Finance Act Vis-a-Vis Income Tax Act: How Does The Income Tax Act Go Along With The Finance Act?

We citizens of India often come across two terms like “The Finance Act” and “The Income Tax Act.” It is a common term for people in the profession of accounting, finance, or management, but for commoners, it is a little hard to understand the scope of each act. Let’s join me in understanding in simple terms.

1 . What Is The Finance Act?

It is an act of financial proposal by the central government for a financial year.

Every year on the 1st day of February, the honourable Finance Minister of India presents a Union Budget in parliament. For example, in the year 2023, on February 1st, the honorable Union Minister of Finance and Corporate Affairs, Smt. Nirmala Sitharaman, presented the union budget in parliament. 

The budget is an annual financial report in the form of estimated income and expenditure by the government periodically. The finance bill is presented in the budget, which covers proposed amendments to direct and indirect taxes. The Finance Bill is to be passed by the upper and lower houses, named Rajya Sabha and Lok Sabha, within 75 days of its introduction in parliament.
After its approval in both houses, it is sent to the honourable president for consent. Once approved, it becomes the Finance Act of India. The Finance Bill 2023 received the consent of the honourable President Smt. Droupadi Murmu on March 31, 2023, and was published in the official Gazette of India as FINANCE ACT 2023’.

The Finance Act Consists Of Four (4) Parts:

• Part I :- Consists of rates of income tax to be levied for different heads of income for a financial year. ( here are rates for the Financial year 2023–24 relating to the Assessment year 2024–25.)
•  PART II:- Specifies the rate at which tax shall be deducted at source during a financial year.
•  PART III:- Specifies changes in the income tax rates in specific cases. i.e., the TDS rate for income from the head salary and rates of advance tax for the current financial year.
• Part IV: Rules for Calculating Agricultural Income.

2 . What Is The Income Tax Act (1961’)?

It is a charging statute for income tax in India. It covers the levy, administration, collection, and recovery of income tax in India. Income tax is also called  “DIRECT TAX” because the taxpayer himself bears the tax and its burden is not transferred to any other person. It contains 298 sections spread among 23 chapters and several important provisions. The supplement to the Income Tax Act is Income Tax Rules, effective April 1, 1962’.

The Central Board of Direct Taxes (CBDT) is the governing body in the planning and policy-making of direct taxes as well as administering direct tax laws in India through the Income Tax Department. The present CBDT chairman is Shri Nitin Gupta, who will continue his office until June 30, 2024. The headquarter of CBDT is at the North Block, Secretariat Building, New Delhi.

How Does The Income Tax Act 1961’ Go Along With The Finance Act 2023′?

Income Tax Act 1961’ deals with scope, chargeability of different heads of income, deductions for income as well as expenses, computation of total income, calculation of taxes, payment as well as recovery of taxes, filing of return of income, appeal, penalty, and prosecution in a phased manner, and matters related to that.

The Finance Act of every year shows necessary amendments in provisions of the Income Tax Act 1961’ along with changes in rates of direct taxes as well as indirect taxes in India.

E.g., The Finance Act 2023’ shows direct tax rates for the financial year 2023-2024 relating to the assessment year 2024-2025.

We, taxpayers, read basic provisions from the Income Tax Act 1961′, but changes in the scope of provisions by amending sections, sub-sections, and changes in tax rates are obtained from the Finance Act of every year via the Finance Bill in the union budget presented in parliament. So the Income Tax Act of 1961 is to be read with the Finance Act of 2023, and they are interdependent.

What Is An Income Tax?

Income tax is a tax levied by the Government of India on annual income earned by a person based on their residential status in a financial year and at the rates levied by the Finance Act passed by Parliament every year for a particular assessment year. Levy and collection of tax are the duties of the income tax department, but a declaration of income and deposit of tax to the government through the annual filing of an income tax return in the assessment year is an obligation on the part of every taxpayer, commonly called an “assessee” in India.

To understand the preamble, let’s get acquainted with some common terms used in the Income Tax Act 1961’ as amended by the Finance Act 2023’.

3. Who Is A Person?

Section 2(31) of the Income Tax Act 1961’ defines a person. A person includes the following:

• An individual
• A Hindu Undivided Family
• A Partnership Firm ( it includes a Limited Liability Partnership )
• A Company
• An Association of persons (AOP)  or Body of individuals (BOI), whether incorporated or not [clubs, housing societies, etc]
• A Local Authority [E.g, Panchayat, Municipality ]
• Every artificial judicial person does not fall into any of the preceding sub-clauses.[E.g., AJP can be a Trust, any fund, etc]

All Assessees Are Persons But All Persons Are Not Assessees

This is a common saying among taxpayers. Let’s understand what it means. 

