DEDUCTIONS, REFUND AND TAX AUTHORITIES

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This Article is written by Ishtmeet Kaur, Rajiv Gandhi National University of Law (RGNUL), 1^st Semester, An intern at Legal Vidhiya

ABSTRACT

This article aims to understand the concepts of deduction, refund and tax authorities, given under the Income Tax Act, 1961. Apart from this, we will also compare that how provisions of deduction and refund have changed under the new tax regime as compared to the old tax regime, especially at a time when the taxpayers are in a state of confusion over the fact that which regime suits them the best.

Taxes are a major source of revenue for the governments of all the countries and India is no exception. Tax can be defined as a compulsory payment which is made by the households, firms or other institutional units to the government. Income Tax is a type of tax which is directly levied on the income of the people and is therefore classified as direct tax.

For a developing nation like India, taxes play an essential role for the economic growth of the country as well as its people. As India has now become the 5^th largest economy in the world surpassing UK, the role of taxes have assumed more importance than ever. The taxes collected from the citizens are used to fund various welfare schemes of the government and provide public services and goods to the people. Paying tax is a responsibility and we ought to fulfill it as responsible citizens. As Albert Bushnell once said, “Taxation is the price which civilized communities pay for the opportunity of remaining civilized”. It is not possible to run the entire country without collecting taxes and it may also result in a social collapse.

Keywords: Income Tax, Deductions, Refund, Income Tax Department, Assessee, New Tax Regime, Old Tax Regime, Tax slabs.

INTRODUCTION

Income Tax Act, 1961 is a government statute that regulates the administration, collection and recovery of Income Tax in India. It was James Wilson, who first introduced the modern taxation system in India. [1] After the Sepoy Mutiny of 1857 which drained the financial resources of the government and led to a grave economic situation, the Britishers found it necessary to introduce Income Tax in India. The objectives of the Income Tax Act, 1961 are economic development of the country, full employment, resource utilization, price stability and ensuring economic equality.

In this article, we will be discussing the following concepts of taxation:

Meaning of deduction
Types of deductions available under the Income Tax Act
Benefits of Deductions
Refund
How to claim Income Tax Refund?
Tax Authorities
Various Income Tax Authorities in India and their roles
New Tax Regime Vs. Old Tax Regime

Meaning of Deduction

Tax deductions refer to reductions in the taxable income of a taxpayer which leads to a lower tax liability. Taxable income is that income on which the tax is to be levied or imposed. Deductions are a kind of benefit which helps people to save tax. Deductions have been mentioned in Chapter VI A of the Income Tax Act, 1961. [2]

Types of Deductions available under the Income Tax Act, 1961

Investing in LIC or Mutual Funds: Investments which are made in Life Insurance Policies, Mutual Funds, PPF (Public Provident Funds), Sukanya Samriddhi Accounts and even in pension funds can help to get deductions up to maximum limit of 1.5 lakhs under Section 80C and 80CCC of the Income Tax Act. [3]

National Pension Scheme (NPS): NPS is a government sponsored pension scheme for the citizens of the country. Contributions made to the National Pension Scheme can also help to provide deductions under Section 80CCD (1), 80CCD (1B) and 80CCD (2).

Deductions available on Medical Expenditure: Persons filing Income Tax Returns can also get deductions in case of Medical Insurance Premiums and preventive health checkups under Section 80D of the Act. [4] Apart from this deduction of maximum 1.25 lakhs is also available if the assessee has incurred expenditure on the medical treatment of a dependent with disability under Section 80DD of the Income Tax Act. [5]

Deductions for Interest paid on Loans: An income tax assessee can claim deduction on the interest which he/she has paid on loan taken for Higher education and for purchase of residential property under Section 80E and 80EE respectively.

Deductions available for donations: Donations to any charitable institution can be used to claim deduction under Section 80G of the Income Tax act. Apart from this, donation towards scientific research, rural development and even donation to political parties can be used for claiming deductions.

