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Direct and Indirect Taxation

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Direct and Indirect Taxation.

JNU, JaipurFirst Edition 2013

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Index

ContentI. ...................................................................... II

List of FigureII. .......................................................VIII

List of TablesIII. ..........................................................IX

AbbreviationsIV. ......................................................... X

Case StudyV. .............................................................. 122

BibliographyVI. ........................................................ 128

Self Assessment AnswersVII. ................................... 131

Book at a Glance

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Contents

Chapter I ....................................................................................................................................................... 1Direct and Indirect Taxes ............................................................................................................................ 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction .............................................................................................................................................. 21.2 Direct Tax in India ................................................................................................................................... 4 1.2.1 Direct Tax in Pre-1922 Era ...................................................................................................... 4 1.2.2 Direct Tax in Post 1922 Era ..................................................................................................... 51.3 Indirect Tax in India ............................................................................................................................... 10 1.3.1 Indirect Taxes during Pre-Reform Era ................................................................................... 10 1.3.2 Indirect Taxes in Post-Reform Era ......................................................................................... 101.4 Highlights of the Direct and Indirect Taxes ............................................................................................111.5 Tax Penalties ...........................................................................................................................................11Summary ..................................................................................................................................................... 12References ................................................................................................................................................... 12Recommended Reading ............................................................................................................................. 12Self Assessment ........................................................................................................................................... 13

Chapter II ................................................................................................................................................... 15Income Tax .................................................................................................................................................. 15Aim .............................................................................................................................................................. 15Objectives .................................................................................................................................................... 15Learning outcome ........................................................................................................................................ 152.1 Income Tax ............................................................................................................................................. 162.2 History of Income Tax in India .............................................................................................................. 16 2.2.1 Income Tax Reforms up to 1991 ............................................................................................ 16 2.2.2 Income Tax Reforms from 1991 Till Today ........................................................................... 162.3 Deficiencies in the Indian Income Tax System ...................................................................................... 172.4 The Elements/Sources of Income Tax Law ........................................................................................... 172.5 Rates of Income-Tax for Assessment Year 2012-13 .............................................................................. 18 2.5.1 Other Assessees ..................................................................................................................... 192.6 Definition of Assessee ............................................................................................................................ 202.7 Heads of Income [Sec. 14] ..................................................................................................................... 25Summary ..................................................................................................................................................... 27References ................................................................................................................................................... 27Recommended Reading ............................................................................................................................. 27Self Assessment ........................................................................................................................................... 28

Chapter III .................................................................................................................................................. 30Wealth Tax .................................................................................................................................................. 30Aim .............................................................................................................................................................. 30Objectives .................................................................................................................................................... 30Learning outcome ........................................................................................................................................ 303.1 Introduction ............................................................................................................................................ 313.2 Chargeability .......................................................................................................................................... 313.3 Definitions and Concepts ....................................................................................................................... 31 3.3.1 Assessment Year (A.Y.) [Sec2 (D)] ........................................................................................ 31 3.3.2 Valuation Date [Sec.2 (q)]...................................................................................................... 31 3.3.3 Incidence of Tax ..................................................................................................................... 31 3.3.4 Net Wealth.............................................................................................................................. 32 3.3.5 Assets [Sec.2 (ea)] .................................................................................................................. 32 3.3.6 Deemed Assets [Sec. 4] ......................................................................................................... 33

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3.3.7 Exempt Assets [Sec 5] ........................................................................................................... 35 3.3.8 Debt Owed ............................................................................................................................. 363.4 Computation of Net Wealth and Wealth Tax .......................................................................................... 363.5 Valuation of Assets ................................................................................................................................. 37 3.5.1 Valuation of a Building .......................................................................................................... 37 3.5.2 Valuation of Self-residential House [Sec.7 (2)] ..................................................................... 38 3.5.3 Valuation of Business Assets [Schedule III Part D] ............................................................... 38 3.5.4 Valuation of Interest in Firm or AOP [Schedule III Part E] ................................................... 39 3.5.5 Valuation of Life Interest [Schedule III Part F] ..................................................................... 39 3.5.6 Valuation of Jewellery [Schedule III Part G] ......................................................................... 40 3.5.7 Valuation of Other Assets [Schedule III Part H] .................................................................... 40 3.5.8 Valuation by Valuation Officer (V.O.) [sec.16A] ................................................................... 403.6 Procedure for Assessment ...................................................................................................................... 40 3.6.1 Wealth Tax Return (Voluntary /Revised) ............................................................................... 40 3.6.2 Assessment ............................................................................................................................. 41 3.6.3 Due Dates for Filing the Return ............................................................................................. 41 3.6.4 Signing of the Return ............................................................................................................. 41Summary ..................................................................................................................................................... 42References ................................................................................................................................................... 42Recommended Reading ............................................................................................................................. 42Self Assessment .......................................................................................................................................... 43

Chapter IV .................................................................................................................................................. 45Gift Tax ....................................................................................................................................................... 45Aim .............................................................................................................................................................. 45Objectives .................................................................................................................................................... 45Learning outcome ........................................................................................................................................ 454.1 Introduction ............................................................................................................................................ 46 4.1.1 Some Important Definitions ................................................................................................... 464.2 Charge of Gift-Tax and Gifts Subject to Such Charge ........................................................................... 46 4.2.1 Charge of Gift-Tax ................................................................................................................. 46 4.2.2 Gifts to Include Certain Transfers .......................................................................................... 46 4.2.3 Exemptions in Respect of Certain Gifts ................................................................................ 47 4.2.4 Value of Gifts, Determined .................................................................................................... 484.3 Gift-Tax Authorities ............................................................................................................................... 48 4.3.1 Gift-tax Officers ..................................................................................................................... 48 4.3.2 Appellate Assistant Commissioners of Gift Tax .................................................................... 49 4.3.3 Commissioners of Gift Tax .................................................................................................... 49 4.3.4 Inspecting Assistant Commissioners of Gift Tax ................................................................... 49 4.3.5 Gift-tax Officers to be Subordinate to the Commissioner of Gift-tax

and the Inspecting Assistant Commissioner of Gift-tax ........................................................ 49 4.3.6 Gift Tax Authorities to Follow Orders of the Board .............................................................. 494.4 Assessment ............................................................................................................................................. 49 4.4.1 Return of Gifts ....................................................................................................................... 49 4.4.2 Return After Due Date and Amendment of Return ................................................................ 50 4.4.3 Assessment ............................................................................................................................. 50 4.4.4 Gift Escaping Assessment ...................................................................................................... 50 4.4.5 Penalty for Default and Concealment .................................................................................... 50 4.4.6 Rebate on Advance Payments ................................................................................................ 514.5 Liability to Assessment in Special Cases ............................................................................................... 51 4.5.1 Tax of Deceased Person Payable by Legal Representative.................................................... 51 4.5.2 Assessment after Partition of a Hindu Undivided Family ..................................................... 52 4.5.3 Liability in Case of a Discontinued Firm or an Association of Persons ................................ 524.6 Appeals, Revisions and References ....................................................................................................... 52 4.6.1 Appeal to the Appellate Assistant Commissioner from Orders of Gift Tax Officers ............. 52

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4.6.2 Appeal to the Appellate Tribunal ........................................................................................... 53 4.6.3 Powers of Commissioner to Revise Orders of Subordinate Authorities ................................ 54 4.6.4 Appeal to the Appellate Tribunal from Orders of Enhancement by Commissioner .............. 54 4.6.5 Reference to High Court ........................................................................................................ 55 4.6.6 Hearing by High Court .......................................................................................................... 55 4.6.7 Appeal to Supreme Court ....................................................................................................... 564.7 Payment and Recovery of Gift-Tax ....................................................................................................... 56 4.7.1 Gift Tax Payable .................................................................................................................... 56 4.7.2 Gift Tax to be Charged on the Property Gifted ...................................................................... 56 4.7.3 Notice of Demand .................................................................................................................. 56 4.7.4 Recovery of Tax and Penalties ............................................................................................... 56 4.7.5 Mode of Recovery ................................................................................................................. 564.8 Miscellaneous ........................................................................................................................................ 57 4.8.1 Rectification of Mistakes ....................................................................................................... 57 4.8.2 Prosecution ............................................................................................................................. 57 4.8.3 Power to Take Evidence on Oath ........................................................................................... 57 4.8.4 Power to Call for Information ................................................................................................ 58 4.8.5 Effect of Transfer of Authorities on Pending Proceedings .................................................... 58 4.8.6 Computation of Period of Limitation ..................................................................................... 58 4.8.7 Service of Notice ................................................................................................................... 58 4.8.8 Prohibition of Disclosure of Information ............................................................................... 58 4.8.9 Bar of Suits in Civil Court ..................................................................................................... 58 4.8.10 Appearance before Gift-tax Authorities by Authorised Representatives ............................. 59 4.8.11 Agreement for Avoidance or Relief of Double Taxation with Respect to Gift Tax ............. 59 4.8.12 Act Not to Apply in Certain Cases ....................................................................................... 59 4.8.13 Power to Make Rules ........................................................................................................... 594.9 The Schedule .......................................................................................................................................... 60 4.9 1 Rates of Gift-Tax.................................................................................................................... 60Summary ..................................................................................................................................................... 61References ................................................................................................................................................... 61Recommended Reading ............................................................................................................................. 62Self Assessment ........................................................................................................................................... 63

Chapter V .................................................................................................................................................... 65Custom Duties ............................................................................................................................................ 65Aim .............................................................................................................................................................. 65Objectives .................................................................................................................................................... 65Learning outcome ........................................................................................................................................ 655.1 Introduction ............................................................................................................................................ 665.2 An Overview of Customs Law ............................................................................................................... 66 5.2.1 Meaning of Customs Duty ..................................................................................................... 66 5.2.2 Development of Customs Law .............................................................................................. 66 5.2.3 Scope and Coverage of Customs Law ................................................................................... 66 5.2.4 Objects of Customs Duty ....................................................................................................... 675.3 Nature of Customs Duty ........................................................................................................................ 67 5.3.1 Taxable Event ......................................................................................................................... 67 5.3.2 Territorial Water of India ....................................................................................................... 67 5.3.3 Indian Customs Water ............................................................................................................ 68 5.3.4 Types of Customs Duties ....................................................................................................... 68 5.3.5 Rate of Duty Applicable ........................................................................................................ 695.4 Definitions and Concepts ....................................................................................................................... 705.5 Classification and Valuation................................................................................................................... 72 5.5.1 Classification of Goods .......................................................................................................... 72 5.5.2 Valuation of Goods ................................................................................................................ 72

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Summary ..................................................................................................................................................... 76References ................................................................................................................................................... 76Recommended Reading ............................................................................................................................. 77Self Assessment ........................................................................................................................................... 78

Chapter VI .................................................................................................................................................. 80Central Excise Duty ................................................................................................................................... 80Aim .............................................................................................................................................................. 80Objectives .................................................................................................................................................... 80Learning outcome ........................................................................................................................................ 806.1 Introduction ............................................................................................................................................ 816.2 Nature of Excise Duty ............................................................................................................................ 81 6.2.1 Taxable Event ......................................................................................................................... 81 6.2.2 Rates of Excise Duty .............................................................................................................. 826.3 Chargeability of Excise Duty ................................................................................................................. 826.4 Definitions and Concepts ....................................................................................................................... 82 6.4.1 Factory ................................................................................................................................... 82 6.4.2 Goods ..................................................................................................................................... 82 6.4.3 Manufacture or Production .................................................................................................... 83 6.4.4 Manufacturer .......................................................................................................................... 836.5 Classification of Goods .......................................................................................................................... 83 6.5.1 Scheme of Classification ....................................................................................................... 83 6.5.2 Trade Parlance Theory ........................................................................................................... 846.6 Valuation of Goods................................................................................................................................. 846.7 Registration of Goods ............................................................................................................................ 856.8 Clearance of Goods ................................................................................................................................ 866.9 Duty Payment Provisions ....................................................................................................................... 866.10 Excise Duty Set Off Provisions ........................................................................................................... 87Summary ..................................................................................................................................................... 89References ................................................................................................................................................... 89Recommended Reading ............................................................................................................................. 90Self Assessment ........................................................................................................................................... 91

Chapter VII ................................................................................................................................................ 93Sales Tax ...................................................................................................................................................... 93Aim .............................................................................................................................................................. 93Objectives .................................................................................................................................................... 93Learning outcome ........................................................................................................................................ 937.1 Introduction ............................................................................................................................................ 947.2 Features of Central Sales Tax Act .......................................................................................................... 947.3 Important Definitions ............................................................................................................................. 957.4 Levy and Collection of Tax and Penalties ............................................................................................. 977.5 Principles for Determining Place of Sale or Purchase ........................................................................... 98 7.5.1 In The Course of Interstate Trade .......................................................................................... 98 7.5.2 Sale or Purchase of Goods Outside a State ............................................................................ 99 7.5.3 Sale or Purchase of Goods in the Course of Import and Export [Section 5] ........................ 997.6 Liability to Tax on Inter-state Sales ..................................................................................................... 100 7.6.1 Rates of Tax ......................................................................................................................... 100 7.6.2 Determination of Turnover .................................................................................................. 100 7.6.3 Collection of Tax [Section 9 A] ........................................................................................... 1007.7 Registration of Dealers ........................................................................................................................ 101 7.7.1 Compulsory Registration [Section 7 (1)] ............................................................................. 101 7.7.2 Voluntary Registration [Section 7 (2)] ................................................................................. 101 7.7.3 Procedure for Registration ................................................................................................... 101

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7.7.4 Amendment of Certificate of Registration ........................................................................... 102 7.7.5 Cancellation of Certificate of Registration .......................................................................... 102Summary ................................................................................................................................................... 103References ................................................................................................................................................. 103Recommended Reading ........................................................................................................................... 103Self Assessment ......................................................................................................................................... 104

Chapter VIII ............................................................................................................................................. 106Service Tax ................................................................................................................................................ 106Aim ............................................................................................................................................................ 106Objectives .................................................................................................................................................. 106Learning outcome ...................................................................................................................................... 1068.1 Introduction .......................................................................................................................................... 1078.2 Basics of Service Tax ........................................................................................................................... 107 8.2.1 Nature of Levy of Service Tax ............................................................................................. 108 8.2.2 Taxable Service .................................................................................................................... 108 8.2.3 Service Tax is Destination-based Consumption Tax ........................................................... 108 8.2.4 Service Implies Existence of Two Parties ............................................................................ 108 8.2.5 Cenvat Credit ....................................................................................................................... 108 8.2.6 Rate of Service Tax .............................................................................................................. 108 8.2.7 Service Tax, Education Cess and SAH Education Cess to be Shown Separately in Invoice 109 8.2.8 Taxable Event in Service Tax ............................................................................................... 109 8.2.9 Person Liable to Pay Service Tax ........................................................................................ 109 8.2.10 Services Provided to Non-resident .................................................................................... 109 8.2.11 Services of Insurance Agents ............................................................................................. 109 8.2.12 Consignor/Consignee Paying Freight, in case of GTA Services ........................................ 109 8.2.13 Services of Agents of Mutual Fund ................................................................................... 109 8.2.14 Body Corporate or Firm Located in India Receiving Sponsorship Service ...................... 109 8.2.15 Cenvat Credit of Tax Paid .................................................................................................. 109 8.2.16 Large Taxpayer Unit (LTU) ................................................................................................110 8.2.17 Service on Sub-contract Basis ............................................................................................1108.3 Exemptions from Service Tax ...............................................................................................................110 8.3.1 Small Service Providers ........................................................................................................110 8.3.2 Export of Services .................................................................................................................110 8.3.3 Services to UN Agencies .....................................................................................................110 8.3.4 Services Provided within SEZ .............................................................................................110 8.3.5 Services provided to foreign diplomatic missions, family members of

diplomatic missions, etc. ......................................................................................................110 8.3.6 Services provided by RBI exempt .......................................................................................110 8.3.7 General Exemption to Small Service Providers ...................................................................110 8.3.8 Specific Exemptions .............................................................................................................111 8.3.9 Services Provided to EOU ....................................................................................................113 8.3.10 No Service Tax on Service Provided in J&K ......................................................................1138.4 Classification of Service .......................................................................................................................113 8.4.1 Principles of Classification ...................................................................................................113 8.4.2 Service which has been Specifically Excluded in Definition of

One Service Cannot be Covered Under Another Head .........................................................113 8.4.3 Introduction of New Heading Means Earlier it was not Taxable ..........................................1138.5 Procedures to be Followed for the Administration of Service Tax .......................................................114 8.5.1 Registration Under Service Tax ............................................................................................114 8.5.2 Registration Number (STC Code) ........................................................................................114 8.5.3 Premises Code .......................................................................................................................114 8.5.4 Changes to be Informed in Form ST-1within 30 days .........................................................114 8.5.5 Cancellation/Surrender of Registration ................................................................................114 8.5.6 Centralised Registration ........................................................................................................114

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8.6 Invoice by Service Provider ..................................................................................................................115 8.6.1 Details Required to be Shown in Invoice/Bill/Challan .........................................................115 8.6.2 Education Cess and SAH Education Cess to be Shown Separately .....................................115 8.6.3 Invoice in Case of Continuous Service ................................................................................115 8.6.4 Rounding Up of Tax in Each Invoice not Required ..............................................................116 8.6.5 Advance Payment from Customers ......................................................................................116 8.6.6 Payment of Tax .....................................................................................................................116 8.6.7 Exception in March ..............................................................................................................116 8.6.8 Payment of Tax on Amounts Actually Received .................................................................116 8.6.9 Self Adjustment of Excess Tax Paid in Earlier Period ..........................................................116 8.6.10 Self Adjustment Only in Case of Reasons like Calculation Mistake,

Exact Amount Not Known, etc. ..........................................................................................116 8.6.11 Adjustment upto Rs 2,00,000 Only Permissible ................................................................116 8.6.12 Adjustment in Subsequent Month/Quarter ........................................................................117 8.6.13 Inform Details of Adjustment within 15 Days ...................................................................117 8.6.14 Adjustment in Case of Service Tax on Renting of Immovable Property ............................117 8.6.15 Assessees Having Centralised Registration ........................................................................117 8.6.16 Adjustment If Service Not Provided Partly or Fully ...........................................................1178.7 Payment of Service Tax ........................................................................................................................117 8.7.1 Payment from Cenvat Credit Plus/GAR-7 ............................................................................117 8.7.2 Account Code .......................................................................................................................117 8.7.3 Presentation of Cheque on or Before Due Date is Sufficient ..............................................117 8.7.4 If Last Date is a Holiday .......................................................................................................118 8.7.5 Electronic Accounting System in Excise and Service Tax (EASIEST) ...............................118 8.7.6 Mandatory e-payment if Annual Service Tax Payment Exceeds Rs 50 lakhs ......................118 8.7.7 Mandatory Interest for Late Payment of Service Tax ..........................................................118Summary ....................................................................................................................................................119References ..................................................................................................................................................119Recommended Reading ............................................................................................................................119Self Assessment ......................................................................................................................................... 120

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List of Figure

Fig. 1.1 Classification of taxes ....................................................................................................................... 4

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List of Tables

Table 1.1 Proposed income tax rates and slabs .............................................................................................. 9Table 2.1 The first schedule of Finance Act ................................................................................................. 18Table 2.2 Income-tax rates for individuals, HUF, AOP/BOI or artificial juridical person .......................... 18Table 2.3 Income-tax rates for a woman resident in India below sixty years .............................................. 19Table 2.4 Income-tax rates for a resident senior citizen (60 years) ............................................................. 19Table 2.5 Income-tax rates for a resident senior citizen (80 years) ............................................................. 19Table 2.6 Income-tax rates applicable to other assessees ............................................................................ 20Table 2.7 Heads of income ........................................................................................................................... 26Table 3.1 Incidence of tax ............................................................................................................................ 31Table 3.2 Computation of net wealth ........................................................................................................... 36Table 3.3 Adjustment for un-built area ........................................................................................................ 38Table 3.4 Valuation of assets disclosed on balance sheet ............................................................................ 39Table 3.5 Due dates for filing of returns ...................................................................................................... 41Table 7.1 Important definitions .................................................................................................................... 97Table 8.1 Taxable services and partial abatement available .......................................................................112

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Abbreviations

AOP - Association of PersonsAWB - Airway BillAY - Assessment YearBL - Bill of LadingBTP - Bio-Technology ParkCA - Customs ActCBDT - Central Board of Direct TaxesCBE&C - Central Board of Excise and CustomsCEA - Central Excise ActCEGAT - Customs, Excise & Gold (Control) Appellate TribunalCESTAT - Custom Excise & Service Tax Appellate TribunalCETA - Central Excise Tariff ActCOI - Constitution of IndiaCST - Central Sales TaxCTA - Customs Tariff ActCVD - Countervailing DutyDDT - Dividend Distribution TaxDGFT - Director General of Foreign TradeDTC - Direct Tax CodeEASIEST - Electronic Accounting System in Excise and Service TaxECC - Excise Control CodeEHTP - Electronics Hardware Technology ParkELSS - Equity Linked Savings SchemeEOU - Export Oriented UnitFDI - Foreign Direct InvestmentGDP - Gross Domestic ProductGMR - Gross Maintainable RentGTA - Goods Transport AgencyHSN - Harmonised System of NomenclatureHUF - Hindu Undivided FamilyLR - Lorry ReceiptLTA - Leave Travel AllowanceLTU - Large Taxpayer UnitMODVAT - ModifiedVATMRP - Maximum Retail PriceNCCD - National Calamity Contingent DutyNMR - Net Maintainable RentNPS - New Pension SchemeNSC - NationalSavingsCertificatesPAN - Permanent Account NumberPFY - Polyester Filament YarnPLA - Personal Ledger AccountPY - Previous YearRR - Railway ReceiptSSI - Small Scale IndustrySTC - Service Tax CodeSTP - Software Technology ParkSTT - Securities Transaction TaxTDS - Tax Deducted at SourceTF - Task ForceULIP - Unit Linked Insurance PlansVAT - Value Added TaxWTO - World Trade Organisation

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Chapter I

Direct and Indirect Taxes

Aim

The aim of this chapter is to:

introduce the concept of tax•

explicate direct tax in India•

elucidate indirect tax in India•

Objectives

The objectives of this chapter are to:

enlist the characteristics of direct tax code•

explicate direct tax pre and post 1922•

explain direct tax code•

Learning outcome

At the end of this chapter, you will be able to:

identify the merits and demerits of direct and indirect taxes•

understand the history of tax•

determine the highlights of direct and indirect taxes•


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1.1 IntroductionIt is a matter of general belief that taxes on income and wealth are of recent origin, but there is enough evidence to show that taxes on income in some form or the other were levied even in primitive and ancient communities. The origin of the word ‘Tax’ is from ‘Taxation’, which means an estimate. These were levied either on the sale and purchase of merchandise or livestock and were collected in a haphazard manner from time to time. Nearly 2000 years ago, there went out a decree from Caesar Augustus that the entire world should be taxed. In Greece, Germany and Roman Empires, taxes were levied sometime on the basis of turnover and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch. In Northern England, taxes were levied on land and on moveable property, such as the Saladin Title in 1188. Later on, these were supplemented by introduction of poll taxes and indirect taxes known as, ‘Ancient Customs’ which were duties on wool, leather and hides. These levies and taxes in various forms and on various commodities and professions were imposed to meet the needs of the governments, to meet their military and civil expenditures , to ensure safety to the subjects and also to meet the common needs of the citizens like maintenance of roads, administration of justice and such other functions of the State.

A tax is a legally compulsory payment levied by the government on the persons or companies to meet the expenditure incurredonconferringcommonbenefitsuponthepeopleofacountry.Inotherwords,ataxcanalsobedescribedas a compulsory levy, where those who are taxed have to pay the sums irrespective of any corresponding return of services or goods by the government.

Ataxmaybedefinedasa“pecuniaryburdenlaiduponindividualsorpropertyownerstosupportthegovernment,apaymentexactedbythelegislativeauthority.”Atax“isnotavoluntarypaymentordonation,butanenforcedcontribution, exacted pursuant to legislative authority.” Taxes consist of direct taxes and indirect taxes, and may be paid in money or as its labour equivalent (often but not always unpaid labour). India has a well developed taxation structure. The tax system in India is mainly a three tier system which is based between the Central, State Governments and the local government organisations. In most cases, these local bodies include the local councils and the municipalities. According to the Constitution of India, the government has the right to levy taxes on individuals and organisations. However, the constitution states that no one has the right to levy or charge taxes except the authority of law. Whatever tax is being charged has to be backed by the law passed by the legislature or the parliament. Article 246 (seventh schedule) of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists:

List - I entailing the areas on which only the parliament is competent to makes laws•List - II entailing the areas on which only the state legislature can make laws and•List - III listing the areas on which both the Parliament and the State Legislature can make laws upon •concurrently

Separate heads of taxation are provided under lists I and II of Seventh Schedule of Indian Constitution. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). Any tax levied by the government which is not backed by law or is beyond the powers of the legislating authority may be struck down as unconstitutional. The thirteen heads List-I of Seventh Schedule of Constitution of India covered under Union taxation, on which Parliament enacts the taxation law, are as under:

Taxes on income other than agricultural income•Duties of customs including export duties•Duties of excise on tobacco and other goods manufactured or produced in India except:•

alcoholic liquor for human consumption, and �opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations �containing alcohol or any substance included in Corporation Tax

Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on capital •of companiesEstate duty in respect of property other than agricultural land•Duties in respect of succession to property other than agricultural land•

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Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight•Taxes other than stamp duties on transactions in stock exchanges and futures markets•Taxes on the sale or purchase of newspapers and on advertisements published therein•Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course •of inter-state trade or commerceTaxes on the consignment of goods in the course of inter-state trade or commerce•All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution•

The nineteen heads List-II of Seventh Schedule of the Indian Constitution covered under state taxation, on which state legislative enacts the taxation law, are as under:

Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for •revenue purposes and records of rights, and alienation of revenuesTaxes on agricultural income•Duties in respect of succession to agricultural income•Estate duty in respect of agricultural income•Taxes on lands and buildings•Taxes on mineral rights•Duties of excise for following goods manufactured or produced within the State are:•

alcoholic liquors for human consumption �opium, Indian hemp and other narcotic drugs and narcotics �

Taxes on entry of goods into a local area for consumption, use or sale therein•Taxes on the consumption or sale of electricity•Taxes on the sale or purchase of goods other than newspapers•Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by •radio or televisionTaxes on goods and passengers carried by roads or on inland waterways•Taxes on vehicles suitable for use on roads•Taxes on animals and boats•Tolls•Taxes on profession, trades, callings and employments•Capitation taxes•Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling•Stamp duty•

Provisions have been made by 73rd Constitutional Amendment, enforced from 24th April, 1993, to levy taxes by the panchayat. A State may by law authorise a panchayat to levy, collect and appropriate taxes, duties, tolls etc. Similarly, the provisions have been made by 74th Constitutional Amendment, enforced from 1st June, 1993, to levy the taxes by the Municipalities. A State Legislature may by law authorise a Municipality to levy, collect and appropriate taxes, duties, tolls, etc.

Taxesaremainlyclassifiedinto:Direct tax•Indirect tax•


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Tax

Wealth Tax

Gift Tax

Custom Duties

Excise Duties

Sales Tax

Service Tax

Direct Tax

IndirectTax

Income Tax

Fig. 1.1 Classification of taxes

1.2 Direct Tax in IndiaDirect taxes are the taxes which are not shifted, i.e., the incidence of which falls on persons who pay them to the government, for example, income tax and wealth tax.

1.2.1 Direct Tax in Pre-1922 EraIn India, the system of direct taxation as it is known today has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject. He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the collection of taxes in such a manner that the subjects did notfeelthepinchofpayingtaxes.Helaiddownthatthetradersandartisansshouldpay1/5thoftheirprofitsinsilver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.

The learned author K.B.Sarkar commends the system of taxation in ancient India in his book ‘Public Finance in Ancient India’, (1978 edition) as follows:“MostofthetaxesofancientIndiawerehighlyproductive.Theadmixtureofdirecttaxeswithindirecttaxessecuredelasticity in the tax system, although more emphasis was laid on direct tax. The tax-structure was a broad based one andcoveredmostpeoplewithinitsfold.Thetaxeswerevariedandthelargevarietyoftaxesreflectedthelifeofalarge and composite population.”

However, it is Kautilya’s Arthasastra, which deals with the system of taxation in an elaborate and planned manner. This well known treatise on state crafts written sometime in 300 B.C., when the Mauryan Empire was at its glorious upwards move is truly amazing, for its deep study of the civilisation of that time and the suggestions given which shouldguideakinginrunningtheStateinamostefficientandfruitfulmanner.AmajorportionofArthasastraisdevotedbyKautilyatofinancialmattersincludingfinancialadministration.Accordingtofamousstatesman,the

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Mauryan system, so far as it applied to agriculture, was a sort of state landlordism and the collection of land revenue formed an important source of revenue to the State. The State not only collected a part of the agricultural produce which was normally one sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals, etc.

Kautilya’sArthasastrawasthefirstauthoritativetextonpublicfinance,administrationandthefiscallawsinthiscountry.Hisconceptoftaxrevenueandtheon-taxrevenuewasauniquecontributioninthefieldoftaxadministration.It was he, who gave the tax revenues its due importance in the running of the State and its far-reaching contribution to the prosperity and stability of the empire. It lays down in precise terms the art of state craft, including economic andfinancialadministration.

1.2.2 Direct Tax in Post 1922 EraTherapidchangesinadministrationofdirecttaxes,duringthelastdecades,reflectthehistoryofsocio-economicthinking in India. From 1922 to the present day changes in direct tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act as it stands amended to date. It was but natural, in these circumstances that the set up of the department should not only expand, but undergo structural changes as well.

Changes in administrative set up since the inception of the departmentThe organisational history of the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, forthefirsttime,aspecificnomenclaturetovariousIncome-taxauthorities.Thefoundationofapropersystemof administration was thus laid. In 1924, Central Board of Revenue Act constituted the board as a statutory body with functional responsibilities for the administration of the Income-tax Act. Commissioners of income tax were appointedseparatelyforeachprovinceandassistantcommissionersandincometaxofficerswereprovidedundertheir control. The amendments to the Income Tax Act, in 1939, made two vital structural changes:

Appellatefunctionswereseparatedfromadministrativefunctions;aclassofofficers,knownasappellateassistant•commissioners, thus came into existence. A central charge was created in Bombay. In 1940, with a view to exercising effective control over the progress •andinspectionoftheworkofIncome-taxDepartmentthroughoutIndia,theveryfirstattachedofficeoftheBoard, called Directorate of Inspection (Income Tax) was created. As a result of separation of executive and judicial functions, in 1941, the Appellate Tribunal came into existence. In the same year, a central charge was created in Calcutta also.

WorldWarIIbroughtunusualprofitstobusinessmen.During1940to1947,ExcessProfitsTaxandBusinessProfitsTax were introduced and their administration handed over to the Department (These were later repealed in 1946 and 1949 respectively). In 1951, the 1st Voluntary Disclosure Scheme was brought in. It was during this period, in 1946,thatafew,Group‘A’officersweredirectlyrecruited.Lateronin1953,theGroup‘A’Servicewasformallyconstituted as the ‘Indian Revenue Service’.

This era was characterised by considerable emphasis on development of investigation techniques. In 1947, Taxation on Income (Investigation) Commission was set up which was declared ultra vires by the Supreme Court in 1956 but the necessity of deep investigation had by then been realised. In 1952, the Directorate of Inspection (Investigation) was set up. It was in this year that a new cadre known as Inspectors of Income Tax was created. The increase in ‘largeincome’casesnecessitatedcheckingoftheworkdonebydepartmentalofficers.Thusin1954,theInternalAudit Scheme was introduced in the Income-tax Department.

Asindicatedearlier,in1946,forthefirsttimeafew,Group‘A’officerswererecruitedinthedepartment.Trainingthem was important. The new recruits were sent to Bombay and Calcutta where they were trained, though not in an organised manner. In 1957, I.R.S. (Direct Taxes) Staff College started functioning in Nagpur. Today, this attached officeoftheBoardfunctionsunderaDirector-General.ItiscalledtheNationalAcademyofDirectTaxes.By1963,the I.T. department, burdened with the administration of several other Acts like W.T., G.T., E.D., etc., had expanded to such an extent that it was considered necessary to put it under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was passed. The Central Board of Direct Taxes was constituted, under this Act.


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The developing nature of the economy of the country brought with it both steep rates of taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement mechanism resulted in the creation of the Settlement Commission.

A very important administrative change occurred during this period. The recovery of arrears of tax which till 1970 wasthefunctionofStateauthoritieswaspassedontothedepartmentalofficers.AwholenewwingofOfficers-TaxRecoveryOfficerswascreatedandanewcadreofpostofTaxRecoveryCommissionerswasintroducedw.e.f.1-1-1972.

In order to improve the quality of work, in 1977, a new cadre known as IAC (Assessment) and in 1978 another cadreknownasCIT(Appeals)werecreated.TheCommissioners’cadrewasfurtherreorganisedandfivepostsofChief Commissioners (Administration) were created in 1981.

Tax reformsCertain important policy and administrative reforms carried out over the past few years are as follows:

The policy reforms include:•Lowering of rates �Withdrawals/reduction of major incentives �Introduction of measures for presumptive taxation �Simplificationoftaxlaws,particularlyrelatingtocapitalgains �Widening the tax base �

The administrative reforms include:•computerisationinvolvingallotmentofauniqueidentificationnumbertotaxpayerswhichisemergingas �auniquebusinessidentificationnumberrealignment of the available human resources with the changed business needs of the organisation �

ComputerisationComputerisation in the income tax department started with the setting up of the Directorate of Income Tax (Systems) in1981.Initially,computerisationofprocessingofchallanswastakenup.Forthis,3computercentreswerefirstsetup in 1984-85 in metropolitan cities using SN-73 systems. This was later extended to 33 major cities by 1989. The computerised activities were subsequently extended to allotment of PAN under the old series, allotment of TAN, and pay roll accounting. These computer centres used batch process with dumb terminals for data entry.

In 1993, a working group was set up by the government to recommend computerisation of the department. Based on the report of the working group a comprehensive computerisation plan was approved by the government in October, 1993. In pursuance of this, Regional Computer Centres (RCC) were set up in Delhi, Mumbai, and Chennai in 1994-95 withRS6000/59HServers.PCswerefirstprovidedtoofficersinthesecitiesinphases.Theplaninvolvednetworkingof all users on LAN/WAN. Network with leased data circuits were accordingly set up in Delhi, Mumbai and Chennai in Phase-I during 1995-96. A National Computer Centre (NCC) was set up at Delhi in 1996-97. Integrated application software were developed and deployed during 1997-99. Thereafter, Rs 6000 type mid range servers were provided in the other 33 computer centres in various major cities in 1996-97. These were connected to the National Computer Centrethroughleasedlines.PCswereprovidedtoofficersofdifferentleveluptoITOsinstagesbetween1997and1999.InphaseII,officesin57citieswerebroughtonthenetworkandlinkedtoRCCsandNCC.

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Restructuring of the Income-tax Department The restructuring of the Income-tax Department was approved by the cabinet in its meeting held on 31-8-2000 to achieve the following objectives:

Increase in effectiveness and productivity•Increase in revenue collection•Improvement in services to tax payers•Reduction in expenditure by downsizing the workforce•Improved career prospects at all levels•Induction of information technology•Standardisation of work norms•

The aforementioned objectives have been sought to be achieved by the department through a multi-pronged strategy of:

re-designing business processes through functionalisation•increasingthenumberofofficerstorationalisethespanofcontrolforbettersupervision,controlandmanagement•of workload and to improve tax-payer servicesre-orient, re-train and re-deploy the workforce with appropriate incentives in the form of career advancement•

Merits of direct taxesMerits of direct tax are as follows:

Imposed according to the ability of the person to pay. (termed as progressive taxation)•Revenue is income elastic as progressive character revenue increases faster than the increase in income.•Create better civic consciousness.•Serves the purpose of transference of income from the rich to the poor.•

Demerits of direct taxesDemerits of direct tax are as follows:

Theabilitytopayisdifficulttodetermine;onlyaroughideacanbeformed.•Because of undeclared sources of income or evasion, the actual payment may not be strictly according to pay.•Necessitate proper maintenance of accounts which some of the tax payers may not be able to do.•Cumbersome assessment procedure requiring expert assistance.•

Direct Tax CodeThe Direct Tax Code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distributiontax,fringebenefittaxandwealth-tax,soastoestablishaneconomicallyefficient,effectiveandequitabledirect tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and minimise litigation.

It is designed to provide stability in the tax regime as it is based on well accepted principles of taxation and best internationalpractices.Itwilleventuallypavethewayforasingleunifiedtaxpayerreportingsystem.ThenewDirect Tax Code (DTC) is said to replace the existing Income Tax Act of 1961 in India. DTC bill was tabled in parliamenton30thAugust,2010.Therearebigchangesnowinmonsoonsessionandthereisnowmuchlessbenefitsascomparedtowhatwereintheoriginalproposal.Duringthebudget2010presentation,thefinanceministerMr.Pranab Mukherjee reiterated his commitment to bringing into fore the new Direct Tax Code (DTC) into force from 1stofApril,2011,butsamecouldnotbefulfilled.


