TAX Definition -: Tax is a compulsory contribution imposed by the government on its citizens, for public welfare.

In other words it is a source of revenue to the government, which is used for the welfare of the country, enforceable by law. It may be charged on the following. Goods Property Income Profits Services

There are various types of taxes levied by the authorities in order to ensure that no individual is allowed to evade the payment of tax as it is a prime source of revenue to the government and contributes near about 28% towards the GDP of our country. Following are the few features of TAX, which will make the study of term much easier.
1. Compulsory Payment: TAX is a compulsory payment to be made by each and

every person who is liable to pay the TAX; no one can refuse the payment as refusal may invite some punishments.

2. Utilisation of TAX: TAX is a major source of revenue for the government, thus

is must be used for the welfare of the country and its citizens by building roads, hospitals, schools ect.
3. Levy and Collection of TAX: Tax may be levied and collected by Central

Government, State Government or Municipalities as per the classification of tax at the rate notified from time to time by the government in the Finance Acts or by way of notifications in the official gazette.
4. Mode of Collection: one thing that the taxation authorities is required to make

sure is that the mode of collection of Tax must be simple so that the payer do not face any inconvenience in the payment of Tax.
5. Classification: Basically Tax is classified under 2 categories, DIRECT TAX and

INDIRECT TAX. The details of these 2 categories will be discussed further.

Now let us discuss the Objectives behind the collection of TAX To provide funds to the government to meet public expenditures, for e.g. free medical treatments in Government Hospitals, free Education etc. Redistribution of wealth among higher and lower sections of the society in order to make them equal. Generation of Employment by establishing new public sector industries, projects etc. Provide funds in the form of credit for further investment in private sectors which result in the economic development of the country.

 Government provide certain Tax benefits to those who invest their savings, thus Taxation promotes investment (injection to economic cycle) and reduce savings ( leakage to economic cycle)

CLASSIFICATION OF TAX

1. Direct Tax: As the name suggest, Direct tax are those taxes in which the burden

of payment falls on the same person who pays the tax. The burden of payment

cannot be shifted to any other person. Now let us discuss in brief various types of Direct Taxes.

i.

Income Tax: Income Tax is governed by Income Tax Act, 1961 and charged according to Income Tax Rules, 1962. The various heads under Income Tax are as follows.

Salaries: Remuneration received by an employee from his employer is taxable at the rates prescribed under Income Tax Act, 1961.

House Property: Income earned by letting a house property on rent is also taxable under the Income Tax Act, 1961.

PGBP: Income earned by way of profits in any business or by way of fee under any profession is also taxable under Income Tax Act, 1961.

Other sources: Any kind of income not falling under any of the 3 heads discussed above will be taxable under this head of the Income Tax as per Income Tax Act, 1961.

Individual Income Tax & Corporate Tax

The provisions relating to income tax are contained in the Income Tax Act 1961 and the Income Tax Rules 1962. The Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) which is part of the Department of Revenue under the Ministry of Finance. In terms of the Income Tax Act, 1961, a tax on income is levied on individuals, corporations and body of persons. Tax rates are prescribed by the government in the Finance Act, popularly known as Budget, every year. The Government of India has recently taken initiatives to reform and simplify the language and structure of the direct tax laws into a single legislation the Direct Taxes Code (DTC). After public consultation the Direct Taxes Code 2010 was placed before the Indian Parliament on 30 August 2010, when passed DTC will replace the Income Tax Act of 1961. The DTC consolidates the provisions for Direct Tax namely the income tax and wealth tax. When it comes into effect, probably April 2012, it is likely to have significant impact on the tax payers especially the business community. In the case of Individuals, incomes from salary, house and property, business & profession, capital gains and other sources are subject to tax. Women and Senior citizens are extended some special privileges. Individuals incomes are subjected to a progressive rate system. Tax treatment differs depending on the residence status. Income of the company is computed and assessed separately in the hands of the company. Income of company is subjected to a flat rate plus a surcharge. In addition to these, an education cess is also charged on the tax amount. Dividends distributed are subjected to special tax and the distributed income is not treated as expenditure but as appropriation of profits by the company. Tax treatment differs depending on the residence status.

