domestic company 30% of the total income.

In the case of a company other than 50% of the specified royalties and fees for
domestic company rendering technical services and 40% on
the balance of total income.

2) Co-operative society

Total income does not exceed 10,000 10% of the total income

10,000 – 20,000 1000 plus 20% of the amount by which the total
income exceeds Rs. 10,000
20,000 - Rs3000 pus 30% of the amount exceeding Rs
20,000
surcharge nil

Local authority 30 % of the total income of the firm

surcharge nil

30% on the whole of the total income of the

Firm/ limited liability partnership firm

surcharge nil

15
Income from Salary

The term ‘Salary’ has been defined differently for different purposes in the Act.

‘Salary’ under section 17(1) includes following:

i) Wages

ii) any annuity or pension,

iii) any gratuity,

iv) any fees, commission, perquisite or profit in lieu of or in addition to any salary or
wages,

v) any advance of salary,

vi) any payment received in respect of any period of leave not availed by him i.e.
leave salary or leave encashment,

vii) transferred balance in recognized provident fund to the extent it is taxable,

viii) the contribution made by central government or any other employer in previous
year to the account of an employee under a pension scheme referred to in section
80CCD.

Basis of Charge

Section 15 deals with basis of charge. Salary chargeable to tax either on ‘due’ basis or on
‘receipt’ basis, whichever is earlier.

Income from House Property

Basis of Charge (U/S 22)

The process of computation of income under head “Income from House Property” starts with
determination of annual value of property. The annual value of property comprising of
building or land appurtenant thereto, of which the assessee is the owner, is chargeable to tax
under the head “Income from house property”.

16
PROPERTY INCOME NOT CHARGEABLE TO TAX

a. Income from farm house

b. Annual value of any one palace of an ex-ruler

c. Property income of educational institution and hospitals.

d. Property income of approved scientific research association.

e. Property income of a local authority.

f. Property income of a political party.

g. Property income of trade union.

h. Property held for charitable purposes.

i. One – self occupied property.

j. Property used for own business or profession

COMPUTATION OF INCOME OF LET OUT HIUSE PROPERTY

 Gross annual value………………….xxxxxxxxxxx

 Less : municipal taxes……………..xxxxxxxxxxx

 Net annual value xxxxxxxxxx

 Less : deductions under sec 24

 Standard deduction xxxxxxxxxx

 Interest on borrowed capital xxxxxxxxxx

 Income from house property. xxxxxxxxxx

17
Income from Business or Profession

The term ‘Business’ has been defined in section 2(13) to “include any trade, commerce or
manufacture or any adventure or concern in nature of trade, commerce or manufacture.

Income chargeable to tax from such business or profession is required to ascertain under this
head of income. The profits disclosed by an assessee are quite different from taxable income
to be ascertained as per the provision of Income-tax Act. All the expenses claimed by
assessee in his profit & loss account may or may not be deductible. Similarly all incomes
shown by him may or may not be taxable under this head of income.

Basis of Charge (U/S 28)

a) profits and gains of any business or profession

b) income derived by a trade, professional or similar association from specific services

performed for its members

c) the value of any benefit or perquisite, whether convertible into money or not arising
from business or the exercise of a profession;

d) any interest, salary, bonus, commission or remuneration received by a partner from

firm

e) any sum received for not carrying out any activity in relation to any business or not to
share any know how, patent, copyright, trademark, etc.

f) profits and gains of managing agency; and

g) income from speculative transaction.

EXCEPTION TO THE ABOVE RULE

NATURE OF INCOME HEAD UNDER WHICH IT IS CHARGEABLE

RENTAL INCOME IN Rent of house property is taxable U/S 22 under the

CASE OF DEALER IN head “Income from House property”
PROPERTY

DIVIDEND ON SHARES IN Dividend on shares taxable U/S 56(2)(i) under the

CASE OF DEALER IN head “Income from other sources”
SHARES

WINNINGS FROM Taxable under the head “Income from other sources”
LOTTEREIS even if derived as a regular business activity

SIncome from Capital Gains

18
According to section 2(14), a capital asset means property of any kind held by an assessee,
whether or not connected with his business or profession, but does not include:

i) any stock in trade, that is to say, movable property held for personal use by the
assessee or any member of his family dependent on him, but excludes

a) Jewellery

b) archaeological collections;

c) drawings;

d) paintings;

e) sculptures; or

f) any work of art

ii) Consumable stores or raw materials held for the purpose of business or profession
of the assessee.

