Ch 6 Business And Tax Laws1

Business and Tax Laws ( Chap VI) PUTTU GURU PRASAD INC GUNTUR

Meaning  Tax derived from the phrase “taxation”

which means “estimate”  It refers to payment made to the government in the form of money to provide public goods and services for the benefit of the society in the State.  Historically , every civilization has found various methods of taxation system.  Taxes were collected in the form of goldcoins cattle, grain, raw materials and also some times by rendering personal services.

Indian Tax System  In India there has been a reference of

the tax system by Manu in his Smrithi’s and in Arthasastras  The collection of taxes are based on the ratio of distribution of revenue as per the Indian Constitution.  The center and the state will distribute the revenue based on the collection through the “Union List “ and the “State List”

Classification

 In the system of taxation in India

the taxes are classified as follows:

System of Tax

Indirect Tax

Direct Tax

Income Tax

Wealth Tax

Excise Duties

Customs Duty

Sales Tax

Direct Taxes to be paid by the people directly to the State It is collected from individuals, companies and organizations etc

Income Tax

Direct Taxes

Professional Tax

Wealth Tax

Estate Tax etc

Indirect Taxes

Indirect Taxes are not paid directly by the person but they are collected through the manufacturers of products and services. It is imposed on the traded items.

Indirect Taxes Commercial

Taxes Sales Tax/ VAT

Excise Duty

Customs Duty

Service Tax

Taxes Collected by Center Central Govt Collects

Indirect Taxes

Customs Duty

Estate Duty

Direct Taxes

Central Sales Tax CST etc

Income Tax

Estate Tax

Education

Cess

Taxes Collected by State State Government

Direct Taxes

Property Tax

Professional Tax

Indirect Taxes

Sales Tax/ VAT

Excise Duty on Liquor

Income Tax Act, 1961  Income Tax can be levied on individuals and 

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business. The income of the individuals includes the personal income earned as salary, wages, tips , commissions and other unearned income like interest and the dividends. The Income Tax Act is administered by CBDT ( Central Board of Direct Taxes) The CBDT is empowered to frame rules to achieve the purpose to good governance of the Act. It issues necessary circulars from time to time.

The Important Terminologies under the IT Act, 1961 (ITA)  Assessee  Person  Assessment year  Financial Year  Income, Total income , Gross Total Income  Previous Year  Accrual of Income  Belated Returns  Revised Return  Self Assessment

Who is a Person under the ITA, 1961?  An Individual  A HUF  A Company  A Firm  An Association of Persons ( whether

incorporated or not)  A Local Authority  Every Artificial Juristic Person, who does not fall under the category of the above stated persons.

Computation of Tax under the ITA, 1961 When a person’s total income of the previous year exceeds the maximum amount, which is not chargeable to the income tax, is an assessee and chargeable to income-tax.  The rate or rates are prescribed in the Financial year based on the relevant assessment year.  The total income of the person is determined on the basis of his residential status in India.  The status of the residence can be classified such as Resident and ordinarily resident , Resident but nor ordinarily resident and NonResident 

Heads of Income as per the ITA, 1961 Income of a individual can be under any one of the five heads  Income from salary  Income from House property  Profits and Gains of business or profession  Capital Gains  Other incomes

Income from Salary A person may be employed on a full time or part time basis. It can be termed in any manner. Therefore as per ITA, 1961 Salary includes:  Wages  Any annuity or pension  Any gratuity  Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages  Any advance of salary  Any payment received in period of leave by the employee  Others ( as explained in the IT Act)

Income from House Property  The annual value of the house property

consisting of any buildings or land appurtenants, of which the assesse is the owner, is chargeable to tax under the head “ Income from house property”  Any house which the assessee has occupied for any business or profession that is carried out by him or her, the profits of which is taxed, but the annual value of such property is not chargeable to tax under this head.  The term “ Owner” under this heading includes, individual, firm, company, co-operative society, or association of persons.