A company is liable to pay tax on the income computed in accordance with the provisions of the Income Tax Act. Although many companies have huge profits, and declare substantial dividends, they are relieved from tax liabilities because their income when computed as per provisions of the Income Tax Act is either nil or negative or insignificant. Therefore a provision called Minimum Alternative Tax (MAT) was introduced by an amendment in 1997. As per the MAT provision such companies are required to pay a fixed percentage (presently 18% for 2011-2012) of book profit as minimum alternate tax. Additionally, by an amendment in 2005 companies are required to pay Fringe Benefit Tax (FBT) on value of fringe benefits provided or deemed to have been provided to the employees. In addition to income tax chargeable in respect of total income, any amount declared, distributed or paid by a domestic company by way of dividend shall be subjected to dividend tax. Only a domestic company is liable for the tax.

ii.

Wealth Tax: Wealth Tax is governed by Wealth Tax Act, 1957. According to this act any.

Individual

 Hindu Undivided Family Company Association of Persons Body of Individuals Whos net wealth exceeds Rs. 30,00,000 is liable to pay Wealth Tax @ 1% on the value exceeding Rs. 30,00,000.
iii.

Capital Gains: Gain on transfer of capital asset through sale from one person to another is also taxable at the hands of transferor. In order to levy this Tax the following 3 conditions must be satisfied.

There Should be a Capital Asset

There should be transfer of Capital Asset though sale. There should be capital gain/loss arising from such transaction.

Financial Assets:

Equity Shares, Preference Shares, Debentures, UTI

Bonds, Mutual Funds, Zero call bonds. Other Assets: Gold, Property, Land etc.

Depending upon the Holding Periods of the Financial or Non Financial Assets as discussed above an individual may incur LONG TERM CAPITAL GAIN/LOSS or SHORT TERM CAPITAL GAIN/LOSS on transfer of a capital asset.

2. Indirect Tax: Indirect tax is tax in which burden of tax do not fall on the same

person who actually pays the tax. In this case the burden of Tax is shifted to other. Following are the various types of Indirect Taxes and source of charging these taxes.

Excise Duty => Goods Manufactured or Produced in India Customs => Imports into India and exports outside India VAT (Value added Tax) => Sales. Service tax => Consumption of Services Octroi => Movement of goods from one district to another

Now let us discuss the above mentioned taxes in details.

i. Excise Duty: The 1st question that comes in our mind after observing the

term Excise Duty is that, why is it called Duty and not Tax? , And the answer to this question is that TAX is always levied on Services or Incomes whereas Duty is always levied on goods.

The duty levied on goods manufactured in India is known as Excise Duty. The following points would make the study of Excise Duty much easier. Excise Duty is an Indirect Tax.

Excise Duty is levied on the goods manufactured in India. It is charged from the manufacture of the goods but the financial burden is passed on to the consumer.

Excise Duty is levied at the time of removal of goods from the place of removal.

It is charged at the rates prescribed in Central Excise Tariff Act, 1985.

Excise Duty is administrated and collected by the Central Government on goods manufactured in India except liquor.

Revenue of Excise Duty is shared by central and state governments.

Another important term used above in the explanation was MANUFATURE. Thus it is important to understand the exact meaning of the term MANUFACTURE. MANUFACTURE: Manufacture includes any process: Incidental or ancillary to the completion of a manufactured product ; and Which is specified in relation to any good in the section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture, or Which in relation to goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of

containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the Goods to render the product marketable to the consumer,

And the word Manufacturer shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account. 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 setoff any excise duty tax payable.

In the recent budget, a number of tax exemptions have been initiated. Specific goods enjoy concessional duty rates. Exemptions are allowed to tax payers 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.

ii. Customs Duty: As we have discussed above that Duty is always levied on

goods. Thus we can conclude that Customs is also concerned with dealing of goods. Custom Duty is a Duty on the imports into India and Exports outside India. As per section 12(1) of the Customs Act, 1962, duties of customs shall be levied as such rates as may be specified under the Customs Tariff Act, 1975. Import duty is levied on almost all items, while export duty is levied only on a few limited products, where Indian goods are in commanding position.

