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INDIAN TAX SYSTEM: AN INTRODUCTION

India has a well-developed three tiered tax structure, controlled by

the three major bodies of the country-Union government, the State

Governments and the Urban and Rural Local Bodies.

Indian taxation system has undergone extreme restructuring from

the past 20 years. The tax rates have been rationalized and tax laws

have been simplified resulting in better compliance, ease of tax

payment and better enforcement. The process of restructuring of

tax administration is going on in India and is a continuous process.

The Indian economic policy of 1991 brought a revolutionary

change in the Tax System in India by rationalization of the tax

rates, simplification of the tax laws, easy tax payment, reduction in

customs and excise duties, corporate tax, widening of the tax base

and modulating the tax administration. From April 01, 2005, many

states saw the introduction of a new tax- Value Added Tax (VAT)

which was levied in place of sales tax.

Indian government depends very much on the revenue generated

by the Tax collection. Indirect taxes shares two-thirds of the total

tax intake of the Indian government.

The Tax System in India asks taxpayers to file their returns in a

given period of time. The financial tax year in India starts from the

first day of April and ends with the last day of March. Every

business personality should present an annual return by October 31

whereas salaried people need not submit any annual return.

India has a federal system of Government with clear demarcation

of powers between the Central Government and the State

Governments. Like governance, the tax administration is also

based on the principle of separation therefore well defined and

demarcated between Central and State Governments and local

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bodies. The tax on incomes, customs duties, central excise and

service tax are levied by the Central Government. The state

Government levies agricultural income tax (income from

plantations only), Value Added Tax (VAT)/ Sales Tax, Stamp

Duty, State Excise, Land Revenue, Luxury Tax and Tax On

Professions. The local bodies have the authority to levy tax on

properties, octroi/entry tax and tax for utilities like water supply,

drainage etc.

CONSTITUTIONALLY ESTABLISHED SCHEME

OF TAXATION

Article 246 of the Indian Constitution, distributes legislative

powers including taxation, between the Parliament of India 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 make laws,

List - II entailing the areas on which only the state legislature can

make laws, and

List - III lists the areas on which both the Parliament and the State

Legislature can make laws upon concurrently,

Separate heads of taxation are is no head of taxation in the

Concurrent List (Union and the States have no concurrent power of

taxation). The list of thirteen Union heads of taxation and the list of

nineteen State heads is given below:

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Central Government:

S.

No.

Parliament of India

1 Taxes on income other than agriculture income (List I, Entry

82)

2 Duties of customs including export duties (List I, Entry 83)

3 Duties of excise on tobacco and other goods manufactured or

produced in India except (i) alcoholic liquor for human

consumption, and (ii) opium, Indian hemp and other narcotic

drugs and narcotics, but including medicinal and toilet

preparations containing alcohol or any substance included in

(II). (List I, Entry 84)

4 Corporation Tax (List I, Entry 85)

5 Taxes on capital value of assets, exclusive of agricultural

land, of individuals and companies, taxes on capital of

companies (List I, Entry 86)

6 Estate duty in respect of property other than agricultural land

(List I, Entry 87)

7 Duties in respect of succession to property other than

agricultural land (List I, Entry 88)

8 Terminal taxes on goods or passengers, carried by railway,

sea or air; taxes on railway fares and freight (List I, Entry 89)

9 Taxes other than stamp duties on transactions in stock

exchanges and futures markets (List I, Entry 90)

10 Taxes on the sale or purchase of newspapers and on

advertisements published therein (List I, Entry 92)

11 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 commerce (List I, Entry 92A)

12 Taxes on the consignment of goods in the course of inter-

state trade or commerce (List I, Entry 93A)

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State Government:

S.

No.

State Legislature

1 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 revenues

(List II, Entry 45)

2 Taxes on agricultural income (List II, Entry 46)

3 Duties in respect of succession to agricultural income (List

II, Entry 47)

4 Estate Duty in respect of agricultural income (List II, Entry

48)

5 Taxes on lands and buildings (List II, Entry 49)

6 Taxes on mineral rights (List II, Entry 50)

7 Duties of excise for following goods manufactured or

produced within the State (i) alcoholic liquors for human

consumption, and (ii) opium, Indian hemp and other narcotic

drugs and narcotics (List II, Entry 51)

8 Axes on entry of goods into a local area for consumption,

use or sale therein (List II, Entry 52)

9 Taxes on the consumption or sale of electricity (List II, Entry

53)

10 Taxes on the sale or purchase of goods other than

newspapers (List II, Entry 54)

11 Taxes on advertisements other than advertisements published

in newspapers and advertisements broadcast by radio or

television (List II, Entry 55)

12 Taxes on goods and passengers carried by roads or on inland

waterways (List II, Entry 56)

13 Taxes on vehicles suitable for use on roads (List II, Entry 57)

14 Taxes on animals and boats (List II, Entry 58)

15 Tolls (List II, Entry 59)

16 Taxes on profession, trades, callings and employments (List

II, Entry 60)

17 Capitation taxes (List II, Entry 61)

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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.