ASSESSEE

1. Assessee is being defined under Section 2(7) of the Income Tax Act 1961’. It means a person to whom tax or any other sum (like interest, penalty, late fee, etc.) is payable under the act and includes A) Every person in respect to whom a proceeding under this act has been taken for the assessment of his income or the assessment of fringe benefits. OR B) Income of any other person for which he is assessable under the act. OR C) Loss sustained by him or by such other person. OR D) The amount of refund due to him or to such other person.
2. Every person who is deemed to be an assessee under any provision of the act.
3. Every person who is deemed to be an assessee in default under any provision of the act.

Now what appears from above is that the assessee must be a person, but a person may or may not be an assessee because if a person is an individual and his income does not exceed the “maximum amount not chargeable to tax,” i.e., income before giving any deductions under Chapter VIA is below the basic exemption limit, then the person is not liable to pay any tax under the act, and so the person can’t be called an assessee as no sum (here in the example tax) is payable by him under this act.

How Does The Income Tax Department Identify Persons? By Name Or By Any Other Mode?

Every assessee needs to make communications to the income tax department for payments of taxes or other dues, submission of returns voluntarily or in response to the notice issued by the department, and for many other issues. In the case of all communications, the department issues a ten-digit alphanumeric number called PERMANENT ACCOUNT NUMBER, popularly called PAN, to any person who has applied voluntarily through the online portal as below

PORTAL :- https://www.protean-tinpan.com.

This PAN number is affixed to a laminated card with details like the name of the person, the father’s name of the person in the case of an individual, and the date of incorporation for persons in the case of non-individuals. In sum, we can say the department identifies its assessee by PAN only and not by any name or any other identification.

4 . What Is An “Assessment Year” And A “Financial Year”?

An Assessment year comprised of 12 months whose starting point is 1st April and ending point is 31st March as defined under section 2(9) of the Income Tax Act 1961’. A Financial Year, as per Section 3 of the Income Tax Act 1961, is a year comprising twelve (12) months immediately preceding the Assessment Year. As the Financial Year is previous to the assessment year, it is also popularly coined as the PREVIOUS YEAR.

Is The Financial Year The Same Or Different From The Assessment Year?

Both are similar in respect to the fact that the duration is the same in both cases of twelve months, but income earned and taxed in a Financial Year is disclosed to the income tax department in the next year of the Financial Year, which is also called the assessment year.

Example: Let us make it simple with the following example:. Pritam Ghosh is a school teacher employed in a government school in Kolkata, which is in the West Bengal district of India. He joined the school on May 14, 2022, and was employed there for the full year until March 31, 2023. He has been a resident of Kolkata since his birth.

1. Now, Pritam Ghosh is a person who falls under “Individual.”.

2 . He is a “resident” for the whole year from April 1, 2022, to March 31, 2023, as it is said in the example that he has stayed in Kolkata since his birth.

3. He joined a government school, so his income consists of salaries only from May 14th, 2022, to March 31st, 2023. Here Financial Year or Previous Year is a year of 12 months from 1st April 2022 to 31st March 2023. As income is earned this year, it is a Financial Year.

4. The Assessment Year (AY) is the next year of the Financial Year. Here AY starts from 1st April 2023 to 31st March 2024. Income earned by Pritam in the Financial Year 2022-2023 will be declared along with taxes in the assessment year 2023-2024 by the due date of July 31, 2023. Late filing of income tax returns attracts late fees and interest.

Exceptions also exist here. It means income earned and filing of income tax return both occur in the financial year, e.g., if an individual is leaving India temporarily or permanently in a financial year, say on November 4, 2023, then before leaving India, the person must file an income tax return in the Financial Year 2023–24 and not in the Assessment Year 2024–25.

Are Taxes Paid By The Assessee Voluntarily Or Deducted By The Payer?

The Department of Revenue, Government of India, earns revenue through tax collections in any of the three ways or a combination of the three.

• Voluntary payment by the assessees as advance tax or self-assessment tax into various designated banks through designated challan no. 280, either physically or by electronic modes of payment in the portal https://www.incometax.gov.in.
• Tax is deducted at source by the deductor while making payments such as salary, rent, commission, professional fees, etc. to various recipients, deposits the tax so deducted, called TDS, in challan 281 as against the PAN of every recipient, and submits a timely return in any form like 24Q, 26Q, or 27Q to the government so that recipients get due credit for the TDS and can claim this by filing their annual income tax return so that their final tax liability is reduced to the extent of TDS.
• Tax is collected at the source by the seller while collecting the sale value from the buyer or by the collector while collecting any amount from the service receiver. TCS so collected is deposited into the government account through challan 281 as against the PAN of every buyer, and the buyer submits timely return in any form like 27EQ to the government so that the buyer gets due credit for the TCS and can claim this by filing their annual income tax return so that their final tax liability is reduced to the extent of TCS.

5. Concluding Note

Both the Acts are to be read simultaneously and act accordingly.