lecture1-fundamentals of direct taxes - 8.2.2013

8/12/2019 Lecture1-Fundamentals of Direct Taxes - 8.2.2013

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IN THE WONDERLAND OF

FUNDAMENTALS OF

DIRECT TAXESJanuary 30th , 2014

Kanu H DoshiDean, Finance

Welingkar I nsti tute of Management


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Fundamentals of Taxation :

No levy of tax , cess , octroi , duty by whatever name can beimposed & collected by any agency of Central or State Govt or

Local body from Individuals or corporates or firms unless

permitted specifically by the Constitution of India .

Our Constitution permits Central & State Govts to impose Taxes .

Thus we have Central Taxes like Income Tax / Wealth Tax /Excise/

Customs /Service Tax in Union List .

Then we have Sales Tax , Tax on Agriculture , Octroi in State List .

Concurrent list would cover sub ects like Education Law & Order


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Enumerate the two :

Direct Taxes : Indirect Taxes :

Income Tax Excise

Wealth Tax Customs Gifts Tax Sales Tax

Expenditure Tax Octroi

Estate Duty Service Tax Profession Tax


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Distinguish between Direct & Indirect Taxes :

Direct Taxes : Indirect Taxes :I. On Inflow OutflowII. On Person Product

III. Collected Directly Indirectly

IV. Basic Exemption None

V. Slabs FlatVI. Equitable Inequitable

VII. Deflationery Inflationery

VIII. Evasion possible Difficult

IX. Tax Planning Possible Difficult

X. Visible InvisibleXI. Sensitive Insensitive

XII. Rich & Famous AAM Admi

XIII. Direct Taxes Code Goods & Services Tax


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Two Systems of Taxation :

I. Progressive :Basic , Slabs , More than proportionate

increase in tax .

II. Integrated :Prof Nicolas KaldorsReport

Income tax Act 1961 (1922)

Expenditure Tax Act , 1957 Wealth Tax Act , 1957

Gift tax Act , 1958

Estate Duty Act , 1953


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Disintegration

Levy of Sur Charge


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Certain basic principles of taxation :

There is no equity inTaxation .

Considerations of morality & unfairness donot come in & are not relevant . All are equal

in tax . Rich,Poor,Widow . Similarly incomes

from all sources are taxable , legal as well as

illegal (smuggling , drugs ) .

Under the Constitution Tax can be imposed

& recovered retrospectively but not penalty .

Prospective , retrospective , Retroactive .

Penalty falls in Criminal law where equity is a

valid consideration .


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General :

There is method in madness called

Taxation .Tax laws are Accounting oriented hence

CAs do well .

In Criminal Law , Lawyers do wellbecause


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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

the price 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 directtaxation 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 on Income of :

On Rs.2,00,000 NIL

On Rs.3,00,000 Rs. 10,000

On Rs.5,00,000 Rs. 30,000

On Rs.8,00,000 Rs. 90,000On Rs. 10,00,000 Rs. 1,30,000

In Statistics, we have Progression .Hencethe World Progressive.


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Income A/c year 2012-13 Effective Tax

rate in %

5,00,000 30,000 6 %

8,00,000 90,000 11 %

10,00,000 1,30,000 13 %

20,00,000 4,30,000 21 %

25,00,000 5,80,000 23 %

TAX PAYABLE

Ongoing Voluntary Scheme! Declare more and more!!

Ongoing Voluntary Disclosure Scheme! Declare more and more!!


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This is based on the simple principle of

ability to pay or what the traffic canbear.With every increase in our

income, after meeting the basic

necessities, our capacity (ability) to paytax 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:

TAX

First Income of Rs.2,00,000 NIL

On Income of Rs2,00,000 to 5,00,000 10%

On Income of Rs.5,00,000 to 10,00,000 20%

On Income over Rs.10,00,000 30%

(ii) SENIOR CITIZENS (60 years)

Income upto Rs.2,50,000 NIL

(iii) Very senior citizen (80 yrs) NIL

Income upto 5,00,000


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Sur Charge : Sur Charge is a portion of tax. Tax is portion of Income.It is

always a percent of Tax while tax is per cent of Income .

Only for a special specific purpose, hence technicallytemporary. It does not disturb the basic rates of 10,20 &30%. Now Payable by only companies at 5% if incomeexceeds Rs. 1 crore

It is imposed for raising funds for calamaties like sayBangladesh War, Kargil War, Super Cyclone of Orissa,Gujarat Earthquake of 26 Jan 2000 and Tsunami of 26 Dec2004

Surcharge collection not shared with the States and remain

only with the Central Govt Northcote Parkinson in the Laws,Outlaws & Inlaws:

All levies, when imposed, temporary and on a modestscale! Become Permanent and increase


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Three types of Amendments

(I) Prospective:

These come into effect from a future

date e.g. on 28th

Feb ,2014 FMamends section 37 to provide that

salary paid after July 1 2014 to any

employee employed after 1.3.2014over Rs 10 lacs per month will not be

allowed to be tax deductible


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(II)Retrospective:

Those which come into effectfrom past date and completed

assessments are redone.

eg. On 28.2.2014 FM says

salaries paid from 1stApril 2002

over Rs 10 lacs per month willnot be allowed to be tax

deductible


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(III) Retroactive:

Transactions/Contracts done in the

past also affected but from the

future date.

Eg on 28.2.2014, FM states thatappointments made after 1.4.2002

and employees paid over Rs 10

lacs p.m, will be disallowed after1.7.2014.


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Inclusive & Exhaustive

Definitions

(I)Income includes salary, Interest,

rent

Bottomless, Limitless

(II)CBDT means

Central Board of Direct Taxes

Final, Conclusive


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Highest Marginal Rate of Tax

on Income over Rs 10 lacs is30%

Average Rate of Tax on

Income of Rs 10 lacs is13%(Tax is Rs 1,30,000)


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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) The Wealth Tax Act, 1957

(v) The Estate Duty Act, 1953

Highest marginal Income Tax rate in thefinancial year 1973-74 was 97.75% + 3%

Wealth tax which together exceeded 100% of atax payers income. Not thru error but bydesign. Socialistic Pattern of Society of P.Nehru


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Professor Nicolas Kaldor, an eminent EnglishEconomist from UK at the invitation of Pandit

Nehru, our first Prime Minister, came to India in

1956 and studied our Indian Tax system andsubmitted his Report titled IndiasTax Reform.

He noticed that we in India in our wisdom hadimposed income tax on income by virtue of

Indian Income Tax Act, 1922 and also imposed

Estate Duty by the Act of 1953, modeled on English

Death Duty Act on propertypassing 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

timeof the tax payer.


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Similary, to plug loophole in our Income Tax

Act, he suggested levy of Wealth Tax on our

Wealth. Wealth is Income saved after

payment of tax and spending it on ourneeds.

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 servesautomatically as a check over the

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 Incomeand collect proper and full

incometaxon 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 Gandhisappeal).

As of today in Feb, 2014 we have now the Income TaxAct, 1961 and Wealth Tax Act, 1957

Wealth Tax is levied on market


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Wealth Tax is levied on market

value of the following assets owned

by the Tax payer(Ind, HUF, CO):(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 of Wealth

exceeding Rs.30 Lacs every year.


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Gift Tax came back through back

door w.e.f. 1.9.2004 as Income Tax

on gift of sum of money over

Rs.25,000 per year from non close

relatives.


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THANK YOU

lecture1-fundamentals of direct taxes - 8.2.2013

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