Incidence of Tax | Income Tax Laws - B Com PDF Download

 Page 1


Incidence of Tax 
 
Introduction to Incidence of Tax 
The concept of tax incidence is a fundamental aspect of tax policy and economics, 
addressing a key question: who ultimately bears the burden of a tax? While it may seem 
straightforward that the entity legally obligated to pay a tax should bear its full cost, the 
reality is more complex. Taxes can be shifted, and their economic burden can fall on 
different parties than those initially intended. 
What is Tax Incidence? 
Tax incidence refers to the analysis of the distribution of a tax's economic burden 
among various stakeholders in the economy, including producers, consumers, workers, 
and owners of resources. It explores both the legal incidence (who is required to pay the 
tax to the government) and the economic incidence (who actually bears the cost of the 
tax after market adjustments). 
Incidence of Tax and Scope of Total Income 
(Section 5 of the Income Tax Act, India) 
Understanding the scope of total income is crucial for determining the tax liability of an 
individual or entity. This depends largely on the residential status of the assessee 
(taxpayer) during the relevant ?nancial year. Here’s how it works: 
Residential Status Categories 
Resident in India: 
Page 2


Incidence of Tax 
 
Introduction to Incidence of Tax 
The concept of tax incidence is a fundamental aspect of tax policy and economics, 
addressing a key question: who ultimately bears the burden of a tax? While it may seem 
straightforward that the entity legally obligated to pay a tax should bear its full cost, the 
reality is more complex. Taxes can be shifted, and their economic burden can fall on 
different parties than those initially intended. 
What is Tax Incidence? 
Tax incidence refers to the analysis of the distribution of a tax's economic burden 
among various stakeholders in the economy, including producers, consumers, workers, 
and owners of resources. It explores both the legal incidence (who is required to pay the 
tax to the government) and the economic incidence (who actually bears the cost of the 
tax after market adjustments). 
Incidence of Tax and Scope of Total Income 
(Section 5 of the Income Tax Act, India) 
Understanding the scope of total income is crucial for determining the tax liability of an 
individual or entity. This depends largely on the residential status of the assessee 
(taxpayer) during the relevant ?nancial year. Here’s how it works: 
Residential Status Categories 
Resident in India: 
? Individual or Hindu Undivided Family (HUF): Further classi?ed into: 
? Resident and Ordinarily Resident (ROR): A person who ful?lls both the 
conditions of residency and meets additional criteria to be considered 
"ordinarily resident." 
? Resident but Not Ordinarily Resident (RNOR): A person who ful?lls the 
conditions of residency but does not meet the criteria to be "ordinarily 
resident." 
? Other Entities (Companies, Firms, etc.): Simply categorized as Resident in 
India. 
Non-Resident in India (NRI): 
An individual or entity that does not meet the conditions to be considered a resident in 
India. 
Scope of Total Income Based on Residential Status 
(A) Resident and Ordinarily Resident (ROR) in India [Section 5(1)]: 
A person who is a Resident and Ordinarily Resident in India is taxed on their global 
income, meaning: 
? Income Received or Deemed to be Received in India: Any income that is 
actually received in India or is deemed to be received in India during the 
?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues (is earned) 
or arises in India, regardless of where it is received. 
? Income that Accrues or Arises Outside India: Any income that accrues or 
arises outside India, even if it is not related to any business or profession in 
India. 
(B) Resident but Not Ordinarily Resident (RNOR) in India [Section 5(1) Proviso]: 
A Resident but Not Ordinarily Resident in India is taxed on: 
Page 3


