BT-Module 1

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BUSINESS TAXATION

MEANING OF TAX

Financial charge or other levy

By central government or state government

Paid in the form of money

Burden laid upon individuals to support the government

Payment exacted by legislative authority

Not a voluntary payment / donation

Under different names as income tax, customs, excise etc

CMS B School, JAIN University, Prof. SA -Module 1

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TAX RATES

Taxes are most often levied as a percentage, called the tax rate.

PROGRESSIVE TAX RATEA progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is

applied increases. For e.g.. Income tax

REGRESSIVE TAX RATE

A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax isgenerally a tax that is applied uniformly. This means that it hits lower-income individuals harder.

Some examples include gas tax and cigarette tax. For example, if a person has Rs.1,000 of income and must pay

Rs.10 of tax on a package of cigarettes, this represents 1% of the person's income. However, if the personhas Rs.2,000 of income, this Rs.10 tax only represents 0.5% of that person's income.

Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food,clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. Inthis case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are moreaffected by it because they are less able to afford it.

PROPORTIONAL TAX RATE

In case of a proportional tax, the effective tax rate is fixed, while the amount to which the rate is appliedincreases. For e.g.. Property tax (based on the area of the property)

http://en.wikipedia.org/wiki/Progressive_taxhttp://en.wikipedia.org/wiki/Effective_tax_ratehttp://en.wikipedia.org/wiki/Proportional_taxhttp://en.wikipedia.org/wiki/Proportional_taxhttp://en.wikipedia.org/wiki/Effective_tax_ratehttp://en.wikipedia.org/wiki/Progressive_tax

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KINDS OF TAXES

DIRECT TAXES

The Taxes whose burden falls directly on the Tax payers are the Direct Taxes. For

Instance

1. Income Tax (Capital Gains Tax, STT, Corporate Tax)

2. Wealth Tax

INDIRECT TAXES

The taxes in which the burden of tax is passed on to a third party are called Indirect

Taxes. For instance1. Service Tax

2. Excise Duty


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KINDS OF TAXES

OTHER TAXES

1. Octroi

2. Sales Tax

3. VAT

4. Customs Duty

5. Professional Tax

6. Dividend Distribution Tax

7. Municipal Tax

8. Entertainment Tax

9. Stamp Duty, Registration Fees, Transfer Tax

10. Education Cess, Surcharge

11. Gift Tax12. Toll Tax


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PRINCIPLES OF A GOOD TAX SYSTEM

Efficient - A tax system should raise enough revenue such that government projects can be

adequately sponsored, without burdening the tax payer too much, becoming a disincentive

for investment and work.

Understandable - The system should not be incomprehensible to the layperson, nor should it

appear unjust or unnecessary complex. This is to minimize discontent and costs. Easy to

understand and calculate.

Equitable - Taxation should be governed by people's ability to pay, that is, wealthier

individuals or firms with greater incomes should pay more in tax while those with lower

incomes should pay comparatively less.

The tax system should be such that it should be difficult to avoid tax.


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OVERVIEW OF INCOME TAX LAW IN INDIA

Income tax Act : IT act 1961. It came into force on 01.04.1962. It contains 23 chapters, 298sections and XIV schedules. Additions and deletions are brought by the finance act passed byParliament.

The Finance Act : Every year Finance Minister of govt of India presents the budget toParliament.

Part A of budget speech contains the proposed policies of the government in fiscal areas.

Part B of budget speech contains detailed tax proposals.

To implement the above proposals Finance bill is introduced in parliament and once the bill isapproved by Parliament and gets assent of President, it becomes the Finance Act.

Income tax rules : Administration of direct taxes is looked after by CBDT. It frames rules calledIncome tax rules 1962.