Basis of Charge (U/S 45)

Any profits or gains arising from transfer of a capital asset effected in the previous year shall
be chargeable to income tax under this head in the previous year in which the transfer took
place.

Short Term & Long Term Capital Asset

Under section 2(42A) short term capital asset means capital asset held by an assessee for not
more than 36 months immediately preceding the date of transfer. Therefore, a capital asset
held by an assessee for more than 36 months immediately preceding the date of its transfer is
a long term capital asset.

STCG LTCG

Full value of consideration Full value of consideration

Less Exp. Incurred in connectn wt Exp. Incurred in connectn wt

transfer transfer
less Cost of acquisition Indexed cost of acquisition
less Cost of improvement Indexed cost of
improvement.
STCG LTCG

19
Income from Other Sources

Any income, profits or gains includible in the total income of an assessee, which cannot
included under any of the preceding heads of income, is chargeable under head “Income from
Other Sources”.

Basis of Charge (U/S 56)

The following incomes shall be chargeable only under the head of “Income from Other
Sources”:

i) Dividend income

ii) Casual income in the nature of winning from lotteries, crossword puzzles, horse
races, card games & other games of any sort, gambling, betting, etc. Such
winnings are chargeable to tax at a flat rate of 30% under section 115BB.

20
DEDUCTIONS

Deduction under section (80C):

Under the provision of section 80c, an assessee will be entitled to a deduction from gross
total income of the amount invested in LIC policies, provident fund, payment of tuition fees,
repayment of housing loan, investment in infrastructure bonds etc. Subject to a maximum of
RS.100000. Deduction under sec. 80c is available only to an individual or HUF.

The purpose of allowing deduction up to rs.100000 in lieu of rebate is to enable switch over
to the ‘Exempt-Exempt-Taxed’ (EET) method where by the amount would be included in the
taxable income of the person as and when he withdraws/receives back his savings. Under this
method, the contribution to specified saving is exempt from tax (e), the accumulation is also
exempt (e) but the withdrawal/receipts from the saving are taxed (t).

Deduction under section (80D):

Deduction is allowed under sec. 80d up to a maximum of rs.15000 to an individual in respect

of medical insurance premium paid for self, spouse and dependent children.

An additional deduction of up to rs.15000 would be allowed to an individual in respect to

medical premium paid for insuring the health of a parent or parents. This would be in
addition to the deduction of rs.15000 in respect of medical insurance premium paid for self,
spouse, and dependent children. Such additional deduction would be available even if the
parents are not dependent on the individual.

In case the sum is paid to insure the health of the senior citizen, then the deduction would be
rs.20000 instead of rs.15000.

Deduction under section (80G):

Where an assessee pays any sum as donation to eligible funds or institution, he is entitled to a
deduction, subject to certain limitation, from the gross total income.

The following tables gives the details of the instruction and funds to which the donation can
be made for the purpose of claiming deduction under sec. 80g, the qualifying amount and the
deduction allowable-

Eligible institution/ funds Permissible deduction

The national defense fund set up by the 100%

central govt.
The Jawaharlal Nehru memorial fund 50%
Prime minister drought relief fund 50%
Prime minister national relief fund 100%
Prime minister Armenia earthquakes relief 100%
fund

21
 The national children fund 50%
Indira gandhi memorial trust 50%
Rajiv gandhi foundation 50%
Approved university or education inst. Of 100%
national eminence
Maharashtra chief minister earthquakes relief 100%
fund
Any zila saksharta samiti for primary 100%
education in village and towns and for
literacy and post-literacy activities.
The national sports funds set up by the central 100%
govt.
Any state govt. Fund set up to provide 100%
medical relief to the poor.
Notified temple, mosque, gurdwara, church 50% subject to qualifying limit
or other place of historic,
Sum paid by a company as donation to the 100% subject to qualifying limit
Olympic association or any other
association/institution established in India, as
may be notified by the govt. For the
development of the infrastructure for sports
or games, or the sponsorship of the sports and
games in India.
Any corporation established by the central 50%subject to qualifying limit
govt. Or any state govt. For promoting the
interest of the members of a minority
community

Deduction under section (80U):

Sec. 80u harmonizes the criteria for defining disability as existing under the income tax rules
with the criteria prescribed under the person with disability (equal opportunities, protection of
rights, and full participation) act, 1995.