Income from Profits or Gains from Business or Profession Business includes any  Trade  Commerce  Manufacturing  Any Adventure or Concern in the nature of trade, commerce or manufacture including goods and services  It is exhaustive to include persons who earn profits.  The profits that they are earn are chargeable to tax under the head “ Profits and gains of business or profession”.

Capital Gains  “Capital Asset” means- Property of any

kind- Whether fixed or circulating, movable or immovable, tangible or intangible.  It does not include- any stock in trade, consumable stores or raw materials which is held for business or professions

 Personal effects of the assessee  Agricultural land in India (Conditions are

specified in the Act)  Gold Bonds, National Defence Gold Bonds  Special Bearer Bonds  Gold Deposits Bond issued under the Gold Deposit Scheme (1999) But it will include the goodwill of a business And any excess realized over its book value etc…

Income from Other Sources  Dividends  Lotteries, Cross word puzzles  Contributions received by employees under

staff welfare scheme  Interest on securities , if it is not charged under “profits and gains of business”  Income from machinery, plant furniture along with the building…  Any other sums received like bonus, if not taxed under salary or business income.

Income that are exempted from calculation of Total Income        

Agricultural Income Receipts of HUF income by an individual Share of profit of a partner in a firm. Income by way of interests, premium etc notified under the law Scholarship grants to meet the cost of education Long term capital gain Income and allowances of the MLA’s and MP’s that is received in their position Income of former rulers etc.

Deductions The total income of an assessee is computed by deducting from the gross total income.  All deductions permissible under Sections 80C - 80U.  The deductions can be in respect of e) Life Insurance premium. f) Deferred Annuity g) Contribution to Provident Fund h) National Saving Scheme i) Pension Funds j) Loans ( As specified under the Tax laws) k) Medical Insurance l) Donations etc….. The tax which is deducted at source will be refunded by the Income Tax Department, When the assessee produces the receipts of any of the above stated savings.

Wealth Tax  The other species of direct tax legislation is

Wealth Tax.  Wealth tax is levied for 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. Assessee- means a person by whom the wealth tax or any other sum of money is payable under the provisions of the Act.  The assessee includes the legal representative, executor or administrator of a deceased person and a person deemed to be an agent of a nonresident

What are chargeable assets? The assets include  Any guest house, residential house, commercial property, urban farm house etc..  Motor car for personal use.  Jewellery, bullion, furniture, utensils or any other article made wholly or partly of gold, silver, platinum….  Yachts, boats, and air-crafts used for nonbusiness purposes etc

Wealth Tax Not Charged No wealth tax is chargeable in respect of the wealth of the following:  Company registered under Section 25 of the Companies Act.  Any Co-operative Society.  Any Social Club.  Any political party.  A mutual fund specified by the Income Tax.

Persons liable under the Act Under the Act, tax is charged on the following persons in respect of the wealth held by them during the assessment year.  A company.  A Hindu Undivided Family (HUF).  An Association of Persons or a Body of Individuals.  Non-corporative taxpayers whose accounts are to be statutorily audited.

Nonchargeable Assets -Assets which are not considered for wealth tax:

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Personal effects such as wearing apparel, furnitures, motors cars, etc., are held for personal use by the assessee or dependent family members are not considered for wealth tax. Ornaments made of gold, silver, platinum or other precious metals or alloys… whether or not worked or sewn or set into wearing apparel, furniture, utensile or other articles which are not considered as personal effects. A house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than five lakh rupees. Any house for residential or commercial purposes which forms part of stock-in-trade. Cont…..

 Any house which the assessee may occupy for the 

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purposes of any business or profession carried on by him. Any residential property that has been let-out for a minimum period of three hundred days in the previous year. Any property in the nature of commercial establishments or complexes. Motor cars used by the assessee in the business of running them on hire or as stock in trade. Yachts, boats and aircrafts used by the assessee for commercial purpose. Urban Land will not be chargeable to tax. if .....  Construction of building is not permissible.  Construction of building is made with approval of appropriate authority.  Unused land held for industrial purpose for two years.  Stock in trade.