Incidence of Tax 
 
Introduction to Incidence of Tax 
The concept of tax incidence is a fundamental aspect of tax policy and economics, 
addressing a key question: who ultimately bears the burden of a tax? While it may seem 
straightforward that the entity legally obligated to pay a tax should bear its full cost, the 
reality is more complex. Taxes can be shifted, and their economic burden can fall on 
different parties than those initially intended. 
What is Tax Incidence? 
Tax incidence refers to the analysis of the distribution of a tax's economic burden 
among various stakeholders in the economy, including producers, consumers, workers, 
and owners of resources. It explores both the legal incidence (who is required to pay the 
tax to the government) and the economic incidence (who actually bears the cost of the 
tax after market adjustments). 
Incidence of Tax and Scope of Total Income 
(Section 5 of the Income Tax Act, India) 
Understanding the scope of total income is crucial for determining the tax liability of an 
individual or entity. This depends largely on the residential status of the assessee 
(taxpayer) during the relevant ?nancial year. Here’s how it works: 
Residential Status Categories 
Resident in India: 
? Individual or Hindu Undivided Family (HUF): Further classi?ed into: 
? Resident and Ordinarily Resident (ROR): A person who ful?lls both the 
conditions of residency and meets additional criteria to be considered 
"ordinarily resident." 
? Resident but Not Ordinarily Resident (RNOR): A person who ful?lls the 
conditions of residency but does not meet the criteria to be "ordinarily 
resident." 
? Other Entities (Companies, Firms, etc.): Simply categorized as Resident in 
India. 
Non-Resident in India (NRI): 
An individual or entity that does not meet the conditions to be considered a resident in 
India. 
Scope of Total Income Based on Residential Status 
(A) Resident and Ordinarily Resident (ROR) in India [Section 5(1)]: 
A person who is a Resident and Ordinarily Resident in India is taxed on their global 
income, meaning: 
? Income Received or Deemed to be Received in India: Any income that is 
actually received in India or is deemed to be received in India during the 
?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues (is earned) 
or arises in India, regardless of where it is received. 
? Income that Accrues or Arises Outside India: Any income that accrues or 
arises outside India, even if it is not related to any business or profession in 
India. 
(B) Resident but Not Ordinarily Resident (RNOR) in India [Section 5(1) Proviso]: 
A Resident but Not Ordinarily Resident in India is taxed on: 
? Income Received or Deemed to be Received in India: Same as the ROR 
category. 
? Income that Accrues or Arises in India: Same as the ROR category. 
? Income that Accrues or Arises Outside India: Taxable only if it is derived 
from a business controlled or a profession set up in India. Income from any 
other sources outside India is not included in the total income. 
(C) Non-Resident (NRI) in India [Section 5(2)]: 
A Non-Resident in India is taxed only on income that: 
? Income Received or Deemed to be Received in India: Any income received in 
India or deemed to be received in India during the ?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues or arises in 
India, regardless of where it is received. 
Key Differences and Impact on Tax Incidence: 
? Global Income Taxation: Only Resident and Ordinarily Resident (ROR) 
individuals or entities are subject to tax on their global income. 
? Foreign Income: 
? For RNOR individuals, only income that is linked to a business or profession 
in India is taxable if it arises outside India. 
? For NRIs, foreign income is entirely excluded from the scope of total income. 
? Tax Incidence: 
? Highest for ROR, as they are taxed on all global income. 
? Moderate for RNOR, as they are only partially taxed on foreign income. 
? Lowest for NRIs, as they are only taxed on Indian income. 
The residential status of an assessee is a key determinant of their tax liability in India. 
The broader the scope of total income (as in the case of ROR), the higher the tax 
incidence. For RNOR and NRI, the tax burden is reduced as foreign income is either 
partially or entirely excluded from their total income, respectively. This classi?cation 
ensures that the tax system accounts for the varying levels of connection and economic 
presence that individuals and entities have with India. 
Page 4