History

Income tax is today an important source of revenue for government

in all the countries.

More than 3,000 years ago, the inhabitants of ancient Egypt and

Greece used to pay income tax, consumption taxes and custom

duties.

Income-tax was first introduced in India in 1860 by James Wilson

who become Indian’s first Finance Member.

INCOME-TAX AUTHORITIES

Central Government: - Income-tax, Excise Duty and Customs

Duty.

State Governments: - Sales tax, VAT, Excise and tax on

agricultural income.

Municipalities: - Octroi and House property tax

IMPORTANCE’S OF TAX

Economic growth

Government revenue

Private savings

Restraining the consumer demand

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WHAT IS TAX?

A tax may be defined as a "pecuniary burden laid upon individuals

or property owners to support the government, a payment exacted

by legislative authority. India has a well-developed taxation

structure.

TYPES OF TAXES

Direct Tax (Central Board of Direct Taxes): This kind of tax is

named so as such a tax is directly paid to the Union Government of

India. A direct tax is one that cannot be shifted by the taxpayer to

someone else.

Types of Direct Tax: -

1.Individual Income Tax and Corporate Tax

2. Wealth Tax

3.Capital Gains Tax

4.Securities Transaction Act

1) Indirect tax (Central Board Of Excise and Customs): An indirect tax is a tax collected by an intermediary (such as a retail

store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can

be shifted by the taxpayer to someone else. Types of Indirect Tax:-

1.Excise Duty 2.CustomDuty 3.Service tax

4.Value Added Tax 3.Central Sales Tax

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TAX SYSTEM IN INDIA IS A THREE TIER

SYSTEM:

Central Govt State Government Local Bodies

Income Tax Sales Tax Tax on properties

Service Tax Stamp Duty Octroi

Custom Duties State Excise Tax on Market

Central Excise Land Revenue User Charges for

Sales Tax Duty on Entertainment utilities like water

nm Tax on Profession supply,etc

WHO ARE LIABLE FOR TAX?

1. Individuals: - If an individual who satisfies understated both the

conditions of section 6 of the Income-tax Act, then he becomes a

non-resident.

Condition Status :- He is not in India for 182 days or more during

the relevant previous year. If yes, then he is a non-resident. (so

check the next condition.). He is not in India for 60 days or more

during the previous year and he is not in India for 365 days or more

during the 4 years prior to the previous year. If yes, then he is a

non-resident. If you are not satisfying any of

the above conditions to become non-resident, check whether

following assists you to become a non-resident.

2. Hindu Undivided families :- As per section 6(2), a Hindu

undivided family (like an individual) is either resident in India or

non-resident in India. A resident Hindu undivided family is either

ordinarily resident or not ordinarily resident.

A Hindu undivided family is said to be resident in India if control

and management of its affairs is wholly or partly situated in India.

A Hindu undivided family is non-resident in India if control and

management of its affairs is wholly situated outside India.

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3. Companies: - As per section 6(3), an Indian company is always

resident in India. A foreign company is resident in India only if,

during the previous year, control and management of its affairs is

situated wholly in India. However, a foreign company is treated as

non-resident if, during the previous year, control and management

of

its affairs is either wholly or partly situated out of India.

4. Firms (partnerships) :- As per section 6(2), a partnership firm and

an association of persons are said to be resident in India if control

and management of their affairs are wholly or partly situated

within India during the relevant previous year. They are, however,

treated as non-resident in India if control and management of their

affairs are situated holly outside India.

5. Association of persons or bodies of individuals

6. Local authority (municipal bodies)

7. Artificial juridical person .

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BASIC CONCEPTS – DEFINITIONS

1. Assessee – section 2(7)

Any person who is liable to pay any tax or any other sum under the

Income Tax Act, 1961

Assessee includes:-

(a) Every person in respect of whom any proceedings has been

taken for the assessment.

(b) Every person who is deemed to be an assessee under the Act.

(c) Every person who is deemed to be an assessee in default under

the Act.

2. Assessment – section 2 (8)

Process of determining and computing the amount of income and

tax dues of a person.

3. 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 2013-14 relating to previous year

2012-2013.