Assets that are exempted  Agricultural land and growing crops, grass or 

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standing trees on such land; Any building owned or occupied by a cultivator of, or receiver of rent or revenue out of, agricultural land: Animals; Any interest in property where interest is available to an assessee for a period not exceeding 6 years from the date the interest vests in the assessee. Others as specified under the Act.

Deemed Assets  Assets transferred by one spouse to

another- That are transferred in his or her spouse’s name other than for consideration.  Assets held by minor child- All the assets are held by a minor child are included in the net wealth of the individual. The net wealth of the minor will be included in the net wealth of the parent as per the Act….

Central Excise (The Central Excise Act, 1944 - CEA)  It has been enacted to consolidate and amend the law  

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relating to central duties of excise on goods manufacture or produced in certain parts of India. It is collected by both Central and State Governments. Excise duty on alcohol, alcoholic preparations and narcotic substances are collected by State Government as State Excise Duty. Difference between Excise Tax and Sales Tax Excise Tax is a tax on act of manufacture or production of goods. Sales Tax is on the act of sale. Excise duties are levied by the Central Government. It is levied uniformly through out the country and the duty rate / structure are governed through the tariff/ budget notification.

Levy of Excise Duty  Property must be goods- Goods include Movable

property and marketable property. (The goods must be capable of being moved from one place to another and it should be capable of being sold)  The Goods should be marketable/excisable: It will be those items which are specified for tariff purpose under Central Excise and Tariff Act ( CETA), 1985. “Vendibility Test”.  Goods must be manufactured- It can be incidental or ancillary to the completion of a manufacturing of product. Or deemed to be manufacturing process either under the provisions of CETA or CEA.  Manufacturing or production must be India. Some Goods are specifically excluded like those manufactured in SEZ’s, etc. Therefore they are termed as “excluded excisable goods’ and not as exempted goods.

Kinds of Duties  Basic duty is primarily the duty levied on

the goods produced / manufactured by the Excise Department.  The other duties includes special excise duty under the Finance Acts.  Additional Duties of excise in lieu of sales tax.  Additional duties on specified items under the other acts.

Changes in the CEA Certain amendments related to Small Scale Industries are made and they are stated as follows:  Increase in the limit for determining eligibility for the exemptions.  Some exemptions are removed based on monetary considerations.  Specified declaration to be given by the SSI with specified turnover.  Some special procedures set for jewelry manufacturing… The Appeals and review powers of the CCE are specified by CBE/C (Commissioners of Central Excise and Committee are specified)

CENVAT (Meaning)  It stands for Central Value Added Tax.  It was earlier brought into practice as a scheme

known as MODVAT- which enabled the manufacturers of excisable goods to get credit for excise duty component in the cost of raw materials, finished or semi finished components, consumables and packing material  These are the provisions that are used in the Central Excise to implement the concept of VAT at the manufacturing level by giving the credit of duty on inputs.

CENVAT  The scheme is based on the duty paid on inputs

by a manufacturer who has to pay as per the procedure and on the basis of “Assessable Value” i.e. on the selling price and thereby gets credit of duty on inputs.  The duty paid by the manufacture may be on, raw materials, packing material, paints etc. But not on motor spirits even if they are used as motor spirit.  Manufacturer cannot claim these credits on duty when the goods are not exempted under the Rules. However if the manufacturer uses common inputs for both exempted and un-exempted goods, he has to pay an amount of 8% of the price of exempted goods.  Necessary documents needs to be presented as proof. CENVAT rules do not require input-output correlation to be established.

SALES TAX     

The Government of India Act, 1935 has permitted levying of tax on sale of goods and on advertisement. The States could levy taxes if one of the following ingredients have been present: The goods are present or in existence in the state at the time of sale The manufacture has taken place in the State. The property in goods is transferred in the State for a price. There has been a payment of price and title in the goods has been passed.

Applicability of Central Sales Tax The applicability of the CST is as follows:  Tax is levied on interstate sales.  Sales tax collected by the States is retained by the collecting State.  Sales tax to be paid in the state from where the movement of goods begin. The CST has formulated the principles to determine as to where and how the sale of goods has taken place.

