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Unit 2: Residential Status and Taxation

2.3 Incidence of Tax Notes

The study of incidence is very important. The tax system is not merely aimed at raising a certain
amount of revenue, but the aim is to raise it from those sections of the people who can best bear
the tax. The aim, in short, is to secure a just distribution of the tax burden. This obviously cannot
be done unless an effort is made to trace the incidence of each tax levied by the State. We must

know who pays it ultimately in order to find out whether it is just to ask him to pay it, or whether
the burden imposed on him is according to the ability of the tax-payer or not. If the tax system

is to conform to Adam Smith’s first canon of taxation, viz., the canon of equality, it becomes
imperative to make a careful study of the reactions and repercussions of each tax and find out its

final resting place.

There are certain taxes, called direct taxes, which are borne by the people who pay them fi rst.
The incidence in such cases is apparent. But the tax system of a country is not merely composed
of direct taxes. There are indirect taxes also whose reactions are a complicated affair. These taxes
are intended to be shifted. Hut in actual practice, on account of economic friction, the shifting
may not take place at all or it may be partial, or the tax may be shifted on to a class of people quite
different from those intended to bear it.
If Public Finance is to serve as an instrument of social justice, the question of incidence at once
assumes great importance. The rich have to be taxed and the proceeds have to be spent for the
benefit of the poor. If you have to tax the rich, the incidence must be on the rich, otherwise the

object is not served. We must, therefore, follow each tax and make sure that it finds a rich home
to rest in.

Did u know? The incidence of income tax paid by a person will be on him. Import duty is
an indirect tax and can, therefore, be shifted. Income-tax, on the other hand, is a direct tax
and it cannot be shifted.
As per section 5, incidence of tax on a taxpayer depends on his residential status and also on the
place and time of accrual or receipt of income. In order to understand the relationship between
residential status and tax liability, one must understand the meaning of “Indian income” and
“foreign income”.
1. Indian income: Any of the following three is an Indian income:
(a) If income is received (or deemed to be received) in India during the previous year
and at the same time it accrues (or arises or is deemed to accrue or arise) in India
during the previous year.
(b) If income is received (or deemed to be received) in India during the previous year
but it accrues (or arises) outside India during the previous year.
(c) If income is received outside India during the previous year but it accrues (or arises
or is deemed to accrue or arise) in India during the previous year.

2. Foreign income: If the following two conditions are satisfied, then such income is “foreign
income”:
(a) Income is not received (or not deemed to be received) in India; and
(b) Income does not accrue or arise (or does not deemed to accrue or arise) in India.

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