4. Person – section 2(31)

According to law an assessee is a person by whom any tax is

payable. Person includes

j An individual A firm

n A HUF A local authority

n A company

5. Previous year – section 3

Year in which the income is received.

Always ends on 31st march.

6. Capital Asset: [Section 2(14)]

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TYPES OF DIRECT TAX

INCOME TAX

Income Tax Act, 1961 imposes tax on the income of the

individuals or Hindu undivided families or firms or co-operative

societies (other than companies) and trusts (identified as bodies of

individuals associations of persons) or every artificial juridical

person. There are three residential status, viz.,

(i) Resident & Ordinarily Residents (Residents)

(ii) Resident but not Ordinarily Residents and

(iii) Non Residents.

DETERMINATION OF RESIDENTIAL STATUS [SECTION 6] Total income of an assessee cannot be computed unless the

person’s residential status in India during the previous year is known. Section 6 of the Income-tax Act prescribes the tests to be

applied to determine the residential status of all tax payers for the purposes of income-tax. According to the provisions relating to

residential status, a person can either be; (i) Resident in India or (ii) Non-resident in India

However, individual and HUF cannot be simply called resident in

India. If individual or HUF is a resident in India, they will be either;

(a) Resident and ordinarily resident in India (ROR) or (b) Resident but not ordinarily resident in India (RNOR or

NOR).

Persons other than individual and HUF will be either resident in India or non-resident in India.

1. Residential Status of Individual [Section 6(1) and 6(6)]

Provisions relating to determination of residential status of individuals are summarised as follows: Resident If satisfies any one of the two basic conditions.

Non-Resident If does not satisfy any one of the two basic conditions.

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Basic Conditions

1. Stay of Individual in India should be 182 days or more during relevant Previous Year (PY); OR

2. Stay of Individual in India should be 60 days or more during relevant PY and 365 days or more during 4 PYs immediately

preceding relevant PY.

Exception to Basic Conditions

In following cases, only 1st Basic condition needs to be checked:

1. Indian Citizen - who comes on a visit to India during relevant PY; or - who is a crew member of an Indian Ship; or

- who goes abroad for employment purposes.

2. Person of Indian Origin (who himself or his parents or his grandparents were born in undivided India) who comes on a visit to

India during relevant PY ROR If Resident Individual satisfies both the additional conditions.

RNOR If Resident Individual does not satisfy both the additional conditions.

Additional Conditions

1. Individual should be resident (by satisfying any of the two basic conditions or

first basic condition, if falls in exception to basic conditions) in at least 2 PYs out of 10 PYs immediately preceding relevant PY; and

2. Stay of Individual in India should be 730 days or more during 7 PYs immediately preceding relevant PY.

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CORPORATE TAX

ACCORDING TO COMPANIES ACT 1956

DOMESTIC COMPANIES:

• Domestic Corporations / Private Limited Companies 33.99%

• Domestic Corporations / Public Limited Companies 33.99%

• Limited Liability Partnership (LLP's) 30.9%

THE ABOVE TAX RATES INCLUDES SURCHARGE

FOREIGN COMPANIES

• Dividends20% Interest Income 20%

• Royalties 30% Technical Services30%

• Other income 55%

THE ABOVE TAX RATES INCLUDES SURCHARGE

WEALTH TAX

Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth

tax is a tax on the benefits derived from property ownership. The

tax is to be paid year after year on the same property on its market

value, whether or not such property yields any income. Similar to

income tax the liability to pay wealth tax also depends upon the

residential status of the assessee. The assets chargeable to wealth

tax are Guest house, residential house, commercial building, Motor

car, Jewellery, bullion, utensils of gold, silver, Yachts, boats and

aircrafts, urban land, cash in hand (in excess of INR 50,000 for

Individual & HUF only), etc. But in reality majority of the

potential taxpayers do not pay this tax as most of the movable

items such as jewellery, bullion etc are stashed away from

accounting. Invariably they just pay tax for the immovable wealth

such as real estate.

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ASSETS EXEMPTED FROM WEALTH TAX

Property held under a trust. Interest in the property of HUF for a family member.

Residential building of an ex-ruler. Jewellery of an ex-ruler.

Any house or plot of an individual or HUF up to 500 sq meters.

CAPITAL GAINS TAX

The central government also charges tax on the capital gains that is

derived from the sale of the assets. The capital gain is the

difference between the money received from selling the asset and

the price paid for it. To restrict the misuse of this provision, the

definition of capital asset is being widened to include personal

effects such as archaeological collections, drawings, paintings,

sculptures or any work of art.

