fundamentals of direct taxes - 11[1].10

8/2/2019 Fundamentals of Direct Taxes - 11[1].10

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FUNDAMENTALS OFDIRECT TAXESDecember 23, 2011

Kanu H Doshi

Dean, Finance

Welingkar Institute of Management


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Direct Tax collected individually and

seperately

Indirect Tax collected or levied on the

commodity or product/goods/or services.

Direct Tax hits us directly

Indirect Tax hits us indirectly through theprice of the product and services.


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Indirect Tax is harshest on the poor

because irrespective of income /

status of the user / consumerincidence is same.

Direct Tax is on inflow or income.

Indirect Tax is on outflow .


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Two basic Characteristics of our

Direct Tax system :

Progressive

and

Integrated


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Progressive system of direct

taxation is a system in which

proportion of tax increases morethan proportionately of the amount

which attracts the tax.


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Thus at present the tax (inclusive of 2%

Education Cess and Secondary and Higher

Education Cess @ 1%) on Income of Rs.1,60,000 is NIL.On Rs.1,60,000 Rs. NIL

On Rs.2,00,000 Rs. 4,120

On Rs.2,50,000 Rs. 9,270

On Rs.3,00,000 Rs. 14,420

On Rs.4,00,000 Rs. 24,720

On Rs.5,00,000 Rs. 35,020

On Rs.6,00,000 Rs. 55,620

On Rs. 10,00,000 Rs. 1,58,620

In Statistics, we have Progression .Hence

the World Progressive.


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Income A/c year

2009-10Tax

Effect

iveRate

A/c years

2010-112011-12

Tax

Effec

tiveRate

A/c year

2011-12DTC No

Ed. Cess

Effecti

ve Taxrate in

%

5,00,000 55,620 11 % 35,020 7 % 30,000 6 %

8,00,000 1,48,320 19 % 96,820 12 % 90,000 11 %

10,00,000 2,10,120 21 % 1,58,620 16 % 1,30,000 13 %

20,00,000 5,19,120 26 % 4,67,620 23 % 4,30,000 21 %

25,00,000 6,73,620 27 % 6,22,120 25 % 5,80,000 23 %

Tax Payable:

Ongoing Voluntary Scheme! Declare more and more!!


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This is based on the simple principle ofability to pay or what the traffic can

bear. It is observed that with every

increase in our income, after meeting

the basic necessities, our capacity

(ability) to pay tax increases more than

proportionately and hence the quantum

of tax also increases under the system.


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We have the following slabs at present :

(i) GENERAL:

TAXFirst Income of Rs.1,60,000 NIL

On Income of Rs.1,60,001 to 5,00,000 10%

On Income of Rs.5,00,000 to 8,00,000 20%

On Income over Rs.8,00,000 30%

(ii) WOMEN TAXPAYERS

Income upto Rs.1,90,000 NIL

(iii) SENIOR CITIZENS (Over 60 years)(earlier 65 yrs)Income upto Rs.2,50,000 NIL

(iv) Very senior citizen (80 yrs) NIL

Income upto 5,00,000


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Sur Charge :

It is always a per cent of Tax while tax is per cent ofIncome /Wealth. Only for special purpose, hencetemporary. It does not disturb the basic rates of say10,20 & 30%. Payable by only companies on first rupee

of Income at 5% if income exceeds Rs. 1 crore.

It is imposed largely for raising funds for special purposesay Bangladesh War, Kargil War, Super Cyclone ofOrissa, Gujarat Earthquake of 26 Jan 2000 and Tsunamiof 26 Dec 2004. Surcharge collections are not sharedwith the States but remain only with the Central Govt.


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Integrated System of Taxation. We have had the following

Direct Taxes from time to time :

(i) The Income Tax Act, 1961 (1922 Act)(ii) The Expenditure Tax Act, 1957

(iii) The Gift Tax Act, 1958

(iv) TheWealth Tax Act, 1957

(v) The Estate Duty Act, 1953

Highest marginal Income Tax rate in the year1973-74 was 97.75% + 3% Wealth tax which

taxes together exceeded 100% of a taxpayers income. Not thru error but by design.Socialistic Patter of society


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Professor Nicolas Kaldor, an eminent English

Economist from UK at the invitation of Pandit

Nehru, our first Prime Minister, came to India in1956 and studied our Indian Tax system and

submitted his Report titled Indias Tax Reform.

He noticed that we in India in our wisdom had

imposed income tax on income by virtue ofIndian Income Tax Act, 1922. We had also

imposed Estate Duty by the Act of 1953,

modeled on English Death Duty Act on property

passing on death.

In order to plug a loophole in the Estate Duty Act

through GIFTS prior to the death of the person, he

suggested levy of Gift Tax on Gifts during the life

time of the tax payer.


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Similary, to plug loophole in our Income Tax

Act, he suggested levy ofWealth Tax on our

Wealth. Wealth is Income saved after

payment of tax and spending it on our

needs.

Wealth put to productive use generates

income e.g. FD with a Bank Rs.2,00,000 @10% = Rs.20,000 income per year. There is

a direct relationship between Income and

Wealth and hence a check through a tax on

Wealth serves automatically as a check overthe Income.


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On the same principle, a persons

expenditure is a good guide of a persons

income. Hence, the expenditure tax onexpenditure incurred.

Rationale was that if a person filed his

Return of Income, Return of Wealth,

Return of Gifts and Return of Expenditure,

Income Tax Officer would be in a better

position to make a meaningful assessmentof his Income and collect proper and full

income tax on his true income.