Rate and calculations The rates of various categories of CST are as follows:  Sale to government.  Sale to Registered Dealer.  Sale to Unregistered Dealers- The rate of sales tax on declared goods and other goods are different. The Sales Tax are payable on the Sales Turnover within a prescribed period. The rate of tax and turnover are calculated differently under the set provisions.

Authorities and Enforcement Agency.  The CST is administered by respective State

Governments.  Both Central and State Government are authorized to make rules under the CST.  As States are authorized to collect tax. The same administrative structure, which assesses the Sales Tax will assess the CST.  In case of disputes relating to inter-state sale of goods, the CST Appellate Authority constituted by the Central Government will hear the matter.

Customs Duty (Customs Act 1962)  One of the other forms of indirect tax that is

levied by Central Government is Customs Duty.  It is collected by the Central Government on every product that is exported or imported from India.  The duty is levied as a percentage on the assessed value of the product that is exported or imported from India. It is equal through out India at the time of importing and exporting.  The goods may be transported by land, air or by water including the Indian territorial waters.(12 nautical miles from the sea coast of India)

The objectives of levying customs duty are  To restrict imports, so as to preserve

foreign exchange.  To protect domestic industries from undue competition.  To achieve the policy objectives of the government.  To regulate exports.  To co-ordinate the legal provisions that deal with foreign exchange like, FEMA, FT (D&R)A, COFEPOSA etc.

Definition and types of Customs Duties The different kinds types of duties that are levied during import and export are as follows:  Basic duty  Countervailing duty  Anti-Dumping Duty  Protective Duty  Duty on Bounty Fed Articles  Export Duty  Import Duty

Definition of Goods Vessels, aircrafts and vehicles;  Stores;  Baggage;  Currency and Negotiable instruments; and  Any other kind of movable property.

Liability and Exemptions Tax is collected, when the goods are on the vehicle for transport out of India. Exemptions- for payment of customs duty are:  Goods derelict, wreck etc.  Remission of duty on goods that are lost, destroyed or abandoned etc.  Denaturing or mutilation of Goods  Many amendments are made to facilitate origin of goods and matters relating to it.

Value Added Tax (VAT)  VAT is a kind of sales tax is that collected by

government of destination State on the consumer expenditure i.e. the State in which the final consumer is located.  It is imposed and collected through the business transactions, involving sale of goods within the State.  It is a tax on value added in the price of a commodity. It is taxed at the final or retail point of sale, which is collected at each stage of sale when there is a value addition to the goods.

VAT is multi point levy of tax, which is different from the sales tax, which is generally a single point tax levy.  The term goods has been specifically defined for the purpose of imposing tax under VAT. Goods under VAT includes :  The Conventional Sales,  Goods transferred in execution of works contract,  Delivery of goods on hire purchase or any other system of payment,  Supply by way of or part of any services or any other manner etc.

Service Tax  It is another kind of tax paid by the customer for

certain kinds of services that he or she avails.  The tax collected under the service tax have to be deposited with the Central Government Accounts within a stipulated period.  It includes transport, telecom, hospital services etc…. It includes services rendered by individuals and other non-commercial organizations who are brought under the purview of the service tax laws.  The consumers pay to the service providers and in turn the service providers will be submitting it to the concerned authority.

The main objectives of Service Tax  Determining the turnover of the unorganized

service sectors.  To bring the organized sector under the Tax purview.  Revenue generation to the government, as service sector is the major contribution to the contribution to the GDP.  The best examples of the services are, advertising agencies, banking , logistics, online information etc…

Fringe Benefit Tax  Any monetary or non monetary benefit given by

the employer to the employee as a perquisite in addition to the cash salary or wages are called fringe benefits.  It can be any privilege, service, facility or amenity which can be given directly or indirectly to the employee.  Usually it is taxed in the hands of the employees but to be collected by the employer.  It is the duty of the employer to bear the taxes for the perquisites paid by the employer.

Fringe benefits that are taxable under the Finance Act,2005  Entertainment  Gifts  Festival celebrations  Employee welfare  Telephone  Maintenance of motor car  Scholarship for the children of the

employees etc….