Capital gain also includes gain that arises on “transfer” (includes

sale, exchange) of a capital asset and is categorized into short-term

gains and long-term gains. The Long-term Capital Gains Tax is

charged if the capital assets are kept for more than three years or 12

months in the case of securities and shares that are listed under any

recognized Indian stock exchange or mutual fund. Short-term

Capital Gains Tax is applicable if the assets are held for less than

the aforesaid period.

In case of the long term capital gains, they are taxed at a

concession rate. Normal corporate income tax rates are applicable

for short term capital gains. In case of the short term and long term

capital losses, they are allowed to be carried forward for 8

consecutive years.

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Gift Tax

Gift tax in India is regulated by the Gift Tax Act which was

constituted on 1st April 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, check or

others, received from one who doesn't have blood relations with the

recipient, were taxable.

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.

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TYPES OF INDIRECT TAXES

Excise Duty

The central government levies excise duty under the Central Excise

act of 1944 and the Central Excise Tariff Act of 1985. Central

Excise duty is an indirect tax levied on goods manufactured in

India and meant for domestic consumption. The Central Board of

Excise and Customs under the Ministry of Finance, administers the

excise duty. Central Excise Duty arises as soon as the goods are

manufactured. It is paid by a manufacturer, who passes on its

incidence to the customers. Excisable goods have been defined as

those, which have been specified in the Central Excise Tariff Act

as being subjected to the duty of excise.

There are three main types of excise duty –

Basic Excise Duty is charged on all excisable goods other

than salt at the rates mentioned in the said schedule.

Additional Duties of Excise is charged on goods of special

importance, in lieu of sales Tax and shared between Central

and State Governments.

Special Excise Duty is charged on all excisable goods on

which there is a levy of Basic excise Duty. Every year the

annual Budget specifies if Special Excise Duty shall be or

shall not be levied and collected during the relevant financial

year.

Note: Under the Cenvat (Central Value Added Tax) Scheme,

introduced under The Cenvat Credit Rules, 2004, a manufacturer of

product or provider of taxable service shall be allowed to take

credit of duty of excise as well as of service tax paid on any input

received in the factory or any input service received by

manufacturer of final product. Such credits can be used to set off

any excise duty tax payable.

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In the recent budget, a number of tax exemptions have been

initiated. Specific goods enjoy concessional duty rates. Exemptions

are allowed to taxpayers engaged in the manufacture of certain

goods such as, water treatment, bio-diesel, processed food etc. and

certain types of establishments such as small scale industries,

cottage industries that create jobs are also exempted.

Customs Duty

Customs duty in India falls under the Customs Act 1962 and

Customs Tariff Act of 1975. Customs duty is the tax levied on

goods imported into India as well as on goods exported from India.

Taxable event is import into or export from India. Additionally

educational cess is also charged. The customs duty is evaluated on

the value of the transaction of the goods. The Central Board of

Excise and Customs under the Ministry of Finance manages the

customs duty process in the country. The rate at which customs

duty is applicable on the goods depends on the classification of the

goods determined under the Customs Tariff. The Customs Tariff is

generally aligned with the Harmonized System of Nomenclature

(HSL). It should be noted that preferential/concessional rates of

duty are also available under the various Trade Agreements.

The various types of duties leviable are as follows:

Basic Duty: This duty is levied on imported goods under the

Custom Act, 1962.

Additional Duty (Countervailing Duty): This is levied under

section 3 (1) of the Custom Tariff Act and is equal to excise duty

levied on a like product manufactured or produced in India. If a

like product is not manufactured or produced in India, the excise

duty that would be leviable on that product had it been

manufactured or produced in India is the duty payable.

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Anti – Dumping Duty: Sometimes, foreign sellers abroad

may export into India goods at prices below the amounts

charged by them in their domestic markets in order to

capture Indian markets to the detriment of Indian industry.

This is known as dumping. In order to prevent dumping, the

Central Government may levy additional duty equal to the

margin of dumping on such articles.

Service Tax

Service tax was introduced in India way back in 1994 and started

with mere 3 basic services viz. general insurance, stock broking

and telephone. Subsequent Budgets have expanded the scope of the

service tax as well as the rate of service tax. More than 100

services are subjected to tax under this provision. An education

cess is also charged on the tax amount. The Central Board of

Excise and Customs under the Ministry of Finance manages the

administration of service tax.

Every service provider of a taxable service is required to register

with the Central Excise Office in the concerned jurisdiction.

Exemptions are available for services that are exported, small

service providers whose revenue fall below the prescribed level,

services provided to UN and International Agencies and supplies to

SEZ (Special Economic Zones). Subject to conditions, service tax

is not payable on value of goods and material supplied while

providing services.