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Some of the provisions of the code are as follows: Single code for direct taxes: All the direct taxes have been brought under a single code and compliance procedures •unified.Thiswilleventuallypavethewayforasingleunifiedtaxpayerreportingsystem.Use of simple language: With the expansion of the economy, the number of taxpayers can be expected to •increasesignificantly.Thebulkofthesetaxpayerswillbesmall,payingmoderateamountsoftax.Therefore,it is necessary to keep the cost of compliance low by facilitating voluntary compliance by them. This is sought to be achieved, inter alia, by using simple language in drafting so as to convey, with clarity, the intent, scope and amplitude of the provision of law. Each sub-section is a short sentence intended to convey only one point. All directions and mandates, to the extent possible, have been conveyed in active voice. Similarly, the provisos and explanations have been eliminated since they are incomprehensible to non-experts. The various conditions embedded in a provision have also been nested. More importantly, keeping in view the fact that a tax law is essentially a commercial law, extensive use of formulae and tables has been made.Reducing the scope for litigation: Wherever possible, attempt is made to avoid ambiguity in the provisions that •invariably gives rise to rival interpretations. The objective is that the tax administrator and the tax payer are adidemontheprovisionsofthelawandtheassessmentresultsinafinalitytothetaxliabilityofthetaxpayer.To further this objective, power has also been delegated to the Central Government/Board to avoid protracted litigation on procedural issues.Flexibility: The structure of the statute has been developed in a manner which is capable of accommodating •the changes in the structure of a growing economy without resorting to frequent amendments. Therefore, to the extentpossible,theessentialandgeneralprincipleshavebeenreflectedinthestatuteandthemattersofdetailare contained in the rules/schedules.Ensurethatthelawcanbereflectedinaform:Formosttaxpayers,particularlythesmallandmarginalcategory,•thetaxlawiswhatisreflectedintheform.Therefore,thestructureofthetaxlawhasbeendesigned,sothatitis capable of being logically reproduced in a form.Consolidation of provisions: In order to enable a better understanding of tax legislation, provisions relating •todefinitions,incentives,procedureandratesoftaxeshavebeenconsolidated.Further,thevariousprovisionshave also been rearranged to make it consistent with the general scheme of the Act.Elimination of regulatory functions: Traditionally, the taxing statute has also been used as a regulatory tool. •However, with regulatory authorities being established in various sectors of the economy, the regulatory function ofthetaxingstatutehasbeenwithdrawn.Thishassignificantlycontributedtothesimplificationexercise.Providing stability: At present, the rates of taxes are stipulated in the Finance Act of the relevant year. Therefore, •there is a certain degree of uncertainty and instability in the prevailing rates of taxes. Under the Code, all rates of taxes are proposed to be prescribed in the First to the Fourth Schedule to the Code itself thereby obviating the need for an annual Finance Bill. The changes in the rates, if any, will be done through appropriate amendments to the Schedule brought before Parliament in the form of an Amendment Bill.

Characteristics of Direct Tax Code (DTC)The following are the characteristics of Direct Tax Code:

Removal of most of the tax saving schemes: DTC removes most of the categories of exempted income. •Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates),Long-terminfrastructuresbonds,houseloanprincipalrepayment,stampdutyandregistrationfeesonpurchaseofhousepropertywilllosetaxbenefits.New tax saving schemes: Tax saving based investment limit remains Rs. 1,00,000 but another Rs. 50,000 has •been added just for pure life insurance (Sum insured is at least 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. The one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension scheme (NPS).

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Taxslabs:Theincometaxratesandslabshavebeenmodified.Theproposedratesandslabsareasfollows:•

Annual Income Tax Slab

Up-to INR 200,000 (for senior citizens 250,000) Nil

Between INR 200,000 to 500,000 10%

Between INR 500,000 to 1,000,000 20%

Above INR 1,000,000 30%

Table 1.1 Proposed income tax rates and slabs

Men and women are treated same now under Direct Tax Code (DTC)Highlights and impact of DTC are as following:

Home loan interest: Exemption will remain same as 1.5 lakhs per year for interest on housing loan for self-•occupied property.Short and long-term gains: Only half of short-term capital gains will be taxed. E.g., if you gain 50,000, add •25,000 to your taxable income.Long-term capital gains (From equities and equity mutual funds, on which STT has been paid) are still exempted •from income tax.EEE and EET: As per changes on 15th June, 2010, tax exemption at all three stages (EEE) —savings, accretions •and withdrawals—to be allowed for provident funds (GPF, EPF and PPF), NPS (New Pension Scheme administeredbyPFRDA),Retirementbenefits(gratuity,leaveencashment,etc.),purelifeinsuranceproductsand annuity schemes. Earlier DTC wanted to tax withdrawals.Education Cess: Surcharge and education cess are abolished.•Income arising from house property: Deductions for rent and maintenance would be reduced from 30% to 20% •of the gross rent. All interest paid on house loan for a rented house is deductible from rent.Before DTC, if you own more than one property, there was provision for taxing notional rent even if the second •house was not put to rent. But, under the Direct Tax Code 2010, such a concept has been abolished.LTA (Leave Travel Allowance): Tax exemption on LTA is abolished.•Education loan: Tax exemption on education loan to continue.•Corporate tax: Corporate tax reduced from 34% to 30% including education cess and surcharge.•Taxation of capital gains from property sale: For sale within one year, gain is to be added to taxable salary.•Forlong-termgain(afteroneyearofpurchase),insteadofflatrateof20%ofgainafterindexationbenefit,new•concept has been introduced. Now, gain after indexation will be added to taxable income and taxed at per the tax slab.Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st April, 1981.•Medical reimbursement: Max limit for medical reimbursements has been increased to Rs. 50,000 per year from •current Rs. 15,000 limit.Tax on dividends: Equity mutual fund will attract 5% dividend distribution tax (DDT). DDT has been removed •from debt and non-equity based mutual funds, but now dividends on non-equity funds will be taxable in investor’s hand as per his slab rates. There will also be a TDS of 10% (20% in case of NRI and companies), if dividend is more than Rs. 10,000 for non-equity funds.News for NRIs: As per the current laws, an NRI is liable to pay tax on global income, if he is in India for a period •morethan182daysinafinancialyear.Butinthenewbill,thisdurationhasbeenchangedtojust60days.An NRI will be deemed as resident only if he has also resided in India for 365 days or more in the preceding •fourfinancialyears,togetherwith60daysinanyofthesefiscalyears.EvenifanNRIbecomesaresidentinanyfinancialyear,hisglobalincomedoesnotimmediatelybecomeliabletotaxinIndia.Globalincomewouldbecome taxable only if the person also stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.


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1.3 Indirect Tax in IndiaThe indirect tax in India constitutes a group of tax laws and regulations. The indirect taxes in India are enforced upondifferentactivities includingmanufacturing, tradingand imports. Indirect taxes influenceall thebusinesslines in India. Charge levied by the State on consumption, expenditure, privilege, or right but not on income or property. The indirect tax system in India has undergone extensive reforms for more than two decades. One of the most important reasons for recent tax reforms in many developing and transitional economies has been to evolve a tax system to meet the requirements of international competition

Indirect taxes are those whose burden can be shifted to others, so that those who pay these taxes to the government do not bear the whole burden, but pass it on wholly or partly to others. Indirect taxes are levied on production and sale of commodities and services and small or a large part of the burden of indirect taxes are passed on to the consumers. Excise duties on the product of commodities, sales tax, service tax, customs duty, tax on rail or bus fare are some examples of indirect taxes.

1.3.1 Indirect Taxes during Pre-Reform EraThe indirect tax structure was extremely irrational between the reforms. The Constitution gives the permission to levy a multitude of indirect taxes. But the most important ones are customs and excise duties charged by the Central Government and sales tax excepting inter state sales tax to be charged by the State Government. The indirect taxes levied by the center like customs, excise and central sales tax and the major indirect taxes levied by the states and civic bodies like passenger and goods tax, electricity duty and octroi when taken together did not present a rational system.

1.3.2 Indirect Taxes in Post-Reform EraEven post reforms, the indirect tax regime in India is still in the early stages of growth. Both the Central and State Governments charge a multitude of indirect taxes. The Central Government charges tax on goods at the point of import (Customs Duty), manufacture (Excise Duty), interstate sales (Central Sales Tax or CST) and on provision of services (Service Tax). The state governments charge tax on goods sold within the state (Sales Tax/Value Added Tax or VAT), and on the goods that enter the state (Entry Tax).

In the present scenario, corporate would have to analyse the tax cost involved in a transaction, have enough backup documentation to support their tax positions and keep looking for ways for tax maximisation.

Merits of indirect taxesMerits of indirect taxes are as follows:

Indirect taxes are usually hidden in the prices of goods and services being transacted and, therefore their presence •is not felt so much.If the indirect taxes are properly administered, the chances of tax evasion are less.•Indirect taxes are a powerful tool in moulding the production and investment activities of the economy, i.e., •they can guide the economy in its resource allocation.

Demerits of indirect taxesDemerits of indirect taxes are as follows:

It is claimed and very rightly that these taxes negate the principle of ability- to-pay and are therefore unjust to •the poor. Since one of the objectives is to collect enough revenue, they spread over to cover the items, which are purchased generally by the poor. This makes them regressive in effect.If indirect taxes are heavily imposed on the luxury items then this will only help partially because taxing the •luxuries alone will not yield adequate revenue for the State.Direct taxes take away a part of the purchasing power of the taxpayer and that has the effect of reducing demand •and prices. On the other hand, indirect taxes are added to the sale prices of the taxed goods without touching thepurchasingpowerinthefirstplace.

Theresultisthatintheircaseinflationaryforcesarefedthroughhigherprices,highercostsandwagesandagainhigher prices.

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1.4 Highlights of the Direct and Indirect TaxesThe highlights of direct and indirect tax are as follows:

The total revenue realisation from direct and indirect taxes increased from Rs 1881.19 billion in 2000-01 to Rs •6076.45 billion in 2008-09. The percentage share of revenue realisation from direct taxes to the total revenue realisation increased from 36.3% in 2000-01to 55.7% in 2008-09, whereas, the percentage share of revenue realisation from indirect taxes declined from 63.7% in 2000-01 to 44.3% in 2008-09.Revenue collection from direct taxes increased from Rs 683.05 billion in 2000-01 to Rs 3382.12 billion in •2008-09. The percentage share of revenue realisation from corporation tax to the total revenue realisation from direct taxes increased from 52.3% in 2000-01to 63.2% in 2008-09, whereas, the percentage share of revenue realisation from income tax decreased from 46.5% in 2000-01 to 36.7% in 2008-09.Revenue collection from indirect taxes increased from Rs 1198.14 billion in 2000-01 to Rs 2446.67 billion in •2009-10. The percentage share of revenue realisation from customs duties to the total revenue realisation from indirect taxes decreased from 39.7% in 2000-01 to 34.5% in 2009-10, whereas, the percentage share of revenue realisation from excise duties declined from 57.2% in 2000-01 to 42.1% in 2009-10. , However, the percentage share of revenue realisation from service tax to the total revenue realisation from indirect taxes increased substantially from 2.2% in 2000-01 to 23.5% in 2009-10.The total number of effective assesses of income tax and corporation tax increased from 23.00 million in 2000-•01 to 32.65 million in 2008-09. The companies’ assesses declined from 334261 in 2000-01 to 327674 in 2008-09, whereas, the number of individual assessees and assessees of Hindu un-divided Families of income tax increased 20.66 million and 0.55 million respectively in 2000-01 to 30.10 million and 0.77 million in 2008-09. Theassesseesoffirmsdeclinedfrom1.34millionto1.31millionduringsameperiod,whereas,trusts’assesseesincreased from 0.064 million in 2000-01 to 0.071 million in 2008-09. However, the other assessees increased from 0.051 million to 0.071 million during same period.The customs collection rate gradually decreased from 20.2% in 2000-01 to 6.9% in 2008-09. Customs collection •rate of petroleum products decreased from 10% in 2004-05 to 3% in 2008-09, whereas, customs collection rate of non-petroleum products decreased from 12% in 2004-05 to 9% in 2008-09.About 34% of total import duties were realised from machineries, whereas, 10.8%, 9.0%, 8.5% and 7.7% of •the total import duties were realised from gold and articles other than gold, petroleum products, chemicals and iron and steel respectively during 2009-10.About 62.2% of total excise duties was realised from petroleum crude and petroleum products, whereas, 13.5% •and 9.4% of the total excise duties were realised from tobacco products and iron and steel and articles thereof respectively during 2009-10.7% of total service tax was realised from telephone billing, whereas, 6.9%, 6.3% and 5.4% of the total service •taxwererealisedfrombankingandotherfinancialservice,businessauxiliaryserviceandgeneralinsurancepremium respectively during 2009-10.

1.5 Tax PenaltiesSection271ofincometaxdepartmentstatesthat:“IftheAssessingOfficerortheCommissioner(Appeals)ortheCommissionerinthecourseofanyproceedingsunderthisActissatisfiedthatanyperson:(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,- (ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.”


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SummaryThe origin of the word ‘Tax’ is from ‘Taxation’ which means an estimate.•A tax is a legally compulsory payment levied by the government on the persons or companies to meet the •expenditureincurredonconferringcommonbenefitsuponthepeopleofacountry.A tax can also be described as a compulsory levy where those who are taxed have to pay the sums irrespective •of any corresponding return of services or goods by the government.Ataxmaybedefinedasa“pecuniaryburdenlaiduponindividualsorpropertyownerstosupportthegovernment,•apaymentexactedbylegislativeauthority.”Atax“isnotavoluntarypaymentordonation,butanenforcedcontribution, exacted pursuant to legislative authority.”Taxes consist of direct taxes and indirect taxes, and may be paid in money or as its labour equivalent (often but •not always unpaid labour). In India, the system of direct taxation as it is known today has been in force in one form or another even from •ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures.The Direct Tax Code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, •dividenddistributiontax,fringebenefittaxandwealth-tax,soastoestablishaneconomicallyefficient,effectiveand equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio.The indirect tax in India constitutes a group of tax laws and regulations.•The indirect taxes in India are enforced upon different activities including manufacturing, trading and imports. •IndirecttaxesinfluenceallthebusinesslinesinIndia.Indirect taxes are those whose burden can be shifted to others so that those who pay these taxes to the government •do not bear the whole burden but pass it on wholly or partly to othersExcise duties on the product of commodities, sales tax, service tax, customs duty, tax on rail or bus fare are •some examples of indirect taxes.In the present scenario, corporate would have to analyse the tax cost involved in a transaction, have enough •backup documentation to support their tax positions and keep looking for ways for tax maximisation.

ReferencesIndirect Taxes. • [Pdf] Available at: <http://download.nos.org/srsec311new/L.No.40-A.pdf> [Accessed 24 July 2013].Direct and Indirect Taxes. • [Pdf] Available at: <http://mospi.nic.in/Mospi_New/upload/statistical_year_book_2011/SECTOR-1 INDIA%20AN%20OVERVIEW/CH-06 DIRECT%20&%20INDIRECT%20TAXES/DIRECT-INDIRECT%20TAX-WRITEUP.pdf> [Accessed 24 July 2013].Purfield,C.&Schiff,J .A . ,2006.• India Goes Global: Its Expanding Role in the Global Economy. International monetary fund.Pithisaria, M. K., 2011. • Bhatnagar Direct Tax Digest. 9th ed., Lexis Nexis, India.Basic concepts lecture. • [Video online] Available at: <http://www.youtube.com/watch?v=5L9T4R9n5IQ> [Accessed 24 July 2013].Indirect taxation. • [Video online] Available at: <http://www.youtube.com/watch?v=t9N4La0-k9c> [Accessed 24 July 2013].

Recommended ReadingThuronyi, V., 2003. • Comparative Tax Law. Kluwer Law International, Netherland.Grown, C. & Valodia, I., 2010. • Taxation and Gender Equity: A Comparative Analysis of Direct and Indirect Taxes in Developing and Developed Countries. IDRC. Conklin, D. W., 1990.• Provincial Tax Reforms: Options and Opportunities. IRPP, Canada.

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Self AssessmentWhich of the following is not a provision of the direct code?1.

Single code for direct taxes a. Useofdifficultlanguageb. Flexibilityc. Consolidation of provisionsd.

Which of the following statements about direct taxes is false?2. Progressive taxation is imposed according to the ability of the person to pay. a. Revenue is income elastic as progressive character revenue decreases faster than the increase in income.b. Create better Civic Consciousness.c. Serves the purpose of transference of income from the rich to the poor.d.

Which of the following is a characteristic of Direct Tax Code?3. Addition of most of the tax saving schemes a. Old tax saving schemes b. Tax slabsc. Long and short-term gains d.

In which country was the taxes levied on the basis of turnover and occupations?4. USAa. Franceb. Italy c. Germanyd.

The __________seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend 5. distributiontax,fringebenefittaxandwealth-taxsoastoestablishaneconomicallyefficient,effectiveandequitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio.

Direct Tax Codea. Indirect Tax Codeb. Tax Codec. Direct Coded.

Which of the following taxes is not under indirect tax?6. Custom dutiesa. Sales taxb. Excise dutiesc. Income taxd.

When did computerisation in Income Tax Department start?7. 1981a. 1980b. 1982c. 1985d.


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The origin of the word ‘Tax’ is from ‘___________’, which means an estimate.8. Taxia. Taxingb. Taxation c. Testingd.

_________are the taxes which are not shifted, i.e., the incidence of which falls on persons who pay them to 9. the government.

Excise dutiesa. Sales taxb. Direct taxesc. Indirect taxd.

The __________tax in India constitutes a group of tax laws and regulations.10. directa. wealthb. giftc. indirectd.

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Chapter II

Income Tax

Aim


introduce income tax•

explain the history of income tax•

explicatethedeficienciesinIndianincometaxsystem•

Objectives


analyse rates of income tax for assessment year•

enlist elements of income tax law•

explain dividend income•

Learning outcome


identify heads of income•

understand dividend income•

defineassessee,previousandassessmentyear•


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2.1 Income TaxThe tax imposed on an individual or a group of individuals on their annual incomes is known as income tax. Every individualwhoseannualincomeexceedsacertainspecifiedlimitisrequired,undertheIncomeTaxAct,topayapartofhisincomeintheformofincometax.ItsratesareannouncedinthebeginningofeachfinancialyearbytheCentral Government.

Financial yearTheperiodfrom1stAprilto31stMarchistakenasafinancialyear,i.e.,everyfinancialyearbeginson1stApriland ends on 31st March of the consecutive year.

Assessment yearTheyearnexttoaparticularfinancialyeariscalledtheassessmentyearforthatfinancialyear,e.g.,forfinancialyear 2005-06, the assessment year is 2006-07.

Permanent Account Number (PAN)An individual is given a Permanent Account Number (PAN) by the income tax department. He or she is obliged to fileanincometaxreturnofthefinancialyearbyaspecifieddateofthesubsequentfinancialyear.

2.2 History of Income Tax in IndiaMarkTwainhasrightlysaid,“Onlytwothingsarecertaininthislife–deathandtaxes.”Taxationinsomeformorother has always been prevalent in India as in any other nation. Kautilya’s ‘Arthshastra’ gives the complete details abouthowaKingshouldcollectandutilisetaxes.Inmoderndays,incometaxwasintroducedforthefirsttimein1860whenIndiawasacolonyofGreatBritain.TheIndianIncomeTaxAct,1922gaveforthefirsttimeaspecificnomenclature to various income tax authorities and laid the foundation of a proper system of tax administration. In independent India, till the year 1961, direct taxes were administered as per provisions of The Indian Income Tax Act, 1922.

2.2.1 Income Tax Reforms up to 1991The Income Tax Act, 1961 was enacted as a result of recommendations by ‘Income-tax Investigation Commission’ headed by Sir Srinivasa Varadachariar in 1947, by ‘Taxation Enquiry Commission’ of 1953-54 constituted under Dr. John Matha, by famous economist Nicholas Kaldor and by the ‘Direct Taxes Administration Enquiry Committee’ setup in June1958 (TyagiCommittee).Post1961, ‘Committee forRationalisationandSimplificationof ‘TaxStructure’headedbyBhoothalinghamsuggestedmeasuresforrationalisationandsimplificationofpersonalincometaxandcorporationtax.ThisCommitteealsorecommendeddonebasedgifttax.Anothercommittee–‘DirectTaxesEnquiry Committee’ was set up in 1971 under Wanchoo. This Committee looked into aspects of tax evasion and black money. As per this committee, factors like high tax rates, controls, licenses and ineffective information system were major problems in Indian direct tax system. The Committee opposed voluntary disclosure system to control growth of black money. It favoured more stringent measures like searches and seizures. A Committee under K.N.Raj in 1972 suggested a novel option to bring agricultural income under income tax net through integrated system of agricultural and non-agricultural income. This method of computation of tax on agricultural income is still being followed. Personal income tax rates in India were quite high in earlier times. At its peak in 1973-74, the maximum marginal rate of tax (with surcharge) was as high as 97.75 per cent. Keeping in view the recommendations of the Wanchoo Committee (1971), marginal tax rates were reduced gradually to 50% in 1985-86.

2.2.2 Income Tax Reforms from 1991 Till TodayThe foundation for the tax reforms was laid down in 1991 itself, when the economy was liberalised. The Indian companies could not have been able to compete with the multinationals unless the massive tax reforms were undertaken. Other economies have increased their tax revenue-to-GDP ratio not by increasing tax rates but by simplifying tax structures, widening the tax base and improving tax administration. Needless to say that the Indian tax system is one of the most complex systems in the world. There is plethora of taxes that could be combined. There arenumerousnotificationsgrantingandtakingbackexemptions.Themostcomplexproceduresarerequiredtobefollowed for simple things like determination and payment of tax. The tax administration is ineffective. The black

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money has been increasing because tax compliance is low. The feedback received from various quarters suggested improvements in the aspects of structural complexity, low transparency, delay in issue of refunds and PAN numbers, high compliance costs, lack of attention to taxpayer needs, taxpayer harassment, tax leakage, etc. The problems are enormousandtherearesolutions,butpoliticalconsensusisdifficulttoachieveandthegovernmentinpowercannot satisfy the aspirations of all the sectors. But slow and steady progress is being made and The Direct Tax Code Bill–2010isanoutcomeofthisprogress.

2.3 Deficiencies in the Indian Income Tax SystemPersonalincometaxsysteminIndiawashavinganumberofdeficiencies.Therewaslowyield,extremelylimitedcoverage and little compliance. There was massive tax evasion and tax avoidance in India. High tax rates mainly contributed towards this tax evasion and tax avoidance. Another effect of this high tax rate regime was that there were numerous exemptions, deductions and allowances. A Task Force (TF) under the chairmanship of Dr. Vijay Kelkar, then Finance Secretary was formed to look into the aspects of streamlining the taxation system in India in the year 2002.TheTFidentifiedfouroperationalobjectivesrelatingtotheDirectTaxCode.Thosewere:

Institution of a simple and transparent system.•Reduction of transactions costs of tax revenue collection and compliance costs of taxpayers.•Alignment of incentives of taxpayers and the tax administration.•Widening of the tax base.•

2.4 The Elements/Sources of Income Tax LawThe following are the elements and sources of income tax law:The income tax act, 1961The following are its salient features:

Income tax in India is governed by the Income Tax Act, 1961•It came into force w.e.f.1.4.1962•The Act contains 298 sections and XIV Schedules•The Finance Act shall bring amendment to this Act•The law provides for determination of taxable income, tax liability and procedure for assessment, appeal, •penalties and prosecutions

Finance ActThe following are its unique features:

FinanceMinisterpresentsthisasfinancebillinboththehousesofparliament.•PartAofthebudgetcontainsproposedpoliciesofthegovernmentinfiscalareas.•Part B contains the detailed tax proposals.•OncethefinancebillisapprovedbytheparliamentandgetstheassentofthePresident,itbecomestheFinance•Act.The rate of tax at which income shall be charged is prescribed in the Schedule I of Finance Act.•The Finance Act brings amendments to both the direct tax laws (i.e., income tax, wealth tax, etc.) and indirect •tax laws (i.e., laws relating to central excise, customs duty, service tax, etc.)

The income tax rules, 1962Following are the highlights of the income tax rules, 1965:

The administration of direct taxes is vested with Central Board of Direct Taxes (CBDT).•Under Section 295 of IT Act, CBDT is empowered to frame rules from time to time to carry out the purpose •and proper administration of the Act.All forms, procedures and principles of valuation of perquisites prescribed under the Act are provided in the •rules framed by CBDT.


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Circulars/notifications from CBDTFollowingarethecirculars/notificationsfromCBDT:

Inexerciseofthepowersu/s119,CBDTissuescircularsandnotificationsfromtimetotime.•These circulars clarify doubts regarding the scope and meaning of the various provisions of the Act.•Thesecircularsactasguidanceforofficersandassessees.•ThiscircularisbindingonAssessingOfficersbutnotonassesseesandCourts.•The circulars issued by the CBDT shall not be in contrary to the provisions of the Act.•

Subordinate legislationThe government enacts the law in the Parliament, e.g., Income Tax Act, Central Excise Act, etc. where is a need for detailed rules and regulations, the enactment is to be done by either CBDT or CBEC. The rules and regulations enactedbyCBDTorCBEC,i.e., incometaxrules,cenvatcreditrules,thenotificationsandcircularsissuedbyCBDT, CBEC is called subordinate legislation.

Supreme Court and High Court DecisionsThe Supreme Court and the High Court can give judgement only on the question of law.•The law laid down by the Supreme Court is the law of the land.•The decision of High Court will apply in the respective States, within its jurisdiction.•

Determining the rates of tax under the income tax act, 1961IncometaxshallbechargedattheratesfixedfortheyearbytheAnnualFinanceAct.•The First Schedule to the Finance Act provides the following rates of taxation:•

Part I The tax rates applicable to income of various types of assessees for the as-sessment year

Part II RatesofTDSforthecurrentfinancialyear

Part III Rates of TDS for salary and advance tax (which becomes Part I of the next assessment year)

Table 2.1 The first schedule of Finance Act

2.5 Rates of Income-Tax for Assessment Year 2012-13Normal rates of income tax are as follows:

In the case of every individual or Hindu Undivided Family (HUF) or AOP/BOI (other than a co-operative •society)whetherincorporatedornot,oreveryartificialjudicialperson

Upto Rs. 1,80,000 Nil

Rs. 1,80,010 to Rs 5,00,000 10%

Rs 5,00,010 to Rs 8,00,000 20%

Above Rs 8,00,000 30%

Table 2.2 Income-tax rates for individuals, HUF, AOP/BOI or artificial juridical person

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Following are the income tax rates in the case of every individual, being a woman resident in India, and below •the age of sixty years at any time during the previous year:

Upto Rs 1,90,000 Nil

Rs 1,90,010 to Rs 5,00,000 10%

Rs 5,00,010 to Rs 8,00,000 20%

Above Rs 8,00,000 30%

Table 2.3 Income-tax rates for a woman resident in India below sixty years

Following are the income-tax rates in the case of every individual, being a resident in India, who is of the age •of 60 years (senior citizen) or more at any time during the previous year:

Upto Rs 2,50,000 NilRs 2,50,010 to Rs 5,00,000 10%Rs 5,00,010 to Rs 8,00,000 20%Above Rs 8,00,000 30%

Table 2.4 Income-tax rates for a resident senior citizen (60 years)

Following are the income-tax rates in the case of every individual, being a resident in India, who is of the age •of 80 years (very senior citizen) or more at any time during the previous year:

Upto Rs 5 ,00,000 Nil

Rs 5,00,010 to Rs 8,00,000 20%

Above Rs 8,00,000 30%

Table 2.5 Income-tax rates for a resident senior citizen (80 years)

Note: No surcharge is payable by the above assessees.

‘Education Cess’ @ 2%, and ‘Secondary and Higher Education Cess (SHEC)’ @ 1% on income tax shall be chargeable.

2.5.1 Other Assessees

Assessee Rate of Tax Surcharge

For Firms (including limited liability partnership)

Total Income × 30% +EC2% + SHEC @ 1%. Surcharge — NIL

Domestic companies Total Income × 30% + EC @ 2% + SHEC @ 1%.

Surcharge @ 5% if the total income exceeds 1 crore


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Foreign companies Other Income Royalty received from Indian government or an Indian concern in pursuance of anagreement made by it with the Indian concern after March 31, 1961, but before April 1, 1976,or fees for rendering technical services in pursuance of an agreement made by it afterFebruary 29, 1964 and where such agreementhas, in either case been approved by theCentral Government

Total Income x 40%+ EC@ 2% + SHEC @ 1%

Surcharge @ 2% if the total income exceeds 1 crore

For Local Authorities Total Income × 30% + EC@ 2% + SHEC @ 1%.

(Surcharge is not applicable)Nil

For Co-operative Societies

For First 10,000 @ 10%For Next 10,000 @ 20%For the balance @ 30%EC @ 2% and SHEC @ 1% are applicable.

Surcharge is not applicableNil

MAT = Minimum Alternate Tax 18.5%ofBookProfit+EC2% + SHEC 1%

Surchargeifbookprofitsexceed Rs 1 crore

Table 2.6 Income-tax rates applicable to other assessees

2.6 Definition of AssesseeAssessee [Section 2(7)]Assessee means any person who is liable to pay any tax or any other sum under the Income Tax Act, 1961, and assessee includes:

Every person in respect of whom any proceedings has been taken for the assessment of•Hisincomeorfringebenefitsoroftheincomeofanyotherperson. �Loss sustained by him or other person. �Refund due to him or such other person. �

Every person who is deemed to be an assessee under the Act.•Every person who is deemed to be an assessee in default under the Act.•

Assessment year [Section 2 (9)]Assessment year means the period of twelve months commencing on the 1st day of April every year.•The year for which tax is paid is called assessment year.•

The present assessment year is 2012-13 relating to previous year 2010-11.

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Previous year [Section 3]Previousyearmeansfinancialyearimmediatelyprecedingtheassessmentyear.•The year in respect of the income of which tax is levied is called previous year.•

The present previous year 2011-12 and its assessment year is 2012-13.

Note: Previous year for newly established business is from the date of setting up of the business to the end of the financialyearinwhichbusinesswassetup.

Example: X Ltd. started business on 1.11.11. So for X Ltd., previous year will be considered as 1.11.11 to 31.3.12.

Income [Section 2(24)]Income includes:

Profitsorgainsofbusinessorprofession1. Dividend2. Voluntary contribution received by a charitable/religious trust or university/education institution or hospital3. Valueofperquisiteorprofitinlieuofsalarytaxableu/s17andspecialallowanceorbenefitspecificallygranted4. eithertomeetpersonalexpensesorforperformanceofdutiesofanofficeoranemploymentofprofit.Export incentives like duty drawback, cash compensatory support, sale of licences, etc.5. Interest,salary,bonus,commissionorremunerationearnedbyapartnerofafirmfromsuchfirm6. Capital gains chargeable u/s 457. Profitsandgainsfromthebusinessofbankingcarriedonbyacooperativesocietywithitsmembers.8. Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any 9. sort or from gambling or betting of any form or nature whatsoever.Deemed income u/s 41 or 5910. Sums received by an assessee from his employees towards welfare fund contributions such as provident fund, 11. superannuation fund, etc.Amount received under Keyman Insurance Policy including bonus thereon12. Amount received under agreement for not carrying out activity in relation to any business, or not sharing any 13. knowhow, patent, copyright, etc.Benefitorperquisitereceivedfromacompany,byadirectororapersonholdingsubstantialinterestorarelative14. of the director or such person.Giftasdefinedu/s56(2)(vi)(w.e.f.A.Y2008-2009).Anysumofmoneyexceeding`Rs.50,000,receivedby15. an individual or an HUF from any person during the previous year without consideration on or after 1.4.2007, then the whole of aggregate of such sums will be taxable.

Previous year and assessment yearPrevious year and assessment year will be same in the following cases:

Shipping business of non resident [Section 172]•Persons leaving India [Section 174]•AOPorBOIorArtificialJuridicalPersonformedforaparticulareventorpurpose[Sec.174A]•Persons likely to transfer property to avoid tax [Section 175]•Discontinued business [Section 176]•

Undisclosed sources of incomeUndisclosed sources of income are as follows:

Unexplained cash credits u/s 68•Unexplained investments u/s 69•Unexplained money, bullion or jewel or valuable article u/s 69A•


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Applied direct taxation•Undisclosed investments u/s 69B•Unexplained expenditure u/s 69C•Amount borrowed or repaid on hundi, other than by way of account payee cheque u/s 69D•

Application of incomeAn obligation to apply income, which has accrued or has arisen or has been received, amounts to merely the apportionment of income. Therefore, the essentials of the concept of application of income under the provisions of the income tax act are:

Income accrues to the assessee•Income reaches the assessee•Income is applied to discharge an obligation, whether self-imposed or gratuitous•

Diversion of incomeAn obligation to apply the income in a particular way before it is received by the assessee or before it has arisen or accrued to the assessee results in diversion of income. The source is charged with an overriding title, which diverts the income. Therefore, the essentials are the following:

Income is diverted at source•There is an overriding charge or title for such diversion•The charge/obligation is on the source of income and not on the receiver•

Examples of diversion by overriding title are:Right of maintenance of dependants or of coparceners on partition•Right under a statutory provision•A charge created by a decree of a court of law•

Total income [sec. 2(45)]‘Total income’ means the total amount of income as referred to in sec. 5 and computed in the manner laid down in the Act. Total income constitutes the tax with reference to which income tax is charged.

Gross total income [sec. 80b]Gross total income means total income computed in accordance with the provisions of the Income Tax Act before making any deduction under Chapter VIA.

Rounding off total income and tax [sec. 288A]The total income computed under this act shall be rounded off to the nearest multiples of 10. Rounding off Tax [Section 288B]: The amount of tax including Tax Deducted at Source (TDS) and advance tax, interest, penalty, fineoranyothersumpayable,andtheamountofrefunddueundertheIncomeTaxAct,shallberoundedofftothenearest Ten Rupees.

Books of account [sec. 2(12a)]It includes ledgers, day books, cash books, account-books and other books, whether kept in the written form or as printoutsordatastoredinafloppy,disc,tapeoranyotherformofelectromagneticdatastoragedevice.

Document [sec. 2(22aa)]Itincludesanelectronicrecordasdefinedinclause(t)ofsub-section(1)ofsection2oftheInformationTechnologyAct, 2000 (21 of 2000).

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Relative [sec. 2(41)]In relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

Resulting company [sec. 2(41a)]It means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.

Insurer [sec. 2(28bb)]ItmeansaninsurerbeinganIndianinsurancecompany,asdefinedunderclause(7A)ofsection2oftheInsuranceAct,1938(4of1938),whichhasbeengrantedacertificateofregistrationundersection3ofthatAct.

Substantial interest [sec. 2 (32)]Apersonwhohasasubstantialinterestinthecompany,inrelationtoacompany,meansapersonwhoisthebeneficialownerofshares,notbeingsharesentitledtoafixedrateofdividendwhetherwithorwithoutarighttoparticipateinprofits,carryingnotlessthantwentypercentofthevotingpower.Inthecaseofanon-corporateentity,apersoncanbesaidtohavesubstantialinterestif20%ormoreshareofprofitisheld.

Infrastructural capital company [sec.2 (26a)‘Infrastructural capital company’ means such company which makes investments by way of acquiring shares or providinglong-termfinancetoanyenterpriseorundertakingwhollyengagedinthebusinessreferredtoinsubsection(4)ofsection80–IAorsub-section(1)ofsection80-IABoranundertakingdevelopingandbuildingahousingproject referred to in sub-section (10) of section 80- IB or a project for constructing a hospital with at least one hundred beds for patients.[ Sec. 2(26A)].

Infrastructural capital fund [sec.2 (26b)]‘Infrastructural capital fund’ means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 established to raise monies by the trustees for investment by way of acquiring shares or providinglong-termfinancetoanyenterpriseorundertakingwhollyengagedinthebusinessreferredtoinsubsection(4) of section 80-IA or sub-section (1) of section 80- IAB or an undertaking developing and building a housing project referred to in sub-section (10) of section 80-IB or a project for constructing a hotel of not less than three-star categoryasclassifiedbytheCentralGovernmentoraprojectforconstructingahospitalwithatleastonehundredbeds for patients. [Sec 2(26B)].

Charge of income tax [sec. 4]According to sec. 4 of the Income-tax, 1961 the following basic principles are followed while charging income tax:

income-tax is a tax on the annual income of an assessee, usually, the income of the Previous Year (PY) is •chargedtothefollowingAssessmentYear(AY)attheprescribedratefixedbytherelevantFinancialAct,andtax is levied on the total income of every assessee.

Receipt of income - deemed income [sec. 7]The following income shall be deemed to be received in the previous year:

Employers contribution to recognised provident fund in excess of 12% of salary and interest credited to the •recognised provident fund in excess of 9.5%The transfer balance in a recognised provident fund, to the extent provided in sub rule (4) of rule 11 of part A •of fourth schedule.


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Dividend income [sec. 8]Dividend income includes:

anydistributionbyacompanyofaccumulatedprofitswhethercapitalisedornot,ifsuchdistributionentailsa. the release by the company to its shareholders of all or any part of the assets of the companyanydistributiontoitsshareholdersbyacompanyofdebentures,debenture-stock,ordepositcertificatesinanyb. form, whether with or without interest, and any distribution to its preference shareholders of shares by way ofbonus,totheextenttowhichthecompanypossessesaccumulatedprofits,whethercapitalisedornotany distribution made to the shareholders of a company on its liquidation, to the extent to which the c. distributionisattributabletotheaccumulatedprofitsofthecompanyimmediatelybeforeitsliquidation,whether capitalised or notany distribution to its shareholders by a company on the reduction of its capital, to the extent to which the d. companypossessesaccumulatedprofits85whicharoseaftertheendofthepreviousyearendingnextbeforethe1stdayofApril,1933,whethersuchaccumulatedprofitshavebeencapitalisedornotany payment by a company, not being a company in which the public are substantially interested, of any e. sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day ofMay,1987,bywayofadvanceorloantoashareholder,beingapersonwhoisthebeneficialownerofshares(notbeingsharesentitledtoafixedrateofdividendwhetherwithorwithoutarighttoparticipateinprofits)holdingnotlessthantenpercentofthevotingpower,ortoanyconcerninwhichsuchshareholderis a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the saidconcern)]oranypaymentbyanysuchcompanyonbehalf,orfortheindividualbenefit,ofanysuchshareholder,totheextenttowhichthecompanyineithercasepossessesaccumulatedprofits

But ‘dividend’ does not include: (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for

full cash consideration, where the holder of the share is not entitled in the event of liquidation to partici-pate in the surplus assets

(ii) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is at-tributabletothecapitalisedprofitsofthecompanyrepresentingbonussharesallottedtoitsequityshare-holders after the 31st day of March, 1964

(iii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

(iv) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off

(v) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956)

(vi) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)

Explanation1—Theexpression“accumulatedprofits”,whereveritoccursinthisclause,shallnotincludecapitalgains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.

Explanation2—Theexpression‘accumulatedprofits’insub-clauses(a),(b),(d)and(e),shallincludeallprofitsofthe company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall includeallprofitsofthecompanyuptothedateofliquidation,[butshallnot,wheretheliquidationisconsequenton the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Governmentunderanylawforthetimebeinginforce,includeanyprofitsofthecompanypriortothreesuccessiveprevious years immediately preceding the previous year in which such acquisition took place].

Explanation3—Forthepurposesofthisclause,—(a)“concern”meansaHinduUndividedFamily,orafirmoranassociation of persons or a body of individuals or a company ;(b) a person shall be deemed to have a substantial interestinaconcern,otherthanacompany,ifheis,atanytimeduringthepreviousyear,beneficiallyentitledtonotless than twenty per cent of the income of such concern;

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Capital and revenue receiptsTheobjectiveoftheIncome-taxActistotaxonlyincome,generallyrevenuereceiptsunlessspecificallyexempted.OntheotherhandcapitalreceiptsarenotchargeabletotaxexceptwhenspecificallyprovidedintheAct.Thedistinctionbetween a capital receipt and a revenue receipt should be perceived based on the facts and circumstances of each case.ThereisnospecificprovisionintheActtodistinguishbetweenacapitalreceiptandrevenuereceipt.It may be observed that:

A receipt in substitution of a source of income is a capital receipt while a receipt in substitution of an income •is a revenue receipt.An amount received as a compensation for surrender of certain rights under an agreement is a capital receipt •whereas an amount received under an agreement as compensation for loss of future profit is a revenuereceipt.

