Unit-2

Classification tax

A. On the basis of Form of Taxa. Direct Taxb. Indirect Tax

B. On the basis of source of Taxa. Income Taxb. Property Taxc. Production Taxd. Consumption Taxe. Sales Tax

C. On basis of Frequency tax a. Single Taxb. Multiple Tax

D. On basis of Specificity of Taxa. Ad-Valorem Taxb. Specific Tax

E. On basis of Method of taxa. Proportional Taxb. Progressive Taxc. Regressive Taxd. Depressive Tax

Direct Tax A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (artificial or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed in India are as under:

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.

Corporation Tax: The companies and business organizations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961.

Indirect Tax 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. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more

for the products. The some important indirect taxes imposed in India are as under:

Customs Duty: The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.

Central Excise Duty: The Central Government levies excise duty under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which is charged on such excisable goods that are manufactured in India and are meant for domestic consumption.

Service Tax: The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions related to Service Tax came into effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver.

Value Added Tax (VAT): The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid. 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 items.

Merits of Direct Tax:

1. Justifiable tax- according to paying capacity of tax payers

2. Creates Civic consciousness- tax payer realize their right to question the government about development of state

3. Helps in reduction of inequality (of income and wealth)

4. Certainty of tax (date, rate, amount of tax)

5. Elasticity- Rates can be revised on yearly basis

6. Educative Value- Tax payer tries to understand tax calculation and subsequent tax liability

7. Easier to understand

8. Suitable for developed countries

Demerits of Direct Tax:

1. Inconvenience in tax calculation and deposition

2. Unpopular tax

3. Possibility of tax evasion (hiding the taxable income)

4. Narrow in scope- applicable on high income earners

5. Creates barrier in capital formation

6. Influenced from political decisions

7. Not suitable for under-developed country

Merits of Indirect Tax:

1. Convenient for tax payer- as generally they don’t come to know about tax payment

2. Elastic in nature: changeable as per requirement

3. Rare possibility of evasion

4. Equal tax liability on purchaser of goods; irrespective of social or financial status

5. Social Welfare- applicable high rates on luxury articles

6. Progressive in nature

7. Wider in coverage than direct tax

8. Suitable for developing countries

9. Easy to collect

Demerits of Indirect Tax

1. Regressive in nature (High burden on low income persons)

2. Uncertainty- changeable in nature

3. No Civic consciousness

4. Discourage Savings

5. Inflationary in nature

6. Inequitable- as no role of economic condition of tax sufferer

7. No direct link with government authorities

Distinction between Direct and Indirect Tax:

Basis Direct tax Indirect Tax

Meaning Burden on same person who makes tax payment

Tax burden suffered by others

Shifting of Tax Can’t Shift Can be shifted

Impact & Incidence On same person Falls on two different parties

Civic Consciousness Inculcates civic consciousness

No civic consciousness

Income & expenditure Basically applicable on Income

Majorly applicable on Expenditure

Nature of Tax Compulsory Not compulsory; depends upon expenditure

Example Income Tax, Wealth Tax

Custom Duty, VAT

Whichever is better: Direct Tax or Indirect Tax?

This purely Depends upon economic status of the country:

o In case of underdeveloped country-Indirect tax is preferable

o In case of developed country-Direct tax is suitable

o In case of developing country-Proper blend (mix) of both the taxes

Income TaxIncome: Meaning of income as generally understood-

Income is periodical monetary return with some sort of regularity. It may be recurring in nature.

It may be broadly defined as the true increase in the amount of wealth which comes to a person during a fixed period of time. Therefore following are included in income:

Income from Regular and definite source

Different forms of income (including cash and kinds)

Receipt or accrual

Illegal income

Disputed title income

Diversion of income by overriding title

Temporary and permanent income

Income includes losses

Extended meaning of income-

This section includes the following incomes:

Profits or gains of Business or Profession

Dividend

Perquisites in hands of employees

Any special allowances/ dearness allowance

City compensatory allowance

Any salary, commission, bonus etc received by partner of firm

Deemed profits

Capital gains

Income from gift

Winning from lottery/ speculation income

Employees contribution towards provident fund in the hands of employees

Tax applicable on above mentioned incomes is termed as income tax. In case of Individual, below mentioned format can be used for such calculation:

Computation of Income Tax of Indiviidual

(For the Assessment Year 2012-2013)

Income from Salary ………

Income from House Property ………

Profits or Gains of Business or Profession ………

Capital Gains ………

Income from other sources ………

Total Income ………

Set-off & carry forward of losses and unabsorbed depreciation

Gross Total Income (GTI) ………

Less: Deduction from section 80C to 80U ………

Taxable Income/ Net Income ………

Tax (as per tax slab) ………

Add: Education Cess (2% -Education Cess, 1% Higher Edu. Cess) ………

Tax Payable ………

Corporation Tax

Corporate Taxation in India

Corporate Taxes are annual taxes payable on the income of a body corporate operating in India. The provisions relating to corporate income tax are contained in the Income-tax Act, 1961.