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Securities Transaction Tax

Transactions in equity shares, derivatives and units of equity-

oriented funds entered in a recognized stock exchange attract

Securities Transaction Tax. Service Tax, Surcharge and Education

Cess are not applicable on STT. Taxation of profit or loss from

securities transactions depends on whether the activity of

purchasing and selling of shares / derivatives is classified as

investment activity or business activity. Treatment of STT also

depends upon whether the income from these securities

transactions are included under the head “Income from Capital

Gains” or under the head ‘Profits and Gains of Business or

Profession’.

Note: The Indian Government is keen on merging all taxes like

Service Tax, Excise and VAT into a common Goods and Service

Tax (GST). GST system has been proposed in order to simplify

current indirect tax system which is very tedious and complicated.

All goods and services will be brought into the GST base. There

will be no distinction between goods and services. Alcohol,

tobacco, petroleum products are likely to be out of the GST regime.

The state and central combined tax rate is speculated to be between

16%-20% in line with the global trend. Originally slated for

implementation by the year 2010 it has been postponed twice and

now scheduled for the year 2012. The central and state tax

authorities which had locked horns earlier are seemingly nearing a

consensus. If implemented this will be the most outstanding reform

ever to the Indian tax system.

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Value Added Tax

Sales tax charged on the sales of movable goods has been replaced

with VAT in most of the Indian states since 2005. This was

introduced to counter the rampant double taxation issues and

resultant cascading tax burden that occurred due to the flaws

inherent in the previous sales tax system.

VAT, chargeable only on goods and does not include services, is a

multi-stage system of taxation, whereby tax is levied on value

addition at each stage of transaction in the supply chain. The term

‘value addition’ implies the increase in value of goods and services

at each stage of production or transfer of goods and services. VAT

is a tax on the final consumption of goods or services and is

ultimately borne by the consumer. VAT comes under the state list.

Taxpayers can claim credit for the taxes paid at earlier stages and

purchases known as an Input Tax Credit, by producing relevant tax

invoices. The credit can be used to set off any VAT tax liability.

Different rates of VAT are charged depending on the category to

which the goods belong. Rates vary for essential commodities,

bullion and valuable stones, industrial inputs and capital goods of

mass consumption, and others. Petroleum tobacco, liquor and so on

are subjected to higher rate and differ from state to state.

Notably, there is no VAT on imports and export sales are not

subjected to VAT. Therefore VAT charged on inputs purchased

and used in the manufacture of export goods or goods purchased

for export, is available as a refund.

VAT in India classified under the tax slabs are

- 0% for essential commodities,

- 1% on gold ingots and expensive stones,

- 4% on industrial inputs, capital merchandise and

commodities of mass consumption, and

- 12.5% on other item

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Stamp Duty

It is a tax that is levied on the transaction performed by means of a

document or instrument as per the regulations of Indian Stamp Act,

1899. It is collected by the government of the state where the

transaction is carried out. Stamp duty rates vary between the states.

Stamp duty is paid on instruments, which are essentially a

document to create, transfer, limit, extend, extinguish or record a

right or liability. Document acquires legality once it is stamped

properly after the payment of the requisite stamp duty charges.

Stamp duty is payable for transfer of shares, share certificate,

partnership deed, bill of exchange, shares, share transfer, leave and

license agreement, debentures, gift deed, bank guarantee, bonds,

demat shares, development agreement, demerger, power of

attorney, home loans, houses & house purchase, lease deed, loan

agreement and lease agreement.

State Excise

Power to impose excise on alcoholic liquors, opium and narcotics

is granted to States under the Constitution and it is called ‘State

Excise’. The Act, Rules and rates for excise on liquor are different

for each State.

In addition to the above taxes by the Central and State

Governments the local bodies have the authority to levy tax on

properties, octroi/entry tax and tax on utilities.

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INCOME EXEMPT FROM TAX

1. Agricultural income sec 2(1A)

2. Sum received by a member from HUF

3. Tax-free income under the head salary

4. Exempted to former ruler: sec – 10 (19A)

5. Awards: sec – 10(17A)

6. Income of local authority: Sec – 10(20)

7. Any sum received under a life insurance policy

8. Income of any regimental fund of the armed forces

9. Income of certain national funds; sec – 10(23-c)

10. Income of mutual funds

11. Income of Registered Trade union – section 10(24)

12. Income of provident funds: sec – 10(25)

13. Relief to foreign Govt. Employees

14. Relief to foreign companies

15. Incomes of non-residents

16. Interest on certain securities: sec-10(15)

17. Share of profit from partnership firm

18. Income of SAARC fund

19. Capital gain on transfer of US 64 units of the UTI

20. Exemption to political parties – section 13A

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OTHER KEY NOTES

Periodic returns must be submitted by companies registered for

CENVAT or VAT/CST or Service Tax in India.