Capital and revenue expenditureIn computing taxable income normally revenue expenditure incurred for the purpose of earning income is deductible fromrevenuereceiptunlessthelawprovidesspecificrulestodisallowsuchexpenditurewhollyorpartly.Ontheotherhand, capital expenditure is not deductible while computing taxable income unless the law expressly so provides. NeitherthecapitalexpenditurenorrevenueexpenditurehasbeendefinedintheAct.However,fromthefactsandcircumstances of each case and from the judicial decisions the following general principles to be kept in mind:

Capitalexpenditureisincurredinacquiring,extendingorimprovingafixedasset,whereasrevenueexpenditure•is incurred in the normal course of business as a routine expenditure.Capitalexpenditureincurredforenduringbenefits,whereasrevenueexpenditureisconsumedwithinaprevious•year.Capital expenditure makes improvement with earning capacity of a business, whereas revenue expenditure •maintainstheprofitmakingcapacityofabusiness.Capital expenditure is a nonrecurring expenditure, whereas revenue expenditure is normally a recurring one.•

2.7 Heads of Income [Sec. 14]Significanceofheadsofincome:

The income chargeable under a particular head cannot be charged under any other head.•The act has self contained provisions in respect of each head of income.•Ifanyincomeischargedunderawrongheadofincome,theassesseewilllosethebenefitofdeductionavailable•to him under that head.

Heads of income Relevance of method of accounting

Chapter IV-ASalaries (15 - 17)

1. Taxable on due basis or on receipt basis, whichever is earlier.2. Method of accounting is irrelevant.

Chapter IV-C House Property (22 - 27)

1. Income from house property is taxable only on accrual basis.2. Method of accounting is not relevant.


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Chapter IV-D (28-44DB)

1. U/s 145 assessee may follow either cash or mercantile system of business income accounting regularly employed by the assessee.

2. Exceptions: Certain payments are allowable only on actual payment basis. Accrual concept does not hold good.(a) Employer’s contribution to PF, ESI, Tax, Duty, Cess, fees to

government, interest on loans and advances from banks and financialinstitutions,provisionforleaveencashment,bonusor commission, etc.

(b) Telecommunication licence fee is allowable in installments only from the year of payment.

(c)Preliminaryexpensesdistributedoverfiveyears.(d)Amalgamation/demergerexpensesdistributedoverfiveyears.(e) Amount paid in connection with Voluntary Retirement

Scheme(VRS)distributedoverfiveyears.

Chapter IV-E Capital Gains (45 - 55A)

1. Income from capital gains shall be taxable during the previous year capital gains in which the capital asset is transferred, i.e., year of accrual.

2. The method of accounting is not relevant for taxing the income under the head capital gains.

Chapter IV-F Other Sources (56 - 59)

U/s 145 assessee may follow either on cash or mercantile system of accounting regularly employed by the assessee.

Table 2.7 Heads of income

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SummaryThe tax imposed on an individual or a group of individuals on their annual incomes is known as income tax.•Everyindividualwhoseannualincomeexceedsacertainspecifiedlimitisrequired,undertheIncomeTaxAct,•to pay a part of his income in the form of income tax.Theperiodfrom1stAprilto31stMarchistakenasafinancialyear,i.e.,everyfinancialyearbeginson1stApril•and ends on 31st March of the consecutive year.Inmoderndays, income taxwas introduced for thefirst time in 1860,when Indiawas a colonyofGreat•Britain.In independent India, till the year 1961, direct taxes were administered as per provisions of The Indian Income •Tax Act, 1922.The foundation for the tax reforms was laid down in 1991 itself, when the economy was liberalised.•Assessment year means the period of twelve months commencing on the 1st day of April every year. The year •for which tax is paid is called assessment year. The present assessment year is 2012-13 relating to the previous year 2010-11.An obligation to apply the income in a particular way before it is received by the assessee or before it has arisen •or accrued to the assessee results in diversion of income. ‘Total income’ means the total amount of income as referred to in sec. 5 and computed in the manner laid down •in the Act. Total income constitutes the tax with reference to which income tax is charged.Theobjective of the Income-taxAct is to tax only income, generally revenue receipts unless specifically•exempted.In computing taxable income normally revenue expenditure incurred for the purpose of earning income is •deductiblefromrevenuereceipt,unlessthelawprovidesspecificrulestodisallowsuchexpenditurewhollyorpartly.

ReferencesPatil, A.C.,• Unit 17 Income Tax Reforms in India. [Pdf] Available at: <http://www.taxwomanpune.com/Tax-Reforms-in-India.pdf> [Accessed 25 July 2013].Applied Direct Taxation. • [Pdf] Available at: <http://www.myicwai.com/StudyMaterial/AppDirTax6.pdf pdf> [Accessed 25 July 2013].Ault, H. J. & Arnold, B. J., 2010.• Comparative Income Taxation: A Structural Analysis. Kluwer Law International.Lal, B. B., 2010. • Income Tax. Dorling Kindersley (India) Pvt. Ltd., New Delhi.Income Tax Law in India. • [Video online] Available at: <http://www.youtube.com/watch?v=GMuZp6EWXF4> [Accessed 25 July 2013].Income Tax Law in India - Depreciation Rates. • [Video online] Available at: <http://www.youtube.com/watch?v=f8jL-3pRd9o> [Accessed 25 July 2013].

Recommended ReadingLieuallen, G. G., 2009. • Basic Federal Income Tax. Aspen Publishers, N.Y.Bhagwati, J. N. & Wilson, J. D, 1989. • Income Taxation and International Mobility, MIT Witte, J. F., 1986. • The Politics and Development of the Federal Income Tax. University of Wisconsin Press, England


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Self AssessmentWhich of the following statement under the Income Tax Act is false?1.

Income tax in India is governed by the Income Tax Act, 1961.a. It came into force w.e.f.1.4.1962.b. The Finance Act shall bring amendment to this Act.c. The law does not provide for determination of taxable income, tax liability and procedure for assessment, d. appeal, penalties and prosecutions.

Assessment year means the period of ________months commencing on the 1st day of April every year.2. twelvea. thirteenb. sixc. tend.

‘____________’ means the total amount of income as referred to in sec. 5 and computed in the manner laid 3. down in the Act.

Rounding off taxa. Rounding off total incomeb. Gross total incomec. Total incomed.

Which of the following statements regarding dividend is true?4. Any distribution by a company of accumulated losses, whether capitalised or not, if such distribution entails a. the release by the company to its shareholders of all or any part of the assets of the company.Anydistributiontoitsshareholdersbyacompanyofdebentures,debenture-stock,ordepositcertificatesinb. any form, whether with or without interest, and any distribution to its present shareholders of shares by way ofbonus,totheextenttowhichthecompanypossessesaccumulatedprofits,whethercapitalisedornot.Any distribution made to the shareholders of a company on its liquidation, to the extent to which the c. distribution is attributable to the accumulated profits of the company immediately after its liquidation,whether capitalised or not.Any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the d. companypossessesaccumulatedprofitswhicharoseaftertheendofthepreviousyearendingnextbeforethe1stdayofApril,1933,whethersuchaccumulatedprofitshavebeencapitalisedornot.

The tax imposed on an individual or a group of individuals on their annual incomes is known 5. as___________.

wealth taxa. income tax b. gift taxc. direct taxd.

Which of the following is not a part of income tax?6. Financial yeara. Assessment yearb. Direct taxc. Permanent account numberd.

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Everyindividualwhose__________incomeexceedsacertainspecifiedlimitisrequired,undertheIncomeTax7. Act, to pay a part of his income in the form of income tax.

annuala. quarterlyb. six monthsc. two consecutived.

The foundation for the tax reforms was laid down in _______ itself when the economy was liberalised.8. 1990a. 1922b. 1991c. 1947d.

Which of the following statement is false?9. Income accrues to the assessee.a. Income reaches the assessee.b. Income is applied to discharge an obligation, whether self-imposed or gratuitous.c. Income does not reach the assessee.d.

Theobjectiveof the Income-taxAct is to taxonly income,generally________receiptsunless specifically10. exempted.

revenuea. bonusb. salaryc. compensationd.


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Chapter III

Wealth Tax

Aim


introduce wealth tax•

explain the assets included in wealth•

explicate deemed assets and exempted assets•

Objectives


enlist the assets •

elucidate valuation of assets•

explain the computation of net wealth and wealth tax•

Learning outcome


identify various items of assets•

understand how wealth tax is charged•

describe the procedure for assessment•

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3.1 IntroductionThe Wealth Tax Act came into force on April 1, 1957 and it extends to the whole of India including the State of Jammu and Kashmir. [sec. 1] Wealth tax is a direct tax, which is charged on the net wealth of the assessee.

3.2 ChargeabilityThe wealth tax is charged for every assessment year in respect of the net wealth of the corresponding valuation date of every individual, Hindu Undivided Family (HUF), and company, @1% of the amount by which net wealth exceeds Rs.15 lakhs. By virtue of section 45, no wealth tax is chargeable in respect of net wealth of the following persons:

Any company registered under section 25 of Companies Act 1956•Any co-operative society•Any social club•Any political party•Amutualfundspecifiedundersection10(23D)oftheIncomeTaxAct•

3.3 Definitions and ConceptsFollowingaretheimportantdefinitionsandconceptsinwealthtax.

3.3.1 Assessment Year (A.Y.) [Sec2 (D)]Assessment year means a period of 12 months commencing from 1st day of April every year falling immediately after valuation date. Thus, for the year 2006, A.Y. is from 1st April 2006 to 31st March 2007.

3.3.2 Valuation Date [Sec.2 (q)]Valuation date is 31st March immediately proceeding the assessment year. Thus, for assessment year 1st April 2006 to 31st March 2007, the valuation date is 31st March 2006. Valuation date is very important because:

It is the tax base for the charge of wealth tax•The residential status of an assessee is determined with reference to the year ending on valuation date•The value of an asset is determined on valuation date•The wealth as on the last moment of the valuation date is taken to be the net wealth for taxation purposes•

3.3.3 Incidence of TaxIncidence of tax depends on residential status and nationality of the assessee:

Resident and ordinary resident in India [or resident in case of a company]

Resident but not ordinary resident in India Non-resident

In case of Taxablea) Individual who is a

citizen of Indiab) Every Hindu

Undivided Familyc) Company

Taxablewealth=(A-B)+(C-D)

Taxablewealth=(A-B)

Taxablewealth=(A-B)

In case of anindividual who is not a citizen of India

Taxablewealth=(A-B)

Taxablewealth=(A-B)

Taxablewealth=(A-B)

Table 3.1 Incidence of tax


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Here in,‘A’ denotes all assets located in India

‘B’ denotes all debts owed on valuation date which have been incurred in relation to the assets included above

‘C’ denotes all assets located outside India

‘D’ denotes all debts owed on valuation date in relation to the assets included above

3.3.4 Net WealthNet wealth represents the amount by which the total value of all assets including deemed assets but excluding exempt assets, belonging to the assessee on the valuation date exceeds the value of all debts owed by the assessee on the valuation date incurred in relation to the taxable assets.

3.3.5 Assets [Sec.2 (ea)]The term assets include the following:

Building Sec.2 (ea) •(i)Any building or land appurtenant thereto u/s2 (ea) (i) is treated as an asset and it includes:

Commercial building �Residential building �Any guest house �A farmhouse situated within 25 kilometres from the local limits of a local authority �

However following buildings are not treated as assets:Ahousemeantforresidentialpurposesisallottedbyacompanytoanemployeeoranofficerorawhole �time director, having a gross annual salary of less than Rs.5lakhsAny house for residential or commercial purposes, which forms part of stock-in- trade �Any house occupied by assessee for the purposes of his own business or profession �Any residential property that has been let out for a minimum period of 300days in the previous year �Any property in the nature of commercial establishments or complexes �

Motor Cars [Sec.2 (ea) (ii)] •Any motorcar is an asset except the following:

Motor cars used by the assessee in the business of running them on hire �Motor cars held as stock- in- trade �

Jewellery, Bullion, Utensils of Gold, Silver, etc. [Sec. 2(ea) (iii)] •Jewellery, bullion furniture, utensils or any other article made wholly or partly of gold, silver, platinum, or any other precious metal of any alloy containing one or more of such precious metals are treated as an asset.

For this purpose, the term jewellery includes:Ornaments made of gold, silver, platinum or any other precious metal of any alloy containing one or more of •such precious metals, whether or not containing any precious or semi precious stone, whether or not set in any furniture, utensils, or other articles or worked or sewn into any wearing apparel.Precious or semi-precious stones, whether or not set in any furniture, utensils or other articles or worked or •sewn into any wearing apparel.

However, the term jewellery shall not include the Gold Deposit Bonds issued under Gold Deposit Scheme, 1999 notifiedbytheCentralGovernment.Ifanyoftheabovestatedassetsareheldbytheassesseeasstock-in-trade,thenit is not treated as an asset.

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Yachts, Boats and Aircrafts [Sec. 2(ea) (iv)] •Yachts, boats and aircrafts are treated as ‘assets’ excluding yachts boats and aircrafts used by assessee for commercial purposes.Urban Land [Sec. 2(ea) (v)] •Urban land is treated as an ‘asset’ and urban land means land situated:

a) in any area which is comprised within the jurisdiction of local authority and which has a population of not less than tenthousandaccordingtothelastprecedingfiguresofcensusofwhichtherelevantfigureshavebeenpublishedbefore the valuation date; or

b) is any area within such distance, not being more than 8 kilometres from the local limits of the local authority as the central government may, having regard to the extent, and scope for urbanisation of that area and other relevant considerations,specifiedinthisbehalfbynotificationintheofficialgazette.

Howeverlandisnottreatedas“asset”inthefollowingcases:Land on which construction of a building is not permissible under any law for the time being in force in �the area in which such land is situatedLand occupied by any building which has been constructed with approval of the appropriate authority �Any unused land held by the assessee for industrial purposes for a period of two years from the date of �acquisition by himLand held by an assessee as stock-in-trade for a period of 10 years from the date of its acquisition by him �

Cash-in-hand [Sec. 2(ea) (vi)] •Following is treated as an ‘asset’:

In case of any individual and HUF, cash in hand on the last moment of the valuation date in excess of 50,000 �shall be treated as ‘asset’In case of any other person any amount not recorded in the books of accounts shall be treated as ‘asset’. �

3.3.6 Deemed Assets [Sec. 4]Deemed assets represent those assets, which belong to some other person but for the purpose of calculation of wealth tax, these are included in the wealth of the assessee (transferor), it is because at times an individual may transfer his assets without adequate consideration to persons in whom he may be interested.

Thus to prevent avoidance of wealth tax in this manner, wealth tax Act provides that assets transferred by an individual after 31-03-1956 (in case of Dadra Nagar Havely, Goa, Daman and Diu and Pondicherry on after 01-04-1963) shall beincludedinthenetwealthofthetransferor,providedfollowingconditionsaresatisfied:

The individual must be the owner of these assets.•The assets must be transferred without adequate consideration in money or money is worth. In case of inadequate •consideration, difference between adequate consideration and inadequate consideration shall be included in the net wealth of the transferor.The asset must be held by the transferor on the valuation date whether in the same form or in converted form.•

If assets have been lost, destroyed, transferred by the transferee to a third party and it is not held by transferee on the valuation date. Then the value of the assets shall not be included in the net wealth of the transferor, further the form of asset has been changed by transfer then value of substituted asset is included in the wealth of transferor if it is taxable u/s 2 (ea).


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If the asset transferred by an individual to the spouse without adequate consideration was not an asset u/s 2 (ea) but on the valuation date, it has been substituted by an asset taxable u/s 2 (ea) then value of such asset shall be included in the net wealth of transferor.

Deemed assets u/s 4 (i) are as follows:1) Assets transferred to spouse [Sec. 4(1) (a) (ii)] If the assessee has transferred an asset to his/her spouse without adequate consideration or in connection with in an

agreement to live apart, then value of such asset in included in the wealth of assessee provided their relationship exists both on the date of transfer and on the date of valuation.

2) Assets held by minor child [Sec. 4 (1) (a) (ii)] The value of assets held by minor child including step child and adopted child, excluding a married daughter, a

handicapped child, illegitimate child and grandchild of an individual is included in the wealth of a parent.

If marriage of parents subsists, then in the wealth of that parent whose net wealth is more. If marriage of parents does not subsist, then in the wealth of that parent who maintains the minor child in the previous year.

However, the following are the exceptions to it:(i) Assets acquired by the minor child out of his income arising on account of his manual work or activities involving

application of his specialised knowledge and experience shall not be included in the net wealth of a parent.(ii) Assets held by a disabled minor child shall not be included in the wealth of the parent.

In these cases, net wealth of the child shall be determined separately and assessed in his hands.

3) Assets transferred to a person or to AOPs [Sec. 4 (1) (a) (iii)] If an individual transfers his assets to another person or AOP’s (Association of Persons) without adequate consideration,directlyorindirectly,fortheimmediateordeferredbenefitoftheindividualorhisspouse,thenthese assets are included in the wealth of the individual provided their relationship exists on valuation date.

4) Revocable transfer of asset [Sec. 4(1) (a) (iv)] Revocable transfer means a transfer which can be revoked at any time by the transferor. Thus, if an individual has

transferred any assets to another person or AOP under revocable transfer then value of such assets is included in the wealth of the individual.

5) Assets transferred to son’s wife [Sec. 4(1) (a) (v)] If an individual transferred an asset to his son’s wife directly or indirectly after 31-05-1973 without adequate

consideration then the value of such assets is included in the net wealth of the individual.

6)Assetstransferredtoaperson/AOPforthebenefitofson’swife[Sec.4(1)(a)(vi)] If an assessee has transferred his asset to another person or AOP directly or indirectly after 31-05-1993 without adequateconsiderationfortheimmediateordeferredbenefitofhisson’swifethenvalueofsuchassetsshallbeincluded in wealth of the individual.

7) Interest in a Firm or AOP [Sec. 4(1) (b)] IftheassesseeisapartnerinafirmoramemberofanAOP(notbeingacooperativehousingsociety),thenvalueofhisinterestintheassetsoffirmorassociationshallbeincludedinhisnetwealth.WhereaKartaofH.U.F.isapartnerinafirm,hisinterestinthefirm’sassetsisincludibleinthenetwealthoftheH.U.F.

8) Converted Property [Sec. 4(1A)] If an individual who is a member of an HUF converts his individual property after 31-12-1969 into joint family

property either by throwing it into the common stock or by making gifts of separate property or through act of impressing such separate property with the character of property belonging to family without adequate consideration, such property is called converted property. In this case, value of the converted property or any

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part of it held by the family on valuation date is included in the net wealth of the individual. However, in case the converted property becomes the subject matter of partition among the members, then the part of the property received by the individual and his spouse is includible in his net wealth.

9) Transfer by means of book entry [Sec.4 (5A)] Where a person makes a gift of money to another person by means of entries in the books of account maintained bythedonororanindividualorHUForfirmorAOPorbodyofindividualswithwhichthedonehasbusinessorotherrelationship.Then,valueofsuchgiftisincludibleinthenetwealthofdonorunlessthedonorsatisfiestheassessingofficerthatthemoneywasactuallydeliveredtothedonoratthetimeofmakingtheentries.

10) Impartible estate [Sec. 4(6)] Impartible estate of an H.U.F. is that estate which by special law or custom descend to one member of the family

though it is a joint property belonging equally to all, Value of impartible estate is included in the net wealth of such holder, so far wealth tax purposes. He is the deemed owner of the impartible estate.

11) House from a co-operative housing society, etc. [Sec. 4(7)] If the assessee is a member of a co-operative housing society, company or AOP’s and he is allotted a building a

part thereof or leased under a house building scheme of the society, company or association, as the case may be then he is the deemed owner of that building part thereof and hence value of such building shall be included in his net wealth.

12) Building in part performance of a contract [Sec. 4(8) (a)] If a person is allowed to take or retain possession of any building in part performance of a contract of the nature

referred u/s 53 A of Transfer of Property Act, 1882, then he is the deemed owner of that building or part thereof and hence value of such building shall be included in his net wealth.

13) Building on lease [Sec. 4(8) (b)] If an assessee acquires any right by way of lease with respect to a building by virtue of any transaction to a building

by virtue of any transaction referred to in clause (f) of Sec. 269 U A. shall be the deemed owner of the building or part thereof and its value shall be included in his net wealth, however it excludes any right by way of a lease from month to month of for a period not exceeding 1 year.

3.3.7 Exempt Assets [Sec 5]The following assets are exempt from wealth tax:1) Property held under trust [Sec. 5(i)] Any property held under trust or other legal obligations by the assessee for any public purpose of a charitable or

religious nature in India is exempt.

2) Interest in the coparcener property [Sec. 5(ii)] If the assessee is a member of H.U.F., he is not liable to pay tax on his share in the joint property, so long as the

property remains joint and he continues as the member of that family.

3) One building in the occupation of former ruler [Sec. 5 (iii)] Anyonebuildingwhichisintheoccupationofarulerandwhichhasbeendeclaredashisofficialresidenceby

the Central Government is totally exempt from tax. However, the exemption is available only to the ruler during his life time.

4) Jewellery in possession of a former ruler [Sec. 5(iv)] Jewellery in possession of a former Ruler not being his personal property which has been recognised by the

Central Government as his heirloom, before commencement of Wealth Tax Act or by the board after that shall be exempt.However,thisexemptionissubjecttofulfilmentofcertainconditionslikekeepingofjewelleryinIndia,in its original shape, allowing authorised person to examine the jewellery as and when necessary


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5) Assets of Indian repatriate [Sec. 5 (v)] Indian repatriate means a person of Indian origin or a citizen of India who was residing in a foreign country and

on leaving such country assessee has returned to India with the intention of permanently residing therein. In this case his following assets shall be exempt for 7 successive assessment years, commencing with the assessment year following the date of his return to India:

(i) Money brought by him in India.(ii) Assets brought by him in India.(iii) Any balance in Non-resident External Accounts in India on the date of his return.(iv) Assets acquired by him out of money in his Non-resident External Account or by sending money from foreign

country within 1 year immediately preceding the date of his return to India.(v) Any assets acquired by him out of money brought in by him in India or out of the balance in NRE account

after his arrival in India.

6) House [Sec 5 (vi)] One house or part of a house or a plot of land belonging to an individual or HUF is exempt provided size of plot

is not bigger than 500 square meters.

3.3.8 Debt OwedDebt owed represents an obligation to pay an amount either in present or in future. In the computation of net wealth, from the total of all assets value of debts owed by an assessee is deductible provided following conditions aresatisfied:

Debt is owed by assessee on valuation date.•Debt should have been incurred in relation to acquisition or creation of an asset, which is taxable for Wealth •Tax in the hands of assessee.

3.4 Computation of Net Wealth and Wealth TaxProcedure for computation of net wealth is as follows:

Computation of net wealth of the assessee Rupees

Assets owned by assessee on valuation date includingdeemed assets and excluding exempt assets X

Less Deductible debts owed by assessee on the valuation date. (Y)

Net Wealth X - Y

Table 3.2 Computation of net wealth

Procedure for computation of wealth tax:

Wealth tax is chargeable @1% of the amount by which net wealth exceeds 15 lakhs rupees, hence

If net wealth is up to Rs. 15 lakhs, there will not be any wealth tax.

If net wealth exceeds Rs.15 lakhs, wealth tax is calculated as:WealthTax=1%[NetWealth–Rs15Lakhs]

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3.5 Valuation of AssetsIn order to determine net wealth and wealth tax of an assessee, asset’s value should be determined as on valuation date as per the manner given in schedule III.

3.5.1 Valuation of a BuildingValue of an immovable property i.e. a building or land apartment thereto or a part thereof is to be determined according to Part B of schedule III of wealth tax act. The procedure of valuation is:Step 1 Calculation of GMR [Gross Maintainable Rent] GMR is calculated as:

i) Where property is not let out: GMR means amount of annual rent assessed by the local authority or if property is not situated within local limits of a local authority then GMR is the amount which the owner can reasonably be expected to receive as an annual rent.

ii) Where the property is let out, GMR is higher of the annual rent whether received or receivable by owner or annual valueassessedbythelocalauthority.Annualrentisthesumofactualrentandcertainspecifiedadjustments.Actualrentisdefinedas

a) Actual rent received or receivable by owner in respect of such year, if property is let out throughout the period of 12 months during the previous year.

b) Actual rent received or receivable proportionately, where the property is let out for only the part of previous year.

Step 2 Calculation of NMR [Net Maintainable Rent]GMR= XLess a) Taxes levied by local authority whether paid or notb) 15% GMR to cover other expenses =YNMR =(X-Y)

Step 3 Calculation of capitalised value of NMRi) When property is built on freehold land = NMR * 12.5ii) When property is built on leasehold land and unexpired period of lease is 50 years or more = NMR * 10iii) When property is built on leasehold land and unexpired period of lease is less than 50 years = NMR * 8

Step 4 Calculation of value of building under Rule 3i) When property is acquired or constructed before 31st March 1974Value under rule 3 = capitalised value of NMRii) When property is acquired or constructed after 31st March 1974Value under rule 3 = higher of capitalised value of NMR or cost of acquisition/construction plus cost of any improvement.

Step 5 Calculation of value of building for calculation of net wealthValue under rule 3 = AAdd adjustment for the un-built area = BLess amount of unearned increase [in case of leasehold land property] = C[Leastofspecified%ofunearnedincreaseOr 50% of value after adjustment for un-built area]Value of the house =A+B-C

Explanation:i) Adjustment for un-built areaWherein, theun-builtareaofpropertyexceeds thespecifiedarea, thevalueascalculatedunderrule3shallbeincreased by the amount calculated as:D=differencebetweenun-builtareaandspecifiedarea


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D = difference between un built area and specifiedarea Addition to value under Rule 3

D <= 5% No adjustment

10% >= D >= 5% 20% of value under Rule 3

15% >= D >= 10% 30%

20% >= D>= 15% 40%

Table 3.3 Adjustment for un-built area

Herein,specifiedareaisareaasspecifiedunderwealthtaxact.

ii) Unearned increase means difference between value of land on valuation date as determined by government or such authority for purposes of calculation of such increase and the amount of premium actually paid/payable to Government /local authority for the lease of land.

Exception: In some cases the valuation of property shall not be computed according to the provisions of rule 3, these cases are:i)Wheretheaccessingofficer,withthepreviousapprovalofthejointcommissionisoftheopinionthatitisnotpracticable to apply this rule to a case having regard to the facts and circumstances of the case.ii)Wherethedifferencebetweentheun-builtareaandspecifiedareaexceeds20%oftheaggregatearea.iii) Where the property is built in leasehold land and unexpired period of lease does not exceed 15 years from relevant valuation date and the deed of lease does not provide an option to lessee for the renewal of lease.

3.5.2 Valuation of Self-residential House [Sec.7 (2)]The value of oneself occupied house belonging to the assessee and exclusively used him for residential purposes is determined as:i) House acquired/constructed before 1.4.1971: Value determined under rule 3 as on 31.3.1971 shall be the value of

the house for all coming assessment years.ii) House acquired/constructed between 1.4.1971 and 31.3.1974: Value determined under rule 3 as on the valuation

date immediately following the date on which assessee became the owner shall be the value of house for all coming assessment years.

iii) House acquired/constructed after 31.3.1974.Where the cost of the acquired/constructed house including the cost of improvement does not exceed Rs 50 •lakhs, if house is located in Mumbai, Kolkata, Chennai or Delhi [Rs 25 lakhs for any other place], the value as determined under rule 3 as on the valuation date immediately following the date on which the assessee became the owner shall be the value of the house for all coming assessment years.Where the cost of the acquisition/construction including the cost of improvement exceeds Rs 50 lakhs, if house •is located in Mumbai, Kolkata, Chennai or Delhi [Rs 25 lakhs for any other place], the higher of the value as determined under rule 3 on the valuation date immediately following the date on which the assessee became the owner or cost of acquisition/construction including cost of improvement shall be the value of the house for all coming assessment years.

3.5.3 Valuation of Business Assets [Schedule III Part D]In case the assessee is carrying on a business for which accounts are maintained by him regularly, the net value of the assets of the business as a whole, having regard to the balance sheet of such business on the valuation date is takenasvalueofsuchassetsaftermakingfinaladjustments.

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a) Assets disclosed on balance sheet

Asset Value to be taken

i) Depreciable assets Written down value

ii) Non-depreciable asset excluding stock-in-trade Book value

iii) Closing stock Value as calculated for IT purposes

Table 3.4 Valuation of assets disclosed on balance sheet

b) Asset not disclosed in balance sheet: Value as determined with provisions of schedule III as applicable to the asset

Further valuation of business assets following assets shall not be considered.i) Advance IT paid under the IT act.ii) The debt due to the assessee as per balance sheet which has been allowed as a deduction under provisions of II

act for relevant assessment year.iii) Value of any asset exempt from wealth tax.iv)ProfitandLossA/cdebitbalanceanyotheramountshowninbalancesheetwhichdoesnotrepresentthevalue

on any asset.v) Non-business assets.

Further following liabilities are not to be deducted to calculate the net value of business assets:i) Capital employed in business other than borrowed money.ii) Reserve by whatever name called.iii) Any provisions made for meeting any future or contingent liability.iv)Anyliabilityshowninbalancesheetwhichhasbeenspecificallyutilisedforacquiringexemptassetsv) Non-business liability.

However, business liabilities not shown under balance sheet are deductible.

3.5.4 Valuation of Interest in Firm or AOP [Schedule III Part E]Procedureforvaluationofinterestofpartner(members)infirmorAOPisas:i)CompletethenetwealthoffirmAOPinthevaluationdatewithoutconsideringtheexemptiongivenu/s5[exempt

assets]ii)Dividethenetwealthoffirm/AOPamongpartners/member

Uptotheamountofcapitalemployedinfirmintheratioofcapital.•Residualnetwealthintherateinwhichpartner/membershaveagreedtodistributeassetsoffirmintheevent•ofdissolutionoffirm/AOPorinprofitsharingratiointheabsenceofsuchagreement.

Thusindividualpartners/membersoffirm/AOPareliabilitytopaytaxontheirwealthaswellasontheinterestinfirm/AOP;howeverintheirindividualcapacitytheycanclaimexemptionu/s5.

3.5.5 Valuation of Life Interest [Schedule III Part F]Value of life interest can be calculated by multiplying the annual income that accrues to the assessee from life interest by the value shown in the appendix attached to the schedule III. However, the value so calculated shall not exceed the value of corpus as on the valuation date else value of corpus shall be the value of life interest.


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3.5.6 Valuation of Jewellery [Schedule III Part G]The value of the jewellery shall be estimated to be the price it would fetch if sold in open market on the valuation date, further the return of net wealth as furnished by assessee must be supported by:i) A statement in the prescribed form (MOSA), where the value of the jewellery on the valuation dates does not

exceed Rs. 5 lakhs.ii) A report of a registered valuer in the prescribed form, where the value of jewellery on the valuation dates exceeds

Rs. 5 lakhs.

Howeverinthefollowingcases,theassessingofficermayreferthevaluationofjewellerytoavaluationofficer:i) Where he value is estimated by a registered valuer and the AO is of the opinion that value so estimated is less

than its fair market value.ii) In any other case if AO is of the opinion that the fair value of the asset exceeds the value of the asset returned by

1/3rd the value of the asset as returned or more than Rs 50,000.

Whenthevaluationisreferredtothevaluationofficer,thefairmarketvalueofjewelleryasdeterminedbythevaluationofficerwillbethevalueofthejewellery.Thevaluesodeterminedshallbetakentobethevalueofsuchjewelleryfor subsequent 4 assessment years subject to the adjustments of change in market value of gold/ silver/ alloy on the valuation date relevant to the assessment year and for the purchase/sale of jewellery during the assessment years.

3.5.7 Valuation of Other Assets [Schedule III Part H]Other assets shall be valued as:(i) The value of the assets except cash being an asset not covered by part B to G shall be estimated either by AO

himself or by V.O., if a reference is made to him. The value shall be estimated to be the price that it would fetch if sold in open market, on the valuation date.

(ii) If asset is not saleable in open market, then its value shall be determined in accordance with such guidelines or principalsasmaybespecifiedbytheboardfromtimetotimebygeneralorspecialorder.

3.5.8 Valuation by Valuation Officer (V.O.) [sec.16A]For the valuation of jewellery and other assets the AO may refer the valuation to a V.O. in following casesa) AO is of the opinion that the fair value of the asset exceeds the value of the asset returned by 1/3rd the value of

the asset as returned or more than Rs 50,000.b) That having regard to the nature of the asset and other circumstances, it is necessary once reference is made to

V.O.

V.O. will estimate the price of the asset which in his opinion, the asset would fetch if sold on open market on the valuation date and in this case value as estimated by V.O. on value shown by the assessee in his return, whichever is higher shall be the value of asset for wealth tax purposes.

3.6 Procedure for AssessmentProvisions relating to assessment can be enumerated as:

3.6.1 Wealth Tax Return (Voluntary /Revised)It is a statutory obligation of every person, if his net wealth on the valuation date exceeds Rs. 15 lakhs to furnish a returnintheprescribedform(FormBA)withthewealthtaxofficesonorbeforetheduedate.

If any person has not furnished the return on/before the due date or within the time allowed under a notice to furnish return of net wealth or after furnishing the return, discovered any omission or wrong statement therein, he may furnish a return or a revised return at any time before the expiry of one year from the end of relevant AY or before assessment is made whichever is earlier,.

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3.6.2 AssessmentWhere wealth tax is payable on the bases of return to be furnished, the assessee is required to pay the tax before the filingofreturnandsuchreturnistobeaccompaniedbytheproofofsuchpayment.

3.6.3 Due Dates for Filing the ReturnDuedatesforfilingofthereturnare:

Assessee Due Dates

a) Assessee is a companyb) Assessee is other than a company

i) Accounts are required to be audited. Under Income Tax Act or any other law.

ii)Personisrequiredtofilethereturnofincome on the basis of economic criterion.

iii) in any other case

31st October of the relevant AY

31st October of the relevant A.Y.

31st October of the relevant A.Y.

31st July of the relevant A.Y.

Table 3.5 Due dates for filing of returns

3.6.4 Signing of the ReturnTheWealthTaxReturnshallbesignedandverifiedby:(i) In case of an individual

(a) By individual concerned(b) By some person duly authorised by him holding a valid power or attorney in case the individual concerned

is absent from India.(c) By his guardian or any person competent to act on his behalf, if the individual is mentally incapacitated from

attending his affairs.(d) By some duly authorised person holding a rapid power of attorney, if it is not possible for individual to sign

the return due to any reason.(ii) In case of an HUF

(a) The Karta(b) If Karta is absent from India or is mentally incapacitated from attending the affairs, by any other adult member

of the family(iii) In case of a company

(a) By managing director or any other director, if managing director is not able to sign due to unavoidable reasons.

(b) If company is not resident in India, by a person holding valid power of attorney from such company to do so.

(c) By the liquidator of the company, if the company is being wound up.(d)ByprincipalofficerifthemanagementofthecompanyhasbeentakenoverbyCentralGovernmentorany

state Government under any law.


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SummaryThe Wealth Tax Act came into force on April 1, 1957.•Wealth tax is a direct tax, which is charged on the net wealth of the assessee.•The wealth tax is charged for every assessment year in respect of the net wealth of the corresponding valuation •date of every individual, Hindu Undivided Family (HUF), and company, @1% of the amount by which net wealth exceeds Rs.15 lakhs.Valuation date is 31st March immediately preceding the assessment year.•Net wealth represents the amount by which the total value of all assets including deemed assets but excluding •exempt assets, belonging to the assessee on the valuation date exceeds the value of all debts owed by the assessee on the valuation date incurred in relation to the taxable assets.Jewellery, bullion furniture, utensils or any other article made wholly or partly of gold, silver, platinum, or any •other precious metal of any alloy containing one or more of such precious metals are treated as an asset.Deemed assets represent those assets, which belong to some other person but for the purpose of calculation of •wealth tax, these are included in the wealth of the assessee (transferor), it is because at time an individual may transfer his assets without adequate consideration to persons in whom he may be interested.If an individual who is a member of an HUF converts his individual property after 31-12-1969 into joint family •property either by throwing it into the common stock or by making gifts of separate property or through act of impressing such separate property with the character of property belonging to family without adequate consideration, such properly is called converted property.Debt owed represents an obligation to pay an amount either in present or in future.•In order to determine net wealth and wealth tax of an assessee, asset’s value should be determined as on valuation •date as per the manner given in schedule III.Value of an immovable property, i.e., a building or land apartment thereto or a part thereof is to be determined •according to Part B of schedule III of wealth tax act.Value of life interest can be calculated by multiplying the annual income that accrues to the assessee from life •interest by the value shown in the appendix attached to the schedule III.It is a statutory obligation of every person if his net wealth on the valuation date exceeds Rs. 15 Lakhs to furnish •areturnintheprescribedform(FormBA)withthewealthtaxofficesonorbeforetheduedate.Where wealth tax is payable on the bases of return to be furnished, the assessee is required to pay the tax before •fillingofreturnandsuchreturnistobeaccompaniedbytheproofofsuchpayment.

ReferencesLesson – 17 Wealth Tax-I. • [Pdf]Availableat:<http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_17.pdf> [Accessed 26 July 2013].Lesson – 18 Wealth - Ii. • [Pdf]Availableat:<http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_18.pdf> [Accessed 26 July 2013].Shand, R. T., Kalirajan, K. & Sankar, U., 2003. • Economic Reform and the Liberalisation of the Indian Economy: Essays in Honour of Richard T. Shand. Edward Elgar Publishing, U K.Balachandran, V. & Thothadri, S., 2012. • Taxation law and practice. PHI Learning Pvt. Ltd, New Delhi.Introduction to Wealth Tax. • [Video online] Available at: <http://www.youtube.com/watch?v=6EmOWSPAYXU> [Accessed 26 July 2013].Wealth taxation - Computation of net Wealth. • [Video online] Available at: <http://www.youtube.com/watch?v=ASnRevqhFJU> [Accessed 26 July 2013].

