Income tax is a typical example of a direct tax. The tax imposed on a person or entity under the orbit of income tax law is called income tax. It is the tax levied directly on personal income. The resulting revenue is usually one of the chief sources of cash for a government entity. Income Tax Ordinance (ITO), 1984 provides that income tax is one which is imposed, Charged payable and collected in relation to the income of a person for income year/years, on the basis of the tax rate of the assessment year.
Characteristics of income tax: From the analysis of the definition and nature of income tax, the following characteristics can be identified –
- It is a direct tax.
- It is charged on the total income of a person.
- It is charged on the income of the income year at the rate applicable in assessment year.
- It is payable in the year following the income year.
- It is generally charged on revenue income of a person.
- It is a tax charged on a person for income that comes within the preview of relevant income tax law.
- Whether the income is permanent or temporary, it is immaterial from the tax point of view. Even temporary income is taxable.
- If a person receives tax—free income on which tax is paid by the person making payment on behalf of the recipient, it has to be grossed up for inclusion in his total income.