CENVAT filings are monthly, on the 10th day following the

period end.

VAT reporting is either monthly or quarterly, depending on

the particular State’s rules.

Service Tax filings are bi-annual.

Permanent Account Number (PAN)

PAN is an all India, unique ten-digit alphanumeric number, issued

in the form of a laminated card by the Income Tax Department.

Who must have a PAN :-

Every person,

If his total income or the total income of any other person in

respect of which he is assessable, during any previous year,

exceeded the maximum amount which is not chargeable to

income-tax; or

Carrying on any business or profession whose total sales,

turnover or gross receipts are or is likely to exceed INR

500,000 in any previous year; or

Who is required to furnish a return of income or

Being an employer, who is required to furnish a return of

fringe benefits

PAN is increasingly being recognized as a valid Identity Proof

across India and a mandatory document for important transactions

such as purchase of property, motor vehicles, share transactions,

opening of bank accounts, obtaining loans, maintaining deposits

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etc., therefore any person not fulfilling the above conditions may

also apply for allotment of PAN.

Tax deduction at Source (TDS)

The Income-tax Act enjoins on the payer of specific types of

income, to deduct a stipulated percentage of such income by way

of Income-tax and pay only the balance amount to the recipient of

such income. Some of such incomes subjected to T.D.S. are salary,

interest, dividend, interest on securities, winnings from lottery,

horse races, commission and brokerage, rent, fees for professional

and technical services, payments to non-residents etc.

Tax Collection at Source (TCS)

Tax is collected at the point of sale. It is to be collected at source

from the buyer, by the seller at the point of sale. Such tax

collection is to be made by the seller, at the time of debiting the

amount payable to the account of the buyer or at the time of receipt

of such amount from the buyer, whichever is earlier. The goods to

be subjected to TCS are clearly specified and the type of buyers,

sellers and purpose are clearly defined in the Act. Tax rates vary

depending on the goods.

Note: All those persons who are required to deduct tax at source or

collect tax at source on behalf of Income Tax Department are

required to apply for and obtain Tax Deduction and Collection

Account Number (TAN), a 10 digit alpha numeric number, which

is required to be quoted in all documents involving TDS/TCS

transactions. Failure to apply for TAN or not quoting the same in

the specified documents attracts a penalty.

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Double Taxation Relief

India has entered into the Avoidance of Double Taxation

Agreement (DTAA) with 65 countries including countries like

U.S.A., U.K., Japan, France, Germany, etc. The agreement

provides relief from the double taxation in respect of incomes by

providing exemptions and also by providing credits for taxes paid

in one of the countries. These treaties are based on the general

principles laid down in the model draft of the Organisation for

Economic Cooperation and Development (OECD) with suitable

modifications as agreed to by the other contracting countries. In

case of countries with which India has double taxation avoidance

agreements, the tax rates are determined by such agreements and

vary between countries.

Unilateral Relief

The Indian government provides relief from double taxation

irrespective of whether there is a DTAA between India and the

other country concerned, if

The person or company has been a resident of India in the

previous year.

The same income must be accrued to and received by the

taxpayer outside India in the previous year.

The income should have been taxed in India and in another

country with which there is no tax treaty.

The person or company has paid tax under the laws of the

foreign country concerned.

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SOME RELEVANT CASE-LAWS

1.1 EMPLOYER-EMPLOYEE RELATIONSHIP:

The nature and extent of control which is the basic requisite to

establish employer- employee relationship would vary from

business to business. The test which is uniformly applied in order

to determine the relationship is the existence of a “right to control”

in respect of the manner in which the work is to be done.

(Dharangadhra Commercial Works v State of Saurashtra 1957 SCR

152)

1.2 LEAVE ENCASHMENT (S.10 (10AA)):

“Retirement” includes resignation. What is relevant is retirement:

how it took place is immaterial for the purpose of this clause.

Therefore, even on resignation, if an employee gets any amount by

way of leave encashment, S.10(10AA) would apply.(CIT v D.P.

Malhotra (1997) 142 CTR 325(Bom)). (CIT v R.J. Shahney (1986)

159 ITR 160(Mad))

1.3 HOUSE RENT ALLOWANCE (S.10 (13A)):

When commission is paid to a person based upon fixed percentage

of turnover achieved by the employee it would amount to “Salary”

for the purpose of Rule 2 (h) of part A of IV Schedule (Gestetner

Duplicators v CIT 117 ITR 1 (SC)).