Recommended ReadingKillius, J., 2003. • Inheritance and Wealth Tax Aspects of Emigration and Immigration of Individuals. Kluwer Law International, Netherland.Lal, 2008. • Direct Taxes. 29th ed., Pearson Education India. The Tax System in India: Could Reform Spur Growth? Issues 2006-2093• International Monetary Fund.

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Self Assessment The Wealth Tax Act came into force on ___________.1.

April 1, 1947a. April 1, 1957b. April.1, 1936c. April 1, 1942d.

Which of the following statement is false?2. Valuation date is not the tax base for the charge of wealth tax.a. The residential status of an assessee is determined with reference to the year ending on valuation date.b. The value of an asset is determined on valuation date.c. The wealth as on the last moment of the valuation date is taken to be the net wealth for taxation purposes.d.

Net wealth represents the amount by which the total value of all assets including deemed assets but excluding 3. exempt assets, belonging to the assessee on the valuation date exceeds the value of all debts owed by the assessee on the valuation date incurred in relation to the __________assets.

payablea. exemptb. taxablec. assessabled.

Which of the following statement is true?4. Wealth tax is a direct tax, which is charged on the net wealth of the assessee.a. Assessment year means a period of 12 months commencing from 1st day of March every year falling b. immediately after valuation date.Valuation date is 31st April immediately preceding the assessment year.c. The Wealth Tax Act came into force on April 1, 1942.d.

The Wealth Tax is charged for every assessment year in respect of the net wealth of the corresponding valuation 5. date of every individual, ______________and company, @1% of the amount by which net wealth exceeds Rs.15 lakhs.

hindu familya. Hindu Undivided Family (HUF)b. hindu divided family c. familyd.

___________, __________, _________or any other article made wholly or partly of gold, silver, platinum, or 6. any other precious metal of any alloy containing one or more of such precious metals are treated as an asset

Jewellers, bullion furniture, utensilsa. Jewellery, bullion equipment, utensilsb. Jewellery, bullion furniture, apparatusc. Jewellery, bullion furniture, utensilsd.

What does GMR stand for?7. Gross Maintainable Renta. Gross Main Rentb. Gross Main Ratec. Global Maintenance Rate d.


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__________owed represents an obligation to pay an amount either in present or in future8. .Credita. Liabilityb. Debtc. Balanced.

Which of the following is not an asset?9. Buildinga. Motor carsb. Clothesc. Yachts, boats and aircraftsd.

What does NMR stand for?10. Net Maintainable Ratea. Net Motor Rateb. No Main Rentc. Net Maintainable Rentd.

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Chapter IV

Gift Tax

Aim


introduce gift tax•

definegift,donee,donor•

explicate the charge of gift tax•

Objectives


explicate gift tax authorities•

enlist the rates of gift tax•

explain the payment and recovery of gift tax•

Learning outcome


identify assessment•

understand exemption in respect of certain gifts•

describe appeals, revisions and references•


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4.1 IntroductionGift tax in India is regulated by the Gift Tax Act which was constituted on April 1, 1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs 25,000, in the form of cash, draft, cheque or others, received from one, who doesn’t have blood relations with the recipient were taxable.

However, with effect from October 1, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, the Act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs 50,000 in a year would be taxable.

4.1.1 Some Important Definitions‘Gift’ means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section.

‘Donee’ means any person who acquires any property under a gift, and, where a gift is made to a trustee for the benefitofanotherpersonincludesboththetrusteeandthebeneficiary.

‘Donor’ means any person who makes a gift.

4.2 Charge of Gift-Tax and Gifts Subject to Such ChargeCharge of gift tax and gift subjects are as follows:

4.2.1 Charge of Gift-TaxSubjecttotheotherprovisionscontainedinthisAct,theyshallbechargedforeveryfinancialyearcommencingonand from the 1st day of April, 1958, a tax (herein after referred to as gift-tax) in respect of the gifts, if any, made by a person during the previous year (other than gifts made before the 1st day of April, 1957) at the rate or rates specifiedintheSchedule. 4.2.2 Gifts to Include Certain TransfersFollowing transactions are included as gifts for the purposes of this Act:

where property is transferred otherwise than for adequate consideration, the amount by which the market value •of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor;where property is transferred for a consideration which, having regard to the circumstances of the case, has •not passed or is not intended to pass either in full or in part from the transferee, to the transferor, the amount of the consideration which has not passed or is not intended to pass shall be deemed to be a gift made by the transferor;where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable •claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment,totheextenttowhichithasnotbeenfoundtothesatisfactionoftheGift-taxOfficertohavebeenbonafide,shallbedeemedtobeagiftmadebythepersonresponsiblefortherelease,discharge,surrender,forfeiture or abandonment;where a person absolutely entitled to property causes or has caused the same to be vested in whatever manner in •himself and any other person, jointly without adequate consideration and such other person makes an appropriation fromoroutofthesaidproperty,theamountoftheappropriationusedforthebenefitofthepersonmakingtheappropriationorforthebenefitofanyotherpersonshallbedeemedtobeagiftmadeinhisfavourbythepersonwho causes or has caused the property to be so vested.

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4.2.3 Exemptions in Respect of Certain GiftsThe exemptions in respect of certain gifts are as follows:

Gift-tax shall not be charged under this Act in respect of gifts made by any person:•of immovable property situated outside the territories to which this Act extends; �of moveable property situate outside the said territories unless the person- �

(a) being an individual, is a citizen of India and is ordinarily resident in the said territories, or(b) not being an individual, is resident in the said territories, during the previous year in which the gift is

made;ofpropertyintheformofsavingscertificatesissuedbytheCentralGovernment,whichthatGovernment, �bynotificationintheOfficialGazette,exemptsfromgift-tax;to the Government or any local authority; �to any institution or fund established for a charitable purpose ,to which the provisions of section 15B of �the Income-tax Act apply;for any charitable purpose not falling within clause (v)- �

(a) made at any time before the 1st day of April, 1959; or(b) made at any time after that date subject, in respect of each such gift, to a maximum of rupees one hundred

in value and, in respect of such gifts in any one previous year to the same done, to a maximum of rupees fivehundredinvalueintheaggregate;

to any relative dependent upon him for support and maintenance, on the occasion of the marriage of the �relative, subject to a maximum of rupees ten thousand in value in respect of the marriage of each such relative;to his or her spouse, subject to a maximum of rupees one lakh in value in the aggregate in one or more �previous years, the expression ‘spouse’ in this clause, where there are more wives than one, meaning all the wives together;of policies of insurance or annuities to any person (other than his wife) who is dependent upon him for �support and maintenance, subject to a maximum of rupees ten thousand in value in the aggregate in one or morepreviousyearsofthebenefitsinrespectofeachsuchdone;under a will; �in contemplation of death; �for the education of his children, to the extent to which the gifts are proved to the satisfaction of the Gift-tax �Officerasbeingreasonablehavingregardtothecircumstancesofthecase;being an employer, to any employee by way of bonus, gratuity or pension or the dependents of a deceased �employee, to the extent to which the payment of such bonus, gratuity or pension is proved to the satisfaction oftheGift-taxOfficerasbeingreasonablehavingregardtothecircumstancesofthecaseandismadesolelyin recognition of the services rendered by the employees;in the course of carrying on a business, profession or vocation, to the extent to which the gift is proved �tothesatisfactionoftheGift-taxOfficertohavebeenmadebonafideforthepurposeofsuchbusiness,profession or vocation;to any person in charge of any such Bhoodan or Sampattidan movement as the Central Government may, �bynotificationintheOfficialGazette,specify;out of the sums, if any, guaranteed, or assured by the Central Government as his privy purse, if the gifts �are made for-

(a) the maintenance of any relatives dependent on him for support and maintenance; or(b)fortheperformanceofanyofficialceremonies;


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Provided that such gifts are in accordance with the practice, usage or tradition of the family to which the person making the gift belongs.

Without prejudice to the provisions contained in sub-section (1), gift-tax shall not be charged under this Act •in respect of gifts made by any person during the previous year subject to a minimum of rupees ten thousand in value.Notwithstanding anything contained in sub-section (1) or sub-section (2), where either spouse makes any gifts •out of any such gifts received by that spouse as fall within clause (viii) of sub-section (1), the gifts so made shall be deemed to be taxable gifts made by that spouse and nothing contained in sub-section (1) or sub-section (2) shall apply in relation to any such gifts. Explanation - For the purposes of this section:an individual shall be deemed to be ordinarily resident in the territories to which this Act extends during the •previous year in which the gift is made if during that year he is regarded as a resident but not as not ordinarily resident in the taxable territories within the meaning of the Income-tax Act;aHinduundividedfamily,firmorotherassociationofpersonsshallbedeemedtoberesidentintheterritories•to which this Act extends during any previous year unless, during that year, the control and management of its affairs was situated wholly outside the said territories;a company shall be deemed to be resident in the territories to which this Act extends during the previous year, •if:

it is a company formed and registered under the Companies Act, 1956 (1 of 1956), or is an existing company �within the meaning of that Act; orduring that year, the control and management of that company was situated wholly in the said territories; �

“giftsmadeincontemplationofdeath”hasthesamemeaningsinsection191oftheIndianSuccessionAct,•1925 (39 of 1925).

4.2.4 Value of Gifts, DeterminedHow to determine the value of gifts:

The value of any property other than cash transferred by way of gift shall, subject to the provision of sub-sections •(2)and(3),beestimatedtobethepricewhichintheopinionoftheGift-taxOfficer,itwouldfetchifsoldintheopen market on the date on which the gift was made.Whereapersonmakesagiftwhichisnotrevocableforaspecifiedperiod,thevalueofthepropertygifted•shall be the capitalised value of the income from the property gifted during the period for which the gift is not revocable.Where the value of any property cannot be estimated under sub-section (1) because it is not saleable in the open •market, the value shall be determined in the prescribed manner.

4.3 Gift-Tax AuthoritiesFollowing are gift tax authorities: 4.3.1 Gift-tax OfficersEveryIncome-taxOfficerhavingjurisdictionexercisingpowersassuchundertheIncome-taxActinrespectofanypersonshallperformthefunctionsofaGift-taxOfficerunderthisActinrespectofthatperson. Explanation:Forthepurposesofthissection,theIncome-taxOfficerhavingjurisdictioninrelationtoapersonwhohasnoincomeassessabletoincome-taxundertheIncome-taxAct,meanstheIncome-taxOfficeroftheareain which that person resides.

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4.3.2 Appellate Assistant Commissioners of Gift TaxTheBoardmayempowerasmanypersonsasitthinksfittoexerciseunderthisActthefunctionsofanAppellateAssistant Commissioner of gift-tax, and on being so empowered the Appellate Assistant Commissioners shall perform their functions in respect of such areas or such persons or such classes of persons as the Board may direct, and where such directions having assigned to two or more Appellate Assistant Commissioners the same areas or the same persons or the same classes of persons they shall perform their functions in accordance with such orders as the Board may make for the distribution and allocation of the work to be performed.

4.3.3 Commissioners of Gift TaxTheboardmayempowerasmanypersonsasitthinksfittoexerciseunderthisActthefunctionsofaCommissionerof gift-tax, and on being so empowered the Commissioners of gift-tax shall perform their functions in respect of such areas or such persons or such classes of persons as the Board may direct, and where such directions have assigned to two or more Commissioners of the same area, or the same persons or the classes of persons shall have concurrent jurisdiction subject to such orders, if any, as the Board may make for the distribution and allocation of the work to be performed.

4.3.4 Inspecting Assistant Commissioners of Gift TaxTheCommissioner ofGift-taxmay empower asmanypersons as he thinksfit to exercise under thisAct thefunctions of an Inspecting Assistant Commissioners of Gift-tax, and on being so empowered the Inspecting Assistant Commissioners of Gift-tax shall perform their functions in respect of such areas or such persons or such classes of persons as the Commissioner may direct, and where such directions have assigned to two or more Inspecting Assistant Commissioners the same area or the same persons or the same classes of persons they shall perform their functions in accordance with such orders as the Commissioner may make for the distribution and allocation of the work to be performed.

4.3.5 Gift-tax Officers to be Subordinate to the Commissioner of Gift-tax and the Inspecting Assistant Commissioner of Gift-taxTheGift-taxOfficersshallbesubordinatetotheCommissionerofGift-taxandtheInspectingAssistantCommissionerof Gift-tax within whose jurisdiction they perform their functions.

4.3.6 Gift Tax Authorities to Follow Orders of the BoardAllofficersandotherpersonsemployedintheexecutionorthisActshallobserveandfollowtheorders,instructionsand directions of the Board. Provided that no orders, instructions or directions shall be given by the Board so as to interfere with the discretion of the Appellate Assistant Commissioner of Gift-tax in the exercise of his appellate functions. 4.4 Assessment 4.4.1 Return of Gifts

Every person who during a previous year has made any taxable gifts shall, before the thirtieth day of June of •thecorrespondingassessmentyear,furnishtotheGift-taxOfficerareturnintheprescribedformandverifiedin the prescribed manner.IftheGift-taxOfficerisofopinionthatinrespectofthegiftsmadebyapersonduringanypreviousyearhe•is liable to gift-tax under this Act, then notwithstanding anything contained in sub-section (1), he may serve a notice upon such person requiring him to furnish within such period, not being less than thirty days, as may be specifiedinthenotices,areturnintheprescribedformandverifiedintheprescribedmanner.TheGift-taxOfficermayinhisdiscretionextendthedateforthedeliveryofthereturnunderthissection.•


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4.4.2 Return After Due Date and Amendment of ReturnIf any person has not furnished a return within the time allowed under section 13, or having furnished a return under that section, discovers any omission or a wrong statement therein, he may furnish a return or a revised return, as the case may be, at any time before the assessment is made. 4.4.3 AssessmentAssessments under gift tax are as follows:

IftheGift-taxOfficerissatisfiedwithoutrequiringthepresenceoftheassesseeortheproductionbyhimofany•evidence that a return made under section 13 or section 14 is complete, he shall assess the value of the taxable gifts made by the assessee and determine the amount payable by him as gift-tax.IftheGift-taxOfficerisnotsosatisfied,heshallserveanoticeontheassesseeeithertoattendinpersonathis•officeonadatetobespecifiedinthenoticeorcausetobeproducedonthatdateanyevidenceonwhichtheassessee may rely in support of his return.TheGift-taxOfficer,afterhearingsuchevidenceasthepersonmayproduceandsuchotherevidenceashemay•requireonanyspecifiedpointsshall,byorderinwriting,assessthevalueoftaxablegiftsmadebytheassesseeand determine the amount payable by him as gift-tax.ForthepurposeofmakinganassessmentunderthisAct,theGift-taxOfficermayserveonanypersonwhohas•made a return under sub-section (1) of section 13 or section 14, or upon whom a notice has been served under sub-section(2)ofsection13,anoticerequiringhimtoproduceorcausetobeproducedonadatespecifiedinthenoticesuchaccounts,recordsorotherdocumentsastheGift-taxOfficermayrequire.If any person fails to make a return in response to any notice under sub-section (2) of section 13 or fails to •complywiththetermsofanynoticeissuedundersub-section(2)orsub-section(4),theGift-taxOfficershallestimate the value of taxable gifts to the best of his judgement and determine the amount payable by the person as gift-tax.

4.4.4 Gift Escaping AssessmentGift escaping assessments are as follows:

IftheGift-taxOfficer:•has reason to believe that by reason of omission or failure on the part of an assessee to make a return under �section 13 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for that year, any taxable gift has escaped assessment for that year, whether by reason of under-assessment or assessment at too low a rate or otherwise; orhas, in consequence of any information in his possession, reason to believe, notwithstanding that there has �been no such omission or failure as is referred to in clause (a), that any taxable gift has escaped assessment for any year, whether by reason of under-assessment or assessment at too low a rate or otherwise; he may, in cases falling under clause (a) at any time within eight years and in cases falling under cause (b) at any time within four years of the end of that assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 13, and may proceed to assess or re-assess any taxable gift which has escaped assessment, and the provisions of this Act shall, so far as may be, apply as if the notice had issued under that sub-section.

Nothing contained in this section limiting the time within which any proceedings for assessment order-assessment •may be commenced shall apply to an assessment or a re-assessment to be made on the assessee or any person inconsequenceofortogiveeffecttoanyfindingordirectioncontainedinanorderundersection22,section23, section 24, section 26 or section 28.

4.4.5 Penalty for Default and ConcealmentFollowing are the penalty for default and concealment:

IftheGift-taxOfficer,AppellateAssistantCommissioner,CommissionerorAppellateTribunal,inthecourse•ofanyproceedingsunderthisAct,issatisfiedthatanyperson:

has without reasonable cause failed to furnish the return which he is required to furnish under sub-section �

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(1) or sub-section (2) of section 13, or section 16 or has without reasonable cause failed to furnish it within the time allowed and in the manner required; or

has without reasonable cause failed to comply with a notice under sub-section (2) or sub-section (4) of section •15; orhas concealed the particulars of any gift or deliberately furnished inaccurate particulars thereof; he or it may, •by order in writing, direct that such person shall pay by way of penalty:

in the case referred to in clause (a), in addition to the amount of gift-tax payable by him, a sum not exceeding �one and a half times the amount of such tax, andin the case referred to in clause (b) or clause (c), in addition to the amount of gift-tax payable by him, a �sum not exceeding one and a half times the amount of the tax, if any, which would have been avoided if the return made by such person under section 13, section 14, or section 16, as the case may be, had been accepted as correct.

No order shall be made under sub-section (1) unless the person concerned has been given a reasonable opportunity •of being heard.No prosecution for an offence under this Act shall be instituted in respect of the same facts in relation to which •a penalty has been imposed under this section.TheGift-taxOfficer shall not impose anypenalty under this sectionwithout the previous approval of the•Inspecting Assistant Commissioner of Gift-tax.

4.4.6 Rebate on Advance PaymentsRebate on advance payments are as follows:

If a person making a taxable gift of the value of not less than rupees ten thousand pays into the treasury, in the •case of a taxable gift made before the 16th day of July, 1958, before the 1st day of August, 1958, and, in the caseofanyothertaxablegift,withinfifteendaysofhismakingthegift,anamountcalculatedinthemannerspecifiedinsub-section(2),heshall,atthetimeofassessmentundersection15,begivencreditinadditiontothe amount so paid, for an amount equal to ten per cent of the amount so paid. The amount to be paid into the treasury under sub-section (1) shall be:•

wherethevalueofthegiftdoesnotexceedrupeesfiftythousand,fourpercentofthevalue; �wherethevalueofthegiftexceedsrupeesfiftythousandbutdoesnotexceedrupeestwohundredthousand, �eight per cent of the value; andinanyothercase,fifteenpercentofthevalue. �

4.5 Liability to Assessment in Special CasesLiability to assessment in special cases.

4.5.1 Tax of Deceased Person Payable by Legal RepresentativeTaxes of deceased person payable by legal representative are listed below:

Where a person dies, his executor, administrator, or other legal representative shall be liable to pay out of the •estate of the deceased person, to the extent to which the estate is capable of meeting the charge, the gift-tax determined as payable by such person, or any sum which would have been payable by him under this Act, if he had not died. Where a person dies without having furnished a return under section 13, or after having furnished a return •whichtheGift-taxOfficerhasreasontobelievetobeincorrectorincomplete,theGift-taxOfficermaymakean assessment of the value of the taxable gifts made by such person and determine the gift-tax payable by him, and for this purpose may, be served upon the deceased person if he had survived, require from the executor, administrator or other legal representative of the deceased person any accounts, documents or other evidence which might, under the provisions of section 15 have been required from the deceased person. The provisions of sections 13, 14 and 16 shall apply to an executor, administrator or other legal representative •as they apply to any person referred to in that section.


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4.5.2 Assessment after Partition of a Hindu Undivided FamilyAssessments after partition of HUF are as follows:

Where,atthetimeofmakinganassessment,itisbroughttothenoticeoftheGift-taxOfficerthatapartitionhas•takenplaceamongthemembersofaHinduUndividedFamily,andtheGift-taxOfficer,afterenquiry,issatisfiedthatthejointfamilyproprietyhasbeenpartitionedamongthevariousmembersorgroupsofmembersindefiniteportions, he shall record an order to that effect and he shall make assessments on the amount of taxable gifts made by the family as such as if no partition had taken place and each member or group of members shall be liable jointly and severally for the tax assessed on the value of the taxable gifts made by the joint family as such.WheretheGift-taxOfficerisnotsosatisfied,hemay,byorder,declarethatsuchfamilyshallbedeemedforthe•purposes of this Act to continue to be a Hindu Undivided Family.

4.5.3 Liability in Case of a Discontinued Firm or an Association of PersonsLiabilityincaseofdiscontinuedfirmorassociationofpersons:

Whereafirmorassociationofpersonsliabletopaygift-taxhasbeendiscontinuedordissolved,theGift-taxOfficer•shalldeterminethegift-taxpayablebythefirmorassociationofpersonsassuchasifnosuchdiscontinuanceor dissolution had taken place.IftheGift-taxOfficer,theAppellateAssistantCommissionerortheAppellateTribunalinthecourseofany•proceedingsunderthisActinrespectofanysuchfirmorotherassociationofpersonsasisreferredtoinsub-section(1)issatisfiedthatthefirmorassociationisguiltyofanyoftheactsspecifiedinclause(a)orclause(b) or clause (c) of sub-section (1) of section 17, he or it may impose or direct the imposition of a penalty in accordance with the provisions of that section.Everypersonwhowasatthetimeofsuchdiscontinuanceordissolutionapartnerofthefirmoramemberofthe•association, as the case may be, shall be jointly and severally liable for the amount of tax or penalty payable, and all the provisions of Chapter VII, so far as may be, shall apply to any such assessment or imposition of penalty.

4.6 Appeals, Revisions and ReferencesAppeals, revision and references are listed below:

4.6.1 Appeal to the Appellate Assistant Commissioner from Orders of Gift Tax OfficersAppealtotheappellateassistantcommissionerfromordersofgifttaxofficers:

Any person:•objecting to the value of his taxable gifts determined under this Act; or �objecting to the amount of gift-tax determined as payable by him under this Act; or �denying his liability to be assessed under this Act; or �objectingtoanypenaltyimposedbytheGift-taxOfficerundersection17m,or �objectingtoanyorderoftheGift-taxOfficerundersub-section(2)ofsection20;or �objectingtoanypenaltyimposedbytheGift-taxOfficerundersub-section(1)ofsection46oftheIncome- �tax Act as applied under section 33 for the purposes of gift-tax; may appeal to the Appellate Assistant Commissioneragainsttheassessmentororder,asthecasemaybe,intheprescribedformandverifiedinthe prescribed manner:

Providedthatnoappealshalllieunderclause(f)unlessthetaxhasbeenpaidbeforetheappealisfiled.An appeal shall be presented within thirty days of the receipt of the notice of demand relating to the assessment •or penalty objected to or the date on which any order objected to is communicated to him, but the Appellate AssistantCommissionermayadmitanappealaftertheexpirationoftheperiodaforesaidifheissatisfiedthattheappellanthadsufficientcausefornotpresentingtheappealwithinthatperiod.TheAppellateAssistantCommissionershallfixadayandplaceforthehearingoftheappealandmayfrom•time to time adjourn the hearing.

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The Appellate Assistant Commissioner may:•atthehearingofanappealallowanappellanttogointoanygroundofappealnotspecifiedinthegrounds �of appeal;beforedisposingofanappeal,makesuchfurtherinquiryashethinksfitorcausefurtherinquirytobemade �bytheGift-taxOfficer.

Indisposingofanappeal,theAppellateAssistantCommissionermaypasssuchorderashethinksfitwhich•may include an order enhancing the amount of gift-tax determined or penalty imposed;

Provided that no order enhancing the amount of gift-tax determined or penalty imposed shall be made unless the person affected thereby has been given a reasonable opportunity of showing cause against such enhancement.

A copy of every order passed by the Appellate Assistant Commissioner under this section shall be forwarded •to the appellant and the Commissioner.

4.6.2 Appeal to the Appellate TribunalAppeals to the appellate tribunal are:

Any assessee objecting to an order passed by the Appellate Assistant Commissioner under section 17 or to an •order passed by the Commissioner under section 17 may appeal to the Appellate Tribunal within sixty days of the date on which he is served with notice of such order.TheCommissionermay,ifheisnotsatisfiedastothecorrectnessofanyorderpassedbyanAppellateAssistant•Commissionerundersection22direct theGift-taxOfficer toappeal to theAppellateTribunalagainstsuchorder, and such appeal may be made at any time before the expiry of sixty days of the date on which the order is communicated to the Commissioner.The Appellate Tribunal may admit an appeal after the expiry of sixty days referred to in sub-sections (1) and •(2),ifitissatisfiedthattherewassufficientcausefornotpresentingitwithinthatperiod.AnappealtotheAppellateTribunalshallbeintheprescribedformandshallbeverifiedintheprescribedmanner•and shall, except in the case of an appeal referred to in sub-section (2), be accompanied by a fee of rupees one hundred. The Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders •thereonasitthinksfit,andanysuchordersmayincludeanorderenhancingtheamountofgift-taxdeterminedor penalty imposed.Provided that no order enhancing the amount of gift-tax determined or penalty imposed shall be made unless the •person affected thereby has been given a reasonable opportunity of showing cause against such enhancement.Where the appellant objects to the valuation of any gift, the Appellate Tribunal may, and if the appellant so •requires, shall, refer the question of disputed value to the arbitration of two values, one of whom shall be nominated by the appellant and the other by the respondent, and the Appellate Tribunal shall, so far as that question is concerned pass its order under sub-section (5) conformably to the decision of the valuers:

Provided that if there is a difference of opinion between the two valuers, the matter shall be referred to a third valuer nominated by agreement, or failing agreement, by the Appellate Tribunal, and the decision of that valuer on the questionofvaluationshallbefinal.

The costs of any arbitration proceeding under sub-section (6) shall be borne by the Central Government or the •assessee, as the case may be, at whose instance the question was referred to the values. Provided that where the assessee has been wholly or partially successful in any reference made at his instance, the •extent to which the costs shall be borne by the assessee shall be at the discretion of the Appellate Tribunal. The values may, in disposing off any matter referred to them for arbitration under sub-section (6), hold or cause •tobeheldsuchinquiryastheythinkfit,andaftergivingtheappellantandtherespondentanopportunityofbeingheard,passsuchordersthereonastheythinkfitandshallsendacopyofsuchordertotheAppellateTribunal.A copy of every order passed by the Appellate Tribunal under this section shall be forwarded to the assessee •and the Commissioner.


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Saveasprovidedinsection26,anyorderpassedbytheAppellateTribunalonappealshallbefinal.•The provisions of sub-section (5), (7) and (8) of section 5A of the Income-tax Act shall apply to the Appellate •Tribunal in the discharge of its functions under this Act as they apply to it in the discharge of its functions under the Income-tax Act.

4.6.3 Powers of Commissioner to Revise Orders of Subordinate AuthoritiesPowers of the commissioner to revise orders of subordinate authorities are as follows:

The Commissioner may, either on his own motion or on application made by an assessee in this behalf, call for •the record of any proceeding under this Act in which an order has been passed by any authority subordinate to him, and may make such inquiry or cause such inquiry to be made, and, subject to the provisions of this Act, passsuchorderthereonnotbeinganorderprejudicialtotheassessee,astheCommissionerthinksfit.

Provided that the Commissioner shall not revise any order under this sub-section in any case:

where an appeal against the order lies to the Appellate Assistant Commissioner or to the Appellate Tribunal and •the time within which such appeal can be made has not expired or, in the case of the Appellate Tribunal, the assessee has not waived his right of appeal;where the order is pending in appeal before the Appellate Assistant Commissioner, or has been the subject of •an appeal to the Appellate Tribunal;where the application is made by the assessee for such revision unless•-theapplicationisaccompaniedbyafeeofrupeesthirty-five;and- the application is made within one year from the date of the order sought to be revised or within such further periodas theCommissionermay thinkfit toallowonbeing satisfied that theassesseewaspreventedbysufficientcausefrommakingtheapplicationwithinthatperiod,and

where the order is sought to be revised by the Commissioner on his own motion, if such order is made more •than one year previously.

Explanation- For the purposes of this sub-section:

the Appellate Assistant Commissioner shall be deemed to be an authority subordinate to the Commissioner, �andan order by the Commissioner declining to interfere shall be deemed not to be an order prejudicial to the �assessee

Without prejudice to the provisions contained in sub-section (1) the Commissioner may call for and examine •the record of any proceeding under this Act, and if he considers that any order passed therein by a Gift-tax Officeriserroneousinsofarasitisprejudicialtotheinterestsofrevenue,hemay,aftergivingtheassesseeanopportunity of being heard; and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancement or modifying the assessment or cancelling it and directing a fresh assessment.No order shall be made under sub-section (2) after the expiry of two years from the date of the order sought to •be revised.

4.6.4 Appeal to the Appellate Tribunal from Orders of Enhancement by CommissionerAppeals to the appellate tribunal from orders of enhancement by commissioner are as follows:

Any assessee objecting to an order of enhancement made by the Commissioner under section 24 may appeal to •the Appellate Tribunal within sixty days of the date on which the order is communicated to him.AnappealtotheAppellateTribunalundersub-section(1)shallbeintheprescribedformandshallbeverified•in the prescribed manner and shall be accompanied by a fee of rupees one hundred.The provisions of sub-sections (3) and (5) to (10) inclusive of section 23 shall apply to relation to any appeal •under this section as they apply in relation to any appeal under that section.

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4.6.5 Reference to High CourtReference to high court:

Within ninety days of the date upon which he is served with an order under section 23 or section 25, the assessee •or the Commissioner may present an application in the prescribed form and where the application is by the assessee, accompanied by a fee of rupees one hundred, to the Appellate Tribunal requiring the Appellate Tribunal to refer to the High Court any question of law arising out of such order, and the Appellate Tribunal shall, if in its opinion, a question of law arises out of such order, state the case for the opinion of the High Court.An application under sub-section (1) may be admitting after the expiry of the period of ninety days aforesaid if •theAppellateTribunalissatisfiedthattherewassufficientcausefornotpresentingitwithinthesaidperiod.If on an application made under sub-section (1), the Appellate Tribunal:•

refuses to state a case on the ground that no question of law arises, or �rejects it on the ground that it is time-barred �

The applicant may, within ninety days from the date on which he is served with a notice of refusal or rejection, as thecasemaybe,applytotheHighCourt,andtheHighCourtmayifitisnotsatisfiedwiththecorrectnessofthedecision of the Appellate Tribunal, require the Appellate Tribunal to state the case to the High Court. And on receipt of such requisition the Appellate Tribunal shall state the case: Provided that, if in any case where the Appellate Tribunal has been required by an assessee to state a case the Appellate Tribunal refuses to do so on the ground that no question of law arises, the assessee may, within thirty days from the date on which he receives notice of refusal to state the case, withdraw his application, and if he does so, the fee paid by him under sub-section (1) shall be refunded to him.

The statement to the High Court shall set forth the facts, the determination of the Appellate Tribunal and the •question of law which arises out of the case.IftheHighCourtisnotsatisfiedthatthecaseasstatedissufficienttoenableittodeterminethequestionoflaw•raisedtherebyitmayrequiretheAppellateTribunaltomakesuchmodificationthereinasitmaydirect.The High Court, upon hearing any such case, shall decide the question of law raised therein, and in doing so, •may,ifitthinksfit,altertheformofthequestionoflawandshalldeliverjudgementthereoncontainingthegrounds on which such decision is founded and shall send a copy of the judgement under the seal of the Court and the signature of the Registrar to the Appellate Tribunal and the Appellate Tribunal shall pass such orders as are necessary to dispose of the case conformably to such judgement. Where the amount of any assessment is reduced as a result of any reference to the High Court, the amount, if •any, overpaid as gift-tax shall be refunded with such interest as the Commissioner may arrow, unless the High Court, on intimation given by the Commissioner within thirty days of the receipt of the result of such reference that he intends to ask for leave to appeal to the Supreme Court, makes an order authorising the Commissioner to postpone payment of such refund until the disposal o the appeal in the Supreme Court.The costs of any reference to the High Court shall be in the discretion of the Court.•Section 5 of the Indian Limitation Act, 1908, shall apply to 9 of 1908 an application to the High Court under •this section.

4.6.6 Hearing by High CourtWhen a case has been stated to the High Court under section 26, it shall be heard by a Bench of not less than two Judges of the High Court and shall be decided in accordance with the opinion of such Judges or of the majority of such Judge, if any: Provided that where there is no such majority, the Judges shall state the point of law upon which they differ and the case shall then be heard upon the point only by one or more of the Judges of the High Court, and such point shall be decided according to the opinion of the majority of the Judges who have heard the case including those whofirstheardit.


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4.6.7 Appeal to Supreme CourtAppeal to Supreme Court:

An appeal shall lie to the Supreme Court from any judgement of the High Court delivered on a case stated under •section26inanycasewhichtheHighCourtcertifiesasafitacaseforappealtotheSupremeCourt.Where the judgement of the High Court is varied or reversed on appeal under this section, effect shall be given •to the order of the Supreme Court in the manner provided in sub-section (6) of section 26.The High Court may, on application made to it for the execution of any order of the Supreme Court in respect •of any costs awarded by it, transmit the order for execution to any Court subordinate to the High Court.

4.7 Payment and Recovery of Gift-TaxPayment and recovery of gift tax.

4.7.1 Gift Tax PayableGift-taxshallbepayablebythedonorbutwhereintheopinionoftheGift-taxOfficerthetaxcannotberecoveredfrom the donor, it may be recovered from the donee. Provided that the amount of the tax which may be recovered from the donee shall not exceed that portion of the gift-tax which is attributable to the value of the gift made to the donee by the donor as at the date of the gift.

4.7.2 Gift Tax to be Charged on the Property GiftedGift-taxpayableinrespectofanygiftcomprisingimmovablepropertyshallbeafirstchargeonthatproperty,butanysuchchargeshallnotaffectthetitleofabonafidepurchaserforvaluableconsiderationwithoutnoticeofthecharge. 4.7.3 Notice of DemandWhenanytaxorpenaltyisdueinconsequenceofanyorderpassedunderthisAct,theGift-taxOfficershallserveupon the assessee or other person liable to pay such tax or penalty a notice of demand in the prescribed form specifying the sum so payable and the time within which it shall be payable.

4.7.4 Recovery of Tax and PenaltiesRecovery of tax and penalties:

Anyamountspecifiedaspayableinanoticeofdemandissuedundersection31shallbepaidwithinthetime,•attheplace,andtothepersonmentionedinthenotice,orifnotimeissomentioned,thenonorbeforethefirstday of the second month following the date of service of the notice, and any assessee or other person liable to pay the amount failing so to pay shall be deemed to be in default.Notwithstanding anything contained in this section, where an assessee has presented an appeal under section •22,theGift-taxOfficer,mayinhisdiscretiontreattheassesseeasnotbeingindefaultaslongassuchappealis undisputed of.

4.7.5 Mode of RecoveryThe provisions of sub-sections (1), (1A), (2), (3), (4), (5), (5A), (6) and (7) of section 46 and section 47 of the Income-tax Act shall apply as if the said provisions were provisions of this Act, and referred to gift-tax and sums imposed by way of penalty under this Act instead of income-tax and sums imposed by way of penalty under that Act,andtoGift-taxOfficerandCommissionerofGift-taxinsteadoftoIncome-taxOfficerandCommissionerofIncome-tax.

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4.8 MiscellaneousThe following are the other miscellaneous provisions of the Act.

4.8.1 Rectification of MistakesAtanytimewithinfouryearsfromthedateofanyorderpassedbyhim,theGift-taxOfficer,theAppellateAssistantCommissioner, the Commission and the Appellate Tribunal may, on his own motion rectify mistakes apparent from the recordandshall,withinalikeperiodrectifysuchmistakesbroughttothenoticeoftheGift-taxOfficer,theAppellateAssistant Commissioner, the Commissioner or the Appellate Tribunal, as the case may be, by an assessee. Providedthatnosuchrectificationshallbemade,whichhastheeffectofenhancingtheamountofgift-taxdeterminedunless the assessee has been given a reasonable opportunity of being heard in the matter.

4.8.2 ProsecutionProsecution listed below:

If any person fails without reasonable cause:•to furnish in due time any return of gift under this Act; �to produce, or cause to be produced, on or before the date mentioned in any notice under sub-section (2) or �sub-section (4) of section 15, such accounts, records and documents as are referred to in the notice;tofurnishwithinthetimespecifiedanystatementorinformationwhichsuchpersonisboundtofurnishto �theGift-taxOfficerundersection37;heshall,onconvictionbeforeamagistrate,bepunishablewithfinewhich may extend to rupees ten for every day during which the default continues.

IfapersonmakesastatementinaverificationinanyreturnofgiftsfurnishedunderthisActorinaverification•mentioned in section 22, 23 or 25 which is false, and which he either knows or believes to be false, or does not believe to be true, he shall on conviction before magistrate, be punishable with simple imprisonment which may extendtooneyear,orwithfinewhichmayextendtorupeesonethousandorwithboth.A person shall not be proceeded against for an offence under this section except at the instance of the •Commissioner.The Commissioner may either before or after the institution of proceedings compound any such offence.•

Explanation:Forthepurposesofthissection‘magistrate’meansapresidencymagistrate,amagistrateofthefirstclass or a magistrate of the second class specially empowered by the Central Government to try offences under this Act. 4.8.3 Power to Take Evidence on OathTheGift-taxOfficer,theAppellateAssistantCommissioner,theCommissionerandtheAppellateTribunalshall,forthe purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1958, when trying a suit in respect of the following matters, namely:

enforcing the attendance of any person and examining him on oath;•requiring the discovery and production of documents;•receivingevidenceonaffidavit;•issuingcommissions for theexaminationofwitnesses;andanyproceedingbefore theGift-taxOfficer, the•Appellate Assistant Commissioner, the Commissioner or the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code (45 of 1860).


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4.8.4 Power to Call for InformationWhere, for the purposes of determining the gift-tax payable by any person, it appears necessary for the Gift-tax Officertoobtainanystatementorinformationfromanyperson,theGift-taxOfficermayserveanoticerequiringsuchperson,onorbeforeadatetobethereinspecified,tofurnishsuchstatementorinformationonthepointsspecifiedin the notice, and that person shall, notwithstanding anything in any law to the contrary, be bound to furnish such statementorinformationtotheGift-taxOfficer: Provided that no legal practitioner shall be bound to furnish any statement or information under this section based on any professional communications made to him otherwise than as permitted by section 126 of the Indian Evidence Act, 1872 (4 of 1872).

4.8.5 Effect of Transfer of Authorities on Pending ProceedingsWhenever in respect of any proceeding under this Act any Gift-tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises such jurisdiction, the authority so succeeding may continue the preceding from the stage at which the proceeding was left by his predecessor.