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These taxes could be summarized

as :(i) If we earn income, we pay Income Tax;

(ii) If we spend that income, we pay

Expenditure Tax;(iii) If we gifted that income, we pay Gift Tax;

(iv) If we retained that income, we pay

Wealth tax; &

(v) If we died leaving behind that wealth,

there was Estate Duty to be paid on it.


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(i) Expenditure tax was abolished 01.04.1960

(ii) Estate Duty w.e.f. 15.03.1985

(iii) Gift Tax w.e.f. 01.10.1998(iv) Wealth Tax diluted w.e.f. 01.04.1992

Expenditure tax was removed because cost of collectionof tax exceeded the tax itself. Same for Estate Duty.

However, real reason for deleting Estate Duty was that itprevented NRIs to keep deposits in India and invest inIndia because estate duty was payable on such fundseven if NRI died outside India. (Indian in Dubai movedby Mrs.Indira Gandhis appeal).

As of today in Oct 2011 we have now the Income TaxAct, 1961 and Wealth Tax Act, 1957


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Wealth Tax is levied on market

value of the following assets;(i) Vacant land (Not being agricultural)

(ii) Jewellery (Gold, Diamonds, Silver, Precious Stones)(Sarabhais)

(iii) House Property (ONE is Exempt)

(iv) Motor Car (Infosys) aircraft, boat, (not being for hire)

(v) Cash over Rs.50,000

Wealth Tax is @1% of the market value ofWealth

exceeding Rs.30 Lacs every year.


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Gift Tax came back through backdoor w.e.f. 1.9.2004 as Income Tax

on gift of sum of money over

Rs.25,000 per year from non closerelatives.


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FEW

TAX PLANNING

IDEAS


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Capital Asset defined : section 2(14)

Capital asset means property of any kind held by an assessee,whether or not connected with his business or profession, but

does not include -

(i) any stock in trade ,consumable stores or raw

materials held for the purpose of his business orprofession;

(ii) personal effects, that is to say ,movable

property (including wearing apparel andfurniture) held for personal use by the assessee or

any member of his family dependent on him, but

excludes -


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a) jewellery;

b) archeological collections;

c) drawings;d) painting;

e) sculptures; or

f) any work of art.


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Explanation For the purpose of this sub

clause, jewellery includes-

a) ornaments made of gold,silver,platinum or

any other precious metal or alloy containing

one or more of such precious metals ,whether

or not worked or sewn in to any wearing

apparel;

b) precious or semi-precious stones, whether or

not set in any furniture , utensil or otherarticle or worked or sewn into any wearing

apparel;


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Wealth Tax Act 1957:

Section 2(ea) (iii)

Jewellery, bullion, furniture, utensils or any

other article made wholly or partly of gold,

siliver, platinum or any other precious metal or

nay alloy containing one or more of such

precious metals:

Provided that where any of the said assets is

used by the assessee as stock-in-trade, suchasst shall be deemed as excluded from the

assets specified in this sub-clause.


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Section 54EC

Capital gain not to be charged on investment in

certain bonds. Where the capital gain arises from the transfer

of a long-term capital asset (the capital asset to

transferred being hereafter in this section

referred to as the original asset) and the

assessee has, at any time within a period of six

months after the date of such transfer, invested

the whole or any part of capital gains in thelong-term specified asset, the capital gain shall

be dealt with in accordance with the following

provisions of the section, that is to say, -


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Provided that the investment made on or after

the 1st day of April,2007 in the long-term

specified asset by an assessee during anyfinancial year does not exceed fifty

lakh rupees.


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Gifts as Income

Income from other sources.

Section 56

1) Income of every kind which is not to be excludedfrom the total income under this Act shall bechargeable to income tax under the head Income

from other sources, if it is not chargeable to income-tax under any of the heads specified in section 14,

items A to E.

.....

v) where any sum of money exceeding twenty- fivethousand rupees is received without considerationby an individual or a Hindu undivided family fromany person on or after the 1st day of September, 2004but before the 1st day of April, 2006, the whole of

such sum:


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vi)

where any sum of money, the aggregate

value of which exceeds fifty thousandrupees, is received without consideration, byan individual or a Hindu undivided family, in

any previous year from any person or persons

on or after the 1st day of April, 2006 but

before the 1st day of October, 2009, the

whole of the aggregate value of such sum:


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vii) where an individual or a Hindu undivided

family receives, in any previous year, from

any person or persons on or after the 1st day

of October, 2009,-

a)any sum of money,

without consideration,

the aggregate value of which exceeds fifty

thousand rupees, the whole of the aggregate

value of such sum;


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b) any immovable property , without consideration ,

the stamp duty value of which exceeds fifty

thousand rupees, the stamp duty value of such

property;

c) any property, other than immovable property,-

i) without consideration, the aggregate fair marketvalue of which exceeds fifty thousand rupees, the

whole of the aggregate fair market value of such

property;


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Provided that this clause shall not

apply to any sum of money

received

(a) from any relative; or

(b) on the occasion of the marriage of

the individual; or

(c) under a will or by way of inheritance; or

(d) in contemplation of death of the payer; or


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Explanation For the purpose of this clause,

relative means-

i. Spouse of the individual;ii. Brother or sister of the individual;

iii. Brother or sister of the spouse of the individual;

iv. Brother or sister of either of the parents of the

individual;

v. Any lineal ascendant or descendant of the

individual;

vi. Any lineal ascendant or descendant of the spouse ofthe individual;

vii. Spouse of the person referred to in clauses (ii) to

(vi);


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fundamentals of direct taxes - 11[1].10

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