Incidence of Tax 
 
Introduction to Incidence of Tax 
The concept of tax incidence is a fundamental aspect of tax policy and economics, 
addressing a key question: who ultimately bears the burden of a tax? While it may seem 
straightforward that the entity legally obligated to pay a tax should bear its full cost, the 
reality is more complex. Taxes can be shifted, and their economic burden can fall on 
different parties than those initially intended. 
What is Tax Incidence? 
Tax incidence refers to the analysis of the distribution of a tax's economic burden 
among various stakeholders in the economy, including producers, consumers, workers, 
and owners of resources. It explores both the legal incidence (who is required to pay the 
tax to the government) and the economic incidence (who actually bears the cost of the 
tax after market adjustments). 
Incidence of Tax and Scope of Total Income 
(Section 5 of the Income Tax Act, India) 
Understanding the scope of total income is crucial for determining the tax liability of an 
individual or entity. This depends largely on the residential status of the assessee 
(taxpayer) during the relevant ?nancial year. Here’s how it works: 
Residential Status Categories 
Resident in India: 
? Individual or Hindu Undivided Family (HUF): Further classi?ed into: 
? Resident and Ordinarily Resident (ROR): A person who ful?lls both the 
conditions of residency and meets additional criteria to be considered 
"ordinarily resident." 
? Resident but Not Ordinarily Resident (RNOR): A person who ful?lls the 
conditions of residency but does not meet the criteria to be "ordinarily 
resident." 
? Other Entities (Companies, Firms, etc.): Simply categorized as Resident in 
India. 
Non-Resident in India (NRI): 
An individual or entity that does not meet the conditions to be considered a resident in 
India. 
Scope of Total Income Based on Residential Status 
(A) Resident and Ordinarily Resident (ROR) in India [Section 5(1)]: 
A person who is a Resident and Ordinarily Resident in India is taxed on their global 
income, meaning: 
? Income Received or Deemed to be Received in India: Any income that is 
actually received in India or is deemed to be received in India during the 
?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues (is earned) 
or arises in India, regardless of where it is received. 
? Income that Accrues or Arises Outside India: Any income that accrues or 
arises outside India, even if it is not related to any business or profession in 
India. 
(B) Resident but Not Ordinarily Resident (RNOR) in India [Section 5(1) Proviso]: 
A Resident but Not Ordinarily Resident in India is taxed on: 
? Income Received or Deemed to be Received in India: Same as the ROR 
category. 
? Income that Accrues or Arises in India: Same as the ROR category. 
? Income that Accrues or Arises Outside India: Taxable only if it is derived 
from a business controlled or a profession set up in India. Income from any 
other sources outside India is not included in the total income. 
(C) Non-Resident (NRI) in India [Section 5(2)]: 
A Non-Resident in India is taxed only on income that: 
? Income Received or Deemed to be Received in India: Any income received in 
India or deemed to be received in India during the ?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues or arises in 
India, regardless of where it is received. 
Key Differences and Impact on Tax Incidence: 
? Global Income Taxation: Only Resident and Ordinarily Resident (ROR) 
individuals or entities are subject to tax on their global income. 
? Foreign Income: 
? For RNOR individuals, only income that is linked to a business or profession 
in India is taxable if it arises outside India. 
? For NRIs, foreign income is entirely excluded from the scope of total income. 
? Tax Incidence: 
? Highest for ROR, as they are taxed on all global income. 
? Moderate for RNOR, as they are only partially taxed on foreign income. 
? Lowest for NRIs, as they are only taxed on Indian income. 
The residential status of an assessee is a key determinant of their tax liability in India. 
The broader the scope of total income (as in the case of ROR), the higher the tax 
incidence. For RNOR and NRI, the tax burden is reduced as foreign income is either 
partially or entirely excluded from their total income, respectively. This classi?cation 
ensures that the tax system accounts for the varying levels of connection and economic 
presence that individuals and entities have with India. 
 