4.8.6 Computation of Period of LimitationIn computing the period of limitation, prescribed for an appeal under this Act or for an application under section 26, the day on which the order complained of was made and the time requisite for obtaining a copy of such order shall be excluded.

4.8.7 Service of NoticeService of notice:

A notice or a requisition under this Act may be served on the person therein named either by post or as if it were •summons issued by a court under the Code of Civil Procedure, 1908 (5 of 1908).Anysuchnoticeorrequisitionmay,inthecaseofafirmoraHinduUndividedFamilybeaddressedtoany•memberofthefirmortothemanageroranyadultmalememberofthefamily,andinthecaseofacompanyorassociationofpersonsbeaddressedtotheprincipalofficerthereof.

4.8.8 Prohibition of Disclosure of InformationProhibition of disclosure of information:

Subject to the provisions contained in sub-section (2), the provisions of section 54 of the Income-tax shall •applytoallaccountsorinrelationtostatements,documents,evidenceoraffidavitsgiven,producedorobtainedin connection with or in the curse of any proceeding under this Act as they apply to or in relation to similar particularsunderthatActsubjecttothemodificationthatthereferencetoany‘Income-taxauthority’inclause(d) of sub-section (3) and to the ‘Commissioner’ in sub-section (5) of section 54 of that Act shall be construed as a reference to any ‘Gift-tax, authority’ and to the ‘Commissioner of Gift-tax’, respectively.Nothing contained in section 54 of the Income-tax Act shall apply to the disclosure of any such particulars as •are referred to in sub-section (1) to any person acting in the execution of this Act or the Income-tax Act, or the Estate Duty Act, 1953 (34 of 1953), or the Wealth-tax Act, 1957 (27 of 1957), or the Expenditure-tax Act, 1957 (29 of 1957), where it is necessary or desirable to disclose the same to him for the purposes of this Act or any of the other Acts aforesaid.

4.8.9 Bar of Suits in Civil CourtNo suit shall lie in any civil court to set aside or modify any assessment made under this Act, and no prosecution, suitorotherlegalproceedingshalllieagainstanyofficeroftheGovernmentforanythingingoodfaithdoneorintended to be done under this Act.

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4.8.10 Appearance before Gift-tax Authorities by Authorised RepresentativesAny assessee who is entitled to or required to attend before any Gift-tax authority or the Appellate Tribunal in connection with any proceeding or inquiry under this Act, except where he is required under this Act, to attend in person, may attend by a person authorised by him in writing in this behalf, being a relative of, or a person regularly employed by, the assessee or a legal practitioner or a chartered accountant or any other person having suchqualificationsasmaybeprescribed. Explanation - For the purposes of this section:

Theexpression‘apersonregularlyemployedbytheassessee’includesanyofficerofascheduledbankwith•which the assessee maintains a current account or has other regular dealings.‘Charteredaccountant’meansacharteredaccountantasdefinedintheCharteredAccountantsAct,1949(38•of 1949).

4.8.11 Agreement for Avoidance or Relief of Double Taxation with Respect to Gift TaxThe Central Government may enter into any agreement with the Government of any reciprocating country for the avoidance or relief of double taxation with respect to gift-tax payable under this Act and under the corresponding lawinforceinthereciprocatingcountryandmay,bynotificationintheOfficialGazette,makesuchprovisionsasmay be necessary for implementing the agreement. Explanation- The expression ‘reciprocating country’ for the purposes of this Act means any country which the Central Governmentmay,bynotificationintheOfficialGazette,declaretobeareciprocatingcountry. 4.8.12 Act Not to Apply in Certain CasesThe provisions of this Act shall not apply to gifts made by:

AGovernmentcompanyasdefinedinsection617oftheCompaniesAct1956(1of1956);•a corporation established by a Central, State or Provincial Act;•anycompany(otherthanaprivatecompanyasdefinedinsection3oftheCompaniesAct,1956)•

Providedthattheaffairsofthecompanyorthesharesinthecompanycarryingmorethanfiftypercentofthetotalpower were at no time during the previous year controlled or held by less than six persons;

a company which is a subsidiary of and in which more than half the nominal value of equity share capital is •held by a company referred to in clause (c);any institution or fund the income whereof is exempt from income-tax under clause (i) of sub-section (3) of •section 4 of the Income-tax Act.

Explanation: For the purpose of computing the number of six persons referred to in the proviso to clause (c), persons who are related to one another as husband and wife, brother and sister, brothers, sisters or who are lineal descendants or ascendants of one another and persons who are nominees of any other person together with that other person shall be treated as a single person. 4.8.13 Power to Make RulesPower to make rules:

TheBoardmay,bynotificationintheOfficialGazette,makerulesforcarryingoutthepurposesofthisAct.•In particular, and without prejudice to the generality of the foregoing power, rules made under this section may •provide for:

the manner in which the value of any property may be determined; �theforminwhichreturnsunderthisActshallbemadeandthemannerinwhichtheyshallbeverified; �the form in which appeals and applications under this Act may be made, and the manner in which they �shallbeverified;


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the form of any notice of demand under this Act; �therefundsofgift-taxpaidinrespectofgiftswhicharerevokedonthehappeningofanyspecifiedevent �which does not depend on the will of the donor or of any amount paid under section 18;the areas for which lists of values may be drawn up; �any other matter which has to be, or may be, prescribed for the purposes of this Act. �

Thepowertomakerulesconferredbythissectionshallonthefirstoccasionoftheexercisethereofinclude•the power to give retrospective effect to the rules or any of them from a date not earlier than the date of commencement of this Act.All rules made under this Act shall be laid before each House of Parliament as soon as may be after they are •madeandshallbesubjecttosuchmodificationsasParliamentmaymakeduringthesessioninwhichtheyareso laid or the session immediately following.

4.9 The Schedule 4.9 1 Rates of Gift-TaxRates of gifted tax are as follows: Rate of gift tax

OnthefirstRs.50,000ofthevalueofalltaxablegifts 4%•On the next Rs.50,000 of the value of all taxable gifts 6%•On the next Rs.50,000 of the value of all taxable gifts 8%•On the next Rs.50,000 of the value of all taxable gifts 10%•On the next Rs.1,00,000 of the value of all taxable gifts 12%•On the next Rs.2,00,000 of the value of all taxable gifts 15%•On the next Rs.5,00,000 of the value of all taxable gifts 20%•On the next Rs.10,00,000 of the value of all taxable gifts 25%•On the next Rs.10,00,000 of the value of all taxable gifts 30%•On the next Rs.20,00,000 of the value of all taxable gifts 35%•On the balance of the value of all taxable gifts. 40%•

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SummaryGift tax in India is regulated by the Gift Tax Act which was constituted on April 1, 1958.•It came into effect in all parts of the country except Jammu and Kashmir.• ‘Gift’ means the transfer by one person to another of any existing movable or immovable property made •voluntarily and without consideration in money or money’s worth.‘Donee’ means any person who acquires any property under a gift, and, where a gift is made to a trustee for the •benefitofanotherpersonincludesboththetrusteeandthebeneficiary.‘Donor’ means any person who makes a gift.•EveryIncome-taxOfficerhavingjurisdictionexercisingpowersassuchundertheIncome-taxActinrespectof•anypersonshallperformthefunctionsofaGift-taxOfficerunderthisActinrespectofthatperson.TheGift-taxOfficers shall be subordinate to theCommissioner ofGift-tax and the InspectingAssistant•Commissioner of Gift-tax within whose jurisdiction they perform their functions.All officers andother persons employed in the executionor thisAct shall observe and follow the orders,•instructions and directions of the Board.If any person has not furnished a return within the time allowed under section 13, or having furnished a return •under that section, discovers any omission or a wrong statement therein, he may furnish a return or a revised return, as the case may be, at any time before the assessment is made.When a case has been stated to the High Court under section 26, it shall be heard by a Bench of not less than •two Judges of the High Court and shall be decided in accordance with the opinion of such judges or of the majority of such judge, if any.Gift-taxshallbepayablebythedonor,butwhereintheopinionoftheGift-taxOfficerthetaxcannotberecovered•from the donor, it may be recovered from the donee.Gift-taxpayableinrespectofanygiftcomprisingimmovablepropertyshallbeafirstchargeonthatproperty,•butanysuchchargeshallnotaffectthetitleofabonafidepurchaserforvaluableconsiderationwithoutnoticeof the charge.WhenanytaxorpenaltyisdueinconsequenceofanyorderpassedunderthisAct,theGift-taxOfficershall•serve upon the assessee or other person liable to pay such tax or penalty a notice of demand in the prescribed form specifying the sum so payable and the time within which it shall be payable.Whenever in respect of any proceeding under this Act any Gift-tax authority ceases to exercise jurisdiction and •is succeeded by another who has and exercises such jurisdiction, the authority so succeeding may continue the preceding from the stage at which the proceeding was left by his predecessor.In computing the period of limitation, prescribed for an appeal under this Act or for an application under section •26, the day on which the order complained of was made and the time requisite for obtaining a copy of such order shall be excluded.The expression ‘reciprocating country’ for the purposes of this Act means any country which the Central •Governmentmay,bynotificationintheOfficialGazette,declaretobeareciprocatingcountry.

ReferencesThe Gift-Tax Act, 1958. • [Pdf] Available at: <http://www.rfhha.org/images/pdf/Hospital_Laws/GIft_Tax_Act_1958.pdf> [Accessed 29 July 2013].Taxability of Gifts under the Income Tax Act, 1961. • [Pdf] Available at: <http://tpaindore.com/Taxability%20of%20Gift%20-%20Article[1].pdf> [Accessed 29 July 2013].Gale, W. G., Hines, J. R., & Slemrod, J., 2001. • Rethinking Estate and Gift Taxation. Brookings Institution Press, Washington.Rajeev, P. V., 1991. • Resource Mobilization in India and Pakistan. Deep and Deep Publications, New Delhi.


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Gift under IT Act. • [Video online] Available at: <http://www.youtube.com/watch?v=_d1uWv5jnLc> [Accessed 29 July 2013].Preparing a gift tax valuation using ESI-APPRAISE. • [Video online] Available at: <http://www.youtube.com/watch?v=A1a73-cUcDs> [Accessed 29 July 2013].

Recommended ReadingSreekantaradhya, B.S., 2000. • Structure and Reform of Taxation in India. Deep and Deep Publications, New Delhi.Jha, S. M., 1990. • Taxation and the Indian Economy. Deep and Deep Publications, New Delhi.Rhodes, J., 2011. • Private Client Tax: Jurisdictional Comparisons. Sweet & Maxwell, London.

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Self Assessment‘Gift’ means transfer by one person to another of any existing ___________or ___________ property made 1. voluntarily and without consideration in money or money’s worth.

movable, immovablea. tangible, intangibleb. little, morec. new, oldd.

‘__________’ means any person who acquires any property under a gift, and, where a gift is made to a trustee 2. forthebenefitofanotherpersonincludesboththetrusteeandthebeneficiary.

Donora. Giftb. Doneec. Gift taxd.

Gift tax in India is regulated by the Gift Tax Act which was constituted on _____________.3. April 1, 1947a. April 1, 1950b. April 1, 1949c. April 1, 1958d.

Gift-taxpayable in respectof anygift comprising______________property shallbeafirst chargeon that4. property,butanysuchchargeshallnotaffectthetitleofabonafidepurchaserforvaluableconsiderationwithoutnotice of the charge.

movablea. immovableb. variablec. impermanentd.

‘________’ means any person who makes a gift.5. Donora. Gifttaxofficerb. Doneec. Contributord.

Every____________-taxOfficerhavingjurisdictionexercisingpowersassuchundertheIncome-taxActin6. respectofanypersonshallperformthefunctionsofaGift-taxOfficerunderthisActinrespectofthatperson.

Directa. Wealthb. Giftc. Incomed.


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Which of the following statement is false? 7. IftheGift-taxOfficerissatisfiedwithoutrequiringthepresenceoftheassesseeortheproductionbyhimofa. any evidence that a return made under section 13 or section 14 is complete, he shall assess the value of the taxable gifts made by the assessee and determine the amount payable by him as gift-tax.IftheGift-taxOfficerisverysatisfied,heshallserveanoticeontheassesseeeithertoattendinpersonathisb. officeonadatetobespecifiedinthenoticeortoproducercausetobeproducedonthatdateanyevidenceon which the assessee may rely in support of his return.TheGift-taxOfficer,afterhearingsuchevidenceasthepersonmayproduceandsuchotherevidenceashec. mayrequireonanyspecifiedpointsshall,byorderinwriting,assessthevalueoftaxablegiftsmadebytheassessee and determine the amount payable by him as gift-tax.ForthepurposeofmakinganassessmentunderthisAct,theGift-taxOfficermayserveonanypersonwhod. has made a return under sub-section (1) of section 13 or section 14, or upon whom a notice has been served under sub-section (2) of section 13, a notice requiring him to produce or cause to be produced on a date specifiedinthenoticesuchaccounts,recordsorotherdocumentsastheGift-taxOfficermayrequire.

If any person has not furnished a return within the time allowed under____________, or having furnished a 8. return under that section, discovers any omission or a wrong statement therein, he may furnish a return or a revised return, as the case may be, at any time before the assessment is made?

section 14a. section 26b. section 13c. section 15d.

Which of the following statement is true?9. The statement to the High Court shall set forth the facts, the determination of the Appellate Tribunal and a. the question of law which arises out of the case.IftheHighCourtissatisfiedthatthecaseasstatedissufficienttoenableittodeterminethequestionoflawb. raisedtherebyitmayrequiretheAppellateTribunaltomakesuchmodificationthereinasitmaydirect.The costs of any reference to the High Court shall not be in the discretion of the Court.c. Section 5 of the Indian Limitation Act, 1900, shall apply to 9 of 1908,an application to the High Court under d. this section.

Every person who during a previous year has made any taxable gifts shall, before the __________day of June 10. ofthecorrespondingassessmentyear,furnishtotheGift-taxOfficerareturnintheprescribedformandverifiedin the prescribed manner.

tentha. fifteenthb. thirtiethc. firstd.

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Chapter V

Custom Duties

Aim


introduce the concept of customs duty•

explicate the meaning of customs duty•

elucidate the development of customs law•

Objectives


explicate the scope and coverage of customs law•

definetheconceptsundercustomsact•

explain the nature of customs duty•

Learning outcome


enlist various types of customs duties•

understandtheclassificationandvaluationofgoods•

describe the rate of customs duties applicable•


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5.1 IntroductionThe Constitution of India (Article 265) lays down that no tax shall be levied or collected except by authority of law. The law for the levy and collection of customs duties is the Customs Act, 1962. This legislation has been enacted by Parliament in exercise of the exclusive power vested in it under Article 246 read with Entry 83 of list-I of the Seventh Schedule of the Constitution. The customs duties are major tax revenue for the Union Government and constitute around 30% of its total tax revenues. Together with central excise duties, the contribution amounts to nearly three-fourth of total tax revenue of the Union Government.

5.2 An Overview of Customs LawCustoms duties are probably the oldest form of taxation in India. They are as old as international trade itself. Just asdomesticproductionflowsprovidethebaseforexcisetaxation,soalsointernationaltradeflowsarethebasisforcustoms duties.

5.2.1 Meaning of Customs DutyCustoms duty is a duty or tax, which is levied by Central Government on import of goods into, and export of goods from, India. It is collected from the importer or exporter of goods, but its incidence is actually borne by the consumer of the goods and not by the importer or the exporter who pay it.

These duties are usually levied with ad valorem rates and their base is determined by the domestic value of the importedgoods calculated at theofficial exchange rate.Similarly, export duties are imposedon export valuesexpressed in domestic currency

5.2.2 Development of Customs LawThere is historical evidence of imposition of import duty during the ancient and medieval era, the development of organisedtaxationonimportsandexportstoitspresentform,originatedin1786,whenBritishersformedthefirstBoard of Revenue in Calcutta. In 1808, a New Board of Trade was established. The provincial import duties were replaced by uniform Tariff Act through Customs Duties Act, 1859 which was made applicable to all territories in the country. The general rate of duty was 10%, which was subsequently revised to 7.5% in 1864. Several revisions in the Customs policy and tariff took place during subsequent years, though such revisions were mainly related to the textile products.

Sea Customs Act was passed by Government in 1878. The Indian Tariff Act was passed in 1894. Air customs having been covered under the India Aircrafts Act of 1911, the Land Customs Act was passed in 1924. The Indian Customs Act, 1934, governed the Customs Tariff.

After Independence, the Sea Customs Act and other allied enactments were repealed by a consolidating and amending legislation, the Customs Act, 1962 (CA). Similarly, the Act of 1934 was repealed by the Customs Tariff Act, 1975(CTA).

5.2.3 Scope and Coverage of Customs LawThere are two Acts, which form part of Customs Law in India, namely, the Customs Act.1962, and Customs Tariff Act, 1975:

The Customs Act, 1962The Customs Act, 1962 is the basic Act for levy and collection of customs duty in India. It contains various provisions relating to imports and exports of goods and merchandise as well as baggage of persons arriving in India. The main purpose of Customs Act, 1962 is the prevention of illegal imports and exports of goods. The Act extends to the whole of the India. It was extended to Sikkim w.e.f. 1st October 1979.

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The Customs Tariff Act, 1975TheCustomsDutyisleviedongoodsimportedorexportedfromIndiaattheratesspecifiedundertheCustomsTariffAct,1975.TheActcontainstwoschedules-Schedule1givesclassificationandrateofdutiesforimports,whileschedule2givesclassificationandratesofdutiesforexports.InthepresentAct,theTariffSchedulewasreplacedin 1986. The new Schedule is based on Harmonised System of Nomenclature (HSN), the internationally accepted Harmonised Commodity Description and Coding System

5.2.4 Objects of Customs DutyThe customs duty is levied, primarily, for the following purpose:

To raise revenue.•To regulate imports of foreign goods into India.•To conserve foreign exchange, regulate supply of goods into domestic market.•To provide protection to the domestic industry from foreign competition by restricting import of selected goods •and services, import licensing, import quotas, and outright import ban.

5.3 Nature of Customs DutyEntry 82 of List-I (Union List) to the Schedule-VII reads as under 82 ‘Duties of Customs including Export duties’.

Thus, the levy of duty on imports and exports is subject matter of Union and the parliament derives power to make laws related to the duties of customs. Accordingly, the Customs Act, 1962 was enacted by the Parliament.

Section12oftheCustomsActprovidesthatdutiesofcustomsshallbeleviedatsuchratesasmaybespecifiedunderthe Customs Tariff Act, 1975 or any other law for the time being in force, on goods imported into or exported from India. Goods become liable to duty if there is import into and export from India.

5.3.1 Taxable EventGoods become liable to import duty or export duty when there is ‘import into, or export from India.‘Import’,asdefinedinsection2(23),means‘bringingintoIndiafromaplaceoutsideIndia’.

‘Export’,asdefinedinsection2(18),meanstakingoutofIndiatoaplaceoutsideIndia’.

‘India’isdefinedinsection2(27)toincludetheterritorialwatersofIndia.

ThedefinitionofIndiaisaninclusivedefinition.ArticleIoftheConstitutionofIndiadefines‘India’asUnionofStates.GeneralClausesActdefinesIndiatomeanallterritoriesforthetimebeingcomprisedinIndia.

5.3.2 Territorial Water of IndiaTerritorial waters mean that portion of sea, which is adjacent to the shores of a country. As per section 3 of the Territorial waters, Continental Shelf, Exclusive Economic Zones and Maritime Zones Act, 1978, territorial waters of India extend upto 12 nautical miles from the baseline on the coast of India and include any gulf, harbour, creek or tidal river.

Earlier, the territorial waters of India extended upto the 6 nautical miles from the baseline, but it was extended upto12nauticalmiles(1NM1.83kms)in1967.ThisdefinitioniswellinaccordancewiththeArticle3oftheUNConventionontheLawofSea,whichdefinesterritorialsea.

The determination of territorial waters is important for determination of the chargeability of the customs duty, as the entry of goods into the territorial waters is a taxable event.


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5.3.3 Indian Customs WaterSection2(28)defines‘Indiancustomswaters’tomeanthewatersextendingintotheseauptothelimitofcontiguouszone of India under section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and includes any bay, gulf, harbour, creek or tidal river.

Contiguous zone of India comes immediately after the territorial waters of India (i.e., after 12 nautical miles from the baseline) and extends upto 24 nautical miles. Thus, Indian customs water extends upto 12 nautical miles beyond the territorial waters of India. The determination of Indian customs waters is necessary in view of certain provisions oftheCustomsAct,whichempowertheCustomsOfficers:

To arrest a person in India or within the Indian customs water;( section 1041)•To stop and search any vessel in India or within the Indian customs water; (section 1061)•Tofireand/orconfiscatethevessel,ifitdoesnotstop;(section115),etc.•

5.3.4 Types of Customs DutiesWhile Customs Duties include both import and export duties, but as export duties contributed only nominal revenue, due to emphasis on raising competitiveness of exports, import duties alone constituted major part of the revenue from customs duties. The import duties are imposed under The Customs Act, 1962 and Customs Tariff Act, 1975. The structure of customs duties includes the following:

Basic customs dutyAll goods imported into India are chargeable to a duty under Customs Act,1962.The rates of this duty, popularly known as basic customs duty, are indicated in the First Schedule of the Customs Tariff Act, 1975 as amended from timetotimeunderFinanceActs.Thedutymaybefixedonadvalorembasisorspecificratebasis.Thedutymaybeapercentageofthevalueofthegoodsorataspecificrate.TheCentralGovernmenthasthepowertoreduceorexempt any good from these duties.

Auxiliary duty of customsThis duty is levied under the Finance Act and is leviable on all goods imported into the country at the rate of 50 per cent of their value. However, this statutory rate has been reduced in the case of certain types of goods into different slab rates based on the basic duty chargeable on them.

Additional (Countervailing) duty of customsThis countervailing duty is leviable as additional duty on goods imported into the country and the rate structure of this duty is equal to the excise duty on like articles produced in India. The base of this additional duty is c.i.f. value of imports plus the duty levied earlier. If the rate of this duty is on ad-valorem basis, the value for this purpose will be the total of the value of the imported article and the customs duty on it (both basic and auxiliary).

Export dutiesUnder Customs Act, 1962, goods exported from India are chargeable to export duty The items on which export duty is chargeable and the rate at which the duty is levied are given in the customs tariff act,1975 as amended from time to time under Finance Acts. However, the Government has emergency powers to change the duty rates and levy fresh export duty depending on the circumstances.

CessesCessesareleviableonsomespecifiedarticlesofexportslikecoffee,coir,lac,mica,tobacco(unmanufactured),marineproducts cashew kernels, black pepper, cardamom, iron ore, oil cakes and meals, animal feed and turmeric. These cesses are collected as parts of customs duties and are then passed on to the agencies in charge of the administration of the concerned commodities.

Education cess on customs dutyAn education cess has been imposed on imported goods w.e.f. 9-7-2004. The cess will be 2% of the aggregate duty of customs excluding safeguard duty, countervailing duty, Anti-dumping duty.

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Protective dutiesTariff Commission has been established under Tariff Commission Act, 1951. If the Tariff Commission recommends andCentralGovernmentissatisfiedthatimmediateactionisnecessarytoprotectinterestsofIndianindustry,protectivecustoms duty at the rate recommended may be imposed under section 6 of Customs Tariff Act. The protective duty willbevalidtillthedateprescribedinthenotification.

Countervailing duty on subsidised goodsIf a country pays any subsidy (directly or indirectly) to its exporters for exporting goods to India, Central Government can impose Countervailing duty (CVD) up to the amount of such subsidy under section 9 of Customs Tariff Act.

Anti -dumping duty on dumped articlesOften, large manufacturer from abroad may export goods at very low prices compared to prices in his domestic market. Such dumping may be with intention to cripple domestic industry or to dispose of their excess stock. This is called ‘dumping’. In order to avoid such dumping, Central Government can impose, under section 9A of Customs Tariff Act, anti-dumping duty upto margin of dumping on such articles, if the goods are being sold at less than its normal value. Levy of such anti-dumping duty is permissible as per WTO (World Trade Organisation) agreement. Anti-dumping action can be taken only when there is an Indian industry producing ‘like articles’.

Safeguard dutyCentralGovernmentisempoweredtoimpose‘safeguardduty’onspecifiedimportedgoodsifCentralGovernmentissatisfiedthatthegoodsarebeingimportedinlargequantitiesandundersuchconditionsthattheyarecausingorthreatening to cause serious injury to domestic industry. Such duty is permissible under WTO agreement. Safeguard duty is a step in providing a need-based protection to domestic industry for a limited period, with ultimate objective of restoring free and fair competition

National Calamity Contingent DutyA National Calamity Contingent Duty (NCCD) of customs has been imposed vide section 129 of Finance Act, 2001. This duty is imposed on pan masala, chewing tobacco and cigarettes. It varies from 10% to 45%. NCCD of customs of 1% was imposed on PFY(Polyester Filament Yarn), motor cars, multi utility vehicles and two wheelers and NCCD of Rs 50 per ton was imposed on domestic crude oil vide section 134 of Finance Act, 2003.

5.3.5 Rate of Duty ApplicableThere are different rates of duty for different goods there are different rates of duty for goods imported from certain countries in terms of bilateral or other agreement with such countries which are called preferential rate of duties the dutymaybepercentageofthevalueofthegoodsoratspecifiedrate.

Provisions in respect of rate of duty are as follows.

Basic customs duty TherateofcustomsdutyapplicablewillbeasprovidedinCustomsAct,subjecttoexemptionnotifications,ifany,applicable. In case of imports from preferential area, the preferential rate is applicable, if mentioned in the Tariff. It isneedlesstomentionthatifpartialorfullexemptionhasbeengrantedbyanotification,theeffectiverate(aspernotification)willapplyandnotthetariffrate(asmentionedinCustomsTariff).

Rate for additional duty Rate for additional duty (CVD) will be as mentioned in Central Excise Tariff Act, subject to any general exemption notification.Anyspecificexemptionnotification (e.g., exemption togoodsmanufacturedbySSIunitorgoodsmanufactured without aid of power) is not considered while calculating CVD.


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5.4 Definitions and ConceptsDefinitionsconceptsundertheCustomsAct.

Bill of entryThis is a very vital and important document which every importer has to submit under section 46. Bill of entry shouldbesubmittedinquadruplicate–originalandduplicateforcustoms,triplicatefortheimporterandfourthcopy is meant for bank for making remittances.

BaggageThetermhasnotbeendefinedassuch.However,followingmaybenoted:

Baggage means all dutiable articles, imported by a passenger or a member of a crew in his baggage. •Un-accompanied baggage, if despatched previously or subsequently within prescribed period is also covered. •Baggage does not include motor vehicles, alcoholic drinks and goods imported through courier. •Baggage does not include articles imported under an import licence for his own use or on behalf of others.•

Customs stationImportedgoodsarepermittedtobeunloadedonlyatspecifiedplaces.Similarly,goodscanbeexportedonlyfromspecifiedarea.Inviewofthis,adefinitionof‘Customsstation’isimportant.Customsstationmeans:

customs port •inland container depot •customs airport •land customs station•

Customs areaCustoms area means all area of Customs Station and includes any area where imported goods or export goods are ordinarily kept pending clearance by customs authorities. Thus, ‘Customs Area’ could include some area even outside the ‘Customs Station’.

DrawbackDrawback means the rebate of duty chargeable on any imported materials or excisable materials used in manufacture or processing of goods which are manufactured in India and exported.

EntryEntry in relation to goods means an entry made in a Bill of Entry, Shipping Bill or Bill of Export. It includes:

Label or declaration accompanying the goods which contains description, quantity and value of the goods, in •case of postal articles u/s 82. Entry to be made in case of goods to be exported.•Entry in respect of goods imported which are not accompanied by label or declaration made as per provisions •of section 84. [Section 2(16)].

ExporterExporter in relation to any goods at any time between their entry of export and the time when they are exported includes any owner or any person holding himself out to be the exporter. [2(20)]

GoodsCustoms duty is on ‘goods’ as per section 12 of Customs Act. The duty is payable on goods belonging to government aswellasgoodsnotbelongingtoGovernment.Section2(22),givesinclusivedefinitionof‘goods’as:‘Goods’ include:

vessels, aircrafts and vehicles•stores •baggage•

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currency and negotiable instruments •any other kind of movable property•

Thus, ships or aircrafts brought for use in India or for carrying cargo for ports out of India would be dutiable. DefinitionofgoodshasbeenkeptquitewideasCustomsActisusednotonlytocollectdutyon‘goods’butalsotorestrict/prohibit import or export of ‘goods’ of any description. Main two tests for ‘goods’ are

they must be movable •they must be marketable•

The very fact that goods are transported by sea/air/road means, that they are movable. Since most of imports are on paymentbasis,testof‘marketability’isobviouslysatisfied.

Dutiable goods Section2(14)define‘dutiablegoods’asanygoodswhicharechargeabletodutyandonwhichdutyhasnotbeenpaid. Thus, goods continue to be ‘dutiable’ till they are not cleared from the port. However, once goods are assessed at ‘Nil’ rate of duty, they no more remain ‘dutiable goods’.

Imported goods Section2(25)define‘importedgoods’asanygoodsbroughtinIndiafromaplaceoutsideIndia,butdoesnotincludegoods which have been cleared for home consumption. Thus, once goods are cleared by customs authorities from customs area, they are no longer ‘imported goods’. (Though in common discussions, goods cleared from customs are also called ‘imported goods’).

Export goods As per section 2(19) of Customs Act, ‘export goods’ means, any goods which are to be taken out of India to a place outside India. Goods brought near customs area for export purpose will be ‘export goods’. Note that once goods leave Indian Territory, Indian laws have no control over them and hence the term ‘exported goods’ has not been usedordefined.

ImporterImporter, in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner or any person holding himself out to be the importer. [2(26)]Person-in-charge means:

in relation to a vessel, the master of the vessel•in relation to an aircraft, the commander or pilot-in-charge of the aircraft•in relation to a railway train, the conductor, guard or other person having the chief direction of the train•in relation to any other conveyance, the driver or other person-in-charge of the conveyance. [2(31)]•

Prohibited goodsProhibited goods means any goods the import or export of which is subject to any prohibition under this Act or any other law for the time being in force but does not include any such goods in respect of which the conditions subject to which the goods are permitted to be imported or exported have been complied with. [2(33)]

StoresStores means goods for use in a vessel or aircraft and includes fuel and spare parts and other articles of equipment, whetherornotforimmediatefitting.[2(38)]


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5.5 Classification and ValuationClassificationandvaluationareasfollows:

5.5.1 Classification of GoodsClassificationsofgoodsaredoneunderaparticularheadingof theImportTariffgovernedbyasetofGeneralInterpretativeRules,whichformsanintegralpartoftheCTA.AspertheseRules,classificationistodetermineaccording to the terms of the Headings or Sub-headings or Chapter Notes These Rules also provide that completed unfinishedarticleistobeclassifiedascompleteorfinishedart.Ithasanessentialcharacterofthelatterarticle.Similarlyanun-finishedarticleimportedinanunassembledordisassembledconditiontobeclassifiedacompleteorfinishedarticleandnotasparts.TherulesalsoprovidefortheclassificationofmixturesandcompositegoodsconsistingofdifferentmaterialsormadetoofdifferentarticlesOncetheclassificationisdeterminedundertheImportTariff,thedeterminationclassificationundertheCentralExciseTariffforthep1irposoflevyofcountervailingdutyequal to the excise duty is a simple affair as both the Tariff are, more or less, aligned with the HSN.

5.5.2 Valuation of GoodsCustoms duty is payable as a percentage of ‘Value’ often called ‘Assessable Value’ or ‘Customs Value’. The Value may be either:

‘Value’asdefinedinsection14(1)ofCustomsActor•Tariff value prescribed under section 14 (2) of Customs Act.•

Tariffvalue-TariffValuecanbefixedbyCBE&C(CentralBoardofExciseandCustoms)foranyclassofimportedgoodsorexportgoods.Governmentshouldconsidertrendofvalueofsuchorlikegoodswhilefixingtariffvalues.Oncesofixed,dutyispayableaspercentageofthisvalue.(ThepercentageapplicableisasprescribedinCustomsTariff Act).

Customs value as per section 14 (1)-CustomsValuefixedaspersection14(1)isthe‘Value’normallyusedforcalculating customs duty payable (often called ‘customs value’ or ‘Assessable Value’).

Section 14 (1) provide following criteria for deciding ‘Value’ for purpose of Customs Duty:Price at which such or like goods are ordinarily sold or offered for sale•Price for delivery at the time and place of importation or exportation•Price should be in course of international trade•Seller and buyer have no interest in the business of each other or one of them has no interest in the other•Price should be sole consideration for sale or offer for sale•RateofexchangeasondateofpresentationofBillofEntryasfixedbyCBE&C(Board)bynotificationshould•be considered

This criterion is fully applicable for valuing export goods. However, in case of imported goods, valuation is required to be done according to valuation rules:

Valuation has to be on the basis of condition at the time of import. CVD should be levied on goods in the stage •in which they are imported. The stage subsequent to processing of goods is not relevant. It is well settled that the imported goods have to be assessed to duty in the condition in which they are •imported.

Valuation rules for imported goodsValuation in Customs Act has to be done as per valuation rules. These rules are based on ‘WTO Valuation Agreement’ (Earlier termed as GATT Valuation Code). These rules are only for valuation of imported goods and not applicable to export goods.

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The value of imported goods for purposes of assessment of duly is determined in accordance with the provisions of Section 14 of 1962 and the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, which were brought into force on 16th August, 1988.

Rule 3(i) of the Valuation Rules provides that the value of imported goods shall be the. ‘Transaction value’ under Rule4‘Transactionvalue’hasbeendefinedasthepriceactuallypaidorpayableforthegoodswhensoldforexportto India, adjusted in accordance with the provisions of Rule 9. The adjustments under Rule 9 provide, inter alia, the addition in all cases, of freight and cost of insurance to the ‘transaction value’ if not already included and also for the addition of loading, unloading and handling charges for purposes of assessment. In other words, the assessable value is the safe price of the imported goods plus the landing charges subject to any other adjustment which may be necessary under the provisions of the Rule. If the value cannot be determined under Rule 3(i), the value is to be determined under Rules 5 to 8, which are required to be in that order.

The rate of exchange applicable for conversion of foreign currency in Indian currency is the rate in force on the dateofpresentationoftheBillEntryunderSection46.SuchexchangeratesarenotifiedbytheGovernmentfromtimetotimebynotificationsissuedunderclausea(i)ofSection14(3).

Customs value – inclusionsSome costs, services and expenses are to be added to the price paid or payable, if these are not already included in the invoice price. Rule 9 of Customs Valuation Rules provide that following cost and services are to be added:

Commission and brokerage•Cost of container, which are treated as being one with the goods for customs purposes•Cost of packing whether labour or materials•Materials, components, tools, dies etc., supplied by buyer•Royalties and license fees•Value of proceeds of subsequent sales•Other payment as condition of sale of goods being valued•Cost of transport up to place of importation•Landing charges•Cost of insurance•

Exclusions from assessable valueNote to rule 4 provide that following charges shall be excluded:

Charges for construction, erection, assembly, maintenance or technical assistance undertaken after importation •of plant, machinery or equipmentCost of transport after importation•Duties and taxes in India•

Methods of valuation for customsThe Valuation Rules, 1988, based on WTO Valuation Agreement (earlier GATT Valuation Code); consist of rules providing six methods of valuation.

The methods are:Transaction value of imported goods•Transaction value of identical goods•Transaction value of similar goods•Deductive value, which is based on identical or similar imported goods, sold in India•Computedvalue,whichisbasedoncostofmanufactureofgoodsplusprofits•Residual method based on reasonable means and data available•


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These are to be applied in sequential order, i.e., if method one cannot be applied, then method two comes into force and when method two also cannot be applied, method three should be used and so on. The only exception is that the ‘computed value’ method may be used before ‘deductive value’ method, if the importer requests and Assessing Officerpermits.

Transaction value of same goodsThisisthefirstandprimarymethodasperrule3ofValuationRules.Asperrule4(1),‘transactionvalue’ofimportedgoods shall be the price actually paid or payable for the goods when sold for exported to India, adjusted in accordance with provisions of rule 9. [Rule 9 gives costs and services to be added to transaction value].

Transaction value of identical goodsRule 5 of Customs Valuation Rules provide that if valuation on the basis of ‘transaction value’ is not possible, the ‘assessable value’ will be decided on basis of transaction value of identical goods sold for export to India and importedatoraboutthesametime,subjecttomakingnecessaryadjustments.IdenticalgoodsaredefinedunderRule2(1)(c)asthosegoodswhichfulfilallfollowingconditions,i.e.,

The goods should be same in all respects, including physical characteristics, quality and reputation; except for •minor differences in appearance that do not affect value of goods.The goods should have been produced in the same country in which the goods being valued were produced.•They should be produced by same manufacturer who has manufactured goods under valuation - if price of such •goods are not available, price of goods produced by another manufacturer in the same country.

Transaction value of similar goodsIffirstmethodoftransactionvalueofthegoodsorsecondmethodoftransactionvalueofidenticalgoodscannotbe used, rule 6 provide for valuation on basis of ‘Transaction value of similar goods imported at or about the same time’.Rule2(1)(e)define‘similargoods’as:

alike in all respects, have like characteristics and like components and perform same functions. These should •be commercially inter-changeable with goods being valued as regards quality, reputation and trade mark.the goods should have been produced in the same country in which the goods being valued were produced•theyshouldbeproducedbythesamemanufacturerwhohasmanufacturedgoodsundervaluation–iftheprice•of such goods are not available, price of goods produced by another manufacturer in the same country can be considered

Deductive valueRule 7 of Customs Valuation Rules provide for the next, i.e., fourth alternative method, which is called ‘deductive method’. This method should be applied, if transaction value of identical goods or similar goods is not available; but these products are sold in India. The assumption made in this method is that identical or similar imported goods are sold in India and its selling price in India is available. The sale should be in the same condition as they are imported. Assessable Value is calculated by reducing post importation costs and expenses from this selling price. This is called ‘deductive value’ because assessable value has to be arrived at by method of deduction (deduction means arrive at by inference, i.e., by making suitable additions/subtractions from a known price to arrive at required ‘Customs Value’).