This section is applicable to a resident individual, who, at any time during the previous year,
is certified by the medical authority to be a person with disability. A deduction of rs.50000 in
respect of a person with disability and rs.75,000 in respect of a person with severe disability
(having disability over 80%)is allowable under this section.

The benefit of deduction under this section has also been extended to persons suffering from
autism, cerebral palsy, and multiple disabilities.

COMPUTATION OF NET TAXABLE INCOME

22
 PARTICULARS AMOUNT AMOUNT

Income from salary XXXXXX

Income from house property
XXXXXX
Income from profits & gains
of business profession XXXXXX

Income from capital gains XXXXXX

Income from other sources XXXXXX

GROSS TOTAL INCOME XXXXX

Less: deduction under
Chapter vi A

U/S 80 C XXXXX

U/S80 D XXXXX

U/S 80 G XXXXX

U/S 80 U XXXXX XXXXX

Net taxable income XXXXXX

23
INCOME EXEMPTED FROM TAX (U/S 10)

In computing the total income of a previous year of any person, any income which falls
within any of the following clauses shall not be included and as such those incomes do not
form part of the total income. Those incomes are absolutely exempt from tax.

1) Agricultural income [U/S 10(1)]

Agricultural income means any income derived from land which is used for
agricultural purposes and which is assessed to land revenue in India. Such income
must satisfy the following three conditions
a) Rent or revenue should be derived from land.
b) The land must be used for agricultural purposes.
c) The land must be situated in India.
2) Receipt from HUF [U/S 10(2)]
Any sum received by an individual as a member of HUF out of the estate of income
of the family is exempt from tax and not included in the total income of the
individual.
3) Interest to non- resident [U/S 10(4)]
In the case of a non-resident, any income by way of the interest on such securities or
bonds as the central government may, by notification in the official gazette, specify in
this behalf before 1st June 2002, including income by way of premium on the
redemption of such bonds.
In the case of an individual, who is a person resident outside India as defined in the
foreign exchange act, 1973, any income by way of interest on money standing to his
credit in a non-resident (external) account in any bank in India in accordance with the
said act and the rules made there under. However such person must be permitted by
the reserve bank of India to maintain such account.
4) Salary of non- resident employee of a foreign ship [U/S 10(6)(viii)]
The sub- clause (viii) of sec 10 (6) gives the exemption from tax in case of an
individual who is not a citizen of India and non-resident, in respect of income
chargeable under the head salaries received by him for services rendered in
connection with his employment on a foreign ship. However, his total stay in India
should not exceed in aggregate a period of 90 days in the previous year.
5) Gratuity [U/S 10(10)]
Gratuity means a gift free of charge. It is normally given in respect of favours or
services rendered. But, now it has become a legal obligation in almost all the cases of
employment due to either the payment of gratuity act, 1972 or the contract of services.
Any gratuitous payment made by employer to the employee for the services rendered
is to be considered as income under the head salaries as the definition of salaries
includes the gratuity.

24
Income Tax Forms:-

ITR 1 :

This form can be used by an individual whose total income during the previous year includes
income chargeable to income tax under the head ‘salaries’ or ‘income in the nature of family
pension as defined in the explanation to clause (iia) of section 57’ but does not include any
other income except income by way of interest chargeable under the head ‘income from other
sources’.

There should not be any exempt income other than agriculture income and interest income.

ITR 2 :

This form can be used by an individual or HUF whose total income does not include any
income chargeable under the head ‘profits or gains of business or profession’.

ITR 3 :

This form can be used by an individual or HUF who is partner in a firm and where income is
from ‘profits or gains of business or profession’.

ITR 4 :

This form can be used by an individual or HUF who is carrying out a proprietary business or
profession.

ITR 5 :

This form can be used by a partnership firm, AOP, BOI, Artificial judicial person, co-
operativeo society and local authority.

ITR 6 :

This form can be used by a company, other than company claiming exempt income under
section 11.

ITR 7 :

This form can be used by companies who are required to furnish return under section
139(4A), or 139(4B), or 139(4C) or 139(4D).

ITR V :

Acknowledgement in the form of Form ITR V for those who have filed their return of income
online (e-filing).

25
 ADVANCE TAX

 Concept of “pay as you earn”

 Applicable on all types of persons

Due date Corporate Rates Individual Rates

th Up to 15% 15 - -
15 June
th Up to 45% 45 Up to 30% 30
15 sept
th Up to 75% 75 Up to 60% 60
15 dec
th Up to 100% 100 Up to 100% 100
15 mar

What is E-Filing?