Deductions for Royalty: Any author who receives Royalty income can claim deduction under Section QQB of the Act. Royalty on patents can also be used for claiming deductions under Section RRB.

Deductions to disabled persons: A person with disability can claim a deduction of up to Rs 75,000. In case of severe disability, a deduction of up to 1.25 lakhs can also be claimed. This is a fixed deduction provided under Section 80U of the Income Tax Act, 1961. [6]

Benefits of Deductions

Saving Tax: One of the major benefits of Tax deduction is that it helps to reduce the total taxable income and thus saves the tax amount to be paid by an assessee.

Promotes Investment: Less tax helps the taxpayers to save their income and hence leads to greater investment in the economy, promoting GDP growth.

REFUND

When an assessee pays excess tax as compared to their actual tax liability, then he/she can get reimbursement for the extra tax paid, which is referred to as Income Tax Refund. Section 237 of the Income Tax Act deals with the refund of excess tax paid by the taxpayer. Refund of tax is usually obtained in the case where the assessee has paid the advanced tax or TDS (Tax Deducted at Source). [7]

Let us take a simple example to understand the concept of Income Tax Refund. Let’s say the person who paid you your income already deducted 15,000 Rupees from the income as tax and paid it to the government on your behalf. Now, at the time of filing your Income Tax Return, the actual tax you have to pay comes out to be 10,000 Rupees only. So, the remaining 5,000 would be considered the excess tax paid by you and will be refunded to you by the Income Tax Department.

HOW TO CLAIM INCOME TAX REFUND?

As per the Finance (No. 2) Act, 2019 a refund can be claimed only by filing the income tax return within the time limit which has been prescribed. [8]

In order to claim a refund, there is a need to fulfill the following requirements:

It is necessary to file an income tax return for the relevant assessment year.
It is essential to have the details of the tax payments made by you during the assessment year.
It is important to have a proof of TDS or advance tax payments that have been made by you.

TAX AUTHORITIES

It is imperative to understand the functions, roles and powers of Income Tax Authorities for the effective financial management of the country. Income Tax Authorities are organizations that are mainly concerned with collection and administration of taxes and make sure that people do not violate the rules of taxation.

It is necessary for the tax authorities to fulfill their obligations so as to prevent tax evasion and harassment of assesses and at the same time ensure that there is no discrimination in the collection of taxes.

VARIOUS TAX AUTHORITIES AND THEIR ROLES

For the effective implementation of the Income Tax Act, 1961 the government has established various tax authorities [9]:

Central Board of Direct Taxes (CBDT): It is a government body which is responsible for the administration and enforcement of direct tax legislation in India. It was established in 1963 and it comes under the Ministry of Finance, Government of India. It consists of a Chairman and 6 other members. The roles of CBDT are mentioned below:
It controls all the Income Tax Authorities to ensure their effective functioning.
It lays down all the policies and planning related to direct tax matters in the country.
It also reviews the working of Income Tax Department.

Director General of Income Tax: The Director General of Income Tax is appointed by the Central government and has the following powers:
Power to Search and Seizure
Power to discover and produce evidence
Power to make an inquiry
To survey
To give instructions to income tax officers
To take possession of book of accounts

Income Tax Commissioners: Income Tax Commissioners usually administer a specified area and enjoy wide range of powers:
Power to transfer a case from one assessing officer to another officer
Power to grant approval to an order which has been issued
Power to revise an order which has been passed by assessing officers
To foresee the functioning of direct taxes in a specified area.

Joint Commissioners: One of the major functions of a Joint Commissioner is to issue directions to Assessing Officers to make sure that there is effective enforcement of all rules and regulations. The directions which are issued by Joint Commissioner to Assessing Officer are binding in nature.
Income Tax Officers: Some of the major powers of Income Tax Officers include:
Power of Search and Seizure
Power of Survey
Power of assessment
Power to call for any individual to provide information

Income Tax Inspectors: Inspectors of the Income Tax work in accordance to the task which is given to them by their seniors.

The appointments, jurisdiction, powers, roles and functions of Income Tax Authorities are given under Chapter XIII of the Income Tax Act, 1961.