Computed value for customsIf valuation is not possible by deductive method, the same can be done by computing the value under rule 7A which isthefifthmethod[Thismethodhasbeenaddedw.e.f.24-4-95].IftheimporterrequestsandtheCustomsOfficerapproves, this method can be used before the method of ‘deductive value’. In this method, value is the sum of:

Cost of value of materials and fabrication or other processing employed in producing the imported goods. •Anamountforprofitandgeneralexpensesequaltothatusuallyreflectedinsalesofgoodsofthesameclassor•kind, which are made in the country of exportation for export to India.The cost or value of all other expenses under rule 9 (2) i.e. transport, insurance, loading, unloading and handling •charges.

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Residual methodThe sixth and the last method is called ‘residual method’. It is also often termed as ‘fallback method’. This is similar to ‘best judgment method’ of the Central Excise. This method is used in cases where ‘Assessable Value’ cannot be determined by any of the preceding methods. While deciding Assessable Value under this method, reasonable means consistent with general provisions of these rules should be the basis and valuation should be on basis of data available in India. This method can be considered if valuation is not possible by any other method In other words, sellingpriceforexporttoIndiacanaloneformthebasis.(Thus,fixing‘tariffvalue’isreallyagainstthisrule).

Valuation for assessment of export goodsCustoms value of export goods is to be determined under section 14 (1) of Customs Act. Customs Valuation Rules areapplicableonlyforimportedgoods.Thus,AssessableValueofexportgoodsshallbe“deemedtobethepriceatwhich such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of exportation in the course of international trade, where the seller and the buyer have no interest in the business of each other or one of them has no interest in the other, and the price is the sole consideration for the sale or offer for sale.”

Normally, ‘FOB Value’ of exports will be the basis. If the export sale contract is a CIF contract, post exportation elements, i.e., insurance and outward freight will have to be deducted. However, now many instances have come tonotice,whereexportedgoodshavebeenover-valuedtogetexportbenefits.

Valuation for CVD when goods are under MRP provisionsIn respect of some consumer goods, excise duty is payable on basis of MRP (Maximum Retail Price) printed on the carton. If such goods are imported, CVD will be payable on basis of MRP printed on the packing. However, it has beenclarifiedbyDGFT(DirectorGeneralofForeignTrade)videpolicycircularNo.38(RE-2000)/1997-2002dated22-1-2001 that labelling requirements for pre-packed commodities are applicable only when they are intended for retail sale. These are not applicable to raw materials, components, bulk imports, etc., which will undergo further processing or assembly before they are sold to consume.


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SummaryThe Constitution of India (Article 265) lays down that no tax shall be levied or collected except by authority •of law.The law for the levy and collection of Customs duties is the Customs Act, 1962.•The Customs duties are major tax revenue for the Union Government and constitute around 30% of its total •tax revenues.Customs duties are probably the oldest form of taxation in India.•Customs duty is a duty or tax, which is levied by Central Government on import of goods into, and export of •goods from India.There is historical evidence of imposition of import duty during the ancient and medieval era, the development •of organised taxation on imports and exports to its present form, originated in 1786, when the Britishers formed thefirstBoardofRevenueinCalcutta.There are two Acts, which form part of Customs Law in India, namely, the Customs Act.1962 and Customs •Tariff Act, 1975.The Customs Act, 1962 is the basic Act for levy and collection of customs duty in India.•ThecustomsdutyisleviedongoodsimportedorexportedfromIndiaattheratesspecifiedundertheCustoms•Tariff Act, 1975.Goods become liable to import duty or export duty when there is import into, or export from India.•All goods imported into India are chargeable to a duty under Customs Act, 1962.•Cessesareleviableonsomespecifiedarticlesofexportslikecoffee,coir,lac,mica,tobacco(unmanufactured),•marine products cashew kernels, black pepper, cardamom, iron ore, oil cakes and meals, animal feed and turmeric.An education cess has been imposed on imported goods w.e.f. 9-7-2004. The cess will be 2% of the aggregate •duty of customs excluding safeguard duty, countervailing duty, Anti-dumping duty.If a country pays any subsidy (directly or indirectly) to its exporters for exporting goods to India, Central •Government can impose Countervailing duty up to the amount of such subsidy under section 9 of Customs Tariff Act.A National Calamity Contingent Duty (NCCD) of customs has been imposed vide section 129 of Finance Act, •2001. This duty is imposed on pan masala, chewing tobacco and cigarettes.In respect of some consumer goods, excise duty is payable on basis of MRP (Maximum Retail Price) printed •on the carton. If such goods are imported, CVD will be payable on basis of MRP printed on the packing.

ReferencesLESSON- 20 CUSTOMS LAW- BASIC. • [Pdf]Available at: <http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_20.pdf> [Accessed 30 July 2013].CHAPTER II DUTY EXEMPTION SCHEMES. • [Pdf] Available at: <http://www.cag.gov.in/html/reports/indir_taxes/2009-10_14CA/chap2.pdf> [Accessed 30 July 2013].Millar, R., 2007. • Doing Business with India. GMB Publishing Ltd., U K.Mohan, R. & Goswami, O., 1996. • Policy Reform in India. OECD Publishing, France.IDT - CA Final Indirect Taxes. • [Video online] Available at: <http://www.youtube.com/watch?v=b8yHfpVNHdE> [Accessed 30 July 2013].BasicProcedures includingClassificationunderCentralExcise.• [Video online] Available at: <http://www.youtube.com/watch?v=xjtUq7RzvxY> [Accessed 30 July 2013].

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Recommended ReadingAgrawal, S. P., 1992. • Information India 1992-93: Global View. Deep & Deep Publications, New Delhi.Franceschin, G., & Misuraca, F., 2011.• India: Commercial Law, Customs and Taxation. Kluwer Law International, Netherland.Shira, D., & Ellis, D., 2012.• Doing Business in India. Springer, N.Y.


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Self AssessmentThe law for the levy and collection of Customs duties is the Customs Act, ________1. .

1962a. 1947b. 1957c. 1920d.

Which of the following objects of custom duties is false2. ?To raise revenue.a. To regulate imports of foreign goods into India.b. To conserve foreign exchange, regulate supply of goods into domestic market.c. To provide protection to the domestic industry from foreign competition by restricting export of selected d. goods and services, export licensing, export quotas, and outright import ban.

__________defines‘Indiancustomswaters’tomeanthewatersextendingintotheseauptothelimitofcontiguous3. zone of India under section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and includes any bay, gulf, harbour, creek or tidal river.

Section 2(2)a. Section 2(26)b. Section 2(28)c. Section2(3)d.

A __________________of customs has been imposed vide section 129 of Finance Act, 2001.4. safeguard dutya. National Calamity Contingent Duty (NCCD)b. anti-dumping dutyc. protective dutyd.

Which one of the following duty is a type of custom duty?5. National Climate Contingent Duty (NCCD)a. Anti-dummy duty on dumped articles b. Counter duty on subsidised goodsc. Protective dutyd.

Which of the following statement is true?6. Baggage means no dutiable articles, imported by passenger or a member of a crew in his baggage. a. Accompanied baggage, if despatched previously or subsequently within prescribed period is also covered. b. Baggage does not include motor vehicles, alcoholic drinks and goods imported through courier. c. Baggage includes articles imported under an import licence for his own use or on behalf of others.d.

There are two Acts, which form part of Customs Law in India, namely, the Customs Act,1962 and______________, 7. 1975.

Customs Tariff Acta. Custom Valueb. Tariff Valuec. Custom Dutyd.

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Goods become liable to import duty or export duty when there is import into, or export from __________.8. Dutcha. Germanyb. Indiac. Bangladeshd.

Customs duty is payable as a percentage of ‘value’ often called ‘assessable value’ or______________.9. customs valuea. custom dutyb. tariff valuec. value assessedd.

Customs area means all area of _____________and includes any area where imported goods or export goods 10. are ordinarily kept pending clearance by Customs authorities.

Customs stopa. Customs stationb. Customs portc. Customs depotd.


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Chapter VI

Central Excise Duty

Aim


introduce central excise duty•

explicate the nature of excise duty•

elucidate the chargeability of excise duty•

Objectives


explicateclassificationofgoods•

definetaxableevent•

explain trade parlance theory•

Learning outcome


enlist the concepts in central excise duty•

understand registration of goods•

defineclearanceofgoods•

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6.1 IntroductionTax is of two types such as: Direct Tax and Indirect Tax. Direct Tax is the tax, which is paid directly by people to the government, while indirect tax is the tax, which is paid indirectly by people to the government. Income Tax is paid directly to the government, therefore it is a direct tax while excise duty is paid by people to the manufacturer who pays it to the government, and therefore it is an indirect tax.

The Constitution of India has given the power to levy tax to central and state government under seventh schedule. The taxation in India is either charged by the State Governments or by the Central Government. In the basic scheme of taxation in India, it is conceived that Central Government will levy and collect tax revenue from Income Tax (except on agricultural income), Excise (except on alcoholic drinks) and customs while state government will get tax revenue from sales tax, excise on liquor and tax on agricultural income and the municipalities will get tax revenue from octroi and house property tax.

Central Excise Law is a combined study of:Central Excise Act (CEA), 1944•Central Excise Tariff Act (CETA), 1985•Central Excise Rules, 2002 and•CENVAT Credit Rules, 2004•

6.2 Nature of Excise DutyAs per section 3 of Central Excise Act (CEA), excise duty is levied if:

There is a good•Goods must be moveable•Goods are marketable•Goods are mentioned in the central excise tariff act (CETA)•Gods are manufactured in India•

If production or manufacture is in special economic zone then no excise duty is levied. Therefore, we can say that excise duty is not levied on:

Services, such as doctors treating the patients, accountants preparing the accounts, in these cases service tax •are levied.Immovable goods, such as roads, bridges and buildings. •Non-marketable goods, that is., goods for which no market exists, for instance, melted iron ore at 1600 degree •Celsius.Goods that are not mentioned in CETA.•Goods manufactured or produced out of India.•

Excise duty is levied on production or manufacture and not on sale. At the time of sale, another tax called Value Added Tax (VAT) or Sales Tax is applicable.

6.2.1 Taxable EventTaxable event means the stage when tax is levied/ applied. Manufacture or production in India is the stage of levying tax. However, the government, at the time, when the goods are removed from the factory, i.e., goods are taken out from the factory, collects tax. Since, excise duty is levied at the time of removal of goods. Thus, it becomes taxable at the time of their removal and therefore, the date of its actual production is not relevant. The date of removal is relevant and the rate of excise duty applicable on the date of removal shall be the actual rate of excise duty to be paid.


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6.2.2 Rates of Excise DutyThe basic rate of excise duty is 16%, while in some cases there is a special duty of 8% which makes the excise duty in those cases, 24%. There is at present a cess for education called education cess, which is 2% of the excise duty; therefore, the effective excise duty comes out as 16.32% or 24.48%.

6.3 Chargeability of Excise DutyExcise duty is levied on production of goods, but the liability of excise duty arises only on removal of goods from the place of storage, i.e., factory or warehouse. Excise duty is levied even if the duty was paid on the raw material used in production. Excise duty is levied on government undertakings also, for example, Railways is liable to duty on the goods manufactured by it.

Excisedutyisanexpensewhilecalculatingtheprofitsinaccounting.Excisedutyisleviedifgoodsaremarketable.Actual sale is not relevant. Therefore, goods, which are given for free replacement during warranty period, are also liable for excise duty.

6.4 Definitions and ConceptsCentral Excise Law is levied on manufacturer or production of goods. The liability of paying the central excise isonthemanufacturer.So,letusexaminetheconceptanddefinitionsofgoods,manufactureandmanufacturerindetail.

6.4.1 FactoryAccording to section 2(e), factory means any premises where any part of the excisable goods other than salt are manufactured or any manufacturing process is carried out.

6.4.2 GoodsGoodshavenotbeendefinedinCentralExciseAct.AsperArticle366(12)ofConstitutionofIndia,Goodsincludesallmaterialcommoditiesandarticles.SaleofGoodsActdefinesthat‘goods’meanseverykindofmovablepropertyother than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Goods must be:

Movable•Marketable•

Moveable means goods, which can be shifted from one place to another place, for example, motor car, mobile phone, computer, etc. The goods attached to earth are immovable goods, such as, dams, roads, and buildings, etc. Moveable goods are manufactured or produced, but immovable goods are constructed.

Marketable means goods which are capable of being sold, for example, Molten iron ore at 1300 degree to 1400 degreeCelsiusisnotmarketable,thereforenotagood.Similarly,flourproducedinownfactoryforuseasrawmaterial in own.

Sales tax or VAT is applicable on actual sales. Excise duty is applicable on production of goods. Actual sale is not relevant. Goods produced for free distribution, as sample, gifts, or replacement during warranty period is also liable of excise duty.

Excisablegoodsarethosegoods,whicharementionedintheitemsoftariffinCETA.Sec2(d)defines“ExcisableGoodsasgoodsspecifiedinthescheduleofCETA1985asbeingsubjecttoadutyofexciseandincludessalt.”

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6.4.3 Manufacture or ProductionAccording to Section 2(f) of Central Excise Act ‘manufacture’ includes any process:

Incidental or ancillary to the completion of manufactured product or •WhichisspecifiedinrelationtoanygoodsintheSectionorChapternotesoftheScheduletotheCentralExcise•Tariff Act, 1985 as amounting to manufacture, orWhich,inrelationtogoodsspecifiedinthirdscheduletotheCEA,involvespackingorre-packingofsuchgoods•in a unit container or labelling or re-labelling of containers or declaration or alteration of retail sale price or any other treatment to render the product marketable to consumer.

Clause (ii) and (iii) are called deemedmanufacture.Thus, definition of ‘manufacture’ is inclusive and notexhaustive.

Thewordmanufactureasspecifiedinvariouscourtdecisionsshallbecalledonlywhenanewandidentifiablegoodsemerge having a different name, character, or use; for example, manufacture has taken place when table is made from wood or if pulp is converted into base paper, or sugar is made from sugarcane.

Deemed manufactureDeemed manufacture is of two types:

CETAspecifiessomeprocessesas‘amountingtomanufacture’.Ifanyoftheseprocessesarecarriedout,goods•will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [Section 2(f) (ii)].InrespectofgoodsspecifiedinthirdscheduleofCentralExciseAct,repacking,re-labelling,puttingoraltering•retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [Section 2(f) (iii)].

ProductionProductionhasalsonotbeendefinedinCEA,butproductionisusedtocoveritemslikecoffee,tea,tobacco,etc.,which is called to have been produced and not manufactured.

AssemblyAssembly of various parts and components amount to manufacture provided it result in movable goods which have distinctive identity, use, character, name, etc., for example, assembly of computer is manufacture. Assembly of air conditionerinacarisnotmanufactureasnonewidentifiableproductemerges.

6.4.4 ManufacturerManufacturer is a person who actually manufactures or produces the excisable goods. A person who gets the production of other and sell it after putting its own brand then he will not be called manufacturer, for example, if Khaitan company gets the fans made from some person and sells it after putting their brand name, the Khaitan company will not be the manufacturer. The person actually making the fans will be called manufacturer.

6.5 Classification of GoodsTheexcisedutyischargeableatdifferentgoodsatdifferentrates.Therefore,goodsareclassifiedfordeterminationofduty.TheclassificationofgoodsadoptedinCentralExciseTariffActandCustomActiscommon.Theclassificationuses8-digitnomenclature.CETAconsistsof two schedules; thefirst schedulegivesbasicexciseduty (that is,CENVAT duty) and second schedule gives export duties.

6.5.1 Scheme of ClassificationCETA and Customs Act both have sections and chapters. Remember you have read above that the scheme of class is common for both CETA and Customs Act. Each section has various chapters. A section relate t a class of goods forexample,Section–Iis‘animalproducts’,Section–XIis‘textileproducts’,Section–XVIIis‘vehicles,aircraft,vesselsandothertransportequipments’.Achaptercontainsgoodsofoneclass,forexample,Section–XIoftextileproducts has Chapter 50 relating to silk, Chapter 51 relating to wool and Chapter 52 relating to cotton.


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Each Chapter is further divided into headings and headings are divided into sub-headings, for example, Chapter 50 of silk has 5 headings:

50.01 Silk and Cocoons •50.02 Raw Silk •50.03 Silk Waste •50.04 Silk Yarn •50.05 Yarn Spun•

The heading 50.04 ‘Silk Yarn’ has sub-headings 5004.11 Silk Yarns with 85% or more silk and sub-heading 5004.19 relates to Silk Yarns with less than 85% silk.

Inthisclassificationscheme,letuselaborateon5004.19,inthisthereareupto6digits.Thefirsttwodigits‘50’is chapter number; next two digits ‘04’ is heading number and next two digits after decimal ‘19’ is subheading number.The2moredigits(tomakethese6digitsto8digits)areadditionaldigittofacilitateandprovideflexibilityin international trade.

6.5.2 Trade Parlance TheoryTrade Parlance Theory emerged out of case of Grenfell vs. IRC (1876), where justice Pollok concluded that nay word in statue should be interpreted (understood in its popular sense, in which people understand it.Some examples:

A mirror is not a glass wear, as glass loses its character after it is converted into mirror.•Windscreen of motor vehicle (front glass of car) is not a glass; it is understood as automobile part.•Plasticpenhasaseparateidentity.Itcannotbeclassifiedasarticleofplasticlikepipes,plasticsheets,etc.•Carbon paper is not a paper because paper is used for writing,•Printing, drawing, etc.•

Aproductisalsoclassifiedonthebasisofitsenduse,ifclassificationisrelatedtothefunctionofthegoods.

6.6 Valuation of GoodsExcise duty is payable on the basis of:

Specificdutybasedonmeasurementlikeweight,volume,length,etc.•Percentage of tariff value•Maximum retail price•Compounded levy scheme•Percentage of Assessable Value (Ad-valour duty) •

Specific excise dutySpecifiedexcisedutyisthedutyonunitslikeweight,length,volume,andsoon.

Excise duty on tariff valueTariffvalueisthevaluefixedbygovernmentfromtimetotime.Governmentcanfixdifferenttariffvaluefordifferentclasses.Tariffvalueisfixedforpanmasala,readymadegarments.

Excise duty on MRPGovernment can specify the goods on which excise duty will be based on MRP. MRP shall be the maximum price atwhichexcisablegoods shallbe sold to thefinal consumers. It includes taxes, freight and transport charges,commission to dealers, etc. Excise duty on MRP is applicable on products on which quoting of MRP is necessary under the Weights and Measurements Act, for example, chocolates, biscuits, wafers, ice creams, camera, refrigerators, fans, footwear, toothpaste, etc.

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Compounded levy schemeIncaseofsmallmanufacturer,governmentallowsmallmanufacturertopayexcisedutyonthebasisofspecifiedfactorslikesizeofequipmentemployed,atthespecifiedrates.

Excise duty on assessable valueAssessable value is the value of transaction, that is., the value at which transaction takes place, in other words it is the price actually paid or payable for the goods on sales. It is also called transaction value. It includes freight and transportation charges, commissions to dealer, and so on.

Excise duty is paid on transaction value or assessable value if:Goods are sold at the time and place of removal•Buyer and assessee (manufacturer/seller) are not related•Price is the only consideration for sale, that is., money or some valuable item is received on sale•

Assessable value excludes amount of excise duty, sales tax or other tax actually paid.Following items are included:

Primary packing or main packing or necessary packing •Royalty charges•Commission to sales agent•

Following items are excluded:Secondary packing•Returnable primary packing like cold drink bottles, LPG cylinders, etc.•Discount given at the time of sales•

IllustrationIf the sales price of a good is Rs. 10, which includes the cost of bottle of Rs. 2 and the excise duty of 16% plus 2% education cess. What will be the assessable value?

SolutionAssessablevalue=PriceLessDeduction–Allowabledeductions/(1+rateofduty)AssessableValue=(10–2)/(1+0.1632)=Rs.9.54

6.7 Registration of GoodsAccording to section 6 of Central Excise Act, every manufacturer or producer, who produces excisable goods, must get two types of registration:

Registration for manufacturer.•Registration for warehouse, where goods are stored.•

Rules of registrationFollowing are the rules of registration:

Separate registration is required for each premise.•Registration is not transferable.•Registrationcertificateshallbegivenwithin7daysofapplicationforregistration.•If manufacturer cease to produce, i.e., stops the production permanently then he should apply for de-•registration.Registration can be revoked or suspended by AC/DC if any condition of the Act or Rules is breached.•


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Procedure for registrationFollowing are the steps for registration under central excise act:

Application for registration is given in prescribed format to the Assistant Commissioner or Deputy Commissioner •in duplicate.Application should be accompanied by a self-attested copy of Permanent Account number (PAN) allotted by •income tax department.Incaseofcompanyandpartnershipfirmsnameofcompanyorpartnershipshouldbementionedasnameof•business and not the name of owner who sign the application.Onreceiptofapplicationofregistrationtheexcisedepartmentallotstheregistrationcertificatewithin7days.•TheregistrationcertificatementionstheExciseControlCode(ECC),theECCisa15digitnumberwhichhas•first10digitsofPAN,nexttwodigitsareeither‘XM’formanufactureror‘XD’fordealerandthelastthreedigits are number like 001,002, etc.

Theregistrationcertificateincludes:Name of assessee •Constitution of the business •Types of business (manufacturer, dealer or warehouse or depot)•Export Oriented Unit (EOU)•Address of the business •The Excise Control Code (ECC)•

6.8 Clearance of GoodsClearancemeans takinggoodsoutof factory.Thus,finishedgoods canbe storednot removed in theplaceofmanufacture (factory) without payment of duty. There is no time limit for removal of goods from place of manufacture, that is., factory. The records have to be maintained by manufacturer indicating particulars regarding:

Description of goods manufactured or produced •Opening balance of goods manufactured or produced•Quantity produced or manufactured•Stock of goods•Quantity of goods removed•Assessable value•Amount of duty payable•Amount of duty actually paid.•

The record should be preserved for 5 years. If the records are not maintained then penalty up to duty payable can beimposedandgoodscanbeconfiscated.Ifgoodsarestoredatanyotherplaceotherthanfactory,thengoodscanbe cleared from factory without payment of duty, if commissioner permits. Goods can be cleared out of factory without payment of duty for carrying out tests and omission per unit.

6.9 Duty Payment ProvisionsGoods cleared from factory are cleared under an invoice. Duty is payable on monthly basis by 5th of the next month in which duty payment becomes due, i.e., the month in which goods are cleared from the factory. Duty is paid through current account called PLA and /or Central Value Added Tax Credit, i.e., CENVAT Credit. Goods can be cleared out of factory without payment of duty for carrying out tests and omission per unit. Small Scale Industry (SSI) is required to pay the duty by 15th of the next month. However, the duty for the month of March is paid by 31st March itself not on 5th of next month, i.e., 5th of April because government accounts closes on 31st March.

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If the due date is Sunday or holiday, the duty can be paid on next working day. If duty is not paid then assessee is liable to pay the interest also on outstanding amount. If duty and interest is not paid for 30 days after due date, then the facility to pay duty on monthly basis will be withdrawn till the time interest and duty is paid or 2 months, whichever later. Thus, the facility of monthly payment of excise duty is withdrawn at least for 2 months. During this period duty will be paid on removal basis.

Duty is paid by assessee through current account known as PLA (Personal Ledger Account). The PLA is credited whendutyispaid,thatis.,depositedinthebankbyfillingachallancalledTR-6onmonthlybasis.OnlyexcisedutypaidcomesinPLAtheitemslikefine,penalty,interestdoesnotappearinPLA.

A PLA contains:Serial number and date •Details of TR-6 challan number•Balance duty, etc.•

The PLA is maintained in triplicate using both sided carbon.

Excise returnExcise return is submitted to the excise department with the two copies of PLA and TR-6 challan. The excise return is prepared in form ER-1 and ER-3.

CENVATCENVAT has its origin from the system of VAT, which is very common in European countries. VAT means Value added Tax; it is a system of taxation in which tax is paid only on the value addition. Value addition is the difference between the sale price and the purchase price. Thus, if a person buys a good for Rs. 40 and sells it for Rs. 100 after doing some works on it. Then, he has added value of Rs. 60 on these goods. If the rate of taxation is 10% then the tax will be Rs. 6, i.e., 10% of Rs. 60.

ThissystemofVATwasintroducedinCentralExciseActin1986anditwasnamedasMODVAT(ModifiedVAT)later in 200 the name was changed to CENVAT. The system of VAT was brought in Service Tax in 2002 and now it is brought even in Sales Tax Law too.

6.10 Excise Duty Set Off ProvisionsTax of Rs. 6 can also be calculated using the concept of set off of tax. Tax on sale of Rs. 100 is Rs. 10; tax on purchase of Rs. 40 is Rs. 4. Thus, if a manufacturer pay tax on the total value of goods manufactured by him of Rs. 100, i.e., Rs. 10 he can claim back Rs. 4 as his tax liability on value addition of Rs. 60 is only Rs. 6. This claiming back of tax is called tax credit or set off of duty scheme.

CENVAT SystemCENVAT is applicable on central excise duty. In Central Excise, the manufacturer has to pay tax on the value of goods manufactured but taking the VAT system he can claim the tax credit, i.e., CENVAT credit of the tax paid on:

Input goods used in manufacture•Input services used in manufacture. •

It should be noted that no CENVAT credit is available if:Final production is exempt from excise duty.•The document showing proof of payment of duty on input is not available.•

It is worth to note that duty paid on input cannot be enchased/refunded it can only be adjusted against duty on finishedgoods.


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Input output relationThereneednotbeaninput–outputrelationforclaimingCENVATcredit,forexample,dutypaidonautomobilecomponents used in automobile manufacturer can be adjusted against duty on textile production.

CENVAT credit on capital goodsAny duty paid on machinery and plant, spare parts of machine, tools, dyes, etc. used in manufacture can also be adjusted against duty payable on production. However, up to 50% credit is available in current year and balance in subsequentfinancialyear.MotorcarisnotacapitalassetandforthepurposeofCENVATCreditforallmanufacture.However it may be taken as capital good for service tax in case of service provider uses motor car for service providing purpose for example, Courier, tour operator, rent-a-cab, cargo, outdoor caterer, pandal and shamiana operator, and goods transport agency.

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SummaryTax is of two types such as: Direct Tax and Indirect Tax. •Income Tax is paid directly to the government therefore it is a direct tax while excise duty is paid by people to •the manufacturer who pays it to the government, therefore it is an indirect tax.The Constitution of India has given power to levy tax to Central and State Government under seventh •schedule.Excise duty is levied on production or manufacture and not on sale.•Taxable event means the stage when tax is levied/applied.•The basic rate of excise duty is 16% while in some cases there is a special duty, if 8% which makes the excise •duty in those cases at 24%.Excise duty is levied on production of goods, but the liability of excise duty arises only on removal of goods •from the place of storage, i.e., factory or warehouse.Central Excise Law is levied on manufacturer or production of goods.•According to section 2(e) factory means any premises where any part of the excisable goods other than salt are •manufactured or any manufacturing process is carried out.‘Goods’ means every kind of movable property other than actionable claims and money; and includes stocks and •shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.The excise duty is chargeable at different goods at different rates.•Tariffvalueisthevaluefixedbygovernmentfromtimetotime.Governmentcanfixdifferenttariffvaluefor•different classes.Assessable value is the value of transaction, that is, the value at which transaction takes place, in other words •it is the price actually paid or payable for the goods on sales.Clearance means taking goods out of factory.•Duty is payable on monthly basis by 5th of the next month in which duty payment becomes due, i.e., the month •in which goods are cleared from the factory.If the due date is Sunday or holiday, the duty can be paid on next working day.•Any duty paid on machinery and plant, spare parts of machine, tools, dyes, etc. used in manufacture can also •be adjusted against duty payable on production.

ReferencesLESSON–19 CENTRAL EXCISE LAWS. • [Pdf]Availableat:<http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_19.pdf> [Accessed 31 July 2013].CENTRAL EXCISE. • [Pdf]Availableat:<http://cactusblog.files.wordpress.com/2011/02/21482announ12220.pdf> [Accessed 31 July 2013].Bakshi, P. M., 2011. • The Constitution of India. 10th ed., Universal Law Publishing Co. Pvt. Ltd., New Delhi.The National Highways Act, 1956• . Universal Law Publishing Co. Pvt. Ltd, New Delhi.EXCISE INTRO. • [Video online] Available at: <http://www.youtube.com/watch?v=dlIUmBoQFgk> [Accessed 31 July 2013].BasicProcedures includingClassificationunderCentralExcise.• [Video online] Available at: <http://www.youtube.com/watch?v=xjtUq7RzvxY> [Accessed 31 July 2013].


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Recommended ReadingThe Indian Partnership Act, 1932• . Universal Law Publishing Co. Pvt. Ltd., New Delhi.Kashyap, S.C., 2011. • The Constitution of India. Universal Law Publishing Co. Pvt. Ltd., New Delhi.The Bureau of Indian Standards Act, 1986• . Universal Law Publishing Co. Pvt. Ltd., New Delhi.

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Self Assessment_1. ____________is paid directly to the government therefore it is a direct tax while excise duty is paid by people to the manufacturer who pays it to the government; therefore it is an indirect tax.

Sales Taxa. Income Taxb. Wealth Taxc. Indirect Taxd.

The Constitution of India has given power to levy tax to central and state government under __________2. schedule.

tentha. firstb. seventhc. eighthd.

Which of the following Acts does not exist?3. Central Excise Act (CEA), 1948a. Central Excise Tariff Act (CETA), 1985b. Central Excise Rules, 2002c. CENVAT Credit Rules, 2004d.

The basic rate of excise duty is ___________while in some cases there is a special duty if 8% which makes the 4. excise duty in those cases at 24%.

18%a. 15%b. 12%c. 16%d.

__________Law is levied on manufacturer or production of goods.5. Central Salesa. Central Exciseb. Servicec. Customsd.

Duty is payable on monthly basis by 5th of the next __________in which duty payment becomes due, i.e., the 6. month in which goods are cleared from the factory.

weeka. yearb. monthc. dayd.

Which of the following statement is true?7. Services such as doctors treating the patients, accountants preparing the accounts, in these cases service a. tax are levied.Taxable event means the stage when tax is not levied/ applied.b. The basic rate of excise duty is 12% while in some cases there is a special duty if 8% which makes the c. excise duty in those cases at 24%.Moveable means goods, which cannot be shifted from one place to another place.d.


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“ExcisableGoodsasgoodsspecifiedinthescheduleof__________1985asbeingsubjecttoadutyofexcise8. and includes salt.”

CEAa. CENVATb. CETAc. VATd.

According to ____________, factory means any premises where any part of the excisable goods other than salt 9. are manufactured or any manufacturing process is carried out.

section 2(e)a. section 2(a)b. section 2(c)c. section 2(b)d.

___________is applicable on central excise duty.10. VATa. CEAb. CENVATc. CETAd.

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Chapter VII

Sales Tax

Aim


introduce central sales tax•

explain the features of sales tax act•

explicate the levy of sales tax and tax penalties•

Objectives


enlist the procedure for registration•

elucidate the principles for determining the place of sale or purchase•

explain tax on inter-state sales•

Learning outcome


identify import, export and deemed exports •

understand the registration of dealers•

defineimportanttermsundercentralsalestaxact•


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7.1 IntroductionAccording to the article 265 of the Constitution of India, no tax of any nature can be levied or collected by the Central or State Governments except by the authority of law. The constitution of India vide entry no. 54 of the state list, gave power to the state legislature to levy sales tax on sale or purchase of goods other than newspapers, which takes place within the state. However, at that time the parliament was not empowered to levy any type of sales tax. Therefore, only state legislature enacted state sales tax laws in their respective state for levy of sales tax on sale or purchase of goods other than newspapers. Although State Governments were empowered to levy and collect taxonsalesmadewithinitsownterritories,therewasnospecificprovisionsoflevyingtaxonsaleandpurchasehaving inter-state composition. As a result, same goods came to be taxed by several states on the ground that one or more ingredients of sale were present in their state. This led to multiple levy of tax. Therefore, Central Sales Tax Act, 1956 was enacted by the Parliament and received the assent of the president on 21.12.1956. Imposition of tax became effective from 01.07.1957.

7.2 Features of Central Sales Tax ActFollowing are the important features of CST (Central Sales Tax) Act:

It extends to the whole of India.•Everydealerwhomakesaninter-statesalemustbearegistereddealerandacertificateofregistrationhastobe•displayed at all places of his business.There is no exemption limit of turnover for the levy of Central Sales Tax.•Underthisact,thegoodshavebeenclassifiedas:•

Declared goods or goods of special importance in inter-state trade or commerce �Other goods �

The rates of tax on declared goods are lower as compared to the rate of tax on goods in the second category.The tax is levied under this act by the Central Government but, it is collected by the State Government from •where the goods were sold. The tax thus collected is given to the same State Government which collected the tax. In case of Union Territories, the tax collected is deposited in the consolidated fund of India.The rules regarding submission of returns, payment of tax, appeals, etc., are not given in the act. For this purpose, •the rules followed by a state in respect of its own sales tax law shall be followed for purpose of this act also.Even though the Central Sales Tax has been framed by the Central Government, the State Governments are also •allowedtoframesuchrules,subjecttosuchnotificationsandalterationsastheydeemfit.

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7.3 Important DefinitionsFollowingaretheimportantdefinitionsundertheCentralSalesTax:

Appropriate state [Section 2 (A)]

It means:In relation to a dealer who has one or more place of business situated in the •same state, that state, andIn relation to a dealer who has more than one place of business situated •in different states, every such state with respect to the place or places of business situated within its territory

Business [Section 2 (Aa)]

Any trade, commerce or manufacture or any adventure or concern in the •nature of trade, commerce or manufacture, whether or not it is carried on withamotivetomakegainorprofitandwhetherornotanyprofitorgainaccrues from it, andAny transaction in connection with or incidental or ancillary to such trade, •commerce, manufacture, adventure or concern.

Accordingtotheabovedefinition:Itisnotnecessarytohaveprofitmotivetocallanactivityabusiness.•Regularity of business is not essential.•Business may be legal or illegal.•

Any transaction incidental or ancillary to business will also be treated as business. For example, if a registered dealer sells outdated machines, he will be liable to pay Central Sales Tax on it

Dealer [Section 2(B)]

Any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred payment, or for commission, remuneration or other valuable consideration It includes:

A local authority, a body corporate, a company, any cooperative society, •othersociety,club,firm,HinduUndividedFamily,associationofpersonswhich carries on such business.A factor, broker, commission agent who carries on business of buying, •selling, supplying or distributing goods belonging to any principalAn auctioneer who carries on the business of selling or auctioning goods •belonging to any principal.Government.•

However, in case of sale, supply or distribution of old obsolete or waste products, government is not liable to pay tax under this Act. This exception does not apply to government companies, public sector undertakings, and private enterprises. Under this Act, services are not considered. Therefore, if a person is rendering professional service of any type say teacher, doctor, etc., he shall not be treated as a dealer.

Registered dealer [Section 2 (f)]This means a dealer who is registered under Section 7 of the Act.


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Declared goods [Section 2(C)]

It includes those goods which are considered to be of special importance in interstate trade or commerce under section 14.Some of these goods are:

Cereals•Coal•Cotton•Crude Oil•Jute•Oilseeds•Pulses•Sugar•

Goods [section 2(d)]This includes all material articles or commodities and all kinds of movable property excluding newspapers, actionable claims, stocks, shares and securities. If newspapers are sold as scrap then, it will be charged to Central Sales Tax, if it is an inter-state sale.

Place of business [Section 2 (DD)]

Central Sales Tax is collected by that State Government where the dealer has place of business. This includes:

the place of business of agent if, business is carried on through such agent•place where dealer stores his goods like warehouse, go-down, etc.•place where a dealer keeps his books of account•

Sale [Section 2 (G)]

It means transfer of property in goods by one person to another for cash or for deferred payment or for any valuable consideration. However, a mortgage, hypothecation of, or a charge, or pledge on goods is not included.

Essential elements of sale:Goods should be transferred•General property in goods should be transferred•Price must be paid•There must be a seller and a buyer•There must be a valid consent of both buyer and seller•

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Sale price [Section 2 (H)]

It means amount payable to a dealer as consideration for the sale of any goods which includes the following:

Central Sales Tax•Excise duty•Cost of packing material•Packing Charges•Bonus given for effecting additional sales•Insurance charges, if goods are insured by seller•Freight charges, if not shown separately•Any sum charged for anything done by the dealer in respect of goods at the •time of or before delivery thereof

Sale price does not include the following:Freight or transport charges for delivery of goods, if charged separately •Cost of installations, if charged separately•Cash discounts for making timely payments.•Trade discount•Insurance charges of goods insured on behalf of the buyer•Goods rejected•Goods returned within 6 months of the date of sale•

Sales Tax Law [ Section 2 (I) ]

It means any law for the time being in force in any state, or part thereof, which provides for the levy of taxes on the sale or purchase of goods generally. Now, VAT legislation of a state shall also be included within the ambitofthedefinitionof‘StateTaxLaw’.

Turnover [Section 2 (J)]

It is the aggregate of the sale prices received and receivable by the dealer in respect of sales of any goods in the course of inter-state trade or commerce made during a prescribed period. Prescribed period is the period in which salestaxreturnisfiled.

Year [Section 2(K) It means the year applicable in relation to a dealer under the general sales tax law of the appropriate state, and if, there is no such year applicable, it is the financialyear.

Table 7.1 Important definitions

7.4 Levy and Collection of Tax and PenaltiesLevy and collection of tax and penalties:(1) The tax payable by any dealer under this Act on sales of goods effected by him in the course of inter-state trade or

commerce, whether such sales fall within clause (a) or clause (b) of section 3, shall be levied by the Government of India and the tax so levied shall be collected by that Government in accordance with the provision of sub-section (2), in the State from which the movement of the goods commenced:

Provided that, in the case of a sale of goods during their movement from one State to another, being a sale subsequent tothefirstsaleinrespectofthesamegoodsandbeingalsoasalewhichdoesnotfallwithinsub-section(2)ofsection6, the tax shall be levied and collected:(a) Where such subsequent sale has been effected by a registered dealer, in the State from which the registered dealer

obtained or, as the case may be, could have obtained, the form prescribed for the purposes of 3[sub-section (4) of section 8] in connection with the purchase of such goods; and

(b) Where such subsequent sale has been effected by an unregistered dealer in the State from which such subsequent sale has been effected.