Circulars and Notifications : They are issued by CBDT from time to time

to deal with certain specific problems and to clarify doubts regarding the scope andmeaning of provisions

for guidance of officers or assesses

Department is bound by the circulars

Case laws


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STEPS TO CALCULATE TAX

Residential status of the assessee should be determined

Calculate the chargeable income under each of the five heads (wherever applicable)

Apply clubbing provisions (wherever applicable)

Set off losses if any

From gross total income so calculated, claim deductions from income under varioussections

On the balance income calculate tax based on rates applicable

Calculate surcharge and education cess as applicable

Reduce any advance tax paid or tds or any self assessment tax paid

Balance is tax payable or refundable


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COMPUTATION OF INCOME


Particulars Amount (Rs.)

Income under the head Salary

Income under the head House Property

Income under the head Business/ Profession

Income under the head Capital Gains

Income under the head Other Sources

GROSS TOTAL INCOME

Less : Deductions under chapter VI A (Sec 80C to 80U)

NET TAXABLE INCOME

TAX

Less: TDS, ADVANCE TAX, SELF ASSESSMENT TAX

TAX PAYABLE / REFUNDABLE

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BASIC CONCEPTS

1. Assesse: It means a person by whom any tax or any other sum of money is payable under thisact.

2. Person: It includes the following. Individual: It means only a natural person i.e. a human being. It also included a minor

person or a person of unsound mind (guardian).

HUF: It consists of all persons lineally descended from a common ancestor and includestheir wives and unmarried daughters.

The head of the HUF is known as Karta.

Association of persons (AOP) :

When persons combine together for promotion of joint enterprise to produce incomeFor e.g.: ABC group housing society

Body of individuals : Such as trustees who merely receive the income jointly and whomay be assessable in like manner. For e.g.. BJP

Company

Firm

Local Authority : It means a municipal committee or other authority legally entitled bythe government with the control or management of a municipal or local find. For e.g..Delhi municipal corporation

Artificial Person : Every artificial juridical person not falling under other heads likeprivate religious trusts, an idol or deity.


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BASIC CONCEPTS

2. Person: sec 2(31) : It includes 7 types of persons namely.

Individual

HUF

AOP/ BOI

Company

Firm

Local Authority

Artificial Person


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DIFFERENCE BETWEEN AOP & BOI


AOP BOI

Any person can be its member i.e. entities

like Company, Firm etc. can be the member

of AOP but not of BOI.

Only individuals can be the members

Members voluntarily get together with a

common will for a common intention or

purpose and associate themselves in anincome producing activity.

In case of BOI, such common will may or

may not be present, whether or not to

earn income.

AOP is formed on voluntary basis. BOI is creation of law.

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BASIC CONCEPTS

3. Assessment : The procedure by which income of an assesse is determined

by Assessing officer.4. Income: A periodic monetary return which accrues or is expected to accrue

from definite sources.

It need not necessarily be periodic e.g.. Winnings from lotteries and crossword puzzles

Normally only revenue receipts are taxed but in few cases capital receipts are also taxed

(sale of a capital asses like land)

Only net receipts and not gross receipts

Taxable on due or receipt basis.

Income earned in a PY is chargeable to tax in the AY.

5. Previous Year (PY): It is the FY ending on 31st March in which income is accrued or received.

It is the financial year immediately preceding the assessment year.

If source of income comes into existence during the financial year, then in such

cases the previous year will start from the date on which source of income comes

to existence and will end on 31 st March.


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BASIC CONCEPTS

6. Assessment Year (AY): It is the FY ending on 31st march following the PY in

which income of PY is assessed to tax.

It is always a period of 12 months which starts on 1st April every year and ends on 31st March of

the succeeding year..


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BASIC CONCEPTS

1. A is running business from 1992 onwards. Determine the previous year for the

assessment year 2009-10.

2. A lawyer sets up his profession on 1st July 2011. Determine the first previous year.

3. Suppose Mr.X is leaving India for USA on 10.06.09 and it appears to the Assessing officer

(AO) that he has no intention to return. For what income can the AO charge him the tax

before he leaves India.