For the purpose of taxation companies in India are broadly classified into domestic companies and foreign companies or in other words resident or non-resident. Depending on their residence they are subjected to different tax treatment. Companies that are registered in India according to the Companies Act of 1956 are deemed to be domestic companies and a company whose chief control and management are wholly located within India is also known as domestic company. A domestic company may be a public company or a private company. A company which is not registered in India and if its management control is exercised from a foreign country then it is treated as a foreign company.

Key Provisions

• A domestic/ resident company is taxed on-

1. Any income which is received or is deemed to be received in India in the relevant Previous Year by or on behalf of such company

2. Any income which accrues or arises or is deemed to accrue or arise in India during the relevant Previous Year

3. Any income which accrues or arises outside India during the relevant Previous Year.

• A Foreign/non-resident company is taxed on-

1. Any income which is received or is deemed to be received in India during the relevant Previous Year by or on behalf of such company

2. Any income which accrues or arises or is deemed to accrue or arise to it in India during the relevant previous year.

• Companies with more than INR 10 million (1Crore) total incomes are subjected to a surcharge on their taxes. Domestic companies pay a surcharge of 5% as against foreign companies that pay a surcharge of only 2.5%.

Corporate Tax Rates:

Company with total income exceeding INR 10 million

Company with total income less than INR 10 million

Domestic Company

32.445% (30% basic rate  plus surcharge of 5% plus education cess of 3%)

30.9% (30% direct tax plus education cess of 3%)

Foreign Company

42.23% (40% plus surcharge of 2.5% and education cess of 3%)

41.2% (40% plus and education cess of 3%)

Computation of Corporation Tax

(For the Assessment Year 2012-2013)

Income from House Property ………

Profits or Gains of Business or Profession ………

Capital Gains ………

Income from other sources ………

Total Income ………

Set-off & carry forward of losses ………

Gross Total Income (GTI) ………

Less: Deduction from GTI ………

Taxable Income/ Net Income ………

Tax (as per tax slab of company) ………

Add: Surcharge (5%/2.5% of tax, if Total income exceeds Rs 1cr) ………

Total Tax ………

Add: Education Cess (3% of total tax, as Education cess) ………

Tax Payable ………

Value Added Tax(VAT)

VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit.

Or

VAT is a multi-point levy where the tax paid on local purchases from the registered dealer can be set off against the tax payable on the sale of goods.

Or

As its name implies, VAT is a tax on value added to a commodity. It’s special characteristics is that it falls on the value added at each stage from the stage of production to retail stage. VAT is a multipoint system of taxation, with tax being applied on value addition at each stage of transaction in the production/ distribution chain. The term addition implies the increased value of goods at each stage of production or transfer of goods. This is a multistage tax with the provision to allow input tax credit. Input tax credit means setting of the amount of input tax paid by a registered dealer against the output tax as VAT. Basically VAT belongs to sales tax family.

History of VAT:

VAT is comparatively of recent origin which was suggested by industrial executives of Germany in year 1918. For the first time, it was adopted on restricted basis in France in 1954, since then it has become favorite category of tax authorities. European Economic Community (EEC) adopted this tax system in 1967.

In India, Haryana became the first state in the country which introduced VAT in year 2004. Due to the federal nature of the Indian constitution, the states do have the power to set their own VAT rate. Over the years the experience of implementing VAT has been encouraging, with the empowered committee constantly reviewing the progress of implementation.

Rates and turnover for VAT:

The standard rate of VAT is 12.5%. There are reduced rates of 4% and 1%

Ten items have been kept in exempted schedule of zero rate

Floor rate of 20% for articles like cigarettes and lottery tickets

The minimum annual turnover for V.A.T. registration is INR 500,000

V.A.T. returns are filed on a monthly or quarterly basis

Main Benefits/ Features of VAT:

A. Minimizes tax evasion

B. Set-off is given for input tax credit

C. Abolishes multiplicity of taxes (like turnover tax, sales tax etc)

D. Replaces a system of inspection by a system of built-in-self assessment

E. Simpler and more transparent tax system

F. Improves tax compliance

G. Generates higher tax revenue growth

H. Promotes competitiveness of exports