1.4 PERQUISITE (S. 17):

1.4.1 One can not be said to allow a perquisite to an employee if

the employee has no vested right to the same. (CIT v L.W. Russel

(1964) 531 ITR 91 (SC)). 70 71

1.4.2 Reimbursement of expenses incurred by the employee has

been intended to be roped in the definition of “ Salary” by bringing

it as part of “Profit in lieu of salary.” (I.E. I Ltd. v CIT (1993) 204

ITR 386(Cal)

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1.5 RENT FREE ACCOMMODATION:

A rent free accommodation was provided to the assessee by his

employer but he never occupied it. Held that, unless the employee

expressly forgoes his right to occupying it, the perk value would be

taxable even though he never occupies it.(CIT v B.S. Chauhan 150

ITR 8(Del)).

1.6 DEDUCTION UNDER S.80G:

By the very nature of calculation required to be made u/s 80G(4) it

is necessary that all deduction under chapter VIA be first

ascertained and deducted before granting deduction u/s 80G

(Scindia Steam Navigation Co v CIT (1994) 75 Taxman

495(Bom))

1.7 DEDUCTION U/S 80RRA:

Fees received by a consultant or technical for rendering services

abroad would also come within the purview of S. 80RRA (CBDT v

Aditya V. Birla (1988) 170 ITR 137(SC))

1.8 RELIEF U/S 89:

Where arrears of salary are paid under orders of court, the

employee would be entitled to relief u/s 89 (K.C. Joshi v Union of

India (1987) 163 ITR 597(SC).

1.9 REVISED RETURN:

A belated return filed u/s 139(4) cannot be revised u/s 139(5).

(Kumar J.C. Sinha v CIT (1996) (86 Taxman 122(SC)).

1.10 Return showing income below taxable limit is a valid

return.(CIT v Ranchhoddas Karosands (1959) (361 ITR 869 (SC)).

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CONCLUSION

Thus, the following basic conclusions emerge from the study:

1. The Government has tried to achieve the objective of social welfare by providing various incentives for education,

health, housing, savings, pension schemes, donations, senior citizens and women assessees, and 260 generating

employment etc. These incentives are appreciable as these are related with the basic necessities of a common man.

However, in case of some incentives the monetary ceiling seems to be illogical or very low as it has not been revised

since a long time e.g. medical expenses, interest on self occupied housing loan, saving schemes.

2. Certain Rationalization and Simplification Measures have

been taken during the study period such as lowering income tax rates in case of all the assessees, introducing standard

deduction at the rate of 30 per cent of net annual value in case of let out house property, providing depreciation on

intangible assets etc.

3. The Government has tried to achieve all round economic

objectives by providing incentives for infrastructure development, balanced regional growth, scientific research

and development, capital market and exemption of agricultural income.

4. Widening of tax base has remained one of the main

objectives of tax policy during the study period. The Government has adopted certain measures towards this

direction. The main measures are introduction of mandatory Permanent Account Number, Annual Information Return, E-

filing of income tax return, Online tax accounting system, Dividend distribution tax and widening the scope of TDS.

Further, certain measures were introduced and withdrawn during the study period such as compulsory filing of return

based on certain economic criteria, Banking Cash Transaction Tax (BCTT) and Fringe Benefit Tax (FBT). Moreover, standard deduction for salaried 261 class and

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deduction in relation to interest income on specified deposits

were withdrawn during the study period.

5. Revenue from personal income tax as well as corporate tax increased during the study period. Tax to GDP ratio and

buoyancy coefficient in case of personal income tax as well as corporate tax showed an upward trend. Further, the

absolute number of personal assessees and corporate assesses increased but the rate of increase in number of

personal assessees having more than 10 lakh income remained lower as compared to other categories. Moreover,

the share of direct taxes as a percentage of total tax revenue of central Government increased, while the share of indirect taxes declined during the study period. This can be

considered as a positive development on the assumption that direct taxes are more equitable in impact and propoor as

compared to indirect taxes.

6. Maharashtra and Delhi remained best performing states in terms of share in total income tax revenue and income tax to

SDP ratio. Whereas, the states of Bihar & Jharkhand, J & K and Himachal Pradesh experienced the lowest average

income tax to SDP ratio and made the lowest contribution towards total income tax revenue as compared to other states

during the study period.