26
• The process of electronically filing Income tax returns through the internet is known
as e-filing.

• It is mandatory for Companies and Firms requiring Section 44AB audit to

submit the Income tax returns electronically for AY 2007-08.

• Any company or firm requiring 44AB return without a e-filing receipt will not
be accepted.

• If business turnover goes above RS.40 lakhs

• If Profession income goes above RS.10lakhs

• E-filing is possible with or without digital signature

27
28
ROLE OF INCOME TAX

Equity

The income tax follows the principle of equity. It is levied on progressive manner.
The higher the income group people have to pay higher rate of taxes, and lower
income group people have to pay lower taxes. For instance, in the budget 2009,
individuals with the an income of up to Rs. 160000 are exempted from the payment of
income- tax and in case of women tax payers, the exemption limit is Rs.190000 and
senior citizens, the exemption limit is Rs. 240000.

1. Canon of certainty

As far as income tax is concerned, the tax payer is certain as to how much he is
expected to pay, as the tax rates are decided in advance. The government can also
estimate the tax revenue from direct taxes with fair accuracy. Accordingly the
government can make adjustment in its income and expenditure.

2. Relatively elastic

The income tax is relatively elastic. With an increase in an income of individuals and
companies, the yield from direct taxes will also be increased. Elasticity also implies
that government’s revenue can be increased by raising the rate of taxation. An
increase in tax rate will result in increase in tax revenue.

3. Creates public consciousness

The income tax creates public consciousness the taxpayer are made aware of their
obligation to pay taxes through public awareness campaigns in the media. Therefore
as good number of tax payers willing to pay taxes.

4. Anti- inflationary

The income tax can help to control inflation. During inflationary period the
government may increase the tax rate. With which the consumption demand may
decline, which in turn may reduce inflation. Also, if the corporate tax rates are
increased, the investment activity may decline, which in turn may reduce effective
demand.

29
5. Revenue generation

Tax revenue is most important source of public revenue. A tax is compulsory payment
levied by government on individuals or on companies to meet expenditure which is
required for public welfare. The tax payer does not receive a direct quid- pro- quo
from the government.

Share of taxes (percent)

Year Direct taxes Indirect taxes others

1990-91 19.1 78.4 2.5

2001-02 37 62.1 0.9

2007-08 49.9 50.1 0.3

6. Defense And Development

Income tax collected by the government is used for the defense expenditure of a
country. It is used for the welfare of the society.

7. Transparency

In case of companies the income tax has to be paid at the flat rate of 30%. The
company has to disclose its profit to public in general who has an interest in the
company. It helps to maintain the transparency.

DEMERITS
30
1. Tax evasion

In India, there is good amount of tax evasion. The tax evasion is due to:

 High tax rates

 Documentation and formalities

 Poor or corrupt tax administration

Due to tax evasion, the government loses a good amount of revenue.

2. Inconvenience to Tax Payers

Income tax creates inconvenience to taxpayers. They have to follow certain

procedures & formalities in respect of filing tax returns. However in case of direct
taxes, tax payers are free from burden of filing tax returns. Due to formalities &
procedures, a good number of people avoid payment of taxes & therefore the
government loses a good amount of revenues.

3. Narrow Coverage

In India, there is narrow coverage of direct taxes. It is estimated that only 3% of

population pay personal income tax. Due to low coverage, the government doesn’t get
enough funds for public expenditure.

4. Adverse Effect on Savings & Investment

The income tax can affect savings & investments. Due to taxes, the net income of
people gets reduced. This in turns reduces savings. Reduction in savings results in low
investment. The low investment affects capital formation in the country.

5. Sectoral Imbalance

In India, there is sectoral imbalance as far as direct taxes are concerned. Certain sector
like the corporate sector is heavily taxed, whereas the agriculture sector is 100% tax
free. Even the large & rich farmers are exempted from payment of personal income
tax

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 CONCLUSION

The reason for levy of income tax is that they constitute the basic source of revenue to the
government. Revenue so raised is utilized for meeting the expenses of government like
defense, provision of education, health care, infrastructure facilities like roads, dams etc. So it
is our duty to file our returns before due date and pay taxes accordingly so that we can
contribute to overall development of our country. E-filing is also introduced by government
for the convenience of people, so that procedure for filing of income tax will get easier.

If we see someone destroying public property like buses, roads, trains etc. then it is our duty
to stop them as finally we are the people who pays for the same.

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