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(2) Subject to the other provisions of this Act and the rules made there under, the authorities for the time being empowered to assess, re-assess, collect and enforce payment of any tax under general sales tax law of the appropriate State shall, on behalf of the Government of India, assess re-assess, collect and enforce payment of tax, including any 4[interest or penalty] payable by a dealer under this Act as if the tax or 4[interest or penalty] payable by such a dealer under this Act is a tax or 4[interest or penalty] payable under the general sales tax law of the State; and for this purpose they may exercise all or any of the powers they have under the general sales tax law of the State; and the provisions of such law, including provisions relating to returns, provisional assessment, advance payment of tax, registration of the transferee of any business, imposition of the tax liability of a person carrying on businessonthetransfereeof,orsuccessorto,suchbusiness,transferofliabilityofanyfirmorHinduUndividedFamilytopaytaxintheeventofthedissolutionofsuchfirmorpartitionofsuchfamily,recoveryoftaxfromthirdparties, appeals, reviews, revisions, references, 5[refunds, rebates, penalties] 6[charging or payment of interest] compoundingofoffencesandtreatmentofdocumentsfurnishedbyadealerasconfidential,shallapplyaccordingly: Provided that if in any State or part thereof there is no general sales tax law in force, the Central Government may, byrulesmadeinthisbehalfmakenecessaryprovisionforalloranyofthematterspecifiedinthissub-section.

[(2A) All the 8[provisions relating to offences, interest and penalties] (including provisions relating to penalties in lieu of prosecution for an offence or in addition to the penalties or punishment for an offence, but excluding the provisions relating to matters provided for in section 10 and 10A) of the general sales tax law of each Stateshall,withnecessarymodifications,applyinrelationtotheassessment,re-assessment,collectionandthe enforcement of payment of any tax required to be collected under this Act in such State or in relation to any process connected with such assessment, re-assessment, collection or enforcement of payment as if the tax under this Act were a tax under such Sales Tax Law].

[(2B) If the tax payable by any dealer under this Act is not paid in time, the dealer shall be liable to pay interest for delayed payment of such tax and all the provisions for delayed payment of such tax and all the provisions relating to due date for payment of tax, rate of interest for delayed payment of tax, of the general sales tax law of each State, shall apply in relation to due date for payment of tax, rate of interest for delayed payment of tax, and assessment and collection of interest for delayed payment of tax under this Act in such States as if the tax and the interest payable under this Act were a tax and an interest under such sales tax law.]

(3)Theproceedsinanyfinancialyearofanytax,10[includinganyinterestorpenalty]leviedandcollectedunderthis Act in any State (other than a Union Territory) on behalf of the Government of India shall be assigned to the State and shall be retained by it; and the proceeds attributable to Union territories shall form part of the Consolidated Fund of India.]

7.5 Principles for Determining Place of Sale or PurchaseIt is necessary to determine when a sale or purchase of goods takes place in the course of inter-state trade in order to impose central sales-tax.

7.5.1 In The Course of Interstate TradeAccording to section 3, a sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase:

Occasions the movement of goods from one state to another; or•Is effected by a transfer of documents of title to goods during their movement from one state to another.•

Occasional movement of goods [Section 3 (a)]This means there is a completed sale in pursuance of contract of sale or purchase, whereby goods move from one statetoanother.Asalecanbetreatedasaninter-statesaleif,allthefollowingconditionsaresatisfied:

Transaction is a completed sale.•The contract of sale contains a condition for the movement of goods from one state to another.•There should be physical movement of good from one state to another. •The sale concludes in the state where the goods are sent and that state is different from the state from where •the goods actually moved.

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It is not necessary that sale precedes the inter- state movement of goods, sale can be entered before or after the •movement of goods.It is immaterial in which state the ownership of goods passes from seller to buyer.•

Sale by transfer of documents [Section 3 (b)]If sale or purchase of goods is affected by transfer of documents of title to the goods during their movement from one state to another then, such sale or purchase shall be deemed to take place in the course of inter- state trade. A document of title to goods bears internal evidence of ownership of goods by the holder of document. Some of the examples are Lorry Receipt (LR) in case of transport by road; Railway receipt (RR) in case of transport by rail, Bill of Lading (BL)in case of transport by sea, Air Way Bill (AWB) in case of transport by air.

7.5.2 Sale or Purchase of Goods Outside a StateAs per section 4 (1) when a sale or purchase is inside a state as per section 4 (2) such sale or purchase shall be deemed to have taken place outside all other States. Sale inside a state as per section 4 (2) means:

Incaseof specificgoodsorascertained, ifgoodsarewithin the stateat the timeof thecontractof sale is•made.In case of unascertained or future goods, if goods are within the state, at the time of their appropriation to the •contract.

7.5.3 Sale or Purchase of Goods in the Course of Import and Export [Section 5]State Government cannot impose any tax on sale or purchase of goods in course of import and export. In order to make our exports competitive no Central Sales Tax are imposed, and tax is also not imposed on imported goods because they are already subjected to custom duties.

Export of goods out of India [Section 5 (1)]A sale or purchase of goods shall be deemed to take place in the course of export of goods outside India if, such sale or purchase:

either occasions such export, or•is effected by transfer of documents of title to the goods after the goods have crossed the customs frontier of •India

As per section 5 (3), last sale or purchase of any goods preceding the sale or purchase occasioning the export of thesegoodsshallalsobedeemedtobeinthecourseofsuchexport,iffollowingconditionsaresatisfied:

The last sale or purchase has been made after the purchaser of such goods has obtained the order of export or •agreement for export was entered into by him.Such last sale or purchase has been made for the purpose of complying with such order of export or agreement •of export.Form ‘H’ has been submitted by the dealer to the prescribed authority. The form should be signed by the exporter •to whom the goods are sold.

Deemed exports [Section 5 (5)]IfanydesignatedIndiancarrierpurchasesaviationturbinefuelforthepurposeofitsinternationalflight,suchpurchaseshall be deemed to take place in the course of the export of goods out of the territory of India.

Import of goods into India [Section 5 (2)]A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into India if, such sale or purchase:

either occasions such import, or•is effected by transfer of documents of title of goods before the goods have crossed the customs frontiers of •India


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7.6 Liability to Tax on Inter-state SalesAs per Section 9 (1) Central Sales Tax shall be levied by the Central Government, but shall be collected and retained by the state government where the movement of goods have commenced.

7.6.1 Rates of TaxTherateofcentralsalestaxis4%orlocalstateratewhichever,isloweronthefirstpointofinter-statesaleif,thegoodsaresoldtothegovernmentortoaregistereddealer,andonthefulfilmentofspecifiedcondition,subsequentsales during the movement of same goods will be exempted from tax. If any of the dealers in these subsequent sales is or an unregistered dealer then the last registered dealer will collect tax @ 10% from an unregistered dealer to whom goods have been sold.

7.6.2 Determination of TurnoverAs per section 8 (A), to determine turnover following amounts will be deducted:

Central sales tax •Sale price of goods returned within six months •Other items as the central government may notify•

Central Sales TaxIf tax forms a part of aggregate sales price, then amount of tax collected by a registered dealer shall be deducted from his gross turnover. Tax is calculated by the following formula:

If the turnover of a dealer is taxable at different rates, then above formula shall be applied separately in respect of each part of the turnover liable to a different rate of tax.

Returned goods shall be deductedIf goods are returned by the buyer within 6 months, its sales price will be deducted from aggregate sale price after submitting necessary evidence. Sale price of rejected goods will be deducted even after six months.

Transactions exempted from sales taxTransactions exempted from sales tax are:

Subsequent sale by transfer of documents•Sale of goods which are generally exempt or chargeable under the local sales tax provisions at lower rate•Exemptionbyvirtueofanotification•Sale in course of import or export •Sale to a registered dealer to manufacture or processing of goods in a special economic zone•SaletoanyofficialofforeigndiplomaticmissioninIndiaorUNbody•

7.6.3 Collection of Tax [Section 9 A]The Central Sales Tax can be collected from the buyers only by the registered dealers on the inter-state sale affected by them. According to rules prescribed under this Act. Dealers who are not liable to pay tax under general sales tax law,theperiodoffilingthereturninafinancialyearis:

Quarter ending on 30 June•Quarter ending on 30 September•Quarter ending on 31 December•Quarter ending on 31 March•

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7.7 Registration of DealersAccording to Section 7, registration of dealer can be done in any of the two ways:

Compulsory registration •Voluntary registration•

7.7.1 Compulsory Registration [Section 7 (1)]Every dealer who is liable to pay Central Sales Tax should make an application for registration under the Act to the appropriate authority in his state. If a dealer does not get himself registered, he would be subject to penalty under section10whichisimprisonmentwhichmayextendtosixmonthsorfineorbothandincaseofcontinuingoffence,afineofRs.50perdaytillthedefaultcontinues.

7.7.2 Voluntary Registration [Section 7 (2)]Voluntary registration section 7 (2) is as follows:

Under following circumstances, any dealer can voluntarily apply for registration even though he is not liable •to pay tax under Central Sales Tax Act.If he is registered under sales tax law of state but, is not liable to pay tax under Central Sales Tax Act.•If there is no sales tax act in a state or any part of it, any dealer having a place of business in that state or part •thereof.If he deals in a tax-free goods in a state.•

The dealer can apply for registration at any time and, if he does not apply for registration no penalty will be imposed upon him.

Advantages of registrationA registered dealer has to pay actual sales tax @ 4% only on goods purchased by him for manufacture or resale •and, he buys the same against Form C, otherwise, he will be charged @ 10%.Subsequent sales in the course of movement of goods by transfer of documents of title to goods will be exempted •from central sales-tax if, registered dealer effecting sales is able to produce Form E-I or E-II.

FormE-I:ThisformisfilledbythedealerwhoaffectsthefirstsaleundertheInter-Statetradeorcommerce.

FormE-II:Thisformisfilledbythedealerwhoaffectsthesubsequentsaleunderinter–statetradeorcommerce.

7.7.3 Procedure for RegistrationProcedure for registration is as follows:

The dealer must make an application to the concerned authority in the appropriate state, in Form A within 30 •days of the day when he becomes liable to pay tax. The form contains the following details:

Name of the manager of business. �Name and addresses of proprietor or partner of the business. �Date of establishment of business. �Dateonwhichfirstinter-statesalewasmade. �Name of the principal place and other places of business in the appropriate state. �Particulars of any license held by the dealer. �

Single place of business: If a dealer has single place of business in the appropriate state and he is registered •in that state, he shall apply to the sales tax authority of that state only for obtaining registration under Central Sales Tax ActMore than one place of business in the same state: If a dealer has more than one place of business in the same •state, he shall selectoneof theseplaces as theprincipalplaceofbusiness and,getonlyonecertificateofregistration.


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More than one place of business in different states: If a dealer has more than one place of business in different •states,hewillgetaseparatecertificateofregistrationwithrespecttoeachstate.FeesforregistrationisRupeestwentyfivetobepaidincashorcourtfeestamp.•The application has to be signed by, in case of :•

Sole proprietorship , the proprietor �Partnershipfirm,anyonethepartner �HUF, the karta �Company, the director �Government,authorisedofficer �

Grant of Certificate of Registration [Section 7 (3)]Iftheapplicationisinorderandassessingofficerisfullysatisfiedwiththefactscontainedtherein,hewillregisterthedealerunderthisactandissueacertificateofregistrationinFormB.Ifadealerhasmorethanoneplaceofbusinessthenadditionalcopiesofcertificatewillbeissued.

7.7.4 Amendment of Certificate of RegistrationCertificateofregistrationmaybeamended:

At the request of the dealer.•By authorities themselves, after giving one notice to the dealer.•

The amendment will be made:If dealer has changed the name, place or nature of his business or •If dealer has changed the class or classes of goods•For any other reasons•

7.7.5 Cancellation of Certificate of RegistrationIt may be cancelled either:

At the request of the dealer•By authority granting registration•

Cancellation at the request of dealerThedealershallsubmitanapplicationalongwithhiscertificateandcopiesthereoftotheregisteringauthoritywithinsixmonthsbeforetheendoftherelevantyear.Thecertificatewillbecancelled,ifthedealerisnotliabletopayanytax under CST Act.

Cancellation by the authorityCertificateofregistrationwillbecancelledunderfollowingsituations:

The dealer has discontinued the business.•The dealer dies.•Dealer fails to furnish security or additional security.•Dealer has failed to pay tax or penalty under CST Act.•Voluntarily registered dealer has ceased to be liable to pay tax under state tax law of that state.•Foranyothersufficientreasons.•

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SummaryAccording to the article 265 of the constitution of India, no tax of any nature can be levied or collected by the •central or State Governments except by the authority of law.There is no exemption limit of turnover for the levy of Central Sales Tax.•Only state legislature enacted state sales tax laws in their respective state for levy of sales tax on sale or purchase •of goods other than newspapers.It is necessary to determine when a sale or purchase of goods takes place in the course of inter-state trade in •order to impose central sales-tax.State Government cannot impose any tax on sale or purchase of goods in course of import and export.•IfanydesignatedIndiancarrierpurchasesaviationturbinefuelforthepurposeofitsinternationalflight,such•purchase shall be deemed to take place in the course of the export of goods out of territory of India.As per Section 9 (1) central sales tax shall be levied by the Central Government, but shall be collected and •retained by the State Government, where the movement of goods have commenced.If tax forms a part of aggregate sales price then amount of tax collected by a registered dealer shall be deducted •from his gross turnover.If goods are returned by the buyer within 6 months, its sales price will be deducted from aggregate sale price •after submitting necessary evidence.The central sales tax can be collected from the buyers only by the registered dealers on the inter-state sale •affected by them.

ReferencesLESSON – 22 CENTRAL SALES TAX. • [Pdf]Available at: <http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_22.pdf> [Accessed 01 August 2013].CENTRAL SALES TAX ACT, 1956. • [Pdf] Available at: <http://delhi.gov.in/DoIT/TradeAndTaxes/CST_Act_1956.pdf> [Accessed 01 August 2013]. • The Central Sales Tax, 1956, Universal Law Publishing Co. Pvt. Ltd., New Delhi.Lal, B. B., & Vashisht, N., 2008. • Income Tax and Central Sales Tax Law and Practice. 29th ed., Dorling Kindersley (India) Pvt Ltd., New Delhi.Understanding VAT (Value Added Tax) & CST (Central Sales Tax) in India • [Video online] Available at: <http://www.youtube.com/watch?v=x8On2HI6LeA> [Accessed 01 August 2013].LectureNo 1 BASIC CONCEPTS LECTURE 1 vidIndex 0 stream1 • [Video online] Available at: <http://www.youtube.com/watch?v=5L9T4R9n5IQ> [Accessed 01 August 2013].

Recommended ReadingPathak, A., 2008. • Legal Aspects of Business.3rd ed., Tata-Mcgraw Hill Publishing Company Limited, New Delhi.Prasad, K., 2001• . Development of India’s Financial System. Sarup & Sons, New Delhi.Sharma, R. S., 1988• . Administration of Sales Tax. Atlantic Publishers & Distributers, New Delhi.


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Self AssessmentWhich of the following statement about Central Sales Tax is false?1.

Rates of tax are always higher on the declared goods.a. Everydealerwhomakesaninter-statesalemustbearegistereddealerandacertificateofregistrationhasb. to be displayed at all places of his business.There is no exemption limit of turnover for the levy of central sales tax.c. Underthisact,thegoodshavebeenclassifiedas:Declaredgoodsorgoodsofspecialimportanceininter-d. state trade or commerce and Other goods

According to the article _________of the constitution of India, no tax of any nature can be levied or collected 2. by the Central or State Governments except by the authority of law.

260a. 264b. 267c. 265d.

Which of following statement in element of sales is true?3. Goods should not be transferred.a. General property in good should also not be transferred.b. Price must be paid.c. There must not be a valid consent of both buyer and seller.d.

As per ___________, Central Sales Tax shall be levied by the Central Government but shall be collected and 4. retained by the State Government, where the movement of goods has commenced.

Section 9 (3)a. Section 9 (1)b. Section 9 (2)c. Section 9 d.

If goods are returned by the buyer within__________, its sales price will be deducted from aggregate sale price 5. after submitting necessary evidence.

6 monthsa. 8 monthsb. 1 yearc. 1 monthd.

Imposition of tax became effective from_________.6. 01.07.1942a. 01.08.1957b. 01.07.1957c. 01. 08.1947d.

Which of the following is not a declared good in Section 2(C)?7. Cerealsa. Cornb. Cottonc. Crude Oild.

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If tax forms a part of aggregate sales price, then amount of tax collected by a registered ___________shall be 8. deducted from his gross turnover.

dealera. buyerb. supplierc. agentd.

In how many ways can registration of dealer be done, according to Section 7?9. Onea. Twob. Threec. Fourd.

The Central Sales Tax can be collected from the buyers only by the ___________on the inter-state sale affected 10. by them.

registered dealersa. dealersb. agentsc. business mand.


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Chapter VIII

Service Tax

Aim


introduce service tax•

explicate the nature of service tax•

explain exemptions from service tax•

Objectives


explicatetheclassificationofservice•

enlist the basics of service tax•

explain the procedures to be followed for service tax-administration•

Learning outcome


identify the taxable services and partial abatement available•

understand invoice by the service provider•

describe the payment of service tax•

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8.1 IntroductionIndia stands out for the size and dynamism of its services sector. The contribution of the services sector to the Indian economy has been manifold: a 55.2 per cent share in Gross Domestic Product (GDP), growing by 10 percent annually, contributing to about a quarter of total employment, accounting for a high share in foreign direct investment (FDI) inflowsandoverone-thirdoftotalexports,andrecordingveryfast(27.4percent)exportgrowththroughthefirsthalf of 2010-11. The share of services in India’s GDP at factor cost (at current prices) increased rapidly: from 30.5 per cent in 1950-51 to 55.2 per cent in 2009-10. If construction is also included, then the share increases to 63.4 per cent in 2009-10. [Economic Survey 2010-11]

Service tax was imposed on three services w.e.f. 1-7-1994 and its scope is being widened every year. Highlights of the service tax are as follows:

Service tax is imposed under Finance Act, 1994 as amended from time to time. There is no Service Tax Act.•Service Tax @ 5% was introduced from 1-7-1994. The service tax rate was increased to 8% w.e.f. 14-5-2003.•

It was increased to 10% (plus 2% education cess, total 10.2%) w.e.f 10-9-2004. The service tax rate was increased to 12% (plus education cess of 2%, i.e., total 12.24%) w.e.f 18-4-2006. In Finance Act, 2007, SAH (Secondary and Higher Education Cess) of 1% has been introduced w.e.f. 11-5-2007. Thus, total tax is 12.36% w.e.f. 11-5-2007. Service tax rate has been reduced to 10.30% w.e.f. 24-2-2009.

Servicetaxispayableontaxableservicesasdefinedinvariousclausesofsection65(105)ofFinanceAct,1994.•Presently, about 117 services are taxable.Service tax is payable on gross amount charged for taxable service provided or to be provided [Section 67]. •If consideration is partly not in money, valuation is required to be done as per Valuation Rules. Tax is payable when advance is received.Small service providers upto ten lakhs are exempt. Export of service is exempt from service tax. •NotificationNo.6/2005-STdated1-3-2005.ServicesprovidedinJ&Karenottaxable[section64(1)].•Cenvat credit is available of inputs, input services and capital goods used for providing taxable output •services.In some cases, receiver of service is liable to pay service tax. This is termed as ‘reverse charge’.•

8.2 Basics of Service TaxFollowing are the basics of service tax:

Every provider of taxable service should apply for registration in form ST-1 within 30 days from the date of •levy (in case of new services) and date of commencement of business of providing taxable service (in case of existing services) [Rule 4(1)]. Registration will be deemed to have been granted, if not received within seven days [Rule 4(5)].Assessee providing service from various premises can have centralised registration [Rule 4(2)].•Service provider is required to prepare the invoice within 14 days from the date of completion of taxable service •or receipt of payment towards the value of taxable service, whichever is earlier.Tax should be paid by 5th of following month (6th in case of e-payment). If assessee is individual or proprietary •orpartnershipfirm,taxispayableonquarterlybasis.ThisfacilityisnotavailabletoHUF.InMarch,taxispayable by 31st March [Rule 6].If payment of tax is delayed, interest is payable @ 18% p. a. [Section 75].•Assessee has to submit half yearly return in form ST-3 in triplicate within 25 days of close of half year [Rule 7].•Penalty is payable for non-registration, late payment of tax, non-submission of returns, etc. Mandatory penalty •is payable for suppression of facts, wilful misstatement, fraud or collusion [Sections 76 to 80].Penaltyprovisionsrelatingtofraud,suppression,etc.,hasbeenfixedon100%.However,ifthetransactionis•captured in the book of accounts, 50% of penalty is liable. If the same has been paid along with interest and penalty within 30 days, penalty @ 25% shall be leviable.


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As per Section 73(4A), concessional rate of penalty @ 25% or 1% p.m., where the tax is paid before issuance •ofshowcausenotice,whichwasdetectedbythedepartmentwhileconductingaudit/verification/investigationis being further reduced to 1% p.m. of the tax amount for the duration of default with an upper ceiling of 25% of the tax amount.Thetaxisadministeredbyexcisedepartment.Adjudicationorderisissuedbyexciseofficer.•First appeal lies with Commissioner (Appeals) [Section 85] and second appeal with Appellate Tribunal (Customs, •Excise and Service Tax Appellate Tribunal) [Section 86]. Further appeal lies with High Court and Supreme Court.Prosecution enforceable only with the approval of Chief Commissioner of Central Excise. However, there is •no provision for pre-arrest power.Search could be conducted by the Superintendent with the approval of Joint Commissioner, where as earlier •Assistant Commissioner/Deputy Commissioner was authorised to conduct the search with the approval of Commissioner.

8.2.1 Nature of Levy of Service TaxService tax is levied under Entry No. 97 of List I of Seventh Schedule to Constitution of India. The entry reads as follows–‘AnyothermatternotincludedinListII,ListIIIandanytaxnotmentionedinlistIIorlistIII’(called‘residual powers’).

As per section 65(95) of Finance Act, 1994, ‘service tax’ means tax leviable under the provisions of this Chapter (i.e., Chapter V of Finance Act, 1994). Section 66 (charging section) provides that there shall be levied a tax (service tax) @ 10% of the value of taxable service referred to in various clauses of section 65(105). It will be collected in a manner as may be prescribed.

8.2.2 Taxable ServiceAs per section 66 of Finance Act, 1994, service tax is payable on ‘taxable service’. Various clauses of section 65(105) ofFinanceAct,1994defineeachtypeof‘taxableservice’.Thedefinitionisdifferentforeachclassofservices,e.g.,as per section 65(105)(a), any service provided by stock broker to any person in connection with sale or purchase of securities listed on a recognised stock exchange will be ‘taxable service’.

8.2.3 Service Tax is Destination-based Consumption Tax Service tax is a destination based consumption tax, as per CBE&C Circular No. 56/5/2003 dated 25-4-2003.

8.2.4 Service Implies Existence of Two PartiesService tax is attracted when there are two parties. One cannot give service to himself.

8.2.5 Cenvat CreditAssessee is entitled to avail Cenvat credit of excise duty and service tax paid on his inputs, input services and capital goods. This aspect has been discussed in another chapter.

8.2.6 Rate of Service TaxThistaxwasfirsttimeintroducedwitheffectfrom1-7-1994onthreeservices.Theratewas5%.Itwassubsequentlyincreased to 8% w.e.f. 14-5-2003. It was 10% plus education cess of 2% w.e.f. 10-9-2004 (total 10.2%) during 10-9-2004 to 17-4-2006. Service tax rate was 12% plus education cess of 2% (total 12.24%) during 18-4-2006 till 10-5-2007.

Presently, service tax is payable @ 10% of value of taxable services referred in section 65(105) of Finance Act, 1994. In addition, education cess of 2% and SAH education cess of 1% is payable. Thus, total service tax is 10.30%.

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8.2.7 Service Tax, Education Cess and SAH Education Cess to be Shown Separately in InvoiceYou have to show service tax, education cess and SAH education cess separately in invoice. You cannot just charge 10.30% as ‘service tax’.

8.2.8 Taxable Event in Service TaxSection 66 (which is a charging section), reads, ‘There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ten percent of value of taxable services referred to in sub-clauses (a), (b), (zzzzc) and (zzzzd) of clause (105) of section 65 and collected in such manner as may be prescribed. Opening sentence of section 65(105) as amended w.e.f., 16-6 2005 reads as follows, ‘taxable service’ means any service provided or ‘to be provided’. Thus, following are taxable events:

Entering into contract for service: Entering into contract for providing service. Once you enter into a contract, •it is certainly ‘service to be provided’. (Service tax is actually payable after the payment is received, but receipt of advance is not a taxable event. It only defers the liability).Provision of service: This will happen in cases where contract for providing service was entered into before the •service became taxable, but service was provided after the service became a ‘taxable service’.

8.2.9 Person Liable to Pay Service TaxIn most of the cases, service provider, i.e., person who is providing taxable service is liable to pay service tax. However, in few cases, exceptions have been made and service receiver is made liable to pay service tax. The provision that service receiver is liable to pay service tax is termed as ‘Reverse Charge’.

8.2.10 Services Provided to Non-residentIn relation to taxable service provided or to be provided by any person from a country other than India and received by any person under section 66A of Finance Act, service tax is payable by recipient of service [Rule 2(1)(d)(iv)].

8.2.11 Services of Insurance AgentsIn case of insurance auxiliary service by an insurance agent, the tax will be payable by insurance company (general insurance or life insurance as the case may be). The insurance agent is not liable to register and pay tax. [However, the insurance agent is not entitled to avail exemption available to a small service provider].

8.2.12 Consignor/Consignee Paying Freight, in case of GTA ServicesIn case of services of Goods Transport Agency (GTA), service tax is payable by consignor/consignee who is paying freight [rule 2(1)(d)(v)] [However, the consignor/consignee is not entitled to avail exemption available to a small service provider].

8.2.13 Services of Agents of Mutual FundIn case of distributors/agents of mutual funds, the liability will be on the recipient of service, namely, mutual funds [Rule 2(1)(vi)] [However, the mutual fund agent is not entitled to avail exemption available to a small service provider].

8.2.14 Body Corporate or Firm Located in India Receiving Sponsorship ServiceIncaseofsponsorshipserviceprovidedtoabodycorporateorfirmlocatedinIndia,thebodycorporateorfirmreceiving such sponsorship service will be liable to pay service tax [rule 2(1)(d)(vii) inserted w.e.f. 1- 5-2006 and amended w.e.f. 1-4-2007]. If the recipient of sponsorship service is located outside India, service tax is required to be paid by the service provider and not by the recipient.

8.2.15 Cenvat Credit of Tax PaidThebodycorporateorfirmpayingsuchservicetaxwillbeeligibletoavailCenvatcreditoftheservicetaxpaid,on the basis of TR-6/GAR-7 challan by which the tax is paid [Rule 9(1)(e)] of Cenvat Credit Rules, as amended w.e.f., 1-5-2006]. It may be noted that when person receiving service is liable to pay service tax, he is not entitled to exemption which is available to a small service provider.


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8.2.16 Large Taxpayer Unit (LTU)A concept of LTU has been introduced for large taxpayers of direct taxes and indirect taxes. In case of service tax, large taxpayer has meaning assigned to it in Central Excise Rules [rule 2(cccc) of Service Tax Rules]. LTU has started functioning in Bangalore w.e.f. 1-10-2006.

8.2.17 Service on Sub-contract BasisCBE&CvidecircularNo.999.03/23.8.07hasclarifiedthatasub-contractorisalsoataxableserviceprovider.Hisservices are taxable even if these are used by main provider for completion of his work. The sub-contractor is liable even if the service is input service of the main contractor and main contractor is paying service tax on entire value of contract.

8.3 Exemptions from Service TaxCentralGovernmentcangrantpartialortotalexemption,byissuingan‘exemptionnotificationu/s93ofFinanceAct,1994. Such exemption may be partial or total. Exemption may be conditional or unconditional. The only limitation is that exemption cannot be granted by Central Government with retrospective effect. There are following general exemptions:

8.3.1 Small Service ProvidersSmall units whose turnover less than Rs ten lakhs per annum are exempt from service tax. Provisions are discussed a little later (The exemption limit was Rs four lakhs upto 31-3-2007).

8.3.2 Export of ServicesThere is no service tax on export of services, if service is exported as per ‘Export of Service Rules’.

8.3.3 Services to UN Agencies ServicesprovidedtoUNandInternationalAgenciesareexempt[NotificationNo.16/2002-STdated2-8-2002].

8.3.4 Services Provided within SEZ Services provided toSEZunits orSEZdevelopers for consumptionwithinSEZare exempt [NotificationNo.4/2004-STdated31-3-2004inrespectofSEZ].Thewordingofnotificationissuchthatservicesconsumedwithinthe zone are alone exempt. Thus services provided outside SEZ (e.g., customs clearance, transport etc.) are not exempt. Taxable services provided to a developer or a unit in SEZ are exempt from service tax [section 26(1)(e) of SEZ Act]. [Rule 31 to SEZ Rules]

8.3.5 Services provided to foreign diplomatic missions, family members of diplomatic missions, etc. AnytaxableserviceprovidedtoforeigndiplomaticmissionorconsularpostinIndiaisexemptvideNotificationNo. 33/2007-ST dated 23-5-2007. Similarly, any taxable service provided for private use of family members of diplomaticagentsorcareerconsularofficespostedinaforeigndiplomaticmissionorconsularpostinIndiaisexemptvideNotificationNo.34/2007-STdated23-5-2007.

8.3.6 Services provided by RBI exempt Exemption from service tax has been provided to all taxable services provided by Reserve Bank of India. Services whereRBIisliabletopayservicetaxarealsoexempt(NotificationNo.22/2006-STdated31-5-2006–earlierNotificationNo.7/2006-STdated1.3.2006).

8.3.7 General Exemption to Small Service ProvidersThe small service providers whose turnover of taxable services from one or more premises not exceeding Rs 10 lakhsin2007-08willbeexemptfromservicetaxinnextfinancialyear,i.e.,in2008-09uptotheturnoverofRs10lakhs.TheprovisionsareprescribedinNotificationNo.6/2005-STdated1-3-2005(TheexemptionlimitwasRs 4 lakhs upto 31-3-2007). However, if value of taxable turnover exceeds Rs ten lakhs in 2008-09, there will not be exemption at all in 2009-10. For the purpose of determining eligibility in current year, what is relevant is that

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‘aggregatevalueoftaxableservicesrendered’inpreviousfinancialyearshouldnotexceedRstenlakhs,whileforpurposeofexemptionuptofirst-Rs10lakhsincurrentyear,servicetaxisexempttotheextentof‘aggregatevaluenotexceedingtenlakhs,i.e.,thesumtotaloffirstconsecutivepaymentsreceivedduringthecurrentfinancialyear.

The exemption to small service providers is available subject to following conditions:The provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services.•Where a taxable service provider provides one or more taxable services from one or more premises, the exemption •underthisnotificationshallapplytotheaggregatevalueofallsuchtaxableservicesandfromallsuchpremisesand not separately for each premises or each services.The taxable services provided by a person under a brand name or trade name, whether registered or not, of •another person; will not be eligible for exemption available to small service providers.Person providing taxable service in excess of Rs nine lakhs per annum (but less than Rs ten lakhs) will have •toregisterwithSuperintendentofCentralExciseunderServiceTaxprovisions[NotificationNo.26/2005-STdated 7-6-2005], though they will be eligible for exemption, if turnover is less than Rs ten lakhs per annum.

8.3.8 Specific ExemptionsIn case of some services, e.g., catering services, mandap keeper services and construction services, service tax is payable at lower rates, i.e., partial abatement is available from gross value; vide 1/2006-ST dated 1-3-2006. The lower rate is applicable, if the service provider does not avail Cenvat credit of duty/tax on inputs, input services and capital goods. Till 28-2-2006, he was entitled to avail Cenvat credit on input services. W.e.f. 1-3-2006, he cannot avail any Cenvat credit, if he avails the partial abatement.

Some important exemptions are as follows:

Taxable service Partial abatement available

Accommodation booking service by touroperator 10% of gross amount

Air travel agent

Optiontopayservicetaxatflatrateon‘basicfare’@ 0.60% in case of domestic booking and 1.2% in case of international booking [rule 6(7) of Cenvat Credit Rules]

Business auxiliary service in relation toprocessing of parts and accessories used inmanufacture of cycle, cycle rickshaws andhand operated sewing machines

Tax on 70% of gross amount, if gross amount is inclusive of cost of inputs and input services, whether or not supplied by the client

Erection, commissioning and installationcontract for supply of plant, machinery,equipment or structures plus erection,commissioning and installation services

Tax on 33% of gross amount, if gross amount includes value of material

Construction service Tax on 33% of gross amount, if gross amount includes value of material

Goods Transport Agency (GTA)Tax only on 25% amount in his invoice [payment will be made by consignor/consignee who is actually paying freight]

Mandap keeper, hotels and conventionservices, providing full catering services Tax on 60% gross amount charged


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Outdoor caterer Tax on 50% amount if he provides full and substantial meal

Pandal and shamiana Service 70% of gross amount charged if full catering service provided

Rent-a-cab operator Tax payable on 40% of gross amount charged

Tour operator - Package tours (‘package tour’ means a tour wherein transportation,accommodation for stay, food, tourist guide,entry to monuments and other similarservices in relation to tour are provided bythe tour operator as part of the package tourto the person undertaking the tour).

Tax is payable only on 25% of gross amount charged w.e.f. 23- 8-2007 (till 22-8-2007, tax was payable on 40% of gross amount

Tour operator - providing services solely of arranging or booking accommodation for any person in relation to a tour (If bill includes cost of accommodation)

Tax is payable only on 10% of gross amount charged

Tour operator - Other than package tours and other than service of booking accommodation, where bill includes cost of accommodation

Tax is payable only on 10% of gross amount charged

Transport of goods in container by rail Services provided by air-conditioned restaurants having a license to serve alcoholic beverages

Tax payable on 30% of gross amount charged 70% whensuchserviceswillbenotifiedEffectively, service tax shall be leviable on 30% of such value.

Short-term accommodation provided in a hotel, inn, guest-house, club or camp-sites or any other similar establishment for a continuous period of less than three months.

50%whensuchservicewillbenotified.∴ Effectively service tax such be leviable on 50% of such value.

Table 8.1 Taxable services and partial abatement available

ExemptionExemption is provided to the following services:

Value of air freight included in the assessable value of goods for charging customs duties is being excluded from •taxable value for the purpose of levy of service tax under ‘Transport of Goods by air’ service.Services related to transportation of goods by road, rail or air when both the origin and the destination are located •outside India is being exempted from service tax.

Withdrawal or amendments to existing exemptions:The rates of service tax on travel by air are being revised as following:•

Domestic travel (Economy class) Rs 150 �International travel (Economy Class) Rs 750 �Domestic travel (other than Economy Class) 10% (standard rate) �

Exemption to inter-bank transactions of purchase and sale of foreign currency is being extended to any bank, •including a bank located outside India, or money changer, or by any other bank or money changer.

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8.3.9 Services Provided to EOUServices provided to EOU/EHTP/STP/BTP are not exempt from service tax. Para 6.11(c)(v) of Foreign Trade Policy (as amended on 7-4-2006) states that EOU/EHTP/STP/BTP units can avail Cenvat credit of service tax paid. The EOU units can claim rebate of service tax paid on their input services vide Rule 5 of Cenvat Credit Rules (as am ended on 14-3-2006). Procedure for claiming refund of service tax paid on input services and excise duty on inputs hasbeenspecifiedinnotificationNo.5/2006-CE(NT)dated14-3-2006.

8.3.10 No Service Tax on Service Provided in J&KService tax provisions are not applicable in Jammu and Kashmir. Service tax will not be payable only if service is provided in J&K. If a person from J&K provides service outside J&K in any other part of India, that service will be taxable,aslocationwhereserviceisprovidedisrelevant.MerelybecauseofficeissituatedinJ&Kdoesnotmeanthat service is provided in J&K.

8.4 Classification of ServiceTherearevarioustypesofservicesonwhichservicetaxispayable.Thesearespecifiedinvarioussub-clausesofsection65(105)ofFinanceAct,1994.Itispossiblethataservicemayappeartobeclassifiableundermorethanoneheading. It is necessary to specify the heading under which the service being provided is falling. This is termed as ‘classification’.Asperrule4A(1)ofServiceTaxRules,theinvoiceshouldindicatedescriptionandclassificationof service.

8.4.1 Principles of ClassificationTheclassificationofserviceswillbedeterminedaccording to termsspecified invarioussub-clausesofsection65(105),[Section65A(1)].Ifprimafacie,ataxableserviceisclassifiableundertwoormoresub-clausesofsection65(105),classificationshallbeeffectedasperfollowingrules:

Thesub-clausewhichprovidesmostspecificdescriptionshouldbepreferredoversub-clausesprovidingamore•general description [section 65A (2) (a)].Classificationshouldbeasperessentialcharacterincaseofcompositeservices.Compositeservicesarethose•consistingofcombinationofdifferentservices.Incaseofsuchservices,iftheservicecannotbeclassifiedonthebasisofspecificdescriptionaspersection65A(2)(a)above,itshallbeclassifiedasiftheyconsistedofaservice which gives them their essential character [section 65A (2) (b)].Servicewhichappearsearlierinlist,ifservicecannotbeclassifiedonabovebasis.Ifaservicecannotbeclassified•onthebasisofaboveprovisions,theserviceshouldbeclassifiedundersub-clausewhichoccursfirstamongthesub-clauses which equally merit consideration [section 65A (2) (c)].

8.4.2 Service which has been Specifically Excluded in Definition of One Service Cannot be Covered Under Another HeadInDr.LalPathLab(P)Ltd.v.CCE(2006)5STT171(CESTAT),itwasheldwhenthereisaspecificentryforaniteminthetaxcode,samecannotbetaxedunderanyotherentry.Ifaservicehasbeenspecificallyexcludedfromdefinitionofoneservice,itcannotbecoveredunderanothertaxableservice.

8.4.3 Introduction of New Heading Means Earlier it was not TaxableIn Glaxo Smithkline Pharmaceuticals v. CCE (2005) 1 STT 37 (CESTAT), it has been held that when an existing tariffdefinitionremainssame,introductionofnewtariffentrywouldimplythatthecoverageundernewTariffwasnot covered by the earlier entry. When new category is introduced, it means that the service was not taxable under old category.

Service should be mainly or principally a taxable serviceAcompositecontractcannotbevivisectedandserviceportioncannotbesubjectedtotax–WidiaGMBHv.CCE(2006) 5 STT 414 (CESTAT) * Blue Star v. CCE (2007) 7 STT 68 (CESTAT). In Daelim Industrial Co. v. CCE 2003 STT 438 = 7 STT 184 (CEGAT), it was held that a works contract cannot be vivisected and part of it subjected to tax.


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8.5 Procedures to be Followed for the Administration of Service TaxAdministration of service tax is under Central Excise Department. The main procedures to be followed are:

Registration •Maintenance of records •Payment of service tax •Half yearly return. •

There are no prescribed forms of records. The records maintained by assessee including computerised data maintained by assessee in accordance with various other laws are acceptable [Rule 5(1)].