 
Page 5


Incidence of Tax 
 
Introduction to Incidence of Tax 
The concept of tax incidence is a fundamental aspect of tax policy and economics, 
addressing a key question: who ultimately bears the burden of a tax? While it may seem 
straightforward that the entity legally obligated to pay a tax should bear its full cost, the 
reality is more complex. Taxes can be shifted, and their economic burden can fall on 
different parties than those initially intended. 
What is Tax Incidence? 
Tax incidence refers to the analysis of the distribution of a tax's economic burden 
among various stakeholders in the economy, including producers, consumers, workers, 
and owners of resources. It explores both the legal incidence (who is required to pay the 
tax to the government) and the economic incidence (who actually bears the cost of the 
tax after market adjustments). 
Incidence of Tax and Scope of Total Income 
(Section 5 of the Income Tax Act, India) 
Understanding the scope of total income is crucial for determining the tax liability of an 
individual or entity. This depends largely on the residential status of the assessee 
(taxpayer) during the relevant ?nancial year. Here’s how it works: 
Residential Status Categories 
Resident in India: 
? Individual or Hindu Undivided Family (HUF): Further classi?ed into: 
? Resident and Ordinarily Resident (ROR): A person who ful?lls both the 
conditions of residency and meets additional criteria to be considered 
"ordinarily resident." 
? Resident but Not Ordinarily Resident (RNOR): A person who ful?lls the 
conditions of residency but does not meet the criteria to be "ordinarily 
resident." 
? Other Entities (Companies, Firms, etc.): Simply categorized as Resident in 
India. 
Non-Resident in India (NRI): 
An individual or entity that does not meet the conditions to be considered a resident in 
India. 
Scope of Total Income Based on Residential Status 
(A) Resident and Ordinarily Resident (ROR) in India [Section 5(1)]: 
A person who is a Resident and Ordinarily Resident in India is taxed on their global 
income, meaning: 
? Income Received or Deemed to be Received in India: Any income that is 
actually received in India or is deemed to be received in India during the 
?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues (is earned) 
or arises in India, regardless of where it is received. 
? Income that Accrues or Arises Outside India: Any income that accrues or 
arises outside India, even if it is not related to any business or profession in 
India. 
(B) Resident but Not Ordinarily Resident (RNOR) in India [Section 5(1) Proviso]: 
A Resident but Not Ordinarily Resident in India is taxed on: 
? Income Received or Deemed to be Received in India: Same as the ROR 
category. 
? Income that Accrues or Arises in India: Same as the ROR category. 
? Income that Accrues or Arises Outside India: Taxable only if it is derived 
from a business controlled or a profession set up in India. Income from any 
other sources outside India is not included in the total income. 
(C) Non-Resident (NRI) in India [Section 5(2)]: 
A Non-Resident in India is taxed only on income that: 
? Income Received or Deemed to be Received in India: Any income received in 
India or deemed to be received in India during the ?nancial year. 
? Income that Accrues or Arises in India: Any income that accrues or arises in 
India, regardless of where it is received. 
Key Differences and Impact on Tax Incidence: 
? Global Income Taxation: Only Resident and Ordinarily Resident (ROR) 
individuals or entities are subject to tax on their global income. 
? Foreign Income: 
? For RNOR individuals, only income that is linked to a business or profession 
in India is taxable if it arises outside India. 
? For NRIs, foreign income is entirely excluded from the scope of total income. 
? Tax Incidence: 
? Highest for ROR, as they are taxed on all global income. 
? Moderate for RNOR, as they are only partially taxed on foreign income. 
? Lowest for NRIs, as they are only taxed on Indian income. 
The residential status of an assessee is a key determinant of their tax liability in India. 
The broader the scope of total income (as in the case of ROR), the higher the tax 
incidence. For RNOR and NRI, the tax burden is reduced as foreign income is either 
partially or entirely excluded from their total income, respectively. This classi?cation 
ensures that the tax system accounts for the varying levels of connection and economic 
presence that individuals and entities have with India. 
 
 
 
                                        
 
                                                           
 
 
 
 
   
Concept Problem 1 
From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended 31.3.2022, 
compute the total income for the assessment year 2022-23, if he is: 
i) Resident and ordinarily resident; 
ii) Resident but not ordinarily resident; 
iii) Non-resident 
S. No. Particulars Amount 
(a) Short term capital gain on sale of shares in Indian Company received in Germany 15,000 
(b) Dividend from a Japanese Company received in Japan 10,000 
(c) Rent from property in London deposited in a bank in London, later on remitted to 
India through approved banking channels 
75,000 
(d) Dividend from RP Ltd., an Indian Company 6,000 
(e) Agricultural income from lands in Gujarat 25,000 
Solution  
Computation of total income of Mr. Anirudh for the A.Y. 2022-23 
Particulars 
Resident & 
ordinarily 
resident 
Resident but 
not ordinarily 
resident 
Non- 
Resident 
Short term capital gain on sale of shares of an Indian 
company, received in Germany 
15,000 15,000 15,000 
Dividend from a Japanese company, received in Japan 10,000 - - 
Rent from property in London deposited in a bank in 
London [See Note (i)] 
52,500 - - 
Dividend from RP Ltd., an Indian Company [See Note (ii)] 6,000 6,000 6,000 
Agricultural income from land in Gujarat [See Note (iii)] - - - 
Total Income 83,500 21,000 21,000 
Notes: 
i) It has been assumed that the rental income is the gross annual value of the property. Therefore, deduction @ 
30% under section 24, has been provided and the net income so computed is taken into account for 
determining the total income of a resident and ordinarily resident. 
Particulars  Amount 
Rent received (assumed as gross annual value) 75,000 
Less: Deduction under section 24 (30% of INR 75,000) 22,500