The tax laws mean what the words in them say, sinceย ย itย ย isย ย presumedย ย thatย ย the Parliament acts purposefully in the use of its language. The judiciary has the final authority to interpret the tax statute. The normal rules in the doctrine of precedent apply also to tax cases. One general qualification to the doctrine of precedent, which is particularly important in tax law, is that previous decisions are only of value in determining questions of law. It is, however, a common fallacy to use similarity of facts in a previous case to decide another question of fact in the same way.
The Income Tax Act does notย attemptย toย provide anyย comprehensive definition of โincomeโ for tax purposes; but givesย anย inclusiveย definitionย inย Sectionย 2(24). Income – tax is a tax on income from various sources, estimated according to sets of rules which vary according to the source of income from which it flows. Mostย type ofย incomeย canย beย broadlyย classifiedย into three main categories; (a) income derived by a personย byย rendering personalย service;ย (b)ย incomeย fromย property, and (c) incomeย fromย theย profitsย ofย aย trade, professionย orย vocation. Inย ย economicย ย terms, theย firstย categoryย representsย incomeย fromย โlaborโย alone, the ย ย second representsย incomeย from โcapitalโ alone whilst the third category combines both โcapitalโ andย โlaborโ. Through the methods of assessing income under these different heads are distinct, income for tax purposes must be money or something capable of being turned into money. The income tax, whatever way it is charged is, however, one tax. In every case, the tax is a tax on income, whatever may be the standard by which the income is measured under different heads.
The tax unit is the person or entity whose income is calculated and who is to pay the tax. The basic tax unit is the individual – corporations and other legal entities are also tax units. The tax base, in an income tax, is โincomeโ. A broad based income tax will cover all kinds of income, gains, and accretions to wealth.ย Thus, fringe benefits and capital gains are included in a broad based income tax. The broader the tax base, as a general principle, the lower the tax rates required to raise the same amount of revenue and the less easy it is to avoid the tax by converting one type of income into another. A broad tax base satisfies several of the tax policy criteria. The effective tax rate, as opposed to the marginal rate, may differ widely between taxpayers as the result of the tax base and the provisions relating to the tax rebates, exemptions and deductions.
Income-tax applies generally to all types of persons, whether individual, bodies of individuals, corporate bodies or other juridical persons. Levy of income-tax has substantial fiscal, economic and social consequences to the community, and the way it operates is ofย ย vital significance to particular individuals or companies. Imposition of income tax directly affects the sum available for spending by the private sector of the economy, and, raising or lowering of the general rates of tax even marginally, can have marked deflationary or inflationary effect. The tax mayย ย encourage, or discourage, particular types of activity in the private sector, by treating a particular type of activity more, or less favorably for tax purposes compared with other available activities. This is, atย times, deliberately doneย whenย theย governmentย providesย forย someย special relief, suchย asย investmentย allowancesย onย newย ship, aircraft, machinery or plant. Every proposed transaction of substance is required to be studied from the tax angle to find out what tax savings can be affected, if any, by reframing such transaction. The professional men have to be well equipped to correctly and effectively advise taxpayers as toย theirย potentialย liabilityย toย tax, and their work, though not productive toย theย nation, isย necessaryย to ensure smooth working of the tax system.
Levyย ofย income-taxย hasย socialย effects, besides its effect on economicย lifeย ofย theย community. Highlyย progressiveย ratesย ofย taxย on individuals which provide the money for various welfareย functionsย ofย the State haveย significantย socialย consequences. Numerous types of tax reliefs given for charities, the provisions of various types of pensions etc., affect the social structure of the community to a substantial extent, though these factors cannot be evaluated in exact terms.
Whether or not income is an accurate measure of tax paying ability, depends on how it is defined. An individualโs income is the best single index of his ability to contribute to the public revenue. To the extent that a personโs ability to pay taxesย ย is affected by other circumstances, such as, the number of dependents heย supportsย orย extraordinaryย medicalย expenses, it is easier to makeย adjustmentsย forย suchย circumstancesย by changesย inย theย personalย income-tax than by changes in other types of taxes.
In the traditional analysis, taxpayersย haveย two personalitiesย –ย aย businessย personalityย andย personal personality, whichย areย concerned,ย respectively,ย withย profit-seeking andย ย pleasure-seeking.ย ย ย Sometimes, the efforts to analyze payment of income taxes and payments related to income taxes from a two personality approach works very poorly. This has led to the thinking that the taxpayersย haveย aย thirdย personalityย ย concernedย ย withย re-distributionย of wealth which has its own criteria for deductibility, and payment ofย income- taxย fallsย inย thisย ย third category.
Usually, it is easy to attribute expenses between the two personalities. Just look and see whether the tax payerโs purpose in incurring the expenses is to obtain business receipts or reduce costs needed to acquire those receipts, if so, it is deductible business expense.ย This โoriginโ test characterizes the expense by looking at whether it is incurred in business activity or personal activity.
A sharp distinction must be made between evasion and avoidance of tax. Illegal methods of reducing tax liability, by misstating orย omittingย itemsย fromย the returns, are known asย โtaxย evasionโ,ย whichย createsย a statutory liability to substantial monetary penalties and toย aย criminalย prosecutionย in serious cases such as of fraud. Aiders and abettors are similarly liable. โTax avoidanceโ, however, denotes adoption of lawful means for reducing tax liability. Full use is made of loopholes in the tax system particularly when the rates imposed are very high. When loopholes become too well known, the yield of the tax will be less. A simple device is discovered which gradually gets into common use and then the legislation stops it. A more refined device is then adopted which again is plugged by legislation, and so on, a seesaw process goes on between a well-advised tax payer on one side and the Legislature and the Revenue on the other. The result is frequent amendments in theย ย lawย ย of income-tax, making it a complicated branch of the laws.
From earning an income till filling your income tax return, you have a right to know and should know each and every aspect of the laws abiding your income. The basic structure of income tax may be complicated but should be known to those who lie under its ambit.