8.5.1 Registration Under Service TaxA ‘person liable for paying service tax’ has to register with Superintendent of Central Excise under whose jurisdiction your premises fall. He should register within 30 days from date of commencement of the business of providing taxable service. The person will have to apply for registration in form ST-1. If a person is providing more than one taxable service, he may make a single application. He should mention in the application all the taxable services provided by him, [Rule 4(4)].

Applicantshouldsubmitfollowingatthetimeoffilingapplicationforregistration-(a)copyofPAN(b)proofofresidence and (c) constitution of applicant. If application is signed by an authorised person, power of attorney would be required.

Most important document that is required is copy of Income Tax PAN number. Copy of memorandum of association orpartnershipdeedandalistofpartners/directorsshouldbesubmitted.Theregistrationcertificatewillbegrantedby Superintendent of Central Excise in seven days in form ST-2.

8.5.2 Registration Number (STC Code)RegistrationNo.,alsoknownas‘ServiceTaxCode(STC)’isafifteendigitPANbasednumber.First10digitsofthis number are the same as the PAN of such person. Next two digits are ‘ST’. Next three digits are serial numbers indicatingthenumberofregistrationstakenbytheservicetaxpayeragainstacommonPAN–para2.6ofCBE&CCircular No. 97/8/2007-ST dated 23-8-2007.

8.5.3 Premises CodeThe registration certificategivesdetails of ‘premises code’which is givenon thebasisofCommissionerate+Division+Range+SerialNo.ThenumberisgivenintheregistrationcertificateST-2atSlNo.5.Thisnumberisusedforeasyidentificationoflocationofregistrationoftaxpayer–para2.6ofCBE&CCircularNo.97/8/2007-STdated 23-8-2007.

8.5.4 Changes to be Informed in Form ST-1within 30 days Rule 4(5A) is inserted w.e.f. 1-3-2006 provides that if there is any change in information and details submitted in form ST-1 at the time of registration, the same should be informed to jurisdictional AC/DC within thirty days of suchchanges.TheformST-1isbothfornewregistrationaswellasamendmenttoexistingregistrationcertificate.

8.5.5 Cancellation/Surrender of RegistrationIftheassesseeceasestocarryontheactivityforwhichheisregistered,heshouldsurrendertheregistrationcertificatetotheSuperintendentofCentralExcise[Rule4(7)].Assesseeshouldfileup-to-datereturnsandapplyforcancellation.Registration may not be cancelled if any demands are pending.

8.5.6 Centralised RegistrationIn some cases, a person liable for paying service tax on a taxable service:

Providessuchservicefrommorethanonepremisesoroffices(e.g.,providingbankingserviceormaintenance•servicefromvariousbranches/offices);or

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Receivessuchserviceinmorethanonepremisesoroffices(e.g.,GTAservices,sponsorshipservicesprovided•tobodycorporateorfirmlocatedinIndia,mutualfundagent’sservice,insuranceagent’sservice,etc.whereheis liable under reverse charge method); or, Ishavingmorethanonepremisesoroffices,whichareengagedinrelationtosuchserviceinanyothermanner,•making such person liable for paying service tax (e.g., import of services where person receiving service is liable u/s 66A). In such cases, such person can obtain centralised registration, at his option, if:

he has centralised billing system or centralised accounting system in respect of such service, and �such centralised billing or centralised accounting systems are located in one or more premises. He can register �suchpremisesorofficesfromwherecentralisedbillingorcentralisedaccountingsystemsarelocated[Rule4(2) as amended w.e.f. 2-11-2006].

Morethanonecentralisedregistrationofregional/zonalofficesatvariousplacesispermissibleasperMF(DR)circularno.B1/6/2005-TRUdated27-7-2005–confirmedinpara2.5ofCBE&CCircularNo.97/8/2007-STdated23-8-2007.CentralisedRegistrationwillbegrantedbyCommissionerinwhosejurisdictionthepremisesoroffices,from where centralised billing or accounting is done, are located [Rule 4(3) as amended w.e.f. 2-11-2006].

8.6 Invoice by Service ProviderAssessee should prepare invoice in respect of his services. The invoice should be prepared within 14 days from date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlier.

8.6.1 Details Required to be Shown in Invoice/Bill/ChallanAs per rule 4A(1), the invoice/challan/ Bill should be signed by authorised person of provider of input services, should be serially numbered and should contain following details:

Name, address and registration number of person providing taxable service•Name and address of person receiving taxable service•Description,classificationandvalueoftaxableserviceprovidedortobeprovided•Service tax payable on the taxable service•

The rule does not make mention of date, but actually, date should be mentioned.

8.6.2 Education Cess and SAH Education Cess to be Shown SeparatelyEducation cess and SAH education cess to be shown separately in the invoice for complying with requirements of CenvatCreditRulestofacilitateavailmentofCenvatcreditbyrecipient–para5.1CBE&CCircularNo.97/8/2007-STdated23-8-2007.4.7.3Relaxationincaseofbankingandfinancialservices.Incaseofbankingandfinancialservices provided by banking company, FI, NBFC or a commercial concern, the invoice/challan need not be serially numbered and name and address of person receiving taxable service need not be contained on the invoice/challan [proviso to rule 4A(1) of Service Tax Rules]. This facility is also available to input service distributors of such type ofserviceproviders–Para5.3ofCBE&CCircularNo.97/8/2007-STdated23-8-2007.

8.6.3 Invoice in Case of Continuous Service In some cases, service is provided continuously for successive periods of time and value of such taxable service is determined or payable periodically. In such cases, the invoice or challan shall be issued within 14 days from last date of the period [second proviso to rule 4A (1) of Service Tax Rules amended w.e.f. 16-6-2005].

Services like telephones or Annual Maintenance Services are provided on continuous basis. Billing is done periodically (usually monthly). In such case, invoice should be made within 14 days from close that period. 4.7.5 Invoice at end of billing period. In case of some services like services of commission agent, it is impractical to prepare invoice of commission for each sale. Billing is done at end of the agreed period (say month or quarter), which is termed as ‘Billing Period’. In such cases, it can be argued that such services are provided on continuous basis and billing at end of the period should be acceptable.


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8.6.4 Rounding Up of Tax in Each Invoice not RequiredSection 37D of Central Excise Act, which is also made applicable to service tax, requires rounding up of tax. However, this is only while making monthly/quarterly payment to Government. Rounding up of duty in each Invoice is not envisaged in section 37D of Central Excise Act.

8.6.5 Advance Payment from Customers After 13th May 2005, service tax will be payable as soon as advance is received, even if service is provided later. Thus, service tax is payable when advance is received. Invoice will have to be prepared.

8.6.6 Payment of TaxA person liable to pay tax shall pay the same in prescribed manner [Section 68(1)]. The service tax is payable on 5th (6th in case of e-payment) of the month following the month in which payments are received toward value of taxable services except in March [Rule 6(1) of Service Tax Rules].

Iftheassesseeisanindividualorproprietaryfirmorpartnershipfirm,thetaxispayableonquarterlybasis within 5 days (within 6 days if e-payment is made) at the end of quarter except in March, (Rule 6). This facility is not availabletoHUFfirminviewofclearwordingoftheprovision.

Advance received before service was made taxable, but service was partly rendered after service became taxable As per second proviso to rule 6(1) of Service Tax Rules, if advance was received, service tax will not be payable for part or whole value of services, which is attributable to services provided during the period when service was not taxable. Thus, service tax will be payable on pro rata basis in cases where advance was received prior to imposition of service tax and service was partly/fully provided after the service tax on that service became effective.

8.6.7 Exception in March Exception has been made in case of March. Service tax on value of taxable services received during month of March orquarterofMarchisrequiredtobepaidby31stMarch.Assesseemayfinditdifficulttoaccuratelyestimatetheamounts he is going to receive from his customers in last two days. Hence, he may pay excess amount upto Rs 50,000; which can be adjusted in subsequent month/quarter, as per rule 6(4B) inserted w.e.f. 1-3-2007.

8.6.8 Payment of Tax on Amounts Actually Received Rule 6(1) makes it clear that the liability is to pay service tax on payments towards value taxable services actually received. Thus, service tax is not payable on amounts charged in the bills/invoice, but on amounts actually received.

8.6.9 Self Adjustment of Excess Tax Paid in Earlier PeriodFacility of self-adjustment of excess service tax paid has been allowed to all assessees vide rule 6(4A) subject to the following conditions prescribed in rule 6(4B) of Service Tax Rules inserted w.e.f. 1-3-2007.

8.6.10 Self Adjustment Only in Case of Reasons like Calculation Mistake, Exact Amount Not Known, etc.Self-adjustmentofexcesscreditisnotallowedonaccountofreasonslikeinterpretationoflaw,taxability,classification,valuationorapplicabilityofanyexemptionnotification[rule6(4B)(i)].Insuchcases,refundapplicationshouldbefiledandselfadjustmentisnotpermissible.Thus,selfadjustmentispossibleonlyincaseslike,(a)Excesspaymentsince exact amount to be paid could not be calculated (b) when tax is to be paid by 31st March and calculation of exact amount is practically impossible and (c) calculation mistakes.

8.6.11 Adjustment upto Rs 2,00,000 Only Permissible Excess amount paid and proposed to be adjusted should not exceed Rs 2,00,000 for the relevant month or quarter [Rule 6(4B)(iii)].

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8.6.12 Adjustment in Subsequent Month/Quarter Adjustment can be made in the succeeding month or quarter [rule 6(4A)] [Rule does not say that adjustment can be made in subsequent month or quarter only. As per section 13 of General Clauses Act, unless there is anything repugnant to the subject or context, the word singular includes plural and vice versa. Hence, it can be argued that adjustment can be made in any subsequent month/s or quarter/s].

8.6.13 Inform Details of Adjustment within 15 Days The details of self-adjustment should be intimated to the Superintendent of Central Excise within a period of 15 days from the date of adjustment [Rule 6(4B) (iv)] [It can be argued that this is directory provision and not mandatory provision,sinceinmanycases,itisimpossibletoinformin15days.Insuchcases,informationatthetimeoffilingreturnshouldbesufficient].

8.6.14 Adjustment in Case of Service Tax on Renting of Immovable PropertyIn case of service tax on renting of immovable property, abatement is available in case of property tax paid to local authorities. If such tax is paid at a later date, self-adjustment in service tax payable is permissible within one year from date of payment of tax, without any monetary limit. Assessee should inform Superintendent within 15 days of making adjustment [Rule 6(4C) of Service tax Rules].

8.6.15 Assessees Having Centralised Registration Assessees who have centralised registration can adjust the excess service tax paid on their own without any monetary limitprovidedtheexcessamountpaidisonaccountofdelayedreceiptofdetailsofpaymentsfrombranchoffices[Rule 6(4B)(ii)].

8.6.16 Adjustment If Service Not Provided Partly or FullyIf excess tax is paid, in respect of service which is not provided either wholly or partly for any reason, the excess service tax paid can be adjusted against service tax payable for subsequent period, if the value of services and tax thereon is refunded to the person from whom it was received, [Rule 6(3)]. Such adjustment is permissible only when refund is on account of services not provided. Thus, if the person refunds on account of giving some discount to client, this provision does not apply.

8.7 Payment of Service TaxThe service tax is payable 5th of the month following the month (6th in case of e-payment) in which payments are received toward value of taxable services [Rule 6(1) of Service Tax Rules]. Thus, service tax is not payable on basis of amounts charged in the bills/invoice, but only on amounts actually received during the relevant period.

8.7.1 Payment from Cenvat Credit Plus/GAR-7AssesseeshouldfirstutiliseCenvatcreditavailable.Balanceamountispayableincash.

8.7.2 Account Code The tax is payable by a GAR-7 Challan in the bank where excise duty is accepted in that Commissionerate. The major account head is ‘044’. In addition, separate accounting code has been given to each service.. TR-6 challan (in yellow colour in quadruplicate) is for payment in conventional mode while GAR-7 (one challan in yellow colour with counterfoil) is used when bank is having ‘EASIEST facility’. In both cases, payment is by cash or cheque. The tax paid should be rounded off in rupees. Education cess and SAH education cess should be shown separately under separate account head in TR-6/GAR-7 challan.

8.7.3 Presentation of Cheque on or Before Due Date is Sufficient Rule 6(2A) provides that cheque of proper amount should be deposited with bank on or before due date. It will be deemed to have been paid on due date, even if the cheque is realised later. However, if cheque is not realised, service tax will not be deemed to have been paid.


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8.7.4 If Last Date is a HolidayIflastdayofpaymentandfilingreturnisapublicholiday,taxcanbepaidandreturncanbesubmittedonnextworking day - CBE&C circular No. 63/12/2003-ST dated 14-10-2003.

8.7.5 Electronic Accounting System in Excise and Service Tax (EASIEST) ‘Easiest’ has been developed to make payment of tax easy. The facility is available with some 28 banks. The payment is made by GAR-7 challan. Assessee has to make one copy of challan and its counterfoil.

8.7.6 Mandatory e-payment if Annual Service Tax Payment Exceeds Rs 50 lakhsE-payment is a mode of payment in addition to the conventional methods of payment offered by the banks under specificsecuritynormsofReserveBankofIndia.Thisschemefacilitatesanytime,anywherepaymentandaninstantcyber receipt is generated once the transaction is complete. It provides the convenience of making online payment of Central Excise and Service Tax through Bank’s Internet banking service. About 28 Banks are authorised for this purpose. Proviso to rule 6(2) of Service Tax Rules makes e-payment mandatory for payment of duty by all assesseeswhohavepaidServicetaxofrupees50lakhsormoreincashduringtheprecedingfinancialyear,w.e.f.1-10-2006.

8.7.7 Mandatory Interest for Late Payment of Service Tax In case of delayed payment of service tax, there is mandatory payment of simple interest under Section 75 for the periodwhichthepaymentisdelayed.Theinterestrateis18%p.a.videNotificationNo14/2011–ServiceTaxdt.01.03.2011. Relief has been provided to service providers who have an annual turnover not exceeding Rs 60 lakhs, in that interest payable by item shall be 15% p.a.

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SummaryIndia stands out for the size and dynamism of its services sector.•Service tax is levied under Entry No. 97 of List I of Seventh Schedule to Constitution of India.•Service tax is imposed under Finance Act, 1994 as amended from time to time. There is no Service Tax Act•As per section 66 of Finance Act, 1994, service tax is payable on ‘taxable service’.•Service tax is attracted when there are two parties.•Service tax is a destination based consumption tax, as per CBE&C Circular No. 56/5/2003 dated 25-4-2003.•In most of the cases, service provider, i.e., person who is providing taxable service is liable to pay service •tax.In relation to taxable service provided or to be provided by any person from a country other than India and •received by any person under section 66A of Finance Act, service tax is payable by recipient of service [Rule 2(1)(d)(iv)].CentralGovernmentcangrantpartialortotalexemption,byissuinganexemptionnotificationu/s93ofFinance•Act, 1994.Therearevarioustypesofservicesonwhichservicetaxispayable.Thesearespecifiedinvarioussub-clauses•of section 65(105) of Finance Act, 1994.A ‘person liable for paying service tax’ has to register with Superintendent of Central Excise under whose •jurisdiction your premises fall.Assessee should prepare invoice in respect of his services. The invoice should be prepared within 14 days from •date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlier.The service tax is payable 5th of the month following the month (6th in case of e-payment) in which payments •are received toward value of taxable services [rule 6(1) of Service Tax Rules].

ReferencesAPPLIED INDIRECT TAXATION. • [Pdf] Available at: <http://www.myicwai.com/StudyMaterial/Applied_Indirect_Taxation.pdf> [Accessed 02 August 2013].Government of India Ministry of Finance. • [Pdf]Availableat:<http://www.servicetax.gov.in/notifications/notfns-2013/st09-2013.pdf> [Accessed 02 August 2013].Millar, R., 2007. • Doing Business with India. GMB Publishing Ltd., U K.Saini, P. K., 2007. • Financial Administration in India: Changing Contours and Emerging Challenges. Deep and Deep Publications, New Delhi.Overview of Cenvat Credit Excise and Service Tax. • [Video online] Available at: <http://www.youtube.com/watch?v=T7MoXzy4hEY> [Accessed 02 August 2013].IDT - CA Final Indirect Taxes. • [Video online] Available at: <http://www.youtube.com/watch?v=b8yHfpVNHdE> [Accessed 02 August 2013].

Recommended ReadingKelkar, V. L.,• Shome, P., & Chelliah, R. J., 2003. Reports on India’s Tax Reforms. Academic Foundation, New Delhi.Afram, G. G., 2011.• The Remittance Market in India: Opportunities, Challenges, and Policy Option. World Bank Publications, Washington.Sharma, B. K., 2011. • Introduction to the Constitution of India. 6th ed., PHI Learning Pvt. Ltd., New Delhi.


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Self AssessmentService tax is imposed under Finance Act, _________as amended from time to time. 1.

1992a. 1993b. 1994c. 1997d.

Service tax is levied under Entry No. 97 of List I of _________Schedule to Constitution of India.2. Seventha. Sixthb. Fifthc. Thirdd.

Which of the following statement is false?3. Servicetaxispayableontaxableservicesasdefinedinvariousclausesofsection65(105)ofFinanceAct,a. 1994. Presently, about 117 services are taxable.Service tax is payable on gross amount charged for taxable service provided or to be provided [Section b. 67]. If consideration is partly not in money, valuation is required to be done as per Valuation Rules. Tax is payable when advance is not received.Small service providers upto ten lakhs are exempt. Export of service is exempt from service tax under.c. NotificationNo.6/2005-STdated1-3-2005.ServicesprovidedinJ&Karenottaxable[section64(1)].d.

As per __________of Finance Act, 1994, service tax is payable on ‘taxable service’.4. section 61a. section 60b. section 68c. section 66d.

Presently, service tax is payable @ ________of value of taxable services referred in section 65(105) of Finance 5. Act, 1994.

4%a. 10%b. 12%c. 15%d.

Which of following statement is true?6. Assessee providing service from various premises cannot have centralised registration [Rule 4(2)].a. If payment of tax is delayed, interest is payable @ 19% p. a. [Section 75].b. Assessee has to submit half yearly return in form ST-3 in triplicate within 25 days of close of half year c. [Rule 7].Thetaxisadministeredbyexcisedepartment.Adjudicationorderisnotissuedbytheexciseofficer.d.

Service tax is a destination based ____________tax, as per CBE&C Circular No. 56/5/2003 dated 25-4-2003.7. consumptiona. conservationb. maintenancec. managementd.

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Service tax is attracted when there are __________parties.8. onea. twob. threec. fourd.

Under which section does the following statement reads?9. ‘There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ten percent of value of taxable services referred to in sub-clauses (a), (b), (zzzzc) and (zzzzd) of clause (105) of section 65 and collected in such manner as may be prescribed’.

Section 61a. Section 60b. Section 68c. Section 66d.

The service tax is payable _______ of the month following the month (6th in case of e-payment) in which 10. payments are received toward value of taxable services [rule 6(1) of Service Tax Rules].

5tha. 10thb. 1stc. 3rdd.


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Case Study I

Income Tax

About PosidexPosidex Technologies develops software products, solutions and offer services in the domain of entity resolution and analytics. Posidex’s products and solutions help enterprises in their operations, decision-making and planning during the process of customer data integration, data quality management and master data management. Posidex’s clients are spread across various verticals from BFSI to government and are one of the largest data depositories in India in their respective domains. Posidex provides the investigation unit of India’s Income Tax Department, the technology to track tax evasion.

Posidex SolutionTheinvestigationunitoftheIncomeTaxDepartmentofIndiahasaccesstothefinancialtransactionsofthecitizens.The department was looking for a solution which could correlate the information in these huge databases and create acomprehensive360degreeviewoftheassesseewithrespecttothefinancialtransactionsandtaxpayments.Thedepartment also wanted to identify the related identities of the tax payer so as to examine them as a group.

The top challenges for mining the available data were:Therewasnosingleuniqueidentifieracrossthedatasources-eventhoughPAN(PermanentAccountNumber)•is unique to each person, it was not always recorded in every transaction or was recorded incorrectly.Nodefinedstandardsforwritingnameandaddress.•Poor and uneven data quality.•Very large data volume for querying and matching.•

Posidex innovative Prime Match TM technology based solution was selected by the Income Tax Department after a thorough evaluation of the solutions including from other vendors. It was found to be the best based on the key parameters of precision and recall of matching process and speed of response. It was the only solution with the capability of identifying the related entities of the taxpayer.

ITDMSbenefiteddepartmentinthefollowingways:Entire investigation process improved.•Reducedprofilingtimefromweekstoafewhours.•The department proactively detected several hundred crores of rupees in unpaid taxes.•Largest data mining installation in India deployed across 20 centres using identity resolution on over 300 million •records and growing.

(Source: Integrated Tax Payer Data Management System. [Pdf]Availableat:<http://www.posidex.com/pdf_files/Posidex_Incometax.pdf> [Accessed 20 August 2013]).

QuestionsWhat was the income tax department looking for?1. AnswerTheinvestigationunitoftheIncomeTaxDepartmentofIndiahasaccesstothefinancialtransactionsofthecitizens. The department was looking for a solution which could co-relate the information in these huge databases andcreateacomprehensive360degreeviewoftheassesseewithrespecttothefinancialtransactionsandtaxpayments.

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What were the challenges for mining the available data?2. AnswerThe top challenges for mining the available data were:

TherewasnosingleuniqueidentifieracrossthedatasourceseventhoughPAN(PermanentAccountNumber)•is unique to each person, it was not always recorded in every transaction or was recorded incorrectly.Nodefinedstandardsforwritingnameandaddress.•Poor and uneven data quality.•Very large data volume for querying and matching.•

Howdidtheprocessofco-relatingofinformationinhugedatabenefittheincometaxdepartment?3. AnswerTheprocessofco-relatingofinformationinhugedatabenefitedtheincometaxdepartmentinthefollowingways:

Entire investigation process improved.•Reducedprofilingtimefromweekstofewhours.•The department proactively detected several hundred crores of rupees in unpaid taxes.•Largest data mining installation in India deployed across 20 centres using identity resolution on over 300 •million records and growing.


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Case Study II

Vodafone Tax case - A Case Study for Investments in India

India Inc. has been surging ahead audaciously with the support of its Information Technology developments with its repertoire of resources. Global players have been eyeing the Indian market, owing to immense opportunities thatthecontinentprovides;bothintermsofexpansionandprofit.InvestmentpatternsinIndiahaveshownpositivegrowthovertheyearswithsignificantprocessonthede-regulationfront.IndiahasbeengreatlyinvolvedwiththeG-8 and G-20, including signing of the Double Taxations Avoidance Agreements/Treaties (DTAA) with various tax-haven countries. This has boosted the image of India as a ‘lookout destination’ for investment and an emerging hub for economical activities. World Report 2010 ranked India as the 9th most attractive investment destination, while Bloomberg Global Poll conducted in September 2010 put India in the third position, above the United States of America (US).

However, the very same image is said to have taken a beating with the recent Vodafone Tax case, which has been revolving in courts since 2009. With clear signs of the court ruling in favour of the tax authorities, many global companies are said to be rethinking their investment plans in India, keeping in mind the impact of the judgement on the taxation front. The Doing Business Report 2011 of World Bank has ranked India at 134, below neighbouring countrieslikePakistanandBhutan.Thisisaresultofproceduraldifficultiesforstart-upcompaniesandinvestmentcompanies, in India and abroad.

Tax regulations play a major role in cross border transactions and investments in a country. Tax havens, open borders and DTAA countries are major destinations for investment through Foreign Direct Investment (FDI) or other routes. The Vodafone tax case throws an interesting question on the taxability of a non-resident company acquiring sharesofaresidentcompanythroughanindirectroute.Thisisalandmarkcase,asitisforthefirsttimethatthetax departments have sought to tax a company through a mechanism of tracing the source of acquisition. While we have heard about lifting the ‘corporate veil’, this instance has set a rare example wherein the Indian tax authorities have gone to length to interpret the existing tax laws, to bring a global company like Vodafone to its tax ambit.

FactsVodafone International Holdings BV, based in Netherlands and controlled by Vodafone UK, obtained the controlling interest and share of CGP Investments Holdings Ltd. (CGP) located in Cayman Island for a value of $11.01 billion from Hutchinson Telecommunications International Ltd. (HTIL), which had stake in Hutchinson Essar Ltd. (HEL) that handled the company’s mobile operations in India. HEL had its stake in CGP Holdings, from which Vodafone bought 52 per cent of HEL’s stake in 2007, thereby vesting controlling interest over them.

The Bombay High Court, on September 8, ruled that where the underlying assets of the transaction between two or more offshore entities lies in India, it is subject to capital gains tax under relevant income tax laws in India. The Court invoked the nexus rule wherein a state can tax by connecting a person sought to be taxed with the jurisdiction, which seeks to tax. The treatment of the company as an Assessee in Default (AID) under Section 201(1) 1 of the Income Tax Act and reading Sections 5(2)2, 9(1)3 and 1954, the court came to the conclusion that Vodafone was liable to deduct tax at source (TDS). Vodafone has now appealed before the Supreme Court to revisit the judgement, which makes them liable for a record amount of Rs 12,000 crores going to the tax authorities’ kitty.

ImpactVodafone raises pertinent questions on the issue of taxation of non-resident entities. The judgement will have direct impactontransactionsofmajoracquisitionslikeSABMiller-FosterandSanofiAventis-ShantaBiotech.SimilartransactionsthatexistedearlierareSesaGoa,AT&TandGeneralElectric.Britishfirm,CairnEnergyhasalreadyagreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability could range between $868 million and$1.1billion.ThejudgementwoulddefinitelythrowacautiousnotetomajorinvestorsandM&AsinIndia;however,itdoesnothavethatgreatanimpacttocurtailtheinvestmentflowtoanemergingdestinationlikeIndia.ThejudicialproprietyofthecaseisstilltobesettledwhenthemattercomesforfinalstagesintheSupremeCourt.Going by the events in the lower courts, the Supreme Court is unlikely to disturb the Bombay High Court ruling.

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The global community is keenly watching the current trends happening in the Indian subcontinent, especially since it has become an emerging player at the socio-economic and political levels. United Nations Conference on Trade and Development (UNCTAD) has reported that India is set to dislodge the US by December 2012 to become the second best destination for FDIs, the major component of which is M&As. India is also set to revamp its taxation norms withsignificantchangesattheregulatorylevel.TheproposedDirectTaxCodecontainskeyprovisions,whichwillhave a major impact on investments in India. India has improved its rankings in the WB ‘Doing Business’ Report on the number of regulatory changes taken in the existing year. This shows that the country is set to make a global footprint by branding itself as a ‘Must Invest’ destination.

The Vodafone tax case has given India the opportunity to create a model for other countries, which follow source-based taxation principles. It is an opportune time to bask in the glory of India, which is said to have had one third share of the world market in ancient times, as pointed out by economist Amartya Sen in his book The Argumentative Indian. Let’s hope that we can revive the ‘Real India’ soon.

Notes:1. Section 201 of the Act broadly provides that any person (referred to in Section 200 of the Act), and in cases referred toinSection194,theprincipalofficerandtherelevantcompany,whodoesnotdeductthewholeoranypartofthe tax, or after deducting fails to pay the tax as required by or under the Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an ‘assessee in default’ in respect of the tax.

2. Section 5(2) enunciates that the income of a non-resident from whatever source derived is included in the total income if (i) it is received in India; (ii) deemed to be received in India; (iii) accrues in India; (iv) deemed to accrue in India; (v) arises in India; or (vi) deemed to arise in India.

3. Section 9(1) explains the circumstances in which income is deemed to accrue or arise in India and includes all income accruing or arising in India, whether directly or indirectly (a) through or from any business connection in India; or (b) through or from any property in India; or (c) through or from any asset or source of income in India; or (d) through the transfer of a capital asset situated in India.

4. Section 195 provides for deduction for tax at source upon a payment to a non-resident or foreign company

5. The proposed DTC says that, if 50 per cent of the value of the shares being transferred is derived from assets situated in India, it is deemed to be taxable in India.

(Source: Vodafone Tax case - A Case Study for Investments in India. [Online ] Available at: <http://www.civitas.in/legal_solutions/articles/3/Vodafone_Tax_case_-_A_Case_Study_for_Investments_in_India>[Accessed 20 August 2013]).

QuestionsWhat was the Vodafone tax case?1. What does Section 201 state?2. What impact does the Vodafone case have on India?3.


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Case Study III

Income Tax-Empowering the Indian Income Tax Department through Implementation of a Feature-rich Portal for Operational Benefits and Clear Cost Savings

The ClientThe Income Tax Department, India, is the promoter of compliance with Indian direct tax laws, through caring taxpayer service and strict enforcement, leading to realisation of maximum resources for the nation.

The ProjectIn the year 2000, the Income Tax Department undertook a conscious decision for re-designing business processes through leveraging upon Information Technology, with increased control, streamlined processes, cost savings, knowledge management, information dissemination and citizen orientation as the main objectives. As part of the re-designing process, the department wanted a reliable partner to design a centralised portal which brought the various department websites provided for 28 states and 7 union territories under a single umbrella. Quintegra provided the expertise for the department in developing and implementing an optimal portal solution. Quintegra’s roles during the successful expedition of the project included:

Requirements gathering and analysis•Study of existing departmental websites•Design of the solution in accordance with the department’s needs•Design of interfaces with other systems•Creation of a proof of concept prototype•Detailed development through iterative model•Implementation and rollout•Continuous maintenance and enhancement•

Today, the portal (www.incometaxindia.gov.in) provides a single-window access to all of the department’s functions for tax payers. The portal provides various online forms for payment of different types of direct taxes and also provides features for online payment. The portal also caters to PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number), two of the most mandatory details required for payment of taxes, by interfacing with other organisations such as NSDL and UTITSL for online application and status check.

The portal also provides information on tax laws and rules help desk support for computation of tax and e-services, suchaselectronicfurnishingofreturnofincome.Theworkflowofthesolutionalsoallowsnon-technicalstaffofthe Department to easily update information within the portal. The development methodology used also supports the expected growth in features of the site.

Value CreatedConsolidated the department’s disparate websites into a single-access portal•Enhanced productivity through standard formats•Enabled the department to comply with the Right to Information Act 2005, an Indian Act that mandates all •government departments to empower the citizens by providing access to departmental informationIncreased the transparency and speed of the department’s business processes, operations and administration•Reduced20–30%intotalcostofoperationsthroughself-servicebycitizens•Reduced paperwork•Enhanced service levels•Implemented a highly scalable solution to accommodate the department’s expansion plans•Compressed the development time of the project through an iterative software development model•

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Established a professional, technical and management approach to operations•Seamless integration with other systems•Accelerated implementation without compromise on quality•Improved information access and decision-making•Enhanced knowledge management and information dissemination•Bestpracticesandmethodologiesadoptedhelpedbuildamutuallybeneficialrelationship•

(Source: Empowering the Indian Income Tax Department through implementation of a feature-rich portal for operationalbenefitsandclearcostsavings.[Online] Available at: <http://www.quintegrasolutions.com/casestudy08.htm> [Accessed 20 August 2013]).

QuestionsWhat were the main objectives of Income Tax Department for redesigning the business processes?1. What were Quintegra’s roles during the successful expedition of the project?2. What was the result of this project?3.


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Lal, B. B. & Vashisht, N., 2008. • Income Tax and Central Sales Tax Law and Practice. 29th ed. Dorling Kindersley (India) Pvt Ltd., New Delhi.Lal, B. B., 2010. • Income Tax. Dorling Kindersley (India) Pvt. Ltd., New Delhi.Lecture No 1 BASIC CONCEPTS LECTURE 1 vidIndex 0 stream1. • [Video online] Available at: <http://www.youtube.com/watch?v=5L9T4R9n5IQ> [Accessed 01 August 2013].Lesson – 17 Wealth Tax-I. • [Pdf]Availableat:<http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_17.pdf> [Accessed 26 July 2013].Lesson – 18 Wealth - Ii. • [Pdf]Availableat:<http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_18.pdf> [Accessed 26 July 2013].LESSON – 22 CENTRAL SALES TAX. • [Pdf]Available at: <http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_22.pdf> [Accessed 01 August 2013].LESSON- 20 CUSTOMS LAW- BASIC. • [Pdf]Available at: <http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_20.pdf> [Accessed 30 July 2013].LESSON–19 CENTRAL EXCISE LAWS. • [Pdf]Availableat:<http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_19.pdf> [Accessed 31 July 2013].Millar, R., 2007. • Doing Business with India. GMB Publishing Ltd., U K.Millar, R., 2007. • Doing Business with India., GMB Publishing Ltd., U K.Mohan, R., Goswami, O., 1996. • Policy Reform in India. OECD Publishing, France.Overview of Cenvat Credit Excise and Service Tax. • [Video online] Available at: <http://www.youtube.com/watch?v=T7MoXzy4hEY> [Accessed 02 August 2013].Patil, A. C., • Unit 17 Income Tax Reforms in India. [Pdf] Available at: <http://www.taxwomanpune.com/Tax-Reforms-in-India.pdf> [Accessed 25 July 2013].Pithisaria, M. K., 2011. • Bhatnagar Direct Tax Digest. 9th ed., Lexis Nexis, India.Preparing a gift tax valuation using ESI-APPRAISE. • [Video online] Available at: <http://www.youtube.com/watch?v=A1a73-cUcDs> [Accessed 29 July 2013].Purfield,C.&Schiff,J . A . ,2006.• India Goes Global: Its Expanding Role in the Global Economy, International monetary fund.Rajeev, P. V., 1991. • Resource Mobilization in India and Pakistan. Deep & Deep Publications, New Delhi.Saini, P. K., 2007. • Financial Administration in India: Changing Contours and Emerging Challenges. Deep and Deep Publications, New Delhi.Shand, R. T., Kalirajan, K. & Sankar, U., 2003. • Economic Reform and the Liberalisation of the Indian Economy: Essays in Honour of Richard T. Shand. Edward Elgar Publishing, U K.Taxability of Gifts under the Income Tax Act, 1961. • [Pdf] Available at: <http://tpaindore.com/Taxability%20of%20Gift%20-%20Article[1].pdf> [Accessed 29 July 2013].The Central Sales Tax, 1956• . Universal Law Publishing Co. Pvt. Ltd., New Delhi.The Gift-Tax Act, 1958. • [Pdf] Available at: <http://www.rfhha.org/images/pdf/Hospital_Laws/GIft_Tax_Act_1958.pdf> [Accessed 29 July 2013].The National Highways Act, 1956• . Universal Law Publishing Co. Pvt. Ltd, New Delhi.Understanding VAT (Value Added Tax) & CST (Central Sales Tax) in India. • [Video online] Available at: <http://www.youtube.com/watch?v=x8On2HI6LeA> [Accessed 01 August 2013].Wealth taxation - Computation of net Wealth. • [Video online] Available at: <http://www.youtube.com/watch?v=ASnRevqhFJU> [Accessed 26 July 2013].


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Recommended ReadingAfram, G. G., 2011.• The Remittance Market in India: Opportunities, Challenges, and Policy Options. World Bank Publications, Washington.Agrawal, S. P., 1992. • Information India 1992-93: Global View. Deep & Deep Publications, New Delhi.Bhagwati, J. N. & Wilson, J. D, 1989. • Income Taxation and International Mobility, MIT. Conklin, D. W., 1990.• Provincial Tax Reforms: Options and Opportunities, IRPP, Canada.Franceschin, G., & Misuraca, F., 2011.• India: Commercial Law, Customs and Taxation, Kluwer Law International, Netherland.Grown, C. & Valodia, I., 2010. • Taxation and Gender Equity: A Comparative Analysis of Direct and Indirect Taxes in Developing and Developed Countries.IDRC. Jha, S. M., 1990. • Taxation and the Indian Economy, Deep and Deep Publications, New Delhi.Kashyap, S. C., 2011. • The Constitution of India. Universal Law Publishing Co. Pvt. Ltd., New Delhi.Kelkar, V. L.,• Shome, P. & Chelliah, R. J., 2003. Reports on India’s Tax Reforms. Academic Foundation, New Delhi.Killius, J., 2003. • Inheritance and Wealth Tax Aspects of Emigration and Immigration of Individuals, Kluwer Law International, Netherland.Lal, 2008. • Direct Taxes. 29th ed., Pearson Education India.Lieuallen, G. G., 2009. • Basic Federal Income Tax. Aspen Publishers., N.Y.Pathak, A., 2008. • Legal Aspects of Business, 3rd ed., Tata-Mcgraw Hill Publishing Company Limited, New Delhi.Poirson, 2006. • The Tax System in India: Could Reform Spur Growth?, Issues 2006-2093. International Monetary Fund.Prasad, K., 2001• . Development of India’s Financial System. Sarup & Sons, New Delhi.Rhodes, J., 2011. • Private Client Tax: Jurisdictional Comparisons, Sweet & Maxwell, London.Sharma, B. K., 2011. • Introduction to the Constitution of India. 6th ed., PHI Learning Pvt. Ltd., New Delhi.Sharma, R. S., 1988• . Administration of Sales Tax. Atlantic Publishers & Distributers, New Delhi.Shira, D., & Ellis, D., 2012,• Doing Business in India, Springer, N.Y.Sreekantaradhya, B. S., 2000. • Structure and Reform of Taxation in India. Deep & Deep Publications, New Delhi.The Bureau of Indian Standards Act, 1986• . Universal Law Publishing Co. Pvt. Ltd., New Delhi.The Indian Partnership Act, 1932• . Universal Law Publishing Co. Pvt. Ltd., New DelhiThuronyi, V., 2003. • Comparative Tax Law. Kluwer Law International, Netherland.Witte, J. F., 1986. • The Politics and Development of the Federal Income Tax. University of Wisconsin Press, England.

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Self Assessment Answers

Chapter Ib1. b2. c3. d4. a5. d6. a7. c8. c9. d10.

Chapter IId1. a2. d3. d4. b5. c6. a7. c8. d9. a10.

Chapter IIIb1. a2. c3. a4. b5. d6. a7. c8. c9. d10.

Chapter IVa1. c2. d3. b4. a5. d6. b7. c8. a9. c10.


132/JNU OLE

Chapter Va1. d2. c3. b4. d5. c6. a7. c8. a9. b10.

Chapter VIb1. c2. a3. d4. b5. c6. a7. c8. a9. c10.

Chapter VIIa1. d2. c3. b4. a5. c6. b7. a8. b9. a10.

Chapter VIIIc1. a2. b3. d4. b5. c6. a7. b8. d9. a10.

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