7. Cost per rupee of tax collection and cost per assessee

declined during the study period. On an average around 90 per cent of gross collection from personal income tax and 80

per cent of gross collection from corporate tax was realised at pre assessment stage, which might have contributed to

262 reduction in cost of collection per rupee of tax revenue. Thus, Income Tax Department has shown significant

improvement in controlling cost. Further, the number of outstanding refund claims declined during the study period

due to computerization. However, the amount of refund and interest on refunds increased during this period. Actual

collection of income tax remained less than budgeted estimates during these years except in four years (2000-

2001, 2003-04, 2006-07 and 2007-08). Number of pending assessments under scrutiny & summary schemes, number of pending cases under penalty and prosecution proceedings,

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amount of arrear in case of corporate tax as well as personal

income tax, total certified demand due for recovery and number of pending appeals relating to high amount

increased considerably during this period. Moreover, assessment cases involving mistakes and consequent

revenue loss increased during this period. All this puts a question mark on performance of Income Tax Department.

8. Further, a vast majority of tax professionals opined that tax

evasion and corruption are prevalent in the Indian Income Tax System. They pointed out that multiple taxes, high tax

rates, manipulations on detection, social acceptance of tax evasion, low probability of detection and low tax morality are main reasons responsible for tax evasion. Excessive

discretionary powers available with income tax authorities, lack of awareness regarding rights available with tax payers

and time consuming and costly judicial process have been identified as main reasons for corruption. A discussion with

tax professionals revealed that refund claims pertaining to relatively smaller amounts are settled earlier by tax

authorities as compared to refunds 263 of large amounts and there is unreasonable delay in refunds. The respondents have

identified high TDS rates and increase in number of returns as main reasons for delay in refunds.

9. The respondents opined that income tax staff is available in

the office and manpower is overburdened in Income Tax

Department. However, they also opined that Income tax administration is not taxpayer friendly and it is difficult to

satisfy assessing officers regarding correctness of information. People perceive tax officers as tax enforcers

and not as tax facilitator. Moreover, they opined that inefficiency in Income Tax Department is one of the main

causes responsible for tax evasion in addition to social, economic and political reasons. Corruption in Income Tax

System is prevailing due to harassment to taxpayers and lack of integrity on the part of tax officials in addition to

earlier mentioned reasons. They also viewed that shortage of staff, inefficient staff and intentional delay to get bribe are

also important reasons causing unreasonable delay in refunds.

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10. Majority of the respondents have rated office space,

working conditions, drinking water, waiting room facility, wash room facility and parking facility as satisfactory.

However, the respondents tend to be dissatisfied with the position of enquiry office.

11. A very high number of cases remained pending with the

Supreme Court, High Court and Income Tax Appellate Tribunal and Settlement Commission during the study

period.

12. Tax professionals opined that tax rates are reasonable for individuals and HUFs and high for AOPs and BOIs, firms and companies. The respondents are not in favour of

phasing out tax incentives completely and introducing EET system. The respondents considered complexity of income

tax law, frequent changes in tax law and procedures, minimisation of tax burden and avoiding mistakes in tax

compliance are the main causes for which taxpayers seek guidance of tax professionals. The respondents have pointed

out that complicated tax law, high tax rates, corruption, high compliance cost and lengthy return forms are the major

problems discussed with them by their clients.

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BIBLIOGRAPHY

1. http://www.sethassociates.com/taxation-system-in-

india.html

2. http://www.indiacompanysetup.com/india-tax-structure/

3. http://en.wikipedia.org/wiki/Taxation_in_India

4. http://india.gov.in/citizen/taxes.php?id=2

5. http://www.firstpost.com/economy/why-is-indias-tax-to-

gdp-ratio-so-low-239152.html

6. http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS

7. http://www.slideshare.com/india-tax-structure

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Appendices

Appendix 1

Components of total tax revenue are given below:

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Appendix 2

Direct tax trend over the years in given below:

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Appendix 3

Indirect tax trend over the years in given below:

Appendix 5

India’s tax to GDP ratio is given for year 2001 to 2010.

Ratios are mentioned in percentage terms.

Source: World Bank statistics

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CERTIFICATE

I hereby certify that the work which is being presented in the Project Report

entitled “TAX LAW”, submitted to the Mercantile Law Professor of IBS-

Indian Business School, Gurgaon is an authentic record of my own work

carried out during a period from November 2014 to December 2014( 2nd

semester) under the supervision of , Mercantile Law Professor.

The matter presented in this Project Report has not been submitted by

me for the award of any other degree elsewhere.

Signature of Student

This is to certify that the above statement made by the student(s) is correct to

the best of my knowledge

Signature of Supervisor

Date: