The social contract theory explains the principle wherein an individual had to submit all of its rights to the state and in return the state offers its security and safety. However, in the modern era the state confers some rights to the individual, but the individuals still have to give a certain amount of their financial gain to the state, so that the state can use this amount for the welfare of the state. This financial amount is termed as ‘Tax’. Tax has been defined in the Black’s law dictionary as “a contribution imposed by government upon individuals, for the use and service of the state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name”.
The Income Tax was introduced in India for the first time in 1860 by British rulers following the mutiny of 1857. The period between 1860 and 1886 was a period of experiments in the context of Income Tax. This period ended in 1886 when first Income Tax Act came into existence. The pattern laid down in it for levying of Tax continues to operate even to-day though in some changed form. In 1918, another Act- Income Tax Act, 1918 was passed but it was short lived and was replaced by Income Tax Act, 1922 and it remained in existence and operation till 31st. March, 1961.
In present the prime legislation that deals with the subject matter of tax is the Income tax Act, 1961. This act helps the cause of the tax-payers as well as the tax gatherers for the subject matter of computing and collecting tax in different situation. The different concepts which are of prime importance in this act are the concepts related to assessment, powers of the assessing officer and the mechanism to compute the taxes.
Tax can however, be divided into two broad categories.
I. Direct Tax
II. Indirect Tax
Direct Tax is the tax directly paid to the Government by the taxpayers. It is imposed directly by the Government and cannot be transferred to any other entity for payment. An example for direct tax could be Income Tax, wealth Tax or Corporate Tax.
Indirect Tax on the other hand refers to the tax which is not collected directly the government but an intermediately like the retailer. The retailer later files the tax return and the tax on the concerned good is transferred to the government. Therefore, the transfer of tax is not direct to the government but through intermediaries. Some examples of indirect tax are Sales Tax, Exercise Tax or the customs tax.
Talking of assessment, the Act provides a mechanism for computing the tax relating to the income of an assessee pertaining to an assessment year. Such computation is made after allowing various deductions, exemptions, and rebates to the assessee, and is called assessment. The act clearly mentions the deductions, rebates and exemptions that are provided to the tax-payers.
The income tax act in general is considered to be one of the most complex piece of legislation as there have been around 1500 amendments to this legislation by far.
The tax legislation of a country has to be in consonance of the economic and social objective of the country in order to achieve the maximum benefit out of the situation.
Some important concepts relating to Income tax Act, 1961 is that of assesse being defined in Section 2(7) of the Income tax Act, 1961, Income being defined in Section 2(24) of the Income tax Act, 1961 & person being defined in Section 2(31) of Income tax Act, 1961.
Apart from these basic concepts the Income tax Act aims to prevent any kind of tax evasion or individual’s malice intent to bluff the authorities regarding payment of the taxes. Section 175 of the Income tax Act, 1961 deals with Income of a person trying to transfer his assets with a view to avoiding payment of tax. In these cases the Income tax act, 1961 insures that the individual is not allowed to escape without following the tax structure of our country. Furthermore, the Income has also been categorized into numerous categories and is taxed accordingly.
Another major legislation on the subject matter of taxation is the Wealth tax Act, 1957. A new legislation, Direct Taxes Code (DTC), was proposed to replace the two acts However, the Wealth Tax Act was repealed in 2015 and the idea of DTC was dropped.
There are numerous other legislations which aid the subject area of taxation like the customs Act that also regulates the taxes laid on the products imported or exported. Similarly other local body acts which determine the taxes like the property tax in the given area.
However, the area of taxation is an ever growing area and is dynamic in nature. We have seen numerous amendments wherein the loopholes of the act, which were utilized by the tax- payers with malafide intent to do away with payment of tax has been done away with. Thus, with time the taxation laws are adapting to the competitive environment in the country and helping the cause of achieving financial and economical security in the Country.