Objectives of Customs Act, 1962 The main objectives of Customs Act, 1962 are as under:

 Raising of revenue Regulation of imports and exports Protection of Indian industry from dumping Prevention of smuggling and illegal goods Enforcing prohibition and restrictions on imports and exports Discharging various agency functions

BODY OF CUSTOMS LAW Body of customs law consists not only one enactment. Besides Customs Act, 1962 and Customs Tariff Act, 1975, it also contains various rules and regulations. It comprises of the following. Customs Act, 1962: This is the main Act, which provides for levy and collection of duty, import/export procedure, prohibitions on importation and exportation of goods, penalties, offences etc.

Customs Tariff Act, 1975: The Act contains two schedules :

In addition, the CTA (Customs tariff Act) makes provisions for duties like additional duty (CVD), preferential duty, and anti-dumping duty, protective duties ect.

iii. VAT (Value Added Tax): VAT is a Tax charged on the value added to the

cost of a product while selling it at each selling stage. Following are the main features of the Value Added Tax. VAT is a Indirect Tax as the ultimate burden of payment is borne by the consumer. It is charged at each selling stage. For e.g. From Manufacturer to the Middle men and then from Middle men to the Consumer. VAT is levied and collected at the State Level.

Any seller whos Turnover exceeds 5 lakh or 10 lakh as specified by the State government is liable to pay VAT. A small seller whose Turnover lies between 5 lakh and 50 lakh then he can opt to pay 0.25% Tax as Turnover Tax (TOT) to State Government. VAT is levied on Goods only, and Service Tax is levied on Services. In a contract where goods are also included and services are also included, but we cannot segregate the value of goods and services than such contracts are known as WORKS CONTRACT and WORKS CONTRACT TAX is levied on such contracts. For e.g. Amount paid to a beautician in saloon, as we cannot segregate the amount paid for the services of beautician and products involved (beauty creams) , Thus Works Contract Tax will be charged on such contracts.

CST (Central Sales Tax) The Tax levied by the Central Government on inter-state sales of goods is termed as CST. CST is payable in the state from which the movement of goods commences (i.e. from where goods are sold). The main difference between CST and VAT is that the benefit on ITC (Input Tax Credit) is not available in the CST. The Central Government decided to withdraw CST by decreasing the rate by 1% every year starting from 2008. 2008 4% 2009 3% 2010 2% (Government withdrew the further reducing of CST known as withdrawal of CST by 2010) VAT will be charged on sale at 12% (normal goods), CST rate of 2% will be retained by Central Government (benefit of ITC will not be available to seller) and balance will be retained by the State Government. Registration As a 10 digit PAN number is required to pay the Income Tax, similarly all sellers who have registered themselves to pay VAT and not TOT, are required to obtain a 15 digit numeric VAT number. CALCULATION OF VAT VAT can be calculated by using the following 3 formulas Subtraction Method : Value of Output Value of Input e.g. Output = 150, Input = 100, Rate = 10% VAT payable = 150-100 =50, 50 X 10% = Rs. 5

 Addition Method: Rate on the value added at each stage. (Value added method) e.g. 150-100 =50, 50 X 10%= Rs. 5 Tax Credit Method: In Tax Credit method the benefit of VAT paid at the time of purchase is available at the time of payment of VAT in the form of credit. This is also known as ITC (input tax credit). e.g. Total Purchase = Rs. 100 and VAT paid @ 10% = Rs. 10 Total Sales = Rs. 200 and VAT recovered @ 10% = Rs. 20 VAT payable= 20-10= Rs. 10

iv.

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.

v. Octroi Duty: Octroi is a tax levied on the entry of goods into a municipality

or any other specified jurisdiction for use, consumption or sale. Octroi is levied at the time when the goods enter the municipal limits where the goods are to be ultimately sold, used or consumed. Generally, octroi is borne by the purchaser. Goods in transit are exempted from octroi.Certain items have been exempted from the payment.

vi.

C.T.T: Securities Transaction Tax (STT)

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.

OTHER KEY NOTES Filing of VAT, CENVAT, Service Tax returns 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 States 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 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. Double Taxation Relief India has entered into 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 exemption 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 1. The person or company has been a resident of India in the previous year. 2. The same income must be accrued to and received by the tax payer outside India in the previous year. 3. 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.

This guide provides an overview of the tax structure and current tax rates in India. The tax regime in India has undergone elaborate reforms over the last couple of decades in order to enhance rationality, ensure simplicity and improve compliance. The tax authorities constantly review the system in order to remain relevant. 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 principle of separation therefore well defined and demarcated between Central and State Governments and local 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.