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BASIC CONCEPTS

4. Determine how the following will be chargeable to income tax.

a. X , a partner in a firm

b. DCM Ltd.

c. BJP

d. Laxmi Commercial Bank Ltd.

e. Bar Councils

f. Delhi Municipal Corporation

g. Y

h. HUF of A,B and C

i. Delhi university

j. Courts

k. X,Y and Associates

l. ABC group housing co-op society


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TAX RATES FOR AY 2014-15


For Individuals, HUF, AOP and BOI

Total Income Tax Rates

10,00,000 30%

In case of resident individual >=60

years and < 80 years

Basic exemption 250,000

In case of resident individual > 80 years Basic exemption 500,000

Surcharge Nil

Education cess 3%

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For Firms and Companies

Partnership Firms / LLP 30%

Surcharge Nil

Education Cess 3%

Domestic Companies 30%

Surcharge 5% (if total income > 10,000,000)

Education Cess 3%

Foreign Companies 40%

Surcharge 2% (if total income > 10,000,000)

Education Cess 3%

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Capital Gains

PARTICULARS STCG LTCG

Equity Shares 15% (Sec 111A) Exempt from tax

CG on any other asset Added to normal income

and taxed accordingly

20% (Sec 112)

On winnings from lotteries, crossword puzzles, card

games etc

30% (Sec 115BB)

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RESIDENTIAL STATUS

The Residential Status of an assessee must be determined with reference to each PY.

There are 2 types of Residential Status:

Resident

Non Resident

Resident is again divided in the following 2 categories:

Resident and Ordinarily Resident

Resident but not Ordinarily Resident


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RESIDENTIAL STATUS - INDIVIDUAL


Particulars Conditions

Sec 6(1)

1a. A person is said to be R in India in any PY if

he satisfies any one of the following

conditions:

1. He has been in India during the PY for a

total period of 182 days or more OR

1. He has been in India during the 4 years

immediately preceding the PY for a totalperiod of 365 days or more and has been

in India for at least 60 days in the PY

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Sec 6(1)

1b. For the following category of persons it is

necessary to satisfy the first condition to be

Resident in India:

1. An Indian citizen who leaves India during

the previous year for the purpose of

taking employment outside India or as a

member of the crew of an Indian ship

1. An Indian citizen or a person of Indianorigin engaged outside India who comes

on visit to India during the previous year

(a person is said to be of Indian origin if

either he or any of his parents or any of

his grandparents was born in undivided

India).

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Sec 6(6)

Additional conditions to test as to when a

resident individual is ordinarily resident in

India- Both the conditions must be satisfied

1. He has been resident in India in at least 2

out of 10 previous years [according to

basic condition noted above] Immediately

preceding the relevant previous year.

1. He has been in India for a period of 730days or more during 7 years immediately

preceding the relevant previous year.

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Important Points:

Stay in India includes stay in the territorial waters of India (ie 12 nautical miles into the sea

from the Indian coastline)

Both the date of departure as well as date of arrival is considered to be in India.

The stay need not be continuous nor at the same place

Where a person is in India only for a part of a day, the calculation of physical

presence in India in respect of such broken period should be made on an hourly

basis. A total of 24 hours of stay spread over a number of days is to be counted asbeing equivalent to the stay of one day.

If, however, data is not available to calculate the period of stay of an individual in

India in terms of hours, then the day on which he enters India as well as the day

on which he leaves India shall be taken into account as stay of the individual in

India.


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RESIDENTIAL STATUS - HUF



1a. HUF is R in India 1. If the control and management of its

affairs is situated wholly or partly in India

1a. HUF is NR in India 1. If the control and management of its

affairs is situated wholly outside India

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RESIDENTIAL STATUS - HUF

Important Points:

a. Control and management is said to be situated at a place where the head and brain of the

adventure is situated.

b. Place of control may be different from usual place of running the business and sometimes

even the registered office of the assessee.

c. If HUF is resident then status of the Karta determines whether it is ROR or RNOR.