NEW TAX REGIME vs. OLD TAX REGIME

A lot of chaos and confusion has been caused among the taxpayers by the Budget of 2023. Assesses are confused whether they should opt for new tax regime or continue with the old one. Let us try to understand the key differences between the old and new tax regime so that it becomes easy for the taxpayers to make their own choice.

Change in the Tax Slabs: In Old tax regime, the number of slab rates are 4. However, in the case of New Regime there are 6 slab rates, that are, 0%, 5%, 10%, 15%, 20%, 30%. In the case of Old Regime, if the taxable income is less than Rs 5 Lakh, then an individual need not pay any tax. This limit has been increased to Rs 7 Lakh in the New Regime. This means that if an individual has taxable income of less than Rs 7 Lakh, then he/she does not need to pay any tax. [10]

Deductions and exemptions: A major difference in the New and Old Tax Regime is of the deductions and exemptions available. The deductions and exemptions available under the old tax regime would not be applicable in the case of New Regime. So, those who opt for new regime cannot claim several deductions like 80C, 80D, HRA (House Rent Allowance), LTA (Leave Travel Allowance) etc. This is considered as a major disadvantage of the new tax regime. For Example: Deduction of up to Rs 1.5 Lakh which is available under Section 80C of the Income Tax Act, 1961 would not be available to those who opt for the New Tax Regime. [11]

CONCLUSION

To conclude, the Income Tax Act, 1961 regulates the functioning of the tax system in India and provides deductions and refunds to the taxpayers. At the same time, there are various tax authorities that look after the implementation of the Income Tax Act and make sure that there is no tax evasion.

Apart from this, taxpayers have also been provided with the option to opt for New Tax Regime, which was introduced by Finance Minister in the Budget of 2020. Therefore, it has become imperative for the taxpayers to have the knowledge about basics of Income Tax Act so that they can make the right choice. Taxes form a very essential part of our economy and it is upon us to make sure that we are fulfilling our responsibility of paying the tax revenue to the government.

References

[1] The man who came up with Income Tax in India, Economic Times, available at https://economictimes.indiatimes.com/news/economy/the-man-who-came-up-with-income-tax-in-india/a-controversial-move/slideshow/67590662.cms?from=mdr, last seen on 06/06/2023

[2] Income Tax Deductions List for FY 2022-23, Tax2win, available at https://tax2win.in/guide/deductions, last seen on 04/04/2023

[3] Ss. 80C & 80CCC, Income Tax Act, 1961

[4] S. 80D, Income Tax Act, 1961

[5] Dr. Vinod K. Singhania, Direct Taxes Ready Reckoner, 142 (46^th ed., 2022)

[6]S. 80U, Income Tax Act, 1961

[7]Refund under Provisions of Income Tax Act, 1961, TaxGuru, available at https://taxguru.in/income-tax/refund-provisions-income-tax-act-1961.html, last seen on 04/06/2023

[8] Income Tax Refund: How to Claim Refund & Check Status, Canara HSBC Life Insurance, available at https://www.canarahsbclife.com/faqs/tax-saving/income-tax-refund#:~:text=The%20simplest%20way%20to%20claim,tax%20payments%20under%20Form%2026AS, last seen on 05/06/2023

[9] Various Income Tax Authorities, Income Tax Management, available at https://incometaxmanagement.com/Pages/Tax-Management-Procedure/1-1-Various-Income-Tax-Authorities.html, last seen on 03/03/2023

[10] Ektha Surana, Old vs. New Tax Regime: Which is better New or Old Tax Regime for Salaried Employees? , ClearTax, available at https://cleartax.in/s/old-tax-regime-vs-new-tax-regime, last seen on 06/06/2023

[11] Sangeeta Ojha, Income taxpayers in India: The pros and cons of new and old income tax regime, Livemint, available at https://www.livemint.com/money/income-taxpayers-in-india-the-pros-and-cons-of-new-and-old-income-tax-regime-11644803657193.html, last seen on 05/06/2023