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RESIDENTIAL STATUS FIRM, AOP, LOCAL AUTHORITY, ARTIFICIAL PERSON



1a. It is R in India 1. If the control and management of its

affairs is situated wholly or partly in India

1a. It is NR in India 1. If the control and management of its

affairs is situated wholly outside India

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RESIDENTIAL STATUS COMPANY



1a. It is R in India 1. An Indian Company is always R in India

2. A foreign co is R in India only if during the

previous year , control and management

of its affairs is situated wholly in India

1a. It is NR in India 1. A foreign co is NR in India if during the

previous year , control and management

of its affairs is either wholly or partlysituated out of India

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RESIDENTIAL STATUS - COMPANY

Important Points:

Control and management of the affairs of a company are said to be exercised from a

place where the directors meetings (not shareholders meetings) are held and decisions taken

and directions issued.


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Tax incidence of different taxpayers is as follows:

Particulars Individual and HUF

ROR RNOR NR

Indian income Taxable in India Taxable in India Taxable in India

Foreign income

- If it is business Income

and business is controlled

wholly or partly from

India

Taxable in India Taxable in India Not taxable in India

- If it is income from

profession which is set up

in India

Taxable in India Taxable in India Not taxable in India

- If it is business income

and business is controlled

from outside India

Taxable in India Not taxable in India Not taxable in India

- If it is income from

profession which is set up

outside India


- Any other foreign

income (like salary, rent,

interest, etc.)



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RESIDENTIAL STATUS

1. Steve Waugh, the Australian cricketer comes to India for 100 days every year. Find out his

residential status for the AY 2013-14.

2. Mr.B a Canadian Citizen, comes to India for the first time during the PY 2007-08. During

theFYs 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12, he was in India for 55 days, 60

says, 90 days 150 days and 70 days respectively. Determine his residential status for the AY

2012-13.

3. Mr. D an India citizen, leaves India on 22.09.08 for the first time, to work as an office of a

company in France. Determine his residential status for the AY 2009-10.

4. The business of HUF is transacted from Australia and all the policy decisions are taken there.

Mr. E, the Karta of the HUF , who was born in Kolkata, visits India during the PY 2008-09 after

15 years. He comes to India on 01.04.2008 and leaves for Australia on 01.12.08. Determine

the residential status of Mr.E and the HUF for AY 2009-10.


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RESIDENTIAL STATUS

5. X left India for the first time on May 20, 2003. During the financial year 2005-06, he came to

India once on May 27 for a period of 53 days. Determine his residential status for the

assessment year 2006-07.

6. X comes to India, for the first time, on April 16, 2003. During his stay in India up to October 5,

2005, he stays at Delhi up to April 10, 2005 and thereafter remains in Chennai till his

departure from India. Determine his residential status for the assessment year 2006-07.

7. Activity A- X, a foreign citizen comes to India, for the first time in the last 30 years on March

20, 2005. On September 1, 2005, he leaves India for Nepal on a business trip. He comes back

on February 26, 2006. Determine the residential status of X for the assessment year 2006-07.

8. Activity B- X, an Italian citizen, comes to India for the first time (after 20 years) on May 28,

2005. Determine his residential status for the AY 2006-07


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RESIDENTIAL STATUS & TAX INCIDENCE

9. For the assessment year 2006-07 (previous year 2005-06), X is employed in India and receives

Rs. 24,000 as salary. His income from other sources includes:

Dividend received in London on June 3, 2005: Rs. 31,000 from a foreign company;

share of profit received in London on December 15, 2005 from a business situated in Sri

Lanka but controlled from India: Rs. 60,000;

interest earned and received in India on May 11, 2006: Rs. 76,000.

Find out his gross total income, if he is (a) resident and ordinarily resident,

(b) resident but not ordinarily resident,

and (c) non-resident for the assessment year 2006-07.

CMS B School, JAIN University, Prof. SA -d l 